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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________ to ________.
COMMISSION FILE NUMBER: 000-19809
DURA PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3645543
(State or other jurisdiction (I.R.S. Employer
or incorporation or organization) Identification No.)
7475 LUSK BLVD., SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (619) 457-2553
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF
THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g)
OF THE ACT:
COMMON STOCK, $.001 PAR VALUE. WARRANTS TO PURCHASE ONE-FOURTH OF ONE SHARE
OF COMMON STOCK, PAR VALUE $.001 PER SHARE. THE WARRANTS ARE REGISTERED
PURSUANT TO SECTION 12(G) OF THE ACT SEPARATELY AND AS PART OF UNITS, EACH
UNIT CONSISTING OF ONE SHARE OF CALLABLE COMMON STOCK OF SPIROS DEVELOPMENT
CORPORATION II, INC. AND ONE WARRANT. THE WARRANTS ARE NOT SEPARATELY
TRADABLE APART FROM THE UNITS PRIOR TO DECEMBER 31, 1999 OR UPON THE EARLIER
OCCURRENCE OF CERTAIN EVENTS.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 27, 1998 was $1,003,649,682. For the purposes of
this calculation, shares owned by officers, directors (and their affiliates) and
10% or greater shareholders known to the registrant have been deemed to be
affiliates, which should not be construed to indicate that any such person
possesses the power, direct or indirect, to direct or cause the direction of the
management or policies of the Registrant or that such person is controlled by or
under common control with the Registrant.
The number of shares of the Registrant's Common Stock outstanding as of
February 27, 1998 was 46,142,915.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the Annual Meeting of
Shareholders scheduled to be held on May 21, 1998, to be filed with the
Securities and Exchange Commission on or about April 16, 1998, referred to
herein as the "Proxy Statement," are incorporated as provided in Part III, and
portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1997, attached hereto as Exhibit 13, referred to herein as
the "Annual Report," are incorporated as provided in parts II and IV.
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INDEX
Part I:
Item 1. Business 4
Item 2. Properties 22
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Part II:
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters 23
Item 6. Selected Financial Data 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 24
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 24
Part III:
Item 10. Directors and Executive Officers of the Registrant 24
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial Owners and
Management 24
Item 13. Certain Relationships and Related Transactions 25
Part IV:
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 25
Signatures 30
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PART I
ITEM 1. BUSINESS
The discussion of Dura Pharmaceuticals, Inc.'s ("Dura" or "the Company")
business contained in this report may contain certain projections, estimates
and other forward-looking statements that involve a number of risks and
uncertainties. For a discussion of factors which may affect the outcome
projected in such statements, see "Risks and Uncertainties" on pages 16
through 22 of this Annual Report on Form 10-K. While this outlook
represents management's current judgment on the future direction of the
business, such risks and uncertainties could cause actual results to differ
materially from any future performance listed below. The Company undertakes
no obligation to release publicly the results of any revisions to these
forward-looking statements to reflect events and circumstances arising after
the date hereof.
OVERVIEW
The Company is a specialty respiratory pharmaceutical and pulmonary drug
delivery company. The Company is engaged in developing and marketing
prescription pharmaceutical products for the treatment of asthma, hay fever,
chronic obstructive pulmonary disease ("COPD"), the common cold and related
respiratory ailments and is developing a pulmonary drug delivery system
("Spiros-Registered Trademark-"). Dura has strategically focused on the U.S.
respiratory market because of its size and growth opportunities. The
estimated size of the target market for antihistamines, asthma/rhinitis
therapies, cough/cold preparations and anti-infectives in 1997 was
approximately $10.2 billion. The size and fragmented nature of the market
and the identifiable base of physician prescribers allow Dura to achieve
significant market penetration with a specialized sales force. The Company
currently markets 31 prescription products and also has a separate mail
service pharmacy, Health Script pharmacy Services, Inc. ("HealthScript"),
which dispenses respiratory pharmaceuticals.
Dura employs a dual marketing strategy utilizing its focused field sales
force of over 300 people and a dedicated managed care sales and marketing and
national account groups that cover managed care organizations and retail
pharmacy chains. Dura's field sales force targets a physician base that
includes approximately 90,000 U.S. allergists, ear, nose, and throat
specialists ("ENTs"), pulmonologists and a selected subset of pediatricians
and generalist physicians, who Dura believes collectively write a significant
portion of respiratory pharmaceutical prescriptions. Dura believes that its
field sales force calls on approximately one-half of the target physician
base. Dura's managed care sales and marketing group concentrates on sales to
large regional and national managed care organizations. Dura expects to
continue expanding both the field sales force and the managed care sales and
marketing group as warranted by market opportunities.
This marketing strategy has allowed Dura to leverage its distribution
capabilities by acquiring the rights to market additional prescription
pharmaceutical products through acquisition, in-license or co-promotion
arrangements. Since 1992, Dura has acquired 19 products targeted at the U.S.
respiratory market. In September 1996, Dura acquired from Eli Lilly and
Company ("Lilly") exclusive U.S. marketing rights to the antibiotics
Keftab-Registered Trademark- and Ceclor-Registered Trademark- CD. Dura began
marketing Keftab in September 1996 and launched Ceclor CD in October 1996.
In May 1997, Dura acquired from Syntex (USA) Inc. and other members of the
Roche Group (collectively, "Syntex") the exclusive U.S. rights to the
intranasal steroid products Nasarel-Registered Trademark- and
Nasalide-Registered Trademark-.
Another key component of Dura's strategy is to develop the Spiros-Registered
Trademark- pulmonary drug delivery system. Spiros is being designed to
aerosolize pharmaceuticals in dry powder formulations for delivery to the
lungs while providing certain advantages over other currently used methods of
pulmonary drug delivery. Dura has a three-level development program for
Spiros which entails (i) developing, on behalf of Spiros Development
Corporation II, Inc. ("Spiros Corp. II"), certain drug compounds for use in
Spiros, including in the near-term albuterol, beclomethasone and ipratropium,
three of the pharmaceutical agents most frequently prescribed to
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treat respiratory conditions, (ii) licensing Spiros primarily to
pharmaceutical companies, generally for use with certain of their proprietary
respiratory products, and (iii) developing Spiros, generally in collaboration
with third parties, for the systemic delivery of compounds, including certain
proteins and peptides, through the lungs for respiratory and non-respiratory
indications as an alternative to current invasive delivery techniques. In
March 1997, patient dosing was completed in long-term and short-term pivotal
clinical trials for albuterol in the Spiros cassette system. In November
1997, Dura announced, on behalf of Spiros Development Corporation ("Spiros
Corp."), that it had submitted a New Drug Application ("NDA") with the United
States Food and Drug Administration ("FDA") for albuterol in the Spiros
cassette system. In January 1998, the FDA informed Dura that the application
was accepted for filing.
RELATIONSHIP WITH SPIROS CORP. AND SPIROS CORP. II
RELATIONSHIP WITH SPIROS CORP. On December 29, 1995, Spiros Corp. and Dura
completed a $28 million private placement to fund the development of Spiros
for use with certain compounds. The private placement consisted of 933,334
units at $30.00 per unit. Each unit consisted of one share of Spiros Corp.
callable common stock and a Series S warrant to purchase 2.4 shares of the
Company's common stock. In connection with the private placement, the
Company made a $13 million contribution to Spiros Corp. In exchange for the
Series S warrants and the $13 million contribution, the Company received the
right to purchase all of the Spiros Corp. callable common stock and to
acquire the exclusive rights for the use of Spiros with albuterol. Pursuant
to a development and management agreement, Spiros Corp. engaged the Company
to develop the Spiros Corp. products and provide general management services
to Spiros Corp. On December 19, 1997, the Company exercised its right to
purchase 100% of Spiros Corp.'s outstanding callable common stock.
RELATIONSHIP WITH SPIROS CORP. II. On December 22, 1997, Dura and Spiros
Corp. II, a separate, newly-formed Delaware corporation, completed a $101
million public offering (the "Offering"). Under agreements with the Company,
Spiros Corp. II will use the net proceeds of $94 million from the Offering
and a $75 million contribution from Dura to develop Spiros and Spiros
applications for albuterol, beclomethasone, ipratropium,
albuterol-ipratropium combination, budesonide and additional designated
compounds (the "Compounds"). The Offering consisted of 6,325,000 units sold
at $16.00 per unit. Each unit consisted of one share of Spiros Corp. II
callable common stock and a warrant (the "SDCII Warrants") to purchase
one-fourth of one share of Dura's common stock. The SDCII Warrants will be
exercisable from January 1, 2000 through December 31, 2002 at an exercise
price of $54.84 per share of Dura common stock. In consideration of the
SDCII Warrants and the contribution of $75 million to Spiros Corp. II, the
Company has the right through December 31, 2002, to purchase all, but not
less than all, of the then outstanding shares of Spiros Corp. II callable
common stock at predetermined prices (the "Purchase Option") and an option,
through specified dates, to acquire Spiros Corp. II's exclusive rights for
the use of Spiros with albuterol (the "Albuterol Option") and for the use of
Spiros with a second product other than albuterol (the "Product Option"). The
purchase price for the Purchase Option may be paid, at the Company's option,
in cash, shares of Dura's common stock, or a combination thereof. The
purchase price for the Albuterol Option and the Product Option may only be
paid in cash.
In connection with the Offering, the Company also entered into certain other
agreements with Spiros Corp. II which are summarized as follows:
TECHNOLOGY LICENSE AGREEMENT. Under this agreement, the Company granted to
Spiros Corp. II, subject to existing agreements, an exclusive, worldwide,
perpetual, royalty-bearing license to use Spiros in connection with the
Compounds.
ALBUTEROL AND PRODUCT OPTION AGREEMENT. Under this agreement, the Company
has the Albuterol Option and the Product Option.
DEVELOPMENT AGREEMENT. Under this agreement, Spiros Corp. II has engaged
the Company to develop the Spiros products and provide general management
services to Spiros Corp. II.
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MANUFACTURING AND MARKETING AGREEMENT. Under this agreement, Spiros Corp.
II granted to the Company an exclusive worldwide license to manufacture and
market the Spiros products in exchange for a royalty of 7% on net product
sales, as defined.
RECENT DEVELOPMENT
On February 22, 1998, the Company announced that it planned to begin
expanding its sales force immediately from approximately 270 representatives
to over 450 representatives by the end of 1998 to increase the promotional
activity of its current products and to prepare for the launch, subject to
receiving regulatory approval, of Albuterol Spiros-TM-. The Company expects
that the rapid expansion of its sales force will result in an increase in
1998 in its selling, general and administrative expenses, both in total and
as a percentage of revenues, as compared to 1997.
U.S. RESPIRATORY MARKET
Dura divides the U.S. respiratory market into three primary segments: (i)
respiratory infection, (ii) allergy, cough and cold and (iii) asthma and COPD.
RESPIRATORY INFECTION. Respiratory infections are generally caused by a variety
of bacteria and can affect either the upper respiratory tract (nasal cavity,
sinuses and throat) or the lower respiratory tract (lungs). The resulting
diagnoses include sinusitis, tonsillitis and bronchitis. These infections are
treated with antibiotics, which kill the bacteria causing the symptoms. There
are a variety of classes of antibiotics that treat specific ranges, or
spectrums, of bacteria. Classes used to treat respiratory infection include
cephalosporins, broad spectrum macrolides and quinolones. The market for these
classes is very large, totaling $4.8 billion in 1997 for the oral solid forms
alone. The cephalosporin class accounts for approximately $1.4 billion of this
total.
ALLERGY, COUGH AND COLD. While the causes of allergies (which can be seasonal
or perennial) and cough and colds differ, nasal congestion and sneezing are
common symptoms of these diseases. The U.S. combined market for therapeutic
drugs to treat allergies, coughs and colds was over $2.2 billion in 1997.
Antihistamines and antihistamine/decongestant combinations are the most widely
used forms of therapy for allergies and represent the largest portion of the
allergy, cough and cold market in the U.S. An additional form of therapy for
allergies includes intranasal steroids, such as Nasarel and Nasalide, which are
increasingly being prescribed for allergic rhinitis. Cough and cold
preparations represent the next largest portion of the allergy, cough and cold
market and include decongestant and decongestant/expectorant combinations, cough
suppressants and antihistamine combinations and expectorants.
ASTHMA AND COPD. Asthma is a complex physiological disorder characterized by
airway hyperactivity to a variety of stimuli such as dust, pollen, stress or
physical exercise, resulting in airway obstruction that is partially or
temporarily reversible. The U.S. asthma population has grown steadily in recent
years. COPD is a complex condition comprising a combination of chronic
bronchitis, emphysema and airway obstruction. The disease affects males more
often than females and is exacerbated by smoking and other insults to the lung.
Incidence is as high as 20% of the adult male population, though only a minority
are clinically disabled. The U.S. combined market for therapeutic drugs to
treat asthma and COPD was approximately $2.9 billion in 1997.
STRATEGY
Dura's objective is to be a leading supplier of respiratory pharmaceuticals and
pulmonary drug delivery systems. Dura attempts to achieve this objective
through the implementation of the following strategies:
FOCUSING MARKETING EFFORTS ON RESPIRATORY PHYSICIAN SPECIALISTS. Dura
employs a dual marketing strategy utilizing its focused field sales force
and a dedicated managed care sales and marketing group. Dura's field sales
force targets a physician base that includes approximately 90,000 U.S.
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allergists, ENTs, pulmonologists and a selected subset of pediatricians and
generalist physicians, who Dura believes collectively write a significant
portion of respiratory pharmaceutical prescriptions. Dura believes that its
field sales force calls on approximately one-half of the target physician
base. Dura's managed care sales and marketing group concentrates on sales
to large regional and national managed care organizations. Dura expects to
continue expanding both the field sales force and the managed care sales
and marketing group as warranted by market opportunities.
ACQUIRING, IN-LICENSING OR CO-PROMOTING RESPIRATORY PRESCRIPTION
PHARMACEUTICALS. Dura seeks to acquire, in-license or co-promote
respiratory prescription pharmaceuticals or companies developing and/or
marketing such pharmaceuticals. Dura is particularly focused on
respiratory drugs that are under-promoted by large pharmaceutical
companies. Dura believes that the pharmaceutical industry is undergoing a
restructuring that may create greater opportunities for Dura. For example,
many large pharmaceutical companies are consolidating and merging and/or
redirecting their sales forces, which may lead to the underpromotion of
certain products deemed too small for large sales forces and create
significant acquisition, in-licensing and co-promotion opportunities.
Additionally, consolidation within the sector may make small product lines
less desirable to large pharmaceutical companies. Dura is actively
pursuing the acquisition of rights to products and/or companies, which may
require the use of substantial capital resources.
DEVELOPING SPIROS. Dura has a three-level development program for Spiros
which entails (i) developing, on behalf of Spiros Corp. II, certain drug
compounds for use in Spiros, including in the near-term albuterol,
beclomethasone and ipratropium, three of the pharmaceutical agents most
frequently prescribed to treat respiratory conditions, (ii) licensing
Spiros primarily to pharmaceutical companies, generally for use with
certain of their proprietary respiratory products, and (iii) developing
Spiros, generally in collaboration with third parties, for the systemic
delivery of compounds, including certain proteins and peptides, through the
lungs for respiratory and non-respiratory indications as an alternative to
current invasive delivery techniques.
DURA'S CURRENT PRODUCTS
Dura currently markets 31 prescription products, including 25 that are
off-patent, in the following therapeutic categories: respiratory infection (five
products); allergy, cough and cold (24 products); and asthma and COPD (two
products). The following is a list of Dura's principal prescription
pharmaceuticals:
RIGHTS
OBTAINED FROM OR
PRODUCTS DEVELOPED BY
-------- ----------------
Respiratory Infection
Ceclor-Registered Trademark- CD Tablets (anhydrous Lilly
cefaclor)
Keftab-Registered Trademark- (cephalexin Lilly
hydrochloride)
Allergy, Cough and Cold
Nasarel-Registered Trademark- (flunisolide) Nasal Syntex
Solution
Nasalide-Registered Trademark- (flunisolide) Nasal Syntex
Solution
Entex-Registered Trademark- Products Procter & Gamble
Dura-Vent-Registered Trademark- Products Dura
Rondec-Registered Trademark- Products Abbott Laboratories,
Dura
Asthma and COPD
Tornalate-Registered Trademark- Products Sanofi-Winthrop, Inc.
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In September 1996, Dura acquired the exclusive U.S. rights to the cephalosporin
antibiotics Keftab and Ceclor CD from Lilly. The U.S. antibiotic market was
$4.8 billion in 1997, of which $1.4 billion was accounted for by cephalosporin
antibiotics. Dura believes that this acquisition complements its existing
strategy because approximately 60% of antibiotics are prescribed for respiratory
infections. Keftab is an antibiotic indicated for respiratory tract, skin and
soft tissue infections. Ceclor CD is a twice-a-day dosage form of cefaclor
typically taken for seven days. Ceclor, Lilly's currently marketed cefaclor, is
normally taken three times a day for 10 days. Dura believes these product
acquisitions further its strategy of acquiring prescription pharmaceuticals to
be marketed by its sales force to its targeted physicians.
In May 1997, Dura acquired from Syntex the exclusive U.S. rights to the
intranasal steroid products Nasarel and Nasalide. The U.S. market for
intranasal steroids for the treatment of perennial and allergic rhinitis was
approximately $750 million in 1997, and has averaged 19% growth over the last
three years. Dura believes that this acquisition complements its existing
strategy because the products fit within Dura's respiratory focus while adding a
new respiratory category, nasal steroids, to its product portfolio. In
addition, Dura believes that it will be able to further leverage its field sales
force by offering these new products acquired from Lilly and Syntex to
high-prescribing physicians during sales calls.
Keftab and Ceclor CD and the two Tornalate-Registered Trademark- products are
the subject of approved NDAs. Dura also markets Capastat-Registered Trademark-
Sulfate and Seromycin-Registered Trademark- which are also the subject of
approved NDAs and Crolom-TM-,_which is the subject of an approved Abbreviated
New Drug Application ("ANDA"). The remaining products are branded
pharmaceuticals which are not the subject of NDAs or ANDAs.
SPIROS
Spiros is a proprietary pulmonary drug delivery system that is designed to
aerosolize pharmaceuticals in dry powder formulations for delivery to the
lungs while providing certain advantages over traditional pulmonary delivery
systems. The Company believes new inhalation systems will gradually replace
metered dose inhalers ("MDIs") as the leading pulmonary delivery systems, due
primarily to the phasing out of chloroflurocarbon ("CFCs") and coordination
problems associated with many MDIs. Many companies are studying alternative
propellants, such as hydrofluorocarbons ("HFAs"), for use in MDIs, and the
first albuterol MDI using an HFA propellant has obtained FDA approval and is
being marketed by Schering-Plough. However, the Company believes that any
product utilizing alternative propellants will still suffer from many of the
limitations of currently marketed MDIs, including the need for patients to
coordinate breathing with actuation of the drug delivery system. There are
two types of dry powder inhalers ("DPI") 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 ("Astra")), a multiple dose
DPI, is the leading DPI in worldwide sales. In June 1997, the FDA approved
the first Turbuhaler product, the Pulmicort Turbuhaler, for marketing in the
U.S., which Astra launched in early 1998. Recently the FDA also approved two
multiple dose DPIs developed by Glaxo.
POTENTIAL ADVANTAGES OF SPIROS. The Company believes Spiros may have certain
advantages over other currently used methods of pulmonary drug delivery
including:
INSPIRATORY FLOW RATE INDEPENDENCE. Spiros is designed to deliver a
relatively consistent drug dose to the lungs over a wide range of
inspiratory flow rates, which can vary depending on a patient's health,
effort or physical abilities. Tests of Spiros on human subjects have shown
a relatively consistent and significant level of drug deposition throughout
the clinically relevant inspiratory range. Existing DPIs can vary
significantly in their level of drug deposition depending on the patient's
inspiratory flow rate and can deliver significantly less drug at the lower
flow rates typically associated with asthma attacks.
MINIMUM NEED FOR PATIENT COORDINATION. Spiros is breath-actuated and does
not require the user to coordinate inhalation and actuation of the drug
delivery system. MDIs generally require the user to
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coordinate their breathing with actuation of the MDI. Studies indicate
that a significant percentage of patients, particularly young children
and the elderly, do not use MDIs correctly. Spiros is designed to solve
these coordination problems by delivering the drug to patient's lungs as
they inhale.
REDUCED SIDE EFFECTS. Spiros is designed to efficiently deliver drugs to
the lungs, thereby reducing drug deposition to the mouth and throat which
could reduce the possibility of unwanted side effects of certain
pharmaceutical agents, such as coughing and local irritation. With MDIs, a
significant portion of the dose is delivered to the mouth and throat and is
swallowed.
PATIENT CONVENIENCE. Spiros is designed to be convenient for patients,
with features such as breath actuation (Spiros is triggered by inhalation),
portability (light weight and small size), quick delivery time, simple
operation, dose delivery feedback and multi-dose capability. Spiros also
allows the patient to see the actual number of doses remaining in a
cassette or blister pack and an LED light provides a warning of the need to
replace Spiros prior to the end of its useful life.
FREE OF CHLOROFLUOROCARBON PROPELLANTS. CFC propellants have ozone
destructive characteristics and are subject to worldwide regulations aimed
at eliminating their usage within the decade. Spiros does not use CFCs
while most MDIs, currently the most popular form of aerosol drug delivery,
use CFCs. Virtually all of the world's industrial nations, under the
auspices of the United Nations Environmental Program, have pledged to cease
use of CFCs by the year 2000. Continued use of CFCs in medical products
has been permitted under annual exemptions. As a result of the planned
phase out of CFCs, the Company believes that DPIs will become a leading
method for pulmonary drug delivery.
CORE SPIROS TECHNOLOGY. The core technology contained in Spiros which gives
rise to the flow rate independent delivery is an aerosol generator that uses
electromechanical energy to disperse dry powder to form an aerosol for
inhalation. The main components of the aerosol generator include the impeller,
the motor, the breath actuated switch, and the dosing chamber. When the switch
is activated, the electric circuit is completed and the impeller rotates. The
action of the impeller on the dry powder formulation supplies the energy to
disperse the drug and provides a zero-velocity cloud of aerosolized drug for
inhalation. The cloud of aerosolized drug is suspended in the dosing chamber
and is delivered to the lungs only as the patient inhales.
Two separate Spiros systems are currently under development, both utilizing the
same core technology with distinct powder storage systems ("PSS"). Because of
the physical and chemical requirements of the specific drugs deliverable by
Spiros, as well as the varying needs of the patients and marketplace, the
Company believes that its cassette and blisterdisk systems will provide
flexibility for delivery of many different types of drugs.
DEVELOPMENT PROGRAM FOR SPIROS. The Company has a three-level development
program for Spiros. The first level entails developing for use in Spiros, on
behalf of Spiros Corp. II, certain drug applications which are currently used to
treat respiratory conditions, including: beta-agonist (albuterol), two steroids
(beclomethasone and budesonide), an anticholinergic (ipratropium) and a
combination of a beta-agonist and an anticholinergic (albuterol-ipratropium).
Dura currently conducts the development efforts and will conduct marketing
efforts following regulatory approval, if any, for the products listed below on
behalf of Spiros Corp. II under agreements entered into in connection with the
Offering. There can be no assurance that the pharmaceutical products currently
in development by Spiros Corp. II or that any products that may be developed in
the future will be approved by the FDA. In addition, there can be no assurance
that FDA review or other actions will not involve delays that could adversely
affect the time to market and the sale of the products.
ALBUTEROL. Albuterol, a beta-agonist, provides rapid symptomatic relief of
reversible bronchospasm. When administered by inhalation, it produces
significant bronchodilation promptly and its effects are demonstrable for a
number of hours. Albuterol is the most widely accepted asthma medication in the
world. In 1997, U.S. sales of albuterol were approximately $700 million as
measured by average wholesale prices.
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In 1994, an Investigational New Drug ("IND") application was filed with the FDA
to begin clinical testing of an albuterol dry powder formulation with the Spiros
cassette system. In April 1996, dosing of subjects in a clinical trial focusing
on dose selection using a formulation of powdered albuterol with Spiros was
completed. In March 1997, patient dosing was completed in long-term and
short-term pivotal clinical trials. In November 1997, Dura, on behalf of Spiros
Corp., submitted an NDA with the FDA for albuterol in the Spiros cassette
system. In January 1998, the FDA informed Dura that the application was
accepted for filing. The NDA includes the results of clinical trials that were
designed to demonstrate comparability of the Spiros delivery system to a leading
branded albuterol MDI product. Three pivotal studies in addition to a number of
dose finding and performance verification studies were conducted for the
submission.
An open label study of albuterol in the Spiros cassette system is currently in
progress. Interim results of this study were provided to the FDA in the NDA and
results of the full study must be submitted to and reviewed by the FDA prior to
product approval, if any. Dura, on behalf of Spiros Corp. II, is planning
market launch of albuterol in the Spiros cassette system in late 1998 or early
1999, pending FDA approval. There can be no assurance of receipt of FDA
approval in a timely manner, if at all.
BECLOMETHASONE. Beclomethasone is a steroid used to treat the inflammatory
component of asthma and certain symptoms of COPD. Systemic side effects
resulting from the inhalation of beclomethasone are less than those that occur
with steroids taken in capsule, tablet or liquid form. Beclomethasone was first
launched in MDI form as Vanceril by Schering-Plough and later as Beclovent by
Glaxo. In 1997, U.S. sales of beclomethasone were approximately $180 million as
measured by average wholesale prices. In the first quarter of 1997, Dura
completed dose ranging studies of a one dosage strength of beclomethasone in the
Spiros cassette system under an IND, and Dura commenced a Phase III pivotal 12-
week clinical trial to demonstrate safety and efficacy in the fourth quarter of
1997. Enrollment of patients is currently scheduled to be completed by the
second quarter of 1998. Dura plans to submit an NDA for beclomethasone in early
1999, on behalf of Spiros Corp. II.
IPRATROPIUM. Ipratropium is an anticholinergic bronchodilator. Ipratropium is
most commonly prescribed for the long term management of COPD (including chronic
bronchitis and emphysema) and for the treatment of asthmatic patients who are
poorly controlled by, or who experience troublesome side effects from,
beta-agonists such as albuterol. Ipratropium acts at a site that is different
from the site where beta-agonists act and thus affords an alternative approach
to the treatment of airway obstruction. In 1997, U.S. sales of ipratropium were
approximately $230 million as measured by average wholesale prices. Dura has
conducted initial preclinical formulation studies using ipratropium in order to
demonstrate that delivery via Spiros is feasible. The Company currently
anticipates that ipratropium will be the first compound formulated for delivery
through the Spiros blisterdisk system. The Company, on behalf of Spiros Corp.
II, has been in product development for a formulation of ipratropium to be
delivered using Spiros and is preparing an IND under which initial dose ranging
clinical trials will be conducted. Such trials are scheduled to begin in the
second half of 1998.
ALBUTEROL-IPRATROPIUM COMBINATION. Albuterol and ipratropium are frequently
prescribed in combination for patients with COPD or asthma. Boehringer
Ingelheim has marketed an albuterol-ipratropium combination product, Combivent,
outside of the U.S. for a number of years. Combivent was approved for marketing
in the U.S. in early 1997 and has recently been launched in MDI form. Based on
the substantial work performed with albuterol and the feasibility study
conducted with ipratropium, Dura believes that developing an
albuterol-ipratropium formulation for delivery using Spiros will be feasible and
intends, on behalf of Spiros Corp. II, to commence the development of this
formulation in 1998.
BUDESONIDE. Budesonide is a new generation steroid used to treat the
inflammatory component of asthma. Budesonide has been marketed in several dosage
forms outside of the U.S., but to date, has only been available in the U.S. in
nasal spray form. However, in June 1997, the FDA approved for marketing in the
U.S. a dry powder formulation of budesonide for delivery through Astra's
Pulmicort Turbuhaler. In 1997, worldwide sales of budesonide were estimated to
be greater than $600 million as measured by average
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wholesale prices. Dura, on behalf of Spiros Corp. II, has begun formulation
of budesonide for delivery through Spiros.
The second level of Spiros development consists of licensing Spiros primarily to
pharmaceutical companies for use with certain of their proprietary respiratory
products. Dura is currently conducting feasibility studies for pharmaceutical
companies to assess the suitability of certain compounds to be delivered using
Spiros. There can be no assurance that any of the feasibility studies will
prove successful, or even if successful, that the pharmaceutical companies will
proceed to license Spiros for use with these compounds.
The third level of Spiros development is to develop Spiros, in collaboration
with other companies, for the systematic delivery of compounds through the lungs
for respiratory and nonrespiratory indications as an alternative to current
invasive delivery techniques. The Company commenced development efforts on the
use of Spiros with peptides and proteins in 1995. In 1996, Dura entered into a
collaborative agreement with Trega Biosciences, Inc. ("Trega") to develop
inhalation formulations of new compounds discovered and developed by Trega.
Dura is also performing feasibility studies for pharmaceutical companies that
desire to develop Spiros for use with both respiratory drugs and drugs for
systemic pulmonary delivery now being developed by those companies.
SALES AND MARKETING
FIELD SALES FORCE. Dura's specialized sales and marketing organization targets
a physician base that includes approximately 90,000 U.S. allergists, ENTs,
pulmonologists, and a selected subset of pediatricians and generalist physicians
who treat a large number of allergy and asthma patients. Dura believes this
relatively small group of physicians writes a significant portion of respiratory
pharmaceutical prescriptions. This concentration allows for effective market
penetration by a specialized sales and marketing organization.
As of December 31, 1997, Dura had 277 pharmaceutical sales representatives
nationwide, supervised by 25 district managers, 4 area recruiter-trainers and
two regional directors. Dura believes its focused sales force currently calls
on approximately one-half of its target physician base. On February 22, 1998,
the Company announced that it planned to begin expanding its sales force
immediately from approximately 270 representatives to over 450 representatives
by the end of 1998 to increase the promotional activity of its current products
and to prepare for the launch, subject to regulatory approval, of Abuterol
Spiros. The Company expects that the rapid expansion of its sales force will
result in an increase in 1998 in its selling, general and administrative
expenses, both in total and as a percentage of revenues, as compared to 1997.
Dura believes that the personal relationships of Dura's sales representatives
with their physician customers are essential to Dura's business. Dura's sales
representatives differentiate themselves from the competition by focusing
primarily on respiratory infections, allergy, cough and cold, and asthma and
COPD, and by promoting pharmaceuticals used by respiratory specialists in
treating patients. With a relatively small target audience, promotional
spending by Dura on advertising and direct mail is generally inexpensive and
efficient. Dura regularly participates in local, regional and national medical
meetings of the key specialty groups. Dura believes that it has established a
national awareness of the Dura name within the U.S. respiratory market.
MANAGED CARE SALES AND MARKETING AND NATIONAL ACCOUNTS GROUPS. To implement
Dura's marketing strategy, Dura established dedicated managed care sales and
marketing and national accounts groups, which concentrate on sales to large
regional and national managed care organizations and retail pharmacy chains.
These organizations include health maintenance organizations ("HMOs"), preferred
provider organizations ("PPOs"), large drug merchandising chains, nursing home
providers and mail order pharmacies. A primary goal of the managed care sales
and marketing group is to place Dura's products on approved formulary lists of
HMOs and PPOs.
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HEALTH SCRIPT
In March 1995, Dura acquired Health Script, located in Denver, Colorado. Health
Script is a mail service pharmacy which dispenses respiratory pharmaceuticals.
Mail order services are particularly well-suited for respiratory patients who
are long-term, chronic users of certain pharmaceuticals and to whom the
convenience and cost efficiency of mail order is appealing. Health Script was
formed in 1990 to supply value-priced respiratory pharmaceutical products to
patients through the mail. Health Script currently dispenses to its
approximately 30,000 patients nationwide over 100 respiratory products
manufactured by third parties. Health Script is focused on working with home
healthcare providers and patients to coordinate respiratory medication services
and patients' management programs. Health Script markets its services through
specialty field sales representatives and telemarketing. The existing patient
base is maintained by telephone contact with patients to monitor compliance with
their doctors' prescriptions.
COMPETITION
Dura directly competes with at least 25 other companies in the U.S. which are
currently engaged in developing, marketing and selling respiratory
pharmaceuticals. Additionally, there are at least 10 companies currently
involved in the development, marketing or sales of dry powder pulmonary drug
delivery systems. There are two types of DPIs currently in commercial use
worldwide, individual dose and multiple dose. Individual dose DPIs currently
marketed in the U.S. include the Rotohaler (developed and marketed by Glaxo)
and the Spinhaler (developed and marketed by Fisons Limited). The Turbuhaler
(developed and marketed by Astra), a multiple dose DPI, is the leading DPI in
worldwide sales. In June 1997, the FDA approved the first Turbuhaler
product, the Pulmicort Turbuhaler, for marketing in the U.S., which Astra
launched in early 1998. Recently the FDA also approved two multiple dose
DPIs developed by Glaxo.
Many of these companies, including large pharmaceutical firms with financial
and marketing resources and development capabilities substantially greater
than those of Dura, are engaged in developing, marketing and selling products
that compete with those offered by Dura. The selling prices of such products
typically decline as competition increases. Furthermore, other products now
in use or under development by others may be more effective than Dura's
current or future products. The industry is characterized by rapid
technological change, and competitors may develop their products more rapidly
than Dura. Competitors may also be able to complete the regulatory process
sooner and, therefore, may begin to market their products in advance of
Dura's products. Dura believes that competition among both prescription
pharmaceuticals and pulmonary drug delivery systems aimed at the respiratory
infection, allergy, cough and cold and asthma and COPD markets will be based
on, among other things, product efficacy, safety, reliability, availability
and price.
CLINICAL, DEVELOPMENT AND REGULATORY
Dura's clinical, development and regulatory expenses relate primarily to
product development and regulatory compliance activities. Clinical,
development and regulatory expenses were $8,408,000, $18,540,000, and
$24,391,000 for the years ended December 31, 1995, 1996 and 1997,
respectively. The clinical, development and regulatory expenses associated
with Spiros development, for which Dura recorded contract revenues from Dura
Delivery Systems, Inc., Spiros Corp. and Spiros Corp. II, were $6,428,000,
$15,932,000 and $20,605,000 for the years ended December 31, 1995, 1996, and
1997, respectively. See "Risks and Uncertainties--Patents and Proprietary
Rights."
PATENTS AND PROPRIETARY RIGHTS
The Company presently holds five U.S. patents and four U.S. patent applications
relating to the Spiros technology to be further developed by Spiros Corp. II.
The issued patents include a patent with claims covering the use in Spiros of an
impeller to create an aerosol cloud of a drug intended for inhalation, which
expires in 2011. The Company has also filed certain continuations in part and
foreign patent applications relating to Spiros. All of the above patents and
patent applications, relating to the Spiros technology, together with their
respective continuations in part and foreign patent applications, have been
licensed to Spiros
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Corp. II pursuant to the Technology License Agreement. Until the expiration
or termination of the Purchase Option, the Company is required to file patent
applications, at Spiros Corp. II's expense, with respect to inventions
included in the program technology. The Company will be the owner and Spiros
Corp. II will be the exclusive licensee for use with the Spiros products of
any patents included in the program technology.
The Company considers the protection of discoveries in connection with its
development activities important to its business. The Company intends to seek
patent protection in the U.S. and selected foreign countries where deemed
appropriate. There can be no assurance that issued patents or subsequent
patents, if issued, will adequately protect the Company or that such patents
will provide protection against infringement claims by competitors. The Company
has also filed certain foreign patent applications relating to Spiros
technology. There can be no assurance that additional patents, U.S. or foreign,
will be obtained covering the Company's products or that, if issued or licensed,
the patents covering such products will provide substantial protection or be of
commercial benefit. Federal court decisions establishing legal standards for
determining the validity and scope of patents in the field are in transition.
There can be no assurance that the historical legal standards surrounding
questions of validity and scope will continue to be applied or that current
defenses as to issued patents in the field will offer protection in the future.
The Company also relies upon trade secrets, unpatented proprietary know-how and
continuing technological innovation to develop its competitive position. The
Company enters into confidentiality agreements with certain of its employees
pursuant to which such employees agree to assign to the Company any inventions
relating to the Company's business made by them while in the Company's employ.
There can be no assurance, however, that others may not acquire or independently
develop similar technology or, if patents are not issued with respect to
products arising from research, that the Company will be able to maintain
information pertinent to such research as proprietary technology or trade
secrets.
In connection with one of the patents described above, in 1993, the Company
entered into an agreement with the principal inventor thereof which, among other
things, provides compensation to the inventor over the life of the patent which
is linked to annual sales of products related to such patent. Such compensation
amounts to approximately $1 million of the first $50 million of annual sales of
such products, and $1 million of the next $100 million of annual sales, with a
maximum aggregate compensation of $6 million.
Tornalate Inhalation Solution and Tornalate MDI are covered by patents filed by
Sanofi-Winthrop, Inc. which expire in the near-term. The Keftab, Ceclor CD,
Nasarel and Nasalide products or processes to make such products are covered by
patents which expire between 2003 and 2007. Dura's other pharmaceutical
products are not protected by patents.
GOVERNMENT REGULATION
The manufacturing and marketing of Dura's products are subject to regulation
by Federal and state government authorities, including the FDA, the
Environmental Protection Agency and the Occupational Safety and Health
Administration, in the U.S. and other countries. In the U.S.,
pharmaceuticals and drug delivery systems, including Spiros, are also subject
to rigorous FDA regulation and may be subject to regulation by other
jurisdictions, including the State of California. The Federal Food, Drug,
and Cosmetic Act and the Public Health Service Act govern the testing,
manufacture, safety, efficacy, labeling, storage, record keeping, approval,
advertising and promotion of Dura's products. Product development and
approval within this regulatory framework takes a number of years and
involves the expenditure of substantial resources.
To obtain FDA approval for each of the Spiros Products, each of the following
steps and possibly others must be conducted: (i) preclinical testing (laboratory
and possibly animal tests), (ii) the submission to the FDA of an IND
application, which must become effective before human clinical trials may
commence, (iii) adequate and well-controlled human clinical trials to establish
safety and efficacy, (iv) the submission of an NDA to the FDA for marketing
approval, and (v) FDA approval of the NDA prior to any commercial sale or
shipment. The NDA must include, in addition to a compilation of preclinical and
clinical data, complete information
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about product performance and manufacturing facilities and processes. Prior
to completion of the NDA review process, the FDA may conduct an inspection of
the facility, manufacturing procedures, operating systems and personnel
qualifications. In addition to obtaining FDA approval for each product, each
domestic drug and/or device manufacturing facility must be registered with
and approved by the FDA. Domestic manufacturing facilities are subject to
biennial inspections by the FDA and inspections by other jurisdictions and
must comply with Good Manufacturing Practice ("cGMPs") for both drugs and
devices. To supply products for use in the U.S., foreign manufacturing
establishments must comply with cGMP and other requirements and are subject
to periodic inspection by the FDA or by regulatory authorities in such
countries under reciprocal agreements with the FDA.
Preclinical testing includes laboratory evaluation of product chemistry and
animal studies, if appropriate, to assess the safety and efficacy of the product
and its formulation. The results of the preclinical tests are submitted to the
FDA as part of an IND application, and unless the FDA objects, the IND
application will become effective 30 days following its receipt by the FDA, thus
allowing the product to be tested in humans.
Clinical trials involve the administration of the pharmaceutical product to
healthy volunteers or to patients identified as having the condition for which
the pharmaceutical agent is being tested. The pharmaceutical product is
administered under the supervision of a qualified principal investigator.
Clinical trials are conducted in accordance with Good Clinical Practice and
protocols previously submitted to the FDA (as part of the IND application) that
detail the objectives of the study, the parameters used to monitor safety and
the efficacy criteria evaluated. Each clinical study is conducted under the
auspices of an independent Institutional Review Board ("IRB") at the institution
at which the study is conducted. The IRB considers, among other things, the
design of the study, ethical factors, the safety of the human subjects and the
possible liability risk for the institution.
Clinical trials for new products are typically conducted in three sequential
phases that may overlap. In Phase I, the initial introduction of the
pharmaceutical into healthy human volunteers, the emphasis is on testing for
safety (adverse effects), dosage tolerance, metabolism, distribution, excretion
and clinical pharmacology. Phase II involves studies in a limited patient
population to determine the initial efficacy of the pharmaceutical for specific
targeted indications, to determine dosage tolerance and optimal dosage and to
identify possible adverse side effect and safety risks. Once a compound is
found to be effective and to have an acceptable safety profile in Phase II
evaluations, Phase III trials are undertaken to more fully evaluate clinical
outcomes. The FDA reviews both the clinical plans and the results of the trials
and may require the study to be discontinued at any time if there are
significant safety issues.
The results of the preclinical and clinical trials for pharmaceutical drug
products such as those currently marketed by Dura or being developed by Dura are
submitted to the FDA in the form of an NDA for marketing approval. FDA approval
can take several months to several years, or approval may be denied. The
approval process can be affected by a number of factors, including the severity
of the side effects, the availability of alternative treatments and the risks
and benefits demonstrated in clinical trials. Additional animal studies or
clinical trials may be requested during the FDA review process and may delay
marketing approval. After FDA approval for the initial indication, further
clinical trials are necessary to gain approval for the use of the product for
any additional indications. The FDA may also require post-marketing testing and
surveillance to monitor for adverse effects, which can involve significant
additional expense.
Although the FDA has considerable discretion to decide what requirements must be
met prior to approval, Dura believes, based upon the FDA's historical practice
with respect to drug inhalers, that the FDA is likely to regulate each
combination of Spiros with a compound as a discrete pharmaceutical or drug
product requiring separate approval as a new drug. Dura believes that the
approval process for each drug/delivery combination now under development may be
shorter than the full NDA process described above because the safety and
efficacy of the compounds being developed on behalf of Spiros Corp. II have
already been established in currently marketed formulations and delivery
mechanisms.
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For both currently marketed and future products, failure to comply with
applicable regulatory requirements after obtaining regulatory approval can,
among other things, result in the suspension of regulatory approval, as well as
possible civil and criminal sanctions. In addition, changes in regulations
could have a material adverse effect on Dura.
Since completion of the pivotal trials, Dura has made a number of modifications
to the Spiros system, some of which address problems encountered with the
mechanical features of the Spiros delivery system during the pivotal trials.
These changes are intended to improve the reliability, performance,
manufacturability, and customer acceptance of the mechanical features of the
Spiros delivery system. Dura expects that it will be required to complete
testing and validation pursuant to cGMP requirements of the Spiros system as
modified for commercial distribution, which could be costly and time-consuming.
There can be no assurance that the FDA will not require Dura to undertake
further laboratory testing, field testing and/or clinical studies in order to
insure the safety and effectiveness of the Albuterol Spiros intended to be
commercialized by Dura, on behalf of Spiros Corp. II, and to insure that it can
be reliably manufactured. If a proposed change is deemed to be a major
modification by the FDA, Dura, on behalf of Spiros Corp. II, could be required
to repeat one or more of the clinical studies. Moreover, because of the time
necessary to validate the changes to the Spiros system, there can be no
assurance that Dura will be prepared for any FDA preapproval inspection of
Dura's manufacturing facilities in a timely manner. Spiros Corp. II has
contracted with Dura to have Dura manufacture Albuterol Spiros. If Dura is
required to undertake additional laboratory testing and/or clinical studies or
to postpone the preapproval inspection, or if Dura fails to complete the open
label study in a timely manner, Dura, on behalf of Spiros Corp. II, could
receive a non-approvable letter and, in any event, there could be a substantial
delay in completion of the approval process.
The Federal Food, Drug, and Cosmetic Act requires that any "new drug" must be
approved pursuant to an NDA. The term "new drug" is defined as any drug which
is not generally recognized among qualified experts as safe and effective for
its labeled intended uses. Certain exemptions from this definition exist for
products marketed without change since prior to 1938 (the date of enactment of
the Federal Food, Drug, and Cosmetic Act) or, with respect to the need to show
effectiveness, for drug products marketed prior to October 10, 1962 (the date of
enactment of the "Drug Amendments of 1962"). Dura presently markets 21 drug
products for which the FDA has not yet made a determination as to their status
as new drugs under the Federal Food, Drug, and Cosmetic Act. The FDA is
continuing an evaluation of the effectiveness of all products containing
ingredients marketed prior to 1962 that are not the subject of an approved NDA
as part of its Drug Efficacy Study Implementation ("DESI") program and will
determine which are new drugs requiring approval through an NDA for marketing.
The existence of currently-marketed prescription pharmaceuticals that contain
one or more active ingredients first introduced in the marketplace before 1962
and that are marketed based on their manufacturers' belief that such products
are not subject to the new drug provisions of the Act is recognized in paragraph
B of the Food and Drug Administration's Compliance Policy Guide, 440.100. This
Policy Guide indicates that the FDA will implement procedures to determine
whether the new drug provisions are or are not applicable to these products.
The Policy Guide requires that products covered by paragraph B not be similar or
related to any drug included in the DESI program, or have a different
formulation or conditions for use than products marketed before November 13,
1984. If a product is not covered by paragraph B, the FDA could make a
determination as to whether or not the new drug provisions are applicable to it
without first implementing the procedures called for by the Policy Guide. Dura
believes that nine of its prescription pharmaceutical products may be covered by
paragraph B of the Policy Guide and it is aware that one of its products may be
considered to be similar or related to a DESI drug. Also, it is not aware of
evidence to substantiate that three of its products have the same formulation or
conditions for use as products marketed before November 13, 1984. These
products could be subject at any time to an FDA determination that an NDA is
required. If a final determination is made that a particular drug requires an
approved NDA, such approval will be required for marketing to continue. If such
a determination is made, the FDA might impose various requirements: for example,
it might require that the current product be the subject of an approved NDA,
that the product be reformulated and NDA approval obtained, that the product
must be sold on an over-the-counter basis rather than as a prescription drug, or
that the product must be removed from the market. There can be no assurance as
to which of these courses the FDA will require or whether Dura will be able to
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obtain any approvals which the FDA may deem necessary. If any of these actions
are taken by the FDA, such actions could have a material adverse effect on
Dura's business.
In April 1996, the export provisions of the Federal Food, Drug, and Cosmetic Act
were relaxed to permit the export of unapproved drugs to a foreign country,
provided the product complies with the laws of that country and has valid
marketing authorization in at least one of a list of designated "Tier 1"
countries. Once a product is exported to a qualified foreign country, Dura will
be subject to the applicable foreign regulatory requirements governing human
clinical trials and marketing approval in that country. The requirements
relating to the conduct of clinical trials, product licensing, pricing and
reimbursement vary widely from country to country and there can be no assurance
that Dura or any of its collaborators will be able to meet and fulfill the
statutory requirements in a particular country.
Health Script is subject to regulation by state regulatory authorities,
principally state boards of pharmacy. In addition, Health Script is subject to
regulation by other state and Federal agencies with respect to reimbursement for
prescription drug benefits provided to individuals covered primarily by publicly
funded programs.
MANUFACTURING
Dura's principal manufacturing facility is located near its headquarters in San
Diego, California. The facility initially is intended to be used to formulate,
mill, blend and manufacture drugs to be used with Spiros, pending regulatory
approval. Equipment purchases and validation are currently scheduled through
1998. Dura's manufacturing facility must be registered with and licensed by
various regulatory authorities and must comply with cGMP requirements prescribed
by the FDA and the State of California. Dura is currently expanding its
facilities to provide additional manufacturing capabilities. Dura will need to
significantly scale up its current manufacturing operations from clinical supply
scale to commercial scale 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 and to
obtain marketing approval. The initial scale-up of Dura's manufacturing
operations and completion of the regulatory compliance review process are
scheduled to be completed during the first half of 1998. Dura expects that the
cost to complete these tasks will not exceed $3 million. Any failure or
significant delay in the validation of or obtaining a satisfactory regulatory
inspection of the new facility or failure to successfully scale up could have a
material adverse effect on the ability of Dura to manufacture products in
connection with Spiros.
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. Dura's current
dependence upon others for the manufacture of its products may adversely affect
the future profit margin, if any, on the sale of those products and Dura's
ability to develop and deliver products on a timely and competitive basis.
HUMAN RESOURCES
Dura employed 644 employees (of which 618 are full-time) as of December 31,
1997, consisting of 349 people in sales and marketing (of which 319 constitute
the field sales force and the managed care group), 62 in administration and
finance, 90 in clinical, regulatory and research and development, 44 in
operations and 99 at Health Script. None of Dura's employees are represented by
a labor union and Dura believes it maintains positive relations with both field
and corporate personnel.
RISKS AND UNCERTAINTIES
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. Dura expects average selling prices for many of its
products to decline over time due to competitive and reimbursement pressures.
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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.
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 PHARMACEUTICAL PRODUCTS. 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 business, financial condition and
results of operations. Furthermore, there can be no assurance that Dura,
once it has obtained rights to a pharmaceutical product and committed to
payment terms, will be able to generate sales sufficient to create a profit
or otherwise avoid a loss on such product.
DEVELOPMENT RISKS ASSOCIATED WITH SPIROS-Registered Trademark-. 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. 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 business, financial condition or results of operations.
CUSTOMER CONCENTRATION; CONSOLIDATION OF DISTRIBUTION NETWORK. The distribution
network for pharmaceutical products has in recent years been subject to
increasing consolidation. As a result, a few large wholesale distributors
control a significant share of the market and the number of independent drug
stores and small chains has decreased. Further consolidation among, or any
financial difficulties of, distributors or retailers could result in the
combination or elimination of warehouses thereby stimulating product returns to
Dura. Further consolidation or financial difficulties could also cause
customers to reduce their inventory levels or otherwise reduce purchases of
Dura's products which could result in a material adverse effect on Dura's
business, financial condition or results of operations.
Dura's principal customers are wholesale drug distributors and major drug store
chains. For 1997, two wholesale customers (McKesson Corporation and Cardinal
Health, Inc.) each individually accounted for 11% of sales. For 1996, three
wholesale customers individually accounted for 17% (McKesson Corporation), 14%
(Bergen Brunswig Corporation) and 13% (Cardinal Health, Inc.) of sales. For
1995,
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two wholesale customers individually accounted for 16% (McKesson Corporation)
and 11% (Cardinal Health, Inc.) of sales. The loss of any of these customers
could have a material adverse effect upon Dura's business, financial
condition or results of operations.
SEASONALITY AND FLUCTUATING QUARTERLY RESULTS. Historically, as a result of the
winter cold and flu season, industry-wide demand for respiratory products has
been stronger in the first and fourth quarters than in the second and third
quarters of the year. In addition, variations in the timing and severity of the
winter cold and flu season have influenced 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 Keftab-Registered Trademark- and Ceclor-Registered Trademark-
CD, which are 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 respiratory
infection, allergy, cough and cold, and asthma and COPD markets will be based
on, among other things, product efficacy, safety, reliability, availability and
price.
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
DPIs currently in commercial use worldwide, individual dose and multiple dose.
Individual dose DPIs currently marketed in the U.S. include the Rotohaler-TM-
(developed and marketed by Glaxo) and the Spinhaler-Registered Trademark-
(developed and marketed by Fisons Limited). The Turbuhaler-Registered
Trademark- (developed and marketed by Astra), a multiple dose DPI, is the
leading DPI in worldwide sales. In June 1997, the FDA approved the first
Turbuhaler product, the Pulmicort Turbuhaler, for marketing in the U.S., which
Astra launched in early 1998. Recently the FDA also approved two multiple dose
DPIs developed by Glaxo.
DEPENDENCE ON THIRD PARTIES. Dura's strategy for development and
commercialization of certain of its products is dependent upon entering into
various arrangements with corporate partners, licensors and others and upon the
subsequent success of these partners, licensors and others in performing their
obligations. There can be no assurance that 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 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 Good Manufacturing Practice
("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 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
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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 through 1998. Dura's manufacturing facility must be
registered with and licensed by various regulatory authorities and 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 or failure to
successfully scale up 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 of 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 as total
revenues increased 58% in 1995, 102% in 1996, and 74% in 1997, as compared to
prior periods, primarily as a result of the acquisition or 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 the recently 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 sales force immediately from approximately 270
representatives to over 450 representatives by the end of 1998 to increase the
promotional activity of its current products and to prepare for the launch,
subject to receiving regulatory approval, of Albuterol Spiros. Dura's ability
to achieve and maintain profitability is based on management's ability to manage
its changing business effectively.
UNCERTAINTY OF PROFITABILITY; NEED FOR ADDITIONAL FUNDS. Dura has experienced
significant operating losses in the past and at December 31, 1997, Dura's
accumulated deficit was $163.7 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 and planned
introduction of Spiros products, the upgrade and expansion of its facilities,
continued pricing pressure, or the exercise of the Stock Purchase Option or the
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.
EFFECT OF EXERCISE OF THE STOCK PURCHASE OPTION AND THE PRODUCT OPTIONS;
DILUTION. Dura's Purchase Option with respect to the outstanding shares of
callable common stock of Spiros Corp. II expires on December 31, 2002. If
Dura exercises the 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 could 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. The exercise of the
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Purchase Option will likely require Dura to record a significant charge to
earnings and may adversely impact future operating results. If Dura does not
exercise the Stock Purchase Option prior to its expiration, Dura's rights in
and to Spiros Corp. II with respect to certain compounds will terminate.
As part of Dura's contractual relationship with Spiros Corp. II, Dura
received the Product Options to purchase certain rights to the use of Spiros
with albuterol and with an additional product other that albuterol. 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 pharmaceutical products currently in
development by Dura 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. For
both currently marketed products and future products of 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 a 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 nine of its prescription pharmaceutical
products may be covered by paragraph B of the Policy Guide and is aware that
one of its products may be considered to be similar or related to a DESI
drug. Also, 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 business of Dura.
Dura's 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
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infringing upon the proprietary rights of others both in the U.S. and abroad.
However, only six 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, 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 business
or financial condition of Dura.
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, Inc. ("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 did not breach the merger agreement, and for damages
against Scandipharm. The Company believes that it had the right to terminate
the merger agreement and that Scandipharm's claims for specific performance
under the agreement or for unspecified damages are without merit, and that
outcome of this matter will not have a material adverse effect on the Company's
financial position or results of 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 relating to the purchase of such securities by Dura in the event of a
change in control may have the effect of delaying, deferring or preventing a
change in
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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 3 1/2% Convertible Subordinated Notes (the
"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.
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, 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 recognizes the need to ensure
its operations will not be adversely impacted by the inability of the Company's
systems to process data having dates on or after January 1, 2000 ("Year 2000").
Processing errors due to software failure arising from calculations using the
Year 2000 date are a recognized risk. The Company is currently addressing the
risk, with respect to the availability and integrity of its financial systems
and the reliability of its operating systems, and is in the process of
communicating with suppliers, customers, financial institutions and others with
whom it conducts business to assess whether they are or will be Year 2000
compliant. While the Company believes its planning efforts are adequate to
address the Year 2000 concerns, there can be no assurance that the systems of
other companies on which the Company's systems and operations rely will be
converted on a timely basis and will not have a material effect on the Company.
In addition, the potential impact of the Year 2000 on others with whom the
Company does business and any resulting effects on the Company cannot be
reasonably estimated at this time. The cost of the Company's Year 2000
initiatives is not expected to be material to the Company's results of
operations or financial position.
ITEM 2. PROPERTIES
The Company owns and occupies a new 77,000 square foot headquarters facility in
San Diego, California, on a parcel of land that it purchased in 1996. Dura
commenced construction of a 125,000 square foot to be used initially for
research and development purposes. In addition, Dura owns two buildings that
are situated on another parcel of land near its headquarters. One building,
consisting of approximately 31,000 square feet, is currently vacant, but is
expected to be used for research and development and manufacturing purposes.
The second building, consisting of approximately 49,000 square feet, contains
Dura's manufacturing facility that will be used to formulate, mill, blend and
fill drugs to be used with Spiros, laboratory and research facilities and
warehouse space. Dura also occupies an additional 34,000 square feet of office
and laboratory space pursuant to a short-term lease.
The Company also leases approximately 16,660 square feet of space in Denver,
Colorado, which houses the operations of Health Script's mail service pharmacy.
The lease term expires in January 2001 with one five-year renewal option.
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The Company considers its facilities adequate for its current needs and
believes that additional space can be obtained in the future, if necessary.
ITEM 3. LEGAL PROCEEDINGS
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 in the state court in Alabama for
breach of contract, seeking specific performance of the merger agreement and
money damages. On January 19, 1998, the Company filed suit against
Scandipharm in the Chancery Court in Delaware seeking a declaratory judgment
that the Company had the right to terminate the merger agreement and for
damages against Scandipharm. The Company believes that it had the right to
terminate the merger agreement and that Scandipharm's claims for specific
performance and for unspecified damages are without merit, and that the
outcome of this matter will not have a material adverse effect on its
financial position or results of operations. One member of the Company's
Board of Directors is also on the Board of Directors of Scandipharm.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
The information required by Item 5 of Form 10-K is incorporated herein by
reference from the information contained in the sections captioned "Market
Information on Common Stock," "Shareholders," and "Dividends" in the Annual
Report, extracts of which are attached hereto as Exhibit 13.
On December 19, 1997, the Company issued 896,606 shares of its common stock
which were not registered pursuant to the Securities Act of 1933, as amended
(the "Act"). The shares were issued to the shareholders of Spiros Corp.,
primarily venture capital investors, in connection with the Company's
acquisition of all of the outstanding securities of Spiros Corp., a separate,
private company. The purchase price of $45,707,000 consisted of the shares
of Dura common stock, valued at $43,755,000, and a cash payment of
$1,952,000. The shares of common stock were exempt from registration
pursuant to section 4(2) of the Act.
On December 31, 1997, the Company issued a warrant to a separate,
unaffiliated company which was an existing security holder of the Company, to
purchase 200,000 shares of its common stock. Neither the warrant nor the
underlying shares of the Company's common stock were registered pursuant to
the Act. The warrant is exercisable through December 31, 2002 at an exercise
of $45.12 per share of common stock. The warrant was issued as part of the
consideration paid by the Company to terminate a ten-year royalty agreement
which the Company entered into in 1994, in exchange for the security holder's
prior rights to receive certain warrants. No commission or renumeration was
paid for soliciting such exchange. The warrant was exempt from registration
pursuant to section 3(a)(9) of the Act.
ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 6 of Form 10-K is incorporated herein by
reference from the information contained in the section captioned "Selected
Financial Data" in the Annual Report, extracts of which are attached hereto as
Exhibit 13.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by Item 7 of Form 10-K is incorporated herein by
reference from the information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report, extracts of which are attached hereto as Exhibit 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 of Form 10-K is incorporated herein by
reference from the information contained in the section captioned "Financials"
in the Annual Report, extracts of which are attached hereto as Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors. The information under the caption "Election
of Directors," appearing in the Proxy Statement to be filed on or about April
16, 1998, is incorporated herein by reference.
(b) Identification of Executive Officers. The information under the caption
"Executive Officers," appearing in the Proxy Statement to be filed on or about
April 16, 1998, is incorporated herein by reference.
(c) Compliance with Section 16 (a) of the Exchange Act. The information under
the caption "Section 16 (a) Beneficial Ownership Reporting Compliance,"
appearing in the Proxy Statement to be filed on or about April 16, 1998, is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the heading "Executive Compensation and Other Information"
appearing in the Proxy Statement to be filed on or about April 16, 1998, is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information under the headings "Principal Stockholders" and "Common Stock
Ownership of Management," appearing in the Proxy Statement to be filed on or
about April 16, 1998, is incorporated herein by reference.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the headings "Election of Directors," "Executive
Compensation and Other Information" and "Certain Relationships and Related
Transactions," appearing in the Proxy Statement to be filed on or about April
16, 1998, is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a) 2. INDEX TO FINANCIAL STATEMENT SCHEDULES
Financial statement schedules are omitted because they are not required, are not
applicable or the information is included in the consolidated financial
statements or notes thereto.
(a) 3. EXHIBITS
Exhibit
No. Description
------- -----------
13) 2.1 Agreement and Plan of Merger dated July 1, 1997 of Dura
Pharmaceuticals, Inc. (a Delaware corporation) and Dura
Pharmaceuticals, Inc. (a California corporation).
15) 2.2 Agreement and Plan of Merger dated December 18, 1997 between the
Company, Spiros Development Corporation and SDC Acquisition Corp.
13) 3.1 Certificate of Incorporation.
13) 3.2 Bylaws.
17) 4.1 Specimen Common Stock Certificate.
14) 4.2 Indenture, including form of Note, dated July 30, 1997, between the
Company and Chase Trust Company of California, as trustee, with
respect to the 3 1/2% Convertible Subordinated Notes due 2002.
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14) 4.3 Form of 3 1/2% Convertible Subordinated Note (included in Exhibit
4.2).
15) 4.4 Warrant Agreement dated December 22, 1997 between the Company and
ChaseMellon Shareholder Services L.L.C., as warrant agent,
including form of SDCII Warrant.
15) 4.5 Form of SDCII Warrant (included in Exhibit 4.4).
15) 4.8 Specimen Unit Certificate.
3) 4.9 Form of Series W Warrant.
1) 4.10 Form of Series S Warrant.
1) 10.1 License Agreement between the Company and Sterling Drug Inc.
currently known as Sterling Winthrop, Inc., dated June 26, 1991
(with certain confidential portions omitted).
1) 10.2 License Agreement dated June 1, 1990 between the Company and Mark
B. Mecikalski, M.D., (with certain confidential portions omitted).
14) + 10.3 Form of Indemnification Agreement between the Company and each of
its directors.
14) + 10.4 Form of Indemnification Agreement between the Company and each of
its officers.
2) 10.5 Bitolterol Mesylate 0.2% Inhalation Solution and
Tornalate-Registered Trademark- (Bitolterol Mesylate) Metered Dose
Inhaler License Agreement dated June 24, 1992 between Sanofi
Winthrop, Inc., as successor, and the Company (with certain
confidential portions omitted).
14) + 10.6 1992 Stock Option Plan, as amended.
16) + 10.7 Form of Notice of Grant of Stock Option.
16) + 10.8 Form of Stock Option Agreement.
2) + 10.9 Employment Agreement dated May 7, 1990 between the Company and Cam
L. Garner.
4) 10.10 Assignment Agreement dated March 12, 1993 between the Company and
Mark B. Mecikalski, M.D., (with certain confidential portions
omitted).
5) 10.11 Registration Rights Agreement dated April 17, 1996 between the
Company and Elan International Services Limited, as successor in
interest.
11) 10.12 Letter Agreements between the Company and Elan International
Services Limited, dated March 1, 1995 and September 3, 1996.
6) 10.13 Technology Access License and Royalty Agreement dated September 5,
1994 between Elan Corporation, plc and the Company (with certain
confidential portions omitted).
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7) 10.14 Purchase Agreement dated June 14, 1995 between the Company and
Abbott Laboratories, Ross Products Division, including list of
Schedules and Exhibits thereto (with certain confidential portions
omitted).
8) 10.15 Investors' Rights Agreement dated December 29, 1995 between the
Company and the investors listed on Schedule A thereto.
9) 10.16 Agreement for Purchase and Sale of Assets dated June 17, 1996
between the Company and Procter & Gamble Pharmaceuticals, Inc.
(with certain confidential portions omitted).
10) 10.17 Licensing Agreement dated August 21, 1996 between the Company and
Eli Lilly and Company (with certain confidential portions omitted).
11) 10.18 Manufacturing Agreement dated August 21, 1996 between the Company
and Eli Lilly and Company (with certain confidential portions
omitted).
13) 10.19 Business Loan Agreement dated April 14, 1997 between the Company
and Bank of America National Trust and Savings Association.
12) 10.20 Syntex Asset Purchase Agreement dated March 27, 1997 between the
Company and Syntex (USA), Inc.
12) 10.21 SPIL Asset Purchase Agreement dated March 27, 1997 between the
Company and Syntex Pharmaceuticals International Limited.
14) 10.22 Amendment No. 1 to Business Loan Agreement dated May 8, 1997
between the Company and Bank of America National Trust and Savings
Association.
14) 10.23 Amendment No. 2 to Business Loan Agreement dated July 30, 1997
between the Company and Bank of America National Trust and Savings
Association.
10.24 Amendment No. 3 to Business Loan Agreement dated October 28, 1997
between the Company and Bank of America National Trust and Savings
Association.
+ 10.25 Deferred Compensation Plan.
15) 10.26 Technology License Agreement dated December 22, 1997 between the
Company, Dura Delivery Systems, Inc., Spiros Development
Corporation and Spiros Development Corporation II, Inc.
15) 10.27 Development Agreement dated December 22, 1997 between the Company
and Spiros Development Corporation II, Inc.
15) 10.28 Albuterol and Product Option Agreement dated December 22, 1997
between the Company and Spiros Development Corporation II, Inc.
15) 10.29 Manufacturing and Marketing Agreement dated December 22, 1997
between the Company and Spiros Development Corporation II, Inc.
15) 10.30 Services Agreement dated December 22, 1997 between the Company and
Spiros Development Corporation II, Inc.
+10.31 Employment Agreement dated May 1, 1996 between the Company and
David S. Kabakoff.
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<PAGE>
11 Statements Re Computations of Net Income (Loss) Per Share.
13 1997 Annual Report to Shareholders (including only those items
incorporated by reference).
23 Independent Auditors' Consent.
24 Power of Attorney (See Signature page).
27.1 Financial Data Schedule for the year ended December 31, 1997.
27.2 Financial Data Schedule for the years ended December 31, 1995 and
December 31, 1996.
27.3 Financial Data Schedule for the quarters ended March 31, 1997, June
30, 1997, and September 30, 1997.
27.4 Financial Data Schedule for the quarters ended March 31, 1996, June
30, 1996, and September 30, 1996.
1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 33-44525), filed December 13, 1991, as amended.
2) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1992, as amended.
3) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-71798), filed December 13, 1993.
4) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1993, as amended.
5) Incorporated by reference to the Company's Form 10-Q for the quarter ended
June 30, 1994.
6) Incorporated by reference to the Company's Form 10-Q for the quarter ended
September 30, 1994, as amended.
7) Incorporated by reference to the Company's Form 8-K, dated June 14,
1995, as amended.
8) Incorporated by reference to the Company's Form 8-K, dated December 29,
1995, as amended.
9) Incorporated by reference to the Company's Form 8-K, dated July 3, 1996.
10) Incorporated by reference to the Company's Form 8-K, dated September 5,
1996, as amended.
11) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1996.
12) Incorporated by reference to the Company's Form 8-K, dated May 7, 1997, as
amended.
13) Incorporated by reference to the Company's Form 10-Q for the quarter ended
June 30, 1997.
14) Incorporated by reference to the Company's Form 10-Q for the quarter ended
September 30, 1997.
15) Incorporated by reference to the Company's Form 8-K, dated December 19,
1997.
16) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 333-34551), filed August 28, 1997.
17) Incorporated by reference to the Company's Registration Statement on Form
8-A, filed December 11, 1997.
+ Management contract or compensation plan or arrangement.
28
<PAGE>
(b) REPORTS ON FORM 8-K.
On October 10, 1997, the Company filed a current Report on Form 8-K dated
October 10, 1997, as amended on October 21, 1997 and November 26, 1997.
On October 24, 1997, the Company filed a current Report on Form 8-K dated
October 21, 1997.
On December 1, 1997, the Company filed a current Report on Form 8-K dated
December 1, 1997.
On January 5, 1998, the Company filed a current Report on Form 8-K dated
December 19, 1997.
SUPPLEMENTAL INFORMATION
No Annual Report to Shareholders or Proxy materials have been sent to
shareholders as of the date of this report. The Annual Report to Shareholders
and Proxy material will be furnished to the Company's shareholders subsequent to
the filing of this report and the Company will furnish such material to the
Securities and Exchange Commission at that time.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 27, 1998 DURA PHARMACEUTICALS, INC.
By: /s/ Cam L. Garner
-----------------
Cam L. Garner,
Chairman, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Cam L. Garner and James W. Newman, or either of them,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes may lawfully do or cause to be done
by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
ANNUAL REPORT ON FORM 10-K HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Signature Title Date
- --------- ----- ----
/s/ Cam L. Garner Chairman, President and March 27, 1998
- -------------------------- Chief Executive Officer
(Cam L.Garner) (Principal Executive Officer)
/s/ David S. Kabakoff Executive Vice President March 27, 1998
- -------------------------- and Director
(David S. Kabakoff)
/s/ James W. Newman Senior Vice President, March 27, 1998
- -------------------------- Finance and Administration,
(James W. Newman) and Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Walter F. Spath Senior Vice President, March 27, 1998
- -------------------------- Sales and Marketing and
(Walter F. Spath) Director
/s/ James C. Blair Director March 27, 1998
- --------------------------
(James C. Blair)
/s/ Herbert J. Conrad Director March 27, 1998
- --------------------------
(Herbert J. Conrad)
/s/ Joseph C. Cook, Jr. Director March 27, 1998
- --------------------------
(Joseph C. Cook, Jr.)
/s/ David F. Hale Director March 27, 1998
- --------------------------
(David F. Hale)
/s/ Gordon V. Ramseier Director March 27, 1998
- --------------------------
(Gordon V. Ramseier)
/s/ Charles G. Smith Director March 27, 1998
- --------------------------
(Charles G. Smith)
30
<PAGE>
EXHIBIT INDEX
TO
FORM 10-K
DURA PHARMACEUTICALS, INC.
Exhibit
No. Description
------- -----------
13) 2.1 Agreement and Plan of Merger dated July 1, 1997 of Dura
Pharmaceuticals, Inc. (a Delaware corporation) and Dura
Pharmaceuticals, Inc. (a California corporation).
15) 2.2 Agreement and Plan of Merger dated December 18, 1997 between the
Company, Spiros Development Corporation and SDC Acquisition Corp.
13) 3.1 Certificate of Incorporation.
13) 3.2 Bylaws.
17) 4.1 Specimen Common Stock Certificate.
14) 4.2 Indenture, including form of Note, dated July 30, 1997, between the
Company and Chase Trust Company of California, as trustee, with
respect to the 3 1/2% Convertible Subordinated Notes due 2002.
14) 4.3 Form of 3 1/2% Convertible Subordinated Note (included in Exhibit
4.2).
15) 4.4 Warrant Agreement dated December 22, 1997 between the Company and
ChaseMellon Shareholder Services L.L.C., as warrant agent,
including form of SDCII Warrant.
15) 4.5 Form of SDCII Warrant (included in Exhibit 4.4).
15) 4.8 Specimen Unit Certificate.
3) 4.9 Form of Series W Warrant.
1) 4.10 Form of Series S Warrant.
1) 10.1 License Agreement between the Company and Sterling Drug Inc.
currently known as Sterling Winthrop, Inc., dated June 26, 1991
(with certain confidential portions omitted).
1) 10.2 License Agreement dated June 1, 1990 between the Company and Mark
B. Mecikalski, M.D., (with certain confidential portions omitted).
14) + 10.3 Form of Indemnification Agreement between the Company and each of
its directors.
14) + 10.4 Form of Indemnification Agreement between the Company and each of
its officers.
31
<PAGE>
2) 10.5 Bitolterol Mesylate 0.2% Inhalation Solution and
Tornalate-Registered Trademark- (Bitolterol Mesylate) Metered Dose
Inhaler License Agreement dated June 24, 1992 between Sanofi
Winthrop, Inc., as successor, and the Company (with certain
confidential portions omitted).
14) + 10.6 1992 Stock Option Plan, as amended.
16) + 10.7 Form of Notice of Grant of Stock Option.
16) + 10.8 Form of Stock Option Agreement.
2) + 10.9 Employment Agreement dated May 7, 1990 between the Company and Cam
L. Garner.
4) 10.10 Assignment Agreement dated March 12, 1993 between the Company and
Mark B. Mecikalski, M.D., (with certain confidential portions
omitted).
5) 10.11 Registration Rights Agreement dated April 17, 1996 between the
Company and Elan International Services Limited, as successor in
interest.
11) 10.12 Letter Agreements between the Company and Elan International
Services Limited, dated March 1, 1995 and September 3, 1996.
6) 10.13 Technology Access License and Royalty Agreement dated September 5,
1994 between Elan Corporation, plc and the Company (with certain
confidential portions omitted).
7) 10.14 Purchase Agreement dated June 14, 1995 between the Company and
Abbott Laboratories, Ross Products Division, including list of
Schedules and Exhibits thereto (with certain confidential portions
omitted).
8) 10.15 Investors' Rights Agreement dated December 29, 1995 between the
Company and the investors listed on Schedule A thereto.
9) 10.16 Agreement for Purchase and Sale of Assets dated June 17, 1996
between the Company and Procter & Gamble Pharmaceuticals, Inc.
(with certain confidential portions omitted).
10) 10.17 Licensing Agreement dated August 21, 1996 between the Company and
Eli Lilly and Company (with certain confidential portions omitted).
11) 10.18 Manufacturing Agreement dated August 21, 1996 between the Company
and Eli Lilly and Company (with certain confidential portions
omitted).
13) 10.19 Business Loan Agreement dated April 14, 1997 between the Company
and Bank of America National Trust and Savings Association.
12) 10.20 Syntex Asset Purchase Agreement dated March 27, 1997 between the
Company and Syntex (USA), Inc.
12) 10.21 SPIL Asset Purchase Agreement dated March 27, 1997 between the
Company and Syntex Pharmaceuticals International Limited.
32
<PAGE>
14) 10.22 Amendment No. 1 to Business Loan Agreement dated May 8, 1997
between the Company and Bank of America National Trust and Savings
Association.
14) 10.23 Amendment No. 2 to Business Loan Agreement dated July 30, 1997
between the Company and Bank of America National Trust and Savings
Association.
10.24 Amendment No. 3 to Business Loan Agreement dated October 28, 1997
between the Company and Bank of America National Trust and Savings
Association.
+ 10.25 Deferred Compensation Plan.
15) 10.26 Technology License Agreement dated December 22, 1997 between the
Company, Dura Delivery Systems, Inc., Spiros Development
Corporation and Spiros Development Corporation II, Inc.
15) 10.27 Development Agreement dated December 22, 1997 between the Company
and Spiros Development Corporation II, Inc.
15) 10.28 Albuterol and Product Option Agreement dated December 22, 1997
between the Company and Spiros Development Corporation II, Inc.
15) 10.29 Manufacturing and Marketing Agreement dated December 22, 1997
between the Company and Spiros Development Corporation II, Inc.
15) 10.30 Services Agreement dated December 22, 1997 between the Company and
Spiros Development Corporation II, Inc.
+ 10.31 Employment Agreement dated May 1, 1996 between the Company and
David S. Kabakoff.
11 Statements Re Computations of Net Income (Loss) Per Share.
13 1997 Annual Report to Shareholders (including only those items
incorporated by reference).
23 Independent Auditors' Consent.
24 Power of Attorney (See Signature page).
27.1 Financial Data Schedule for the year ended December 31, 1997.
27.2 Financial Data Schedule for the years ended December 31, 1995 and
December 31, 1996.
27.3 Financial Data Schedule for the quarters ended March 31, 1997, June
30, 1997, and September 30, 1997.
27.4 Financial Data Schedule for the quarters ended March 31, 1996, June
30, 1996, and September 30, 1996.
1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 33-44525), filed December 13, 1991, as amended.
2) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1992, as amended.
33
<PAGE>
3) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-71798), filed December 13, 1993.
4) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1993, as amended.
5) Incorporated by reference to the Company's Form 10-Q for the quarter ended
June 30, 1994.
6) Incorporated by reference to the Company's Form 10-Q for the quarter ended
September 30, 1994, as amended.
7) Incorporated by reference to the Company's Form 8-K, dated June 14,
1995, as amended.
8) Incorporated by reference to the Company's Form 8-K, dated December 29,
1995, as amended.
9) Incorporated by reference to the Company's Form 8-K, dated July 3, 1996.
10) Incorporated by reference to the Company's Form 8-K, dated September 5,
1996, as amended.
11) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1996.
12) Incorporated by reference to the Company's Form 8-K, dated May 7, 1997, as
amended.
13) Incorporated by reference to the Company's Form 10-Q for the quarter ended
June 30, 1997.
14) Incorporated by reference to the Company's Form 10-Q for the quarter ended
September 30, 1997.
15) Incorporated by reference to the Company's Form 8-K, dated December 19,
1997.
16) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 333-34551), filed August 28, 1997.
17) Incorporated by reference to the Company's Registration Statement on Form
8-A, filed December 11, 1997.
+ Management contract or compensation plan or arrangement.
34
<PAGE>
EXHIBIT 10.24
AMENDMENT NO. 3 TO BUSINESS LOAN AGREEMENT
This Amendment No. 3 (the "Amendment) dated as of October 28, 1997
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 amended as of May 8, 1997 and July
30, 1997 (the "Agreement").
B. The Bank and the Borrower desire to amend the Agreement to permit the
Borrower to restructure its business in certain respects.
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 CONSOLIDATED FINANCIALS. Paragraph 6.2(b) is amended to read as
follows:
"(b) Within 45 days of the period's end, the Borrower's quarterly
financial statements, including the fourth quarter. These financial
statements are to include year-to-date financial reporting and may be
Borrower prepared. The statements shall be prepared on (i) a consolidated
basis, (ii) on a consolidating basis by division, including, without
limitation, the Healthscript division, the HealthCo division, and any other
division of the Borrower, and (iii) on a combined basis for the Borrower
and its Domestic Subsidiaries (as hereafter defined)."
2.2 COMPLIANCE CERTIFICATE. The form of compliance certificated
appearing as Exhibit A to Amendment No. 2 to the Agreement as referenced in
Paragraph 6.2(d) is amended to read as set forth on Exhibit A to this Amendment.
2.3 NET WORTH. Paragraph 6.3 is amended and restated in its entirety
to read as follows:
"6.3 NET WORTH. To maintain on a consolidated basis for the Borrower and
its Domestic Subsidiaries for each quarterly accounting period Net Worth
equal to, on a cumulative basis, at least the sum of:
(a) Four Hundred Fifty Million Dollars ($450,000,000); PLUS
1
<PAGE>
(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 June 30, 1997; 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 June 30, 1997; 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 June 30, 1997; PLUS
(e) any increase in stockholders' equity resulting from the transactions
described in the Form S-3 Registration Statement filed under the
Securities Act of 1933 as filed by the Borrower with the Securities and
Exchange Commission on October 10, 1997 (the "Form S-3"); MINUS
(f) 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") incurred in such quarterly accounting period
commencing with the quarter ended June 30, 1997, up to a maximum of One
Hundred and Twenty Five Million Dollars ($125,000,000) in the aggregate;
MINUS
(g) 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.
"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. "Domestic Subsidiary"
means any subsidiary (except Dura USA Holdings, Inc.) which is organized
under the laws of the United States or any state thereof."
2.4 MAXIMUM ADJUSTED FUNDED DEBT TO ADJUSTED EBITDA. Paragraph 6.4
is amended and restated in its entirety to read as follows:
"6.4 MAXIMUM ADJUSTED FUNDED DEBT TO ADJUSTED EBITDA. To maintain on
a consolidated basis for the Borrower and its Domestic Subsidiaries, a
ratio of (i) funded debt, including all interest bearing obligations
but excluding obligations owing to Procter & Gamble Pharmaceuticals,
Inc. for the Entex Products up to a maximum of Twenty Million Dollars
($20,000,000) LESS domestic cash and domestic cash equivalents up to
an amount equal to the face amount of the Notes issued pursuant to and
as defined in the Indenture TO (ii) EBITDA of not greater than the
ratio indicated for each period specified below:
2
<PAGE>
Period Ratio
------ -----
From and including the date of this 2.00 to 1.00
Agreement to and including August 31, 1997
From and including September 1, 1997 1.75 to 1.00
and thereafter
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;
(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 at least A1 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, (v) all federal, state, local and
foreign income taxes and (vi) the Spiros Charges up to a maximum
of One Hundred and Twenty Five Million Dollars ($125,000,000) in
the aggregate. 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 MINIMUM EBIT. Paragraph 6.5 is amended and restated in its entirety
to read as follows:
"6.5 MINIMUM EBIT. To maintain on a consolidated basis for the
Borrower and its Domestic Subsidiaries EBIT of at least $0 for
each quarterly accounting period.
For purposes of this Agreement "EBIT" means net income for such
period, LESS, to the extent added in determining such net income,
interest income,
3
<PAGE>
PLUS, to the extent deducted in determining such net income, (i)
interest expense, (ii) all federal, state, local and foreign
income taxes and (iii) the Spiros Charges up to a maximum of One
Hundred and Twenty Five Million Dollars ($125,000,000) in the
aggregate."
2.6 SIGNIFICANT SUBSIDIARIES. Paragraph 6.6 is amended to add the
following at the end thereof:
"Notwithstanding the foregoing, "Significant Subsidiary" shall not
include any Foreign Subsidiary. "Foreign Subsidiary" means a
subsidiary which is not a Domestic Subsidiary.
2.7 DEBTS. Paragraph 6.7 is amended and restated in its entirety to
read as follows:
"6.7 OTHER DEBTS. Not, and not permit its subsidiaries, to have
outstanding or incur any direct or contingent debts (other than
those to the Bank), or become liable for the debts of others without
the Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade
credit.
(b) Endorsing negotiable instruments received in the usual course
of business.
(c) Obtaining surety bonds in the usual course of business.
(d) Debts in existence on the date of this Agreement disclosed in
writing to the Bank.
(e) Additional debts for the acquisition of fixed or capital assets
which do not exceed a total principal amount of Five Million Dollars
($5,000,000) in any single fiscal year.
(f) Debt pursuant to that certain Indenture to be dated as of July
30, 1997 between the Borrower and Chase Trust Company of California
as trustee ("Indenture")."
2.8 LIENS. Paragraph 6.8 is amended and restated in its entirety to
read as follows:
"6.8 OTHER LIENS. Not, and not permit its subsidiaries; to create,
assume, or allow any security interest or lien (including judicial
liens) on property the Borrower now or later owns, except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
4
<PAGE>
(c) Liens outstanding on the date of this agreement disclosed in
writing to the Bank.
Additional purchase money security interests in personal property
acquired after the date of this Agreement if the total principal
amount of debts secured by such liens does not exceed Five Million
Dollars ($5,000,000) in any single fiscal year."
2.9 CAPITAL EXPENDITURES. Paragraph 6.9 is amended and restated in
its entirety to read as follows:
"6.9 CAPITAL EXPENDITURES. Not, and not permit its subsidiaries, to
spend more than an aggregate amount of Thirty Million Dollars
($30,000,000) during 1997 fiscal year or Fifteen Million Dollars
($15,000,000) during 1998 fiscal year to acquire fixed or capital
assets."
2.10 LEASES. Paragraph 6.10 is amended and restated in its entirety to
read as follows:
"6.10 LEASES. Not to permit the aggregate payments due in any
fiscal year under all leases for itself and its subsidiaries
(including capital and operating leases for real or personal
property) to exceed Two Million Dollars ($2,000,000)."
2.10 LOANS TO AFFILIATED COMPANIES. Paragraph 6.12 is amended
to read as follows:
"6.12 LOANS TO AFFILIATED COMPANIES. Not, and not permit any
Domestic Subsidiary, to make any loans, advances, or other
extensions of credit or investments in or to any of the Borrower's
affiliated companies (including, without limitation, subsidiaries of
the Borrower) in excess of an aggregate of Ten Million Dollars
($10,000,000). Notwithstanding the foregoing, the Borrower may make
(i) investments in Foreign Subsidiaries of the Borrower in an
aggregate book amount of not in excess of $90,000,000 and (ii) loans
in an aggregate amount not to exceed $180,000,000 to Dura (Bermuda)
Trading Company, Ltd evidenced by three Secured Promissory Notes
dated as of October 28, 1997."
2.11 COMPLIANCE WITH LAWS. Paragraph 6.16 is amended and restated in
its entirety to read as follows:
"6.16 COMPLIANCE WITH LAWS. To comply with the laws (including
any fictitious name statute), regulations, and orders of any
government body with authority over the Borrower's and its
subsidiaries' business."
2.12 PRESERVATION OF RIGHTS. Paragraph 6.17 is amended and restated in
its entirety to read as follows:
5
<PAGE>
"6.17 PRESERVATION OF RIGHTS. To maintain and preserve all
rights, privileges, and franchises the Borrower and its subsidiaries
now have."
2.13 MAINTENANCE OF PROPERTIES. Paragraph 6.18 is amended to read as
follows:
"6.17 MAINTENANCE OF PROPERTIES. To make any repairs, renewals,
or replacements to keep the Borrower's and its subsidiaries'
properties in good working condition."
2.14 DEFAULTS. Paragraph 8 is amended to replace the word "guarantor"
with "subsidiary" each time such word appears.
3. CONSENT. Notwithstanding anything in the Agreement to the contrary,
the Bank hereby consents to (i) the consummation, on or before March 31,
1998, of the transactions described in a writing from the Borrower to the
Bank referencing this Amendment delivered to the Bank on or prior to the date
of this Amendment and (ii) on or before March 31, 1998, the acquisition by
the Borrower of Spiros Development Corporation and a cash contribution from
the Borrower to Spiros Development Corporation II, Inc. as described in the
Form S-3.
4. 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.
5. FEES. On or before close of business on October 29, 1997, the
Borrower will pay to the Bank an amendment fee of Five Thousand Dollars
($5,000). To facilitate such payment, the Borrower hereby authorizes the
Bank to cause account number 14507-07440 of the Borrower maintained with the
Bank to be debited in the amount of Five Thousand Dollars ($5,000) in
satisfaction of the Borrower's obligation under the preceding sentence. On
demand, the Borrower will reimburse the Bank for legal costs, fees and
expenses (including, without limitation, the allocable cost of inside
counsel) incurred by the Bank in the preparation of this Amendment.
6. CONDITIONS. This Amendment will be effective when (i) this Amendment
is duly executed by the parties and (ii) the Bank receives evidence
satisfactory to it of due execution and delivery by the Borrower of this
Amendment and the transactions contemplated hereby.
7. 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.
6
<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/ James W. Newman
-------------------------------
Name: James W. Newman
Title: Senior Vice President
Finance and Administration
7
<PAGE>
EXHIBIT 10.25
DEFERRED COMPENSATION PLAN
THIS AGREEMENT is made on the Effective Date of the Adoption Agreement
attached hereto, by and between Dura Pharmaceuticals, Inc., a corporation
organized under the laws of the State of California (the "Employer"), and the
Employee named in the attached Adoption Agreement.
WITNESSETH THAT:
In consideration of the agreements hereinafter contained the parties hereto
agree as follows:
Article I -- Introduction and Purpose of Plan
1.1 ESTABLISHMENT OF PLAN. The Employer, by execution of the Adoption
Agreement, hereby establishes this Deferred Compensation Plan which shall
become effective as of the date selected by the Employer in the Adoption
Agreement. The Plan shall be maintained for the exclusive benefit of covered
employees and is intended to comply with all applicable provisions of the
Internal Revenue Code of 1986, as amended, and regulations thereunder, and
other applicable law.
1.2 PURPOSE OF PLAN. The purpose of this Plan is to enable Employees who
become covered under the Plan to enhance their retirement security by
permitting them to enter into agreements with the Employer to defer a portion
of their Compensation and receive benefits at retirement, separation from
service, death, or upon the occurrence of other events as provided elsewhere
in this Plan.
Article II -- Definitions
Whenever used in the Plan, the following terms shall have the meanings as set
forth in this Article II unless a different meaning is clearly required by the
context.
2.1 ADMINISTRATOR means the individual or committee appointed by the Employer
(and designated in the Adoption Agreement) to administer the Plan. If the
Employer fails to make such appointment, the Employer shall be the
Administrator.
2.2 ADOPTION AGREEMENT means the form used by the Employer to establish or amend
this Plan. The terms of and information included in the Adoption Agreement are
incorporated by reference as part of the Plan.
2.3 BENEFICIARY means the person, persons, or legal entity entitled to receive
benefits under this Plan which become payable in the event of the Participant's
death.
2.4 CODE means the Internal Revenue Code of 1986, as amended, and includes any
regulations thereunder.
<PAGE>
2.5 COMPENSATION means the total amount of remuneration earned by an Employee
for personal services rendered to the Employer for the calendar year including
amounts deferred under this Plan and any other deferred compensation plan the
employer may have in existence.
2.6 DEFERRAL means the annual amount of Compensation that a participant elects
to defer pursuant to a properly executed Voluntary Salary Deferral Agreement.
2.7 EMPLOYEE means any person who performs services for the Employer, either as
an employee or as an independent contractor, to whom compensation is paid on a
regular basis.
2.8 EMPLOYER means the entity which has adopted this Plan by completing the
Adoption Agreement.
2.9 NORMAL RETIREMENT AGE means age 65 or other earlier age elected by the
Participant in writing. In no event shall Normal Retirement Age be the earlier
than the earliest date on which a Participant may retire under the Employer's
basic qualified retirement plan, (if any), without the Employer's consent and
receive immediate retirement benefits without incurring an actuarial or similar
reduction in benefits.
2.10 PARTICIPANT means an Employee or former Employee who has enrolled in this
Plan and who retains the rights to benefits under the Plan.
2.11 PLAN means the Model Deferred Compensation Plan as set forth herein and the
Adoption Agreement as it may be amended from time to time.
2.12 PLAN YEAR means the twelve consecutive month period ending on December 31.
2.13 TRUST means a trust established solely for the benefit of employees under
the terms of this agreement, the Trust terms of which are provided in the Trust
document attached.
2.14 VOLUNTARY SALARY DEFERRAL AGREEMENT means the agreement between a
Participant and the Employer to defer receipt by the Participant of
Compensation not yet earned. In the case of bonuses or other non-periodic
payments, such compensation shall be treated as earned no later that the day
prior to the day in which the amount payable has been determined. Such
agreement shall state the Deferral amount to be withheld from a Participant's
pay or bonus and shall become effective no earlier than the first day of the
month following the execution of such agreement.
Article III -- Participation in the Plan
3.1 ELIGIBILITY. Each Employee who is eligible to participate pursuant to the
Employer's election in the Adoption Agreement may become a Participant in this
Plan on the first day of the month next following commencement of employment as
an eligible Employee and enrollment pursuant to Article III. Any person elected
or appointed to a term of office with the Employer shall be deemed to commence
employment at the time such person assumes office.
2
<PAGE>
3.2 ENROLLMENT. Eligible employees may enroll in the Plan by completing a
Voluntary Salary Deferral Agreement and submitting it to the Administrator.
Enrollment shall be effective on or after the first day of the month following
the date the enrollment form is properly completed by the Employee and accepted
by the Administrator.
Article IV -- Deferral of Compensation and Funding
4.1 DEFERRAL AMOUNT. There shall be no stated maximum or minimum deferral
amount under the Plan.
4.2 MODIFICATIONS TO AMOUNT DEFERRED. A Participant may change Deferrals with
respect to Compensation not yet earned by submitting a new properly executed
Voluntary Salary Deferral Agreement to the Administrator. Such change shall
take effect as soon as administratively practicable, but not earlier that the
first pay period commencing with or during the first month following receipt by
the Administrator of such Voluntary Salary Deferral Agreement. Modifications
(other than a revocation of participation as provided in Article 4.3) are
subject to the limitations specified in the Adoption Agreement (if any).
4.3 REVOCATION OF DEFERRAL. Any Participant may revoke his or her election to
have Compensation deferred by so notifying the Administrator in writing. The
Participant's full Compensation on a non-deferred basis will than be restored as
soon as administratively practicable, but no earlier than the first pay period
commencing with or during the first month following receipt of written notice of
such revocation by the Administrator. Notwithstanding this Article 4.3, the
Participant's deferred compensation account shall be paid only as provided in
Article V of this Plan.
4.4 FUNDING. Amounts deferred under this Article IV shall be placed in the
Trust by Employer no later than 7 business days after a proper deferral has been
made by a Plan Participant. Employer will transfer the appropriate funds to the
Administrator within the specified period stated herein. To the extent
cumulative investments by the Trust at the end of any Plan Year are not equal to
the aggregate deferrals placed into the Trust together with interest credited
pursuant to Article 8.5 (the "Shortfall"), Employer shall within 30 days of the
end of any such Plan Year, contribute an amount equal to the Shortfall.
Article V -- Distribution of Benefits
5.1 ELIGIBILITY FOR PAYMENT. Distribution of benefits from the Plan shall be
made no earlier than Separation from Service, the calendar year in which the
Participant attains age 65 or in the event of an approved financial hardship due
to an Unforeseeable Emergency.
(a) "Separation from Service" means the severance of a Participant's
employment with the Employer for any reason, including death,
retirement and disability.
3
<PAGE>
(b)"Unforeseeable Emergency" means a severe financial hardship to the
Participant resulting from a sudden and unexpected illness or accident
of the Participant or a dependent of the Participant, loss of the
Participant's property due to casualty, or other similar extraordinary
and unforeseeable circumstances arising as a result of events beyond
the control of the Participant. The circumstances that will constitute
an "Unforeseeable Emergency" would depend on the facts of each case,
but, in any case, payment may not be made in the event that such
hardship is or may be relieved:
(1) Through reimbursement or compensation by insurance or otherwise,
(2) through loans from other qualified pension plans such as 401(k) plans,
(3) by liquidation of the Participant's assets, to the extent that
liquidation of such assets would not itself cause severe financial
hardship, or
(4) by cessation of Deferrals under the plan.
The need to send a Participant's child to college or the desire to purchase a
home shall not be an Unforeseeable Emergency.
5.2 DISTRIBUTION DUE TO UNFORESEEABLE EMERGENCY. A Participant may request a
distribution due to Unforeseeable Emergency by submitting a written request to
the Administrator accompanied by evidence to demonstrate that the circumstances
being experienced qualify as an Unforeseeable Emergency. The Administrator
shall have the authority to require such evidence as it deems necessary to
determine if a distribution is warranted, and approval of such request shall be
granted if consent to the request is rendered by a majority of the committee
constituting the Administrator. If an application for a hardship distribution
due to an Unforeseeable Emergency is approved, the distribution is limited to an
amount sufficient to meet the emergency. The allowed distribution shall be
payable in a method determined by the Administrator as soon as possible after
approval of such distribution. No member of the committee constituting the
Administrator shall be allowed to consider or vote on any request for hardship
distribution submitted by such member.
A Participant who has commenced receiving installment payments under the Plan
may request acceleration of such payments in the event of an Unforeseeable
Emergency. The Administrator may permit accelerated payments to the extent
payment does not exceed the amount necessary to meet the emergency.
5.3 COMMENCEMENT OF DISTRIBUTIONS. Distribution of benefits to a Participant
under the Plan shall commence 60 days after the Participant separates from
service, unless the Participant makes a one-time irrevocable written election to
defer commencement of benefits to a specified later date and such election is
made at least 30 days before the date benefits commence. Such election is
subject to approval by the Board of Directors of Employer.
Notwithstanding anything in this Article 5.3 to the contrary, if the total
amounts held under this Plan for a Participant total $3,500 or less, the
Participant has separated from service and the Participant may not defer
additional amounts under the Plan, the Participant may at any time
4
<PAGE>
elect a lump sum distribution of his or her benefits which distribution shall
occur no later than 60 days after Participant files a written request for
such distribution with the Administrator.
5.4 DISTRIBUTION REQUIREMENTS.
(a) Limits on Settlement Options. Distributions must be made over one of
the following periods:
(1) One lump sum;
(2) the life of the Participant;
(3) the life of the Participant and his or her Beneficiary;
(4) a period certain not extending beyond the life expectancy of the
Participant, as determined on or about the date such distribution
commences; or
(5) a period certain not extending beyond the joint and last survivor
life expectancy of the Participant and his or her Beneficiary, as
determined on or about the date such distribution commences.
(b) Death Distribution Provisions.
(1) Death After Distributions Begin. If the Participant dies after
distribution of his or her interest has commenced, the remaining
portion of such interest would be distributed at least as rapidly
as the method of distribution being used before the Participant's
death.
(2) Death Before Distributions Begin. If the Participant dies before
distribution of his or her interest commences, any benefits
payable after the Participant's death will be distributed no
later than the December 31 coinciding with or immediately
following the fifth anniversary of the Participant's death,
except to the extent that the recipient of such benefits elects
to receive distribution in accordance with the following
paragraphs:
(A) Any portion of the Participant's interest which is payable
to his or her Beneficiary may be distributed in
substantially equal annual installments over the life of
the Beneficiary, or over a period not extending beyond the
life expectancy of the Beneficiary, commencing no later
than the December 31 coinciding with or immediately
following the first anniversary of the Participant's death;
provided, however, that if the Beneficiary is not the
Participant's surviving spouse, payment of the
Participant's entire account must be paid to such
Beneficiary during a period not to exceed 15 years.
For the purposes hereof and of (3) below, the life expectancy
of the Beneficiary shall not be recalculated once benefits
commence; provided, however, that if the Beneficiary is the
Participant's surviving spouse, the surviving spouse may
give written notice to the Administrator no later than 30
days before the date benefits commence that life expectancy
of the surviving spouse shall be recalculated (but no more
frequently than annually).
5
<PAGE>
(B) Notwithstanding (A) above, if the Beneficiary is the
Participant's surviving spouse, the spouse may elect to
defer distributions no later than the December 31 that
coincides with or immediately follows the later of the
date on which the Participant would have attained the
age of 65, or the first anniversary of the Participant's
death, and, if the spouse dies before payments begin,
subsequent distributions shall be made as if the spouse
has been the Participant.
(C) Any election made by a Beneficiary hereunder must be
made no later than 30 days before the December 31 that
coincides with or immediately follows the first anniversary
of the Participant's death and must be irrevocable as of
such date; provided, however, that if the Beneficiary is
the Participant's surviving spouse, the spouse may defer
making such election no later than 30 days before the
earlier of the December 31 that coincides with or
immediately follows the first anniversary of the
Participant's death or the last date on which the spouse
could defer commencement of benefits under paragraph (B).
(3) Payments to a Minor Child of the Participant. For purposes of
Article 5.4(d), any amount paid to a minor child of the
Participant will be treated as if it had been paid to the
surviving spouse of the Participant if the amount becomes
payable to the Participant's surviving spouse when the child
reaches the age of majority.
5.5 PAYMENT ACCELERATION. In addition to the options provided in Article 5.1,
the Participant shall have the right at anytime to request and receive a payment
of all or part of the Participant's account balance. Such payments will be made
as soon as practicable after such election is made, but in no event will
payments be delayed more than 60 days from the date the election is made. If
such election is made, any amount subject to this election shall be reduced by a
nonrefundable payment acceleration penalty equal to 10% of the elected amounts.
This penalty is absolute and not be rescinded, reduced, or otherwise modified by
the Employer.
Article VI -- Form of Benefit Distribution
6.1 ELECTION. A Participant or Beneficiary may elect the form, subject to the
Administrator's approval, of distribution of his or her benefits and may revoke
that election (with or without a new election) at any time at least 30 days
before his or her benefits begin, by notifying the Administrator in writing of
his or her election.
6.2 FORMS OF DISTRIBUTION. A Participant or Beneficiary may elect distributions
of benefits under any of the Settlement Options provided for on Article 5.4(a).
6.3 FAILURE TO MAKE ELECTION. If a Participant or Beneficiary fails to elect a
form of distribution before 30 days preceding the distribution commencement
date, benefits shall be paid in substantially equal installments over 5 years.
6
<PAGE>
Article VII -- Beneficiary Information
7.1 DESIGNATION. A Participant shall have the right to designate a Beneficiary,
and amend or revoke such designation at any time, in writing. Such designation,
amendment, or revocation shall be effective upon receipt by the Administrator.
Notwithstanding the foregoing, a Participant who elects a joint and survivor
annuity form of payment may not elect a non-spouse joint annuitant, may not
change his or her joint and survivor annuity form of payment and may not elect a
non-spouse joint annuitant after payments commence.
7.2 FAILURE TO DESIGNATE A BENEFICIARY. If no designated Beneficiary survives
the Participant and benefits are payable following the Participant's death, the
Administrator shall direct that payment of benefits be made to the person or
persons in the first of the following classes of successive preference
Beneficiaries.
The Participant's:
(a) spouse,
(b) children, per stirpes,
(c) estate,
(d) parents,
(e) brothers and sisters.
Article VIII -- Plan Administration
8.1 PLAN ADMINISTRATION. The Employer shall be responsible for appointing an
Administrator to administer the Plan. Such Administrator may be an individual
or a committee authorized to act collectively on behalf of the Plan. The
Administrator shall have sole discretionary responsibility for the operation,
interpretation, and administration of the Plan and for determining eligibility
for Plan benefits. Any action taken on any matter within the discretion of the
Administrator shall be final, conclusive, and binding on all parties. In order
to discharge its duties hereunder, the Administrator shall have the power and
authority to adopt, interpret, alter, amend, or revoke rules and regulations
necessary to administer the Plan, to delegate ministerial duties and to employ
such outside professionals as may be required for prudent administration of the
Plan. The Administrator shall also have authority to enter into agreements on
behalf of the employer necessary to implement the Plan. Any individual
Administrator who is otherwise eligible may participate in the Plan, but shall
not be entitled to make decisions solely with respect to his or her own
participation and benefits under the Plan.
8.2 OWNERSHIP OF ASSETS. All amounts of compensation deferred under the Plan,
all property and rights purchased with such amounts and all income attributable
to such amounts, property or rights, either held by the Company or in Trust for
the Beneficiary of Plan Participant, shall remain (until made available to the
Participant or Beneficiary) solely the property and rights of the Employer
(without being restricted to the provisions of benefits under the Plan) and
shall be subject to the claims of the Employer's general creditors.
7
<PAGE>
8.3 PLAN-TO-PLAN TRANSFERS. Notwithstanding any other provisions of the Plan,
all or any part of the account balance(s) of a former Participant in the Plan
shall, instead of being distributed in accordance with Article 5.3, be
transferred to another eligible deferred compensation plan administered by the
Employer in which the former Participant has become a participant, if: (a) the
plan receiving such amounts provides for acceptance of such transfers; and (b)
the Participant gives written direction to the Administrator to make such
transfer.
This Plan also shall accept the transfer of amounts previously deferred by a
Participant under another eligible deferred compensation plan administered by
the Employer.
8.4 ACCOUNTS AND EXPENSES. The Employer shall establish and maintain accounts
on behalf of each Participant as held in the Trust. Such Participant accounts
shall be valued at fair market value as of the last day of the Plan Year and
such other dates as are necessary for the proper administration of the Plan, and
each Participant shall receive a written accounting of his or her account
balance(s) following such valuation. Each Participant's account balance shall
reflect his or her aggregate Deferral (and/or transfer) amount(s) and any
earnings attributable to such amounts, and shall be reduced by administrative,
investment, and other fees necessary for the administration which are not paid
by the Employer.
8.5 EARNINGS. Interest shall be paid by the Employer on deferrals at an annual
rate equal to the greater of twelve percent (12%), compounded on a monthly
basis, or the actual return realized on Plan investments as allocated to
individual Plan participants. Realized returns will include unrealized
appreciation/depreciation of investments if the underlying investments could be
sold on the date of measurement and the unrealized appreciation/depreciation of
the investments realized.
Article IX -- Amendment or Termination of Plan
9.1 AMENDMENT OF PLAN. The Employer shall have the right to amend the Plan, at
any time and from time to time, in whole or in part. The Employer shall notify
each Participant in writing of any Plan amendment.
9.2 TERMINATION. Although the Employer has established this Plan with the
intention and expectation to maintain the Plan indefinitely, the Employer may
terminate or discontinue the Plan in whole or in part at any time without any
liability for such termination or discontinuance. Upon Plan termination, all
Deferrals shall cease. The Employer shall retain each Participant's Deferrals
(and earnings and losses thereon) until distribution of benefits commences under
Article 5.2 or 5.3 in the form determined under Article VI.
Article X -- Miscellaneous
10.1 LIMITATION OF RIGHTS: EMPLOYMENT RELATIONSHIP. Neither the establishment
of this Plan nor any modification thereof, nor the creation of any fund or
account, nor the payment of any benefits, shall be construed as giving a
Participant or other person any legal or equitable right
8
<PAGE>
against the Employer except as provided in the Plan. In no event shall the
terms of employment of any employee be modified or in any way be affected
by the Plan.
10.2 LIMITATION ON ASSIGNMENT. Benefits under this plan may not be assigned,
sold, transferred, or encumbered, and any attempt to do so shall be void. A
Participant's or Beneficiary's interest in benefits under the Plan shall not be
subject to debts or liabilities of any kind and shall not be subject to
attachment, garnishment or other legal process.
10.3 PRONOUNS. Whenever used in this Agreement, the masculine pronoun is to be
deemed to include the feminine. The singular form, whenever used herein, shall
mean or include the plural form where applicable, and vice versa.
10.4 REPRESENTATIONS. The Employer does not represent or guarantee that any
particular federal or state income, payroll, personal property or other tax
consequence will result from participation in this Plan. A Participant should
consult with professional tax advisors to determine the tax consequences of his
or her participation. Furthermore, the Employer does not represent or guarantee
successful investments of Deferrals.
10.5 SEVERABILITY. If a court of competent jurisdiction holds any provision of
this Plan to be invalid or unenforceable, the remaining provisions of the Plan
shall continue to be fully effective.
10.6 APPLICABLE LAW. This Plan shall be construed in accordance with
applicable federal law and, to the extent otherwise applicable, the laws of the
State in which the Employer is located.
10.7 RESPONSIBILITY FOR TAXES. The Participants in this Plan are responsible
for all Federal, State or other taxes assessed on amounts deferred under this
Plan. The Employer shall have the right to withhold or reduce Plan benefits to
satisfy such withholding obligations as it may deem necessary to ensure proper
withholding procedures.
[END]
9
<PAGE>
EXHIBIT 10.31
David S. Kabakoff
May 1, 1996
Page
May 1, 1996
Mr. David S. Kabakoff
P.O. Box 9151
16957 Circa Del Sur
Rancho Santa Fe, CA 92067
Dear David:
This letter will serve as the basis by which you will be employed by
Dura Pharmaceuticals, Inc. (the "Company") as its Executive Vice President
and President of Spiros Development Corporation, a separate newly-formed
corporation ("Spiros Corp.").
During your employment beginning May 1, 1996, you will devote your time,
attention and energy to the Company and Spiros Corp. Such service will
become full time on or after June 1, 1996. In your capacity as Executive
Vice President of the Company and President of Spiros Corp. you will perform
such executive duties as are from time to time prescribed by the President
and the Board of Directors of the Company and the Board of Directors of
Spiros Corp. Except for certain interim consultant services to be provided
to, and serving on the Board of, Corvas International, 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.
Your beginning compensation has been separately established by prior
communication from the Company. Thereafter, for each fiscal year beginning
January 1, 1997, your base salary will be annually reviewed and set by the
Board of Directors and may be increased at the sole discretion of the Board
based upon your performance and other factors. All base salary will be
payable in equal biweekly installments.
The Company will pay you a minimum bonus of $50,000 for 1996, to be paid
the first pay period of January 1997. In subsequent years, the Board of
Directors, in its sole discretion, may pay you a cash bonus based on your
performance during that particular year, and other factors.
In addition to the annual compensation provided for above, you will
receive such fringe benefits as are made available generally to executive
employees of the Company.
You have been nominated for election as a Director of the Company at the
Annual Meeting of Shareholders to be held May 29, 1996. You agree to serve
without additional compensation as a Director or if you are elected or
appointed as an officer of the Company or any subsidiary of the Company. You
also agree to serve without additional compensation as a
<PAGE>
David S. Kabakoff
May 1, 1996
Page 2
Director and President of Spiros Corp. The Company will require you to
execute its standard form of employee confidentiality agreement.
The term of your employment will end on April 30, 1997, 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 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 in 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 Executive Vice 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
<PAGE>
David S. Kabakoff
May 1, 1996
Page 3
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 in
Control, PROVIDED AND ONLY IF such change or reduction is effected without
your written concurrence.
If a Change in 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 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.
<PAGE>
David S. Kabakoff
May 1, 1996
Page 4
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, President and Chief Executive Officer
ACCEPTED:
/s/ David S. Kabakoff
- ---------------------
David S. Kabakoff
Date: May 1, 1997
---------------
<PAGE>
EXHIBIT 11
DURA PHARMACEUTICALS, INC.
STATEMENTS RE COMPUTATIONS OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
NET INCOME (LOSS) PER SHARE - BASIC
Net Income (Loss) ($35,778,000) $24,328,000 ($84,692,000)
------------ ----------- ------------
------------ ----------- ------------
Weighted Average Number of
Common and Common Equivalent
Shares:
Common Stock Outstanding 23,440,754 35,834,714 43,828,208
------------ ----------- ------------
------------ ----------- ------------
Net Income (Loss) Per Share - Basic ($1.53) $0.68 ($1.93)
------------ ----------- ------------
------------ ----------- ------------
NET INCOME (LOSS) PER SHARE - DILUTED
Net Income (Loss) ($35,778,000) $24,328,000 ($84,692,000)
------------ ----------- ------------
------------ ----------- ------------
Weighted Average Number of
Common and Common Equivalent
Shares Assuming Issuance of All
Dilutive Contingent Shares:
Common Stock Outstanding 23,440,754 35,834,714 43,828,208
Stock Options -- 1,772,250 --
Warrants -- 2,872,044 --
------------ ----------- ------------
Total 23,440,754 40,479,008 43,828,208
------------ ----------- ------------
------------ ----------- ------------
Net Income (Loss) Per Share - Diluted ($1.53) $0.60 ($1.93)
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
<PAGE>
EXHIBIT 13
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statement of Operations Data: (1)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Revenues $ 18,113 $ 32,680 $ 51,502 $104,119 $ 181,323
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) (2) $ (8,173) $ 1,936 $(35,778) $ 24,328 $ (84,692)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Per Share (2,3):
- ----------------------------------------------------------------------------------------------------------------------------------
Basic $ (0.55) $ 0.12 $ (1.53) $ 0.68 $(1.93)
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted $ (0.55) $ 0.10 $ (1.53) $ 0.60 $(1.93)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data: (1)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash, Cash Equivalents and
- ----------------------------------------------------------------------------------------------------------------------------------
Short-Term Investments $ 6,541 $ 36,026 $ 67,820 $240,345 $385,221
- -----------------------------------------------------------------------------------------------------------------------------
Working Capital $ 6,830 $ 36,506 $ 59,105 $219,864 $392,870
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 20,048 $ 56,072 $143,997 $504,670 $774,880
- -----------------------------------------------------------------------------------------------------------------------------
Long-Term Obligations $ 4,719 $ 2,780 $ 15,427 $ 6,670 $297,064
- -----------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity $ 12,571 $ 48,537 $109,097 $443,577 $429,277
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Selected Financial Data include Health Script subsequent to its
acquisition on March 22, 1995, DDSI subsequent to its acquisition on
December 29, 1995, Spiros Corp. subsequent to its acquisition on December
19, 1997, the Rondec-Registered Trademark- product line subsequent to its
acquisition on June 30, 1995, the Entex-Registered Trademark- product line
subsequent to its acquisition on July 3, 1996, the Ceclor-Registered
Trademark- CD and Keftab-Registered Trademark- products subsequent to
their acquisition on September 5, 1996, and the Nasarel-Registered
Trademark- and Nasalide-Registered Trademark- products subsequent to their
acquisition on May 7, 1997 (see Notes 4 and 12 of the Notes to
Consolidated Financial Statements).
(2) In 1993, 1995 and 1997, the Company incurred charges for acquired
in-process technology, purchase options and other nonrecurring items
totaling $2.3 million, $43.8 million and $137.7 million, respectively. If
these charges were excluded, Dura would have reported a net loss of $5.9
million, or $0.39 per share (basic and diluted), for 1993, net income of
$8.0 million, or $0.34 per share (basic) and $0.28 per share (diluted) for
1995, and net income of $47.4 million, or $1.08 per share (basic) and
$0.99 per share (diluted) for 1997.
(3) No cash dividends were declared or paid during the periods presented.
-1-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following comments should be read in conjunction with the Consolidated
Financial Statements and Notes contained therein. See "Risks and
Uncertainties" for trends and uncertainties known to the Company that could
cause reported financial information not to be necessarily indicative of
future results, including discussion of the effects of seasonality on the
Company.
RECENT DEVELOPMENTS
During the second half of 1996 and the first half of 1997, the Company made
significant acquisitions of product rights and licenses. In July 1996, the
Company acquired the worldwide rights to the Entex-Registered
Trademark-products, consisting of four prescription upper respiratory drugs.
In September 1996, the Company acquired the U.S. marketing rights to the
patented antibiotics Ceclor-Registered Trademark- CD and Keftab-Registered
Trademark-. In May 1997, the Company acquired the U.S. rights to the
intranasal steroid products Nasarel-Registered Trademark- and
Nasalide-Registered Trademark-. The acquisition of rights to these products
has had a material impact on the Company's financial position and results of
operations.
In the third quarter of 1997, the Company issued $287.5 million principal
amount of 3 1/2% Convertible Subordinated Notes (the "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 Dura's physician base or in areas related or otherwise
complementary to Dura's existing business; (ii) to fund product development
programs, including Spiros-Registered Trademark- products; and (iii) for
working capital and facilities expansion. To date, no proceeds from the Notes
have been used. 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.
On December 19, 1997, the Company acquired all of the outstanding callable
common stock and options to purchase callable common stock of Spiros
Development Corporation ("Spiros Corp."). The purchase price of $45.7 million
consisted of 896,606 shares of the Company's common stock and a cash payment
of approximately $2 million. The acquisition resulted in a nonrecurring
charge of $46 million for acquired in-process technology.
On December 22, 1997, Spiros Development Corporation II, Inc. ("Spiros Corp.
II"), a separate, newly formed Delaware corporation, completed a $101 million
public offering of units (the "Offering"). Under agreements with the Company,
Spiros Corp. II will use the net proceeds of $94 million from the Offering and
a $75 million contribution from Dura to develop Spiros and Spiros applications
for designated drugs and compounds. Each unit consisted of one share of Spiros
Corp. II callable common stock and a warrant (the "SDCII warrants") to purchase
one-fourth of one share of Dura's common stock. The SDCII warrants will be
exercisable from January 1, 2000
-2-
<PAGE>
through December 31, 2002 at an exercise price of $54.84 per share of Dura
common stock. In consideration of the SDCII warrants and the contribution of
$75 million to Spiros Corp. II, the Company has the right through December
31, 2002, to purchase all, but not less than all, of the then outstanding
shares of Spiros Corp. II callable common stock at predetermined prices.
However, the Company is not obligated to purchase such shares of Spiros Corp.
II. Such purchase price may be paid, at the Company's option, in cash, shares
of Dura's common stock, or a combination thereof. In addition, Dura received
an option through specified dates, to acquire Spiros Corp. II's exclusive
rights for the use of Spiros with albuterol and with a second product other
than albuterol. A purchase option expense of $75 million, representing the
cash contributed to Spiros Corp. II, was recorded in December 1997.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 ("1997") AS COMPARED TO THE YEAR ENDED DECEMBER
31, 1996 ("1996")
Total revenues in 1997 increased $77.2 million, up 74%, as compared to 1996.
However, the Company incurred a net loss in 1997 of $84.7 million, or $1.93
per share (basic and diluted), due to nonrecurring charges in the fourth
quarter totaling $137.6 million, of which $121 million related to the
Company's Spiros development program consisting of a $46 million noncash
charge for in-process technology acquired in connection with Dura's
acquisition of Spiros Corp. and Dura's $75 million purchase option charge
resulting from the cash contribution to Spiros Corp. II. In December 1997,
the Company terminated a ten-year royalty agreement, which the Company
entered into in 1994, resulting in an additional nonrecurring charge of $13.8
million for the consideration paid by the Company to terminate the agreement.
Finally, in the fourth quarter of 1997, the Company concluded that the value
of a long-term investment was impaired and, accordingly, wrote down the
investment to its estimated fair value, resulting in a nonrecurring charge of
$2.8 million. If these nonrecurring charges were excluded, the Company would
have reported net income in 1997 of $47.4 million, or $1.08 per share (basic)
and $0.99 per share (diluted).
Pharmaceutical sales in 1997 increased by $70.9 million, or 89%, as compared
to 1996. This increase is due primarily to the acquisition of the Entex
products, Ceclor CD, and Keftab in 1996 and Nasarel and Nasalide in 1997,
which resulted in an increase in pharmaceutical sales of $65.1 million, and
the expansion of the Company's sales force.
Gross profit (pharmaceutical sales less cost of sales) for 1997 increased by
$60.1 million, or 103%, as compared to 1996. Gross profit as a percentage of
sales for 1997 was 79%, as compared to 73% for 1996. These increases are due
primarily to higher average gross margins earned on sales of the Entex
products, Ceclor CD, Keftab, Nasarel and Nasalide, as compared to the average
gross margins earned on the Company's other products.
Contract revenues in 1997 increased by $6.3 million, or 26%, as compared to
1996. The Company, under agreements with several companies, conducts
feasibility testing and development work on various compounds for
-3-
<PAGE>
use with Spiros. Contract revenues from Spiros-related development and
feasibility agreements generated $29.5 million, including $25.9 million from
Spiros Corp. and Spiros Corp. II, in 1997, as compared to $21.2 million,
including $19.1 million from Spiros Corp., in 1996. The Company also earns
contract revenues under various agreements for the co-promotion of certain
pharmaceutical products. Contract revenues from such agreements were $1.4
million in 1997 as compared to $3.4 million for 1996.
Clinical, development and regulatory expenses for 1997 increased by $5.9
million, or 32%, as compared to 1996. The increase reflects additional
expenses incurred by the Company under feasibility and development agreements
covering the use of various compounds with Spiros.
Selling, general and administrative expenses in 1997 increased by $22.6
million, or 53%, as compared to 1996, but decreased as a percentage of total
revenues to 36% in 1997 from 41% in 1996. The dollar increase is primarily
due to increased costs incurred to support the Company's sales and contract
revenue growth, including increased selling expenses primarily associated
with expansion of the Company's sales force (increase of $12.2 million),
higher marketing costs relating to the newly acquired products (increase of
$1.6 million), and amortization of newly-acquired product rights (increase of
$6.2 million). The decrease as a percentage of revenues reflects the growth
of pharmaceutical sales due to new product acquisitions and the growth of
contract revenues. On February 22, 1998, the Company announced that it
planned to begin expanding its sales force immediately from approximately 270
representatives to over 450 representatives by the end of 1998 to increase
the promotional activity of its current products and to prepare for the
launch, subject to receiving regulatory approval, of Albuterol Spiros. The
Company expects that the rapid expansion of its sales force will result in an
increase in 1998 in its selling, general and administrative expenses, both in
total and as a percentage of revenues, as compared to 1997.
Interest income for 1997 increased $11.1 million to $18.0 million as compared
to 1996. The increase is due primarily to higher balances of cash and
short-term investments during 1997 resulting from public stock offerings
completed in May and November 1996 and the Notes offering completed in the
third quarter of 1997, partially offset by decreases in cash used for product
acquisitions and capital expenditures.
Interest expense for 1997 was $5.8 million as compared to $674,000 for 1996.
The increase in interest expense is primarily due to interest accrued on the
Notes issued by the Company in the third quarter of 1997.
The Company's effective tax rate was 34% for 1997 as compared to 13% for
1996. This increase is primarily due to the utilization of net operating loss
carryforwards in 1996. Net operating loss carryforwards available in 1997
relate primarily to tax deductions for stock options exercised and, as such,
the related benefit from their utilization has been credited directly to
shareholders' equity.
-4-
<PAGE>
YEAR ENDED DECEMBER 31, 1996 ("1996") AS COMPARED TO THE YEAR ENDED DECEMBER
31, 1995 ("1995")
Total revenues in 1996 increased $52.6 million, up 102%, as compared to 1995.
Net income for 1996 was $24.3 million as compared with a net loss of $35.8
million for 1995, a change of $60.1 million or $2.21 per share (basic) and
$2.13 per share (diluted). The 1995 net loss of $35.8 million was due to
charges totaling $43.8 million relating to the Spiros development program,
consisting of a $30.8 million nonrecurring charge for in-process technology
acquired in connection with the Company's acquisition of Dura Delivery
Systems, Inc. ("DDSI") and a $13 million purchase option charge resulting
from the cash contribution to Spiros Corp.
Pharmaceutical sales in 1996 increased by $40.3 million, or 102%, as compared
to 1995 due primarily to sales of products acquired in 1996, which resulted
in an increase in pharmaceutical sales of $30.7 million, as well as a $6.4
million increase in sales at Health Script Pharmacy Services, Inc. ("Health
Script"), acquired in March 1995.
Gross profit for 1996 increased by $29.6 million, or 103%, as compared to
1995 due to the increase in pharmaceutical sales. Gross profit as a
percentage of sales remained steady at 73%.
Contract revenues in 1996 increased by $12.4 million, or 101%, as compared to
1995. Contract revenues from Spiros-related development and feasibility
agreements generated $21.2 million in 1996, including $19.1 million from
Spiros Corp., compared to $9.5 million, including $8 million from DDSI, in
1995. Contract revenues under various agreements for the co-promotion of
pharmaceutical products were $3.4 million in 1996 as compared to $2.6 million
for 1995.
Clinical, development and regulatory expenses for 1996 increased by $10.1
million, or 121%, to $18.5 million as compared to 1995. The increase reflects
additional expenses incurred by the Company under feasibility and development
agreements covering the use of various compounds with Spiros.
Selling, general and administrative expenses in 1996 increased $16.7 million,
or 64%, to $42.6 million as compared to 1995, but decreased as a percent of
total revenues to 41% in 1996 from 50% in 1995. The dollar increase results
primarily from marketing and amortization costs related to newly acquired
products (increase of $4.9 million and $3.7 million, respectively) as well as
higher costs at Health Script (increase of $2.6 million) to support its
increased sales. The decrease as a percentage of revenues reflects increased
productivity of the sales force, the growth of pharmaceutical sales due to
product acquisitions, and the growth of contract revenues.
Interest income for 1996 increased $4.1 million to $6.9 million as compared
to 1995. The increase is due primarily to higher balances of cash and
short-term investments during 1996 resulting from public stock offerings
completed in August 1995 and May and November 1996, as well as cash generated
from operations.
-5-
<PAGE>
Interest expense for 1996 was $674,000 as compared to $906,000 for 1995. The
decrease in interest expense is primarily due to lower average balances of
obligations during 1996.
The Company recorded an income tax provision of $3.5 million for 1996 as
compared to $406,000 for 1995. The increased provision is due to the increase
in income before income taxes in 1996. The 1996 provision reflects the
expected combined federal and state tax rate of approximately 40% largely
offset by the benefit from the utilization of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments increased by $144.9 million
to $385.2 million at December 31, 1997 from $240.3 million at December 31,
1996. The increase resulted primarily from the net proceeds of the offering
of the Notes, as well as from cash generated from operations, partially
offset by the Company's December 1997 contribution of $75 million to Spiros
Corp. II, the acquisition of the intranasal steroid products Nasarel and
Nasalide for $75 million, and capital expenditures of $24.1 million. Working
capital increased by $173 million to $392.9 million at December 31, 1997 from
$219.9 million at December 31, 1996.
At December 31, 1997, the Company had $287.5 million in Notes outstanding and
an aggregate of $12.4 million in other current and long-term obligations, of
which $2.8 million is to be paid during the next 12 months. As of December
31, 1997, additional future contingent obligations totaling $93 million
relating to product acquisitions are due through 2004, including $10 million
due in 1998.
The Company has entered into a loan agreement which provides for the
borrowing of up to $50 million on an unsecured basis through May 1, 1999. As
of December 31, 1997, no borrowings were 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 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. 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.
The Company recognizes the need to ensure its operations will not be
adversely impacted by the inability of the Company's systems to process data
having dates on or after January 1, 2000 ("Year 2000"). Processing errors due
to software failure arising from calculations using the Year 2000 date are a
recognized risk. The Company is currently addressing the risk, with respect
to the availability and integrity of its financial systems and the
reliability of its
-6-
<PAGE>
operating systems, and is in the process of communicating with suppliers,
customers, financial institutions and others with whom it conducts business
to assess whether they are or will be Year 2000 compliant. While the Company
believes its planning efforts are adequate to address its Year 2000 concerns,
there can be no assurance that the systems of other companies on which the
Company's systems and operations rely will be converted on a timely basis and
will not have a material effect on the Company. In addition, the potential
impact of the Year 2000 on others with whom the Company does business and any
resulting effects on the Company cannot be reasonably estimated at this time.
The cost of the Company's Year 2000 initiatives is not expected to be
material to the Company's results of operations or financial position.
-7-
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
DURA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
- -------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1996 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $131,101 $72,003
Short-term investments 109,244 313,218
Accounts and other receivables 24,092 40,987
Inventory 7,544 15,201
- -------------------------------------------------------------------------------
Total current assets 271,981 441,409
License agreements and product rights 186,750 250,781
Property 27,500 48,525
Other assets 18,439 34,165
- -------------------------------------------------------------------------------
Total $504,670 $774,880
-----------------------
-----------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $9,253 $8,142
Accrued liabilities 16,566 37,599
Current portion of long-term obligations 26,298 2,798
- -------------------------------------------------------------------------------
Total current liabilities 52,117 48,539
Convertible subordinated notes 287,500
Other long-term obligations 8,976 9,564
- -------------------------------------------------------------------------------
Total liabilities 61,093 345,603
Commitments and contingencies (Notes 4, 5 and 13)
Shareholders' equity:
Preferred stock, no par value (1996), par value $.001 (1997);
shares authorized - 5,000,000; no shares issued or outstanding
Common stock, no par value (1996), par value $.001 (1997);
shares authorized - 100,000,000; issued and outstanding -
43,183,591 and 45,608,414, respectively 525,350 46
Additional paid-in capital 604,991
Unrealized gain (loss) on investments (38) 176
Warrant subscriptions receivable (2,743) (12,252)
Accumulated deficit (78,992) (163,684)
- -------------------------------------------------------------------------------
Total shareholders' equity 443,577 429,277
- -------------------------------------------------------------------------------
Total $504,670 $ 774,880
-----------------------
-----------------------
</TABLE>
See accompanying notes to consolidated financial statements.
-8-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
DURA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
- ------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Sales $39,308 $79,563 $150,476
Contract 12,194 24,556 30,847
- ------------------------------------------------------------------------------------------------
Total revenues 51,502 104,119 181,323
- ------------------------------------------------------------------------------------------------
Operating costs and expenses:
Cost of sales 10,618 21,301 32,081
Clinical, development and regulatory 8,408 18,540 24,391
Selling, general and administrative 25,955 42,631 65,229
Charges for acquired in-process technology,
purchase options and other non recurring
items (Note 11) 43,773 137,639
- ------------------------------------------------------------------------------------------------
Total operating costs and expenses 88,754 82,472 259,340
- ------------------------------------------------------------------------------------------------
Operating income (loss) (37,252) 21,647 (78,017)
- ------------------------------------------------------------------------------------------------
Other:
Interest income 2,768 6,897 17,960
Interest expense (906) (674) (5,816)
Other - net 18 (3) (14)
- ------------------------------------------------------------------------------------------------
Total other 1,880 6,220 12,130
- ------------------------------------------------------------------------------------------------
Income (loss) before income taxes (35,372) 27,867 (65,887)
Provision for income taxes 406 3,539 18,805
- ------------------------------------------------------------------------------------------------
Net income (loss) $(35,778) $24,328 $(84,692)
--------------------------------------------
--------------------------------------------
Net income (loss) per share:
Basic $ (1.53) $ 0.68 $ (1.93)
--------------------------------------------
--------------------------------------------
Diluted $ (1.53) $ 0.60 $ (1.93)
--------------------------------------------
--------------------------------------------
Weighted average number of common shares:
Basic 23,440 35,835 43,828
Diluted 23,440 40,479 43,828
</TABLE>
See accompanying notes to consolidated financial statements.
-9-
<PAGE>
DURA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
--------- ------- ---------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $(35,778) $ 24,328 $ (84,692)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 1,962 6,317 15,209
Non-cash portion of charges for acquired in-
process technology, purchase options and other 30,773 49,146
Changes in assets and liabilities:
Accounts and other receivables (4,089) (17,135) (16,040)
Inventory (1,110) (4,475) (7,739)
Other assets (241) (1,023) (5,215)
Accounts payable and accrued liabilities 4,055 22,590 35,574
--------- -------- --------
Net cash provided by (used for) operating
activities (4,428) 30,602 (13,757)
--------- -------- --------
Investing activities:
Purchases of short-term investments (95,716) (178,901) (381,127)
Sales and maturities of short-term investments 56,117 111,781 177,367
Purchases of long-term investments (494) (5,000)
Capital expenditures (7,835) (12,846) (24,079)
Company/product acquisitions, net of cash
received 744 (128,621) (76,973)
Other (60) (1,864) (1,514)
--------- -------- --------
Net cash used for investing activities (47,244) (215,451) (306,326)
--------- -------- --------
Financing activities:
Issuance of common stock and warrants-net 61,606 307,503 9,310
Issuance of convertible subordinated notes-net 278,175
Issuance of notes payable 4,360
Principal payments on long-term obligations (22,203) (17,107) (26,500)
--------- -------- --------
Net cash provided by financing activities 43,763 290,396 260,985
--------- -------- --------
Net increase (decrease) in cash and cash equivalents (7,909) 105,547 (59,098)
Cash and cash equivalents at beginning of year 33,463 25,554 131,101
--------- -------- --------
Cash and cash equivalents at end of year $ 25,554 $131,101 $72,003
--------- -------- --------
--------- -------- --------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 68 $ 0 $ 0
Income taxes $ 44 $ 266 $6,578
</TABLE>
See accompanying notes to consolidated financial statements.
-10-
<PAGE>
DURA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
UNREALIZED NOTE
COMMON STOCK ADDITIONAL GAIN/(LOSS) WARRANT RECEIVABLE
------------------- PAID-IN ON SUBSCRIPTIONS FROM ACCUMULATED
SHARES AMOUNT CAPITAL INVESTMENTS RECEIVABLE SHAREHOLDERS DEFICIT TOTAL
-------- -------- ------- ----------- ---------- ----------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 20,906 $116,269 $ (190) $(67,542) $48,537
Sale Of Common Stock 4,494 53,815 53,815
Issuance Of Common Stock In
Connection With The Purchase
Of DDSI Callable Common Stock 2,286 33,489 33,489
Issuance Of Common Stock
Warrants 5,040 $ (4,200) 840
Collections On Notes Receivable 177 177
Cancellation Of Restricted Stock
And Related Notes Receivable (4) (13) 13
Exercise Of Stock Options And
Warrants 3,397 7,679 7,679
Income Tax Benefit From Stock
Options Exercised 235 235
Unrealized Gain On Available-
For-Sale Short-Term
Investments $ 103 103
Net Loss (35,778) (35,778)
------- ----- -------- ------ ---------- ---- --------- --------
Balance, December 31, 1995 31,079 216,514 103 (4,200) -0- (103,320) 109,097
Collections On Warrant
Subscriptions Receivable 1,457 1,457
Sale Of Common Stock 10,225 302,893 302,893
Exercise Of Stock Options And
Warrants 1,880 3,153 3,153
Income Tax Benefit From Stock
Options Exercised 2,790 2,790
Unrealized Loss On Available-
For-Sale Short-Term
Investments (141) (141)
Net Income 24,328 24,328
------- ----- -------- ------ ---------- ---- --------- --------
Balance, December 31, 1996 43,184 525,350 (38) (2,743) -0- (78,992) 443,577
Exercise Of Stock Options And
Warrants 1,527 6,028 $ 1,444 7,472
Issuance Of Par Value $.001
Common Stock In Connection
With Reincorporation (531,333) 531,333
Issuance Of Common Stock In
Connection With The Purchase
Of Spiros Corp. Callable Common
Stock 897 1 43,728 43,729
Collections On Warrant
Subscriptions Receivable 3,141 3,141
Issuance Of Common Stock
Warrants 15,130 (12,650) 2,480
Income Tax Benefit From Stock
Options Exercised 13,356 13,356
Unrealized Gain On Available-
For-Sale Short-Term Investments 214 214
Net Loss (84,692) (84,692)
------- ----- -------- ------ ---------- ---- --------- --------
Balance, December 31, 1997 45,608 $ 46 $604,991 $ 176 $(12,252) $-0- $(163,684)$429,277
------- ----- -------- ------ ---------- ---- --------- --------
------- ----- -------- ------ ---------- ---- --------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
-11-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND ITS BUSINESS
ORGANIZATION - Dura Pharmaceuticals, Inc. ("Dura" or the "Company") is a
specialty respiratory pharmaceutical and pulmonary drug delivery company. The
Company develops and markets prescription pharmaceutical products for the
treatment of allergies, asthma, chronic obstructive pulmonary disease, the
common cold and related respiratory ailments and is developing a pulmonary
drug delivery system ("Spiros"). The Company also has a separate mail service
pharmacy, Health Script Pharmacy Services, Inc. ("Health Script"), which
dispenses respiratory pharmaceuticals.
PRINCIPLES OF CONSOLIDATION - 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 years'
financial statements to conform to the presentation for the year ended
December 31, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - 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.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - The Company considers cash
equivalents to include only highly liquid securities with an original
maturity of three months or less. Investments with an original maturity of
more than three months are considered short-term investments and have been
classified by management as available-for-sale. Such investments are carried
at fair value, with unrealized gains and losses reported as a separate
component of shareholders' equity.
CONCENTRATION OF CREDIT RISK - The Company invests its excess cash in U.S.
Government securities and debt instruments of financial institutions and
corporations with strong credit ratings. The Company has established
guidelines relative to diversification of its cash investments and their
maturities which are designed to maintain safety and liquidity. These
guidelines are periodically reviewed and modified to take advantage of trends
in yields and interest rates. The Company has not experienced any significant
losses on its cash equivalents or short-term investments.
The Company extends credit on an uncollateralized basis primarily to
wholesale drug distributors and retail pharmacies throughout the United
States. Historically, the Company has not experienced significant credit
losses on its customer accounts. Two wholesale customers individually
accounted for 16% and 11% of 1995 sales, three
-12-
<PAGE>
wholesale customers individually accounted for 17%, 14%, and 13% of 1996
sales and two wholesale customers each individually accounted for 11% of 1997
sales.
INVENTORY - Inventory is stated at the lower of cost (first-in, first-out
method) or market and is comprised of finished goods and samples.
PROPERTY - Property is stated at cost and depreciated using the straight-line
method over the estimated useful lives of the assets as follows:
Description Lives
----------- ----------
Buildings 30 years
Machinery and equipment 2-10 years
Furniture and fixtures 5-7 years
LICENSE AGREEMENTS AND PRODUCT RIGHTS - The cost of license fees and product
rights are capitalized and amortized on a straight-line basis over the
periods estimated to be benefited, ranging from 15 to 25 years. Amortization
of capitalized license fees and product rights payments are included in
selling, general and administrative expenses in the consolidated statements
of operations. Amortization of license fees and product rights totaled
$1,055,000, $4,435,000 and $10,608,000 in 1995, 1996 and 1997, respectively.
GOODWILL - Other assets include goodwill with an unamortized balance of
$6,630,000 and $8,327,000 at December 31, 1996 and 1997, respectively, which
is stated at cost and amortized using the straight-line method over the
periods estimated to be benefited, ranging from 10 to 20 years.
EVALUATION OF LICENSE AGREEMENTS, PRODUCT RIGHTS AND OTHER INTANGIBLE ASSETS
- -The Company continually evaluates the carrying value of the unamortized
balances of license agreements, product rights and other intangible assets to
determine whether any impairment of these assets has occurred or whether any
revision to the related amortization periods should be made. This evaluation
is based on management's projections of the undiscounted future cash flows
associated with each product or underlying business. If management's
evaluation were to indicate that the carrying values of these intangible
assets were impaired, such impairment would be recognized by a write down of
the applicable asset.
REVENUE RECOGNITION - Revenues from product sales are recognized upon
shipment, net of allowances for returns, rebates and chargebacks. The Company
is obligated to accept from customers the return of pharmaceuticals which
-13-
<PAGE>
have reached their expiration date for which it generally ships replacement
merchandise. The Company has not historically experienced significant returns
of expired pharmaceuticals.
Contract revenue is recognized on a basis consistent with the performance
requirements of the contract. Payments received in advance of performance are
recorded as deferred revenue.
CLINICAL, DEVELOPMENT AND REGULATORY EXPENSES - Clinical, development and
regulatory costs are expensed as incurred.
NET INCOME (LOSS) PER SHARE - In December 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share," which requires the presentation of basic and diluted
earnings per share amounts. Basic earnings per share is calculated based on
the weighted average number of shares outstanding during the year, while
diluted earnings per share also gives effect to all potential dilutive common
shares outstanding during each year such as options, warrants, convertible
securities and contingently issuable shares. The earnings per share data for
1995 and 1996 have been restated to conform to the requirements of SFAS No.
128. The Company incurred net losses in 1995 and 1997 and, as such, the
weighted average number of shares used for basic and diluted earnings per
share do not include potential dilutive common shares from outstanding stock
options and warrants and convertible subordinated notes as their inclusion
would be antidilutive. For 1996, the difference between the weighted average
number of shares used for basic and diluted earnings per share is the
inclusion of 1,772,250 and 2,872,044 dilutive contingent shares for stock
options and warrants, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION - As permitted by SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company accounts for costs of
stock-based compensation in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
discloses the pro forma effect on net income (loss) and related per share
amounts using the fair value-based method to account for its stock-based
compensation.
SEGMENT DISCLOSURES - In June 1997, SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," was issued which revises reporting
requirements and definitions for segments of business operations. The Company
will begin reporting under SFAS No. 131 commencing with the 1998 fiscal year.
-14-
<PAGE>
3. SHORT-TERM INVESTMENTS The following is a summary of short-term
investments as of December 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
Unrealized Estimated
Cost gains/(losses) fair value
------- -------------- --------
<S> <C> <C> <C>
December 31, 1996:
U.S. government securities $ 38,408 $ 41 $ 38,449
U.S. corporate debt securities 70,874 (79) 70,795
-------- -------- --------
Total $109,282 $ (38) $109,244
-------- -------- --------
-------- -------- --------
December 31, 1997:
U.S. government securities $154,126 $ 217 $154,343
U.S. corporate debt securities 158,916 (41) 158,875
-------- -------- --------
Total $313,042 $ 176 $313,218
-------- -------- --------
-------- -------- --------
</TABLE>
The following is a summary of the amortized cost and estimated fair value of
short-term investments by contractual maturity at December 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
Estimated
Cost fair value
-------- ---------
<S> <C> <C>
Due in one year or less $271,307 $ 271,333
Due after one year through two years 41,735 41,885
-------- ---------
Total $313,042 $ 313,218
-------- ---------
-------- ---------
</TABLE>
-15-
<PAGE>
4. LICENSE AGREEMENT AND PRODUCT RIGHTS
The Company has entered into agreements to acquire, in-license or co-promote
respiratory prescription pharmaceuticals. The following is a summary of
license agreements and product rights as of December 31, 1996 and 1997 (in
thousands):
<TABLE>
<CAPTION>
Amortization
1996 1997 period
-------- -------- --------
<S> <C> <C> <C>
Products - at cost:
Nasarel/Nasalide $ 75,298 25 years
Keftab/Ceclor CD $100,065 100,065 25 years
Entex products 45,055 44,655 15 years
Rondec product line 32,613 32,613 25 years
Other 15,011 14,752 20 years
-------- -------- --------
192,744 267,383
Less accumulated amortization (5,994) (16,602)
-------- --------
License agreements and product rights $186,750 $250,781
-------- --------
-------- --------
</TABLE>
NASAREL-REGISTERED TRADEMARK-/NASALIDE-REGISTERED TRADEMARK- - On May 7,
1997, the Company acquired from Syntex (USA), Inc. and other members of the
Roche Group exclusive U.S. rights to the intranasal steroid products
Nasarel-Registered Trademark- and Nasalide-Registered Trademark- for $70
million, which was paid at closing. A $5 million contingent payment was made
on December 31, 1997 and additional future contingent payments totaling $10
million are due through December 1998, subject to the products remaining
without a competing nasal formulation of flunisolide.
Keftab-Registered Trademark-/Ceclor-Registered Trademark- CD - On September
5, 1996, the Company acquired from Eli Lilly and Company exclusive U.S.
marketing rights to the patented antibiotics Keftab-Registered Trademark- and
Ceclor-Registered Trademark- CD (cefaclor extended release tablets). The
purchase price consisted of $100 million paid in cash at closing. Additional
future contingent payments of $15 million per year starting in 1999 and
ending 2003 are subject to Ceclor CD remaining available by prescription only
with no competitive products, as defined in the licensing agreement.
ENTEX-REGISTERED TRADEMARK- PRODUCTS - On July 3, 1996, the Company acquired
from Procter & Gamble Pharmaceuticals, Inc. the worldwide rights to the
Entex-Registered Trademark- products, consisting of four prescription upper
respiratory drugs. The purchase price of $45 million in cash consisted of $25
million paid at closing and $20 million paid on July 3, 1997.
RONDEC-REGISTERED TRADEMARK- PRODUCT LINE - On June 30, 1995, the Company
acquired from Ross Products Division of Abbott Laboratories the U.S. rights
to the Rondec-Registered Trademark- product line of six prescription
cough/cold drugs. Under the acquisition agreement, the Company received cash
at closing of approximately $4.4 million, paid $20 million on July 14, 1995,
$4 million on January 2, 1996, $4 million on December 31, 1996 and $3 million
on December 31, 1997 and is
-16-
<PAGE>
obligated to make additional future payments of up to $16 million, which are
contingent principally on the acquired products remaining available by
prescription only.
Other long-term obligations include $4.4 million (net of current portion of
$2.8 million) which relates to the acquisition of license agreements and
product rights, but exclude $93 million in contingent payments due in years
1998 through 2004, including $10 million due in 1998.
5. PROPERTY
The following is a summary of property as of December 31, 1996 and 1997 (in
thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Property - at cost:
Land $4,833 $5,064
Buildings 3,665 13,434
Machinery and equipment 5,850 11,075
Furniture and fixtures 1,575 2,419
Construction in-progress 14,353 22,228
------- -------
30,276 54,220
Less accumulated depreciation and amortization (2,776) (5,695)
------- -------
Property $27,500 $48,525
------- -------
------- -------
</TABLE>
The Company is constructing a manufacturing facility that will be used to
formulate, mill, blend and fill drugs to be used with the Company's
Spiros-Registered Trademark- pulmonary drug delivery system. Included in
construction in-progress at December 31, 1997 are capital expenditures
relating to the facility of approximately $16 million. At December 31, 1997,
the Company had open purchase commitments relating to the construction of a
new research and development facility totaling approximately $23.4 million.
6. DEVELOPMENT AGREEMENTS
The Company has a worldwide license from a private inventor to the Spiros dry
powder drug delivery technology. This technology uses a device to aerosolize
pharmaceuticals in dry powder formulations for intrapulmonary and intranasal
administration. The Company is required to pay the inventor royalties on
future sales of this device. The development arrangements discussed below
have been entered into regarding Spiros.
DURA DELIVERY SYSTEMS, INC. ("DDSI") - In 1993, DDSI was formed and completed
a $13 million private placement of callable common stock to fund the
development of Spiros for use with certain compounds. In connection with the
private placement, the Company acquired the right to purchase all the
outstanding shares of DDSI callable common
-17-
<PAGE>
stock. Pursuant to a development and management agreement, DDSI engaged the
Company to develop DDSI's products and provide general management services to
DDSI. Dura recorded contract revenues under the agreement with DDSI for the
year ended December 31, 1995 of $8,016,000. On December 29, 1995, the Company
exercised its option and purchased all of DDSI's outstanding callable common
stock (Note 12).
SPIROS DEVELOPMENT CORPORATION ("SPIROS CORP.") - On December 29, 1995,
Spiros Corp. completed a $28 million private placement to fund the
development of Spiros for use with certain compounds. The private placement
consisted of 933,334 units at $30.00 per unit. Each unit consisted of one
share of Spiros Corp. callable common stock and a Series S warrant (Note 8)
to purchase 2.4 shares of the Company's common stock. In connection with the
private placement, the Company made a $13 million contribution to Spiros
Corp. In exchange for the Series S warrants and the $13 million contribution,
the Company received the right to purchase all of the Spiros Corp. callable
common stock and to acquire the exclusive rights for the use of Spiros with
the asthma drug albuterol. A purchase option expense of $13 million
representing the cash contributed to Spiros Corp. was recorded in December
1995. The Company also recorded a warrant subscriptions receivable and a
corresponding increase in common stock of $4.2 million representing the
estimated fair market value of the Series S warrants. Pursuant to a
development and management agreement, Spiros Corp. engaged the Company to
develop the Spiros Corp. products and provide general management services to
Spiros Corp. Dura recorded contract revenues from Spiros Corp. equal to the
amounts due from Spiros Corp. for costs and fees, less a pro rata amount
allocated to the Series S warrant subscriptions receivable. During 1996 and
1997, Dura recorded contract revenues under the agreement with Spiros Corp.
of $19,138,000 and $19,277,000, respectively. On December 19, 1997, the
Company purchased all of Spiros Corp.'s outstanding callable common stock
(Note 12).
SPIROS DEVELOPMENT CORPORATION II, INC. ("SPIROS CORP. II" ) - On December
22, 1997, Spiros Corp. II, a separate, newly-formed Delaware corporation,
completed a $101 million public offering of units (the "Offering"). Under
agreements described below, Spiros Corp. II will use the net proceeds of $94
million from the Offering and a $75 million contribution from Dura to develop
Spiros and Spiros applications for use with the drugs albuterol,
beclomethasone, ipratropium, albuterol-ipratropium combination, budesonide
and additional designated compounds (the "Compounds"). The offering consisted
of 6,325,000 units sold at $16.00 per unit. Each unit consisted of one share
of Spiros Corp. II callable common stock and a warrant (the "SDCII warrants")
to purchase one-fourth of one share of the Company's common stock. The SDCII
warrants will be exercisable from January 1, 2000 through December 31, 2002
at an exercise price of $54.84 per share of Dura common stock. In
consideration for the SDCII warrants and the contribution of $75 million to
Spiros Corp. II, the Company has the right ("Stock Purchase Option") through
December 31, 2002 to purchase all, but not less than all, of the then
outstanding shares of Spiros Corp. II callable common stock at predetermined
prices. However, the Company is not obligated to purchase such shares of
Spiros Corp. II. The purchase price is $24.01 per share (an aggregate of
$151.9 million) through December 31, 1999 and increases on a quarterly basis
thereafter to a maximum of $45.95 per share (an aggregate of
-18-
<PAGE>
$290.6 million) on December 31, 2002. Such purchase price may be paid, at the
Company's option, in cash, shares of the Company's common stock, or a
combination thereof. In addition, Dura received an option, through specified
dates, to acquire Spiros Corp. II's exclusive rights for the use of Spiros
with albuterol and with a second product other than albuterol. A purchase
option expense of $75 million, representing the cash contributed to Spiros
Corp. II, was recorded in December 1997. The Company also recorded a warrant
subscriptions receivable and corresponding increase in additional paid-in
capital of $12.7 million representing the estimated fair market value of the
SDCII warrants. At December 31, 1997, the Company had a remaining SDCII
warrant subscriptions receivable of $12.3 million.
In connection with the December 22, 1997 Offering, the Company also entered
into certain agreements with Spiros Corp. II which are summarized as follows:
TECHNOLOGY LICENSE AGREEMENT - Under this agreement, the Company granted
to Spiros Corp. II, subject to existing agreements, an exclusive,
worldwide, perpetual, royalty-bearing license to use Spiros in connection
with the Compounds. In consideration for this license, the Company will
receive an annual technology access fee from Spiros Corp. II equal to the
greater of 5% of the net sales of Spiros products, or $2 million. Such
agreement expires upon the exercise or expiration of the Stock Purchase
Option. Albuterol and Product Option Agreement - Under this agreement, the
Company has the right to acquire for specified time periods the exclusive
rights for the use of Spiros with albuterol and for the use of Spiros with
a second product other than albuterol ("Product Options"). The formula for
determining the purchase price for each of the products is set forth in
the agreement and is based, in part, on the costs and expenses incurred by
Spiros Corp. II developing the products.
MANUFACTURING AND MARKETING AGREEMENT - Under this agreement, Spiros Corp.
II granted to the Company an exclusive worldwide license to manufacture
and market the Spiros products in exchange for a royalty of 7% on net
product sales, as defined. Such agreement expires upon the exercise or
expiration of the Stock Purchase Option. In the event Dura exercises its
rights under the Product Options, the Manufacturing and Marketing
Agreement will terminate with respect to the related product.
DEVELOPMENT AGREEMENT - Under this agreement, Spiros Corp. II has engaged
the Company to develop the Spiros products and provide general management
services to Spiros Corp. II. Dura records contract revenues equal to the
amounts due from Spiros Corp. II for costs and fees less a pro rata amount
allocated to the SDCII warrant subscriptions receivable. During 1997, Dura
recorded contract revenues under the agreement with Spiros Corp. II of
$6,626,000 for development services provided from October 10, 1997 through
year-end.
-19-
<PAGE>
At December 31, 1997 the Company had a receivable from Spiros Corp. II of
$8,399,000 representing amounts for development costs incurred by the
Company, as well as costs incurred on behalf of Spiros Corp. II in connection
with the Offering.
OTHER DEVELOPMENT AGREEMENTS - The Company has entered into other development
agreements to provide contract research and development services, generally
relating to the dry powder formulation of compounds and to pulmonary drug
delivery technologies, including the use of Spiros. Pursuant to these
agreements, the Company receives contract revenues for services provided and,
in some cases, up-front and milestone payments.
7. CONVERTIBLE SUBORDINATED NOTES
In the third quarter of 1997, the Company issued $287.5 million principal
amount of 3 1/2% Convertible Subordinated Notes (the "Notes") due July 15, 2002
with interest payable semiannually, commencing January 15, 1998. The Notes
are convertible, at the option of the holder, into shares of the Company's
common stock at any time prior to maturity or redemption at a conversion
price of $50.635 per share, subject to adjustment under certain conditions.
The Company cannot redeem the Notes prior to July 15, 2000. Thereafter, the
Company can redeem the Notes from time to time, in whole or in part, at
specified redemption prices. The Notes are unsecured and subordinated to all
existing and future senior indebtedness of the Company. The indenture
governing the Notes does not restrict the incurrence of senior indebtedness
or other indebtedness by the Company.
8. CAPITAL STOCK
COMMON STOCK - Effective July 2, 1997, the Company changed its state of
incorporation from California to Delaware. In connection with this change,
the outstanding shares of the Company's no par value common stock were
converted into and exchanged for an equal number of shares of $.001 par value
common stock of the Delaware entity.
In August 1995, May 1996 and November 1996, the Company completed offerings
of 4,494,000, 5,405,000 and 4,820,000 shares of common stock, respectively,
resulting in net proceeds to the Company of $53.8 million, $150.5 million and
$152.4 million, respectively.
COMMON STOCK WARRANTS - In connection with the private placement completed by
the Company and DDSI in September 1993 (Note 6), DDSI investors received
Series W warrants to purchase an aggregate of 3,640,000 shares of the
Company's common stock. The Series W warrants are exercisable at $2.38 per
share, subject to adjustment upon the occurrence of certain events as
defined, and are exercisable through September 27, 2000.
In connection with the private placement completed by Spiros Corp. on December
29, 1995 (Note 6), Spiros Corp. investors received Series S warrants to
purchase an aggregate of 2,240,000 shares of the Company's common stock.
-20-
<PAGE>
The Series S warrants are exercisable at $19.47 per share, subject to
adjustment upon the occurrence of certain events as defined, and are
exercisable through December 29, 2000.
In connection with the Offering completed by Spiros Corp. II on December 22,
1997 (Note 6), Spiros Corp. II investors received SDCII warrants to purchase
an aggregate of 1,581,250 shares of the Company's common stock. The SDCII
warrants are exercisable at $54.84 per share, subject to adjustment upon the
occurrence of certain events as defined, and are exercisable through December
31, 2002.
The following table summarizes common stock warrants outstanding at December
31, 1997 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Warrant description Warrants Shares covered Exercise price
outstanding by warrants per share
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Series W warrants 290 812 $ 2.38
- ----------------------------------------------------------------------------------------------------------
Series S warrants 933 2,240 $19.47
- ----------------------------------------------------------------------------------------------------------
SDCII warrants 6,325 1,581 $54.84
- ----------------------------------------------------------------------------------------------------------
Other 302 404 $0.25 - $45.12
- ----------------------------------------------------------------------------------------------------------
Total warrants outstanding 7,850 5,037
- ----------------------------------------------------------------------------------------------------------
</TABLE>
COMMON SHARES RESERVED - As of December 31, 1996 and 1997, the Company has
reserved shares of common stock for issuance as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Issuance under 1992 stock option plan 3,729 4,584
Exercise of common stock warrants 4,052 5,037
- -------------------------------------------------------------------------------
Total shares reserved 7,781 9,621
------------------------
------------------------
</TABLE>
9. STOCK OPTIONS
The Company's 1992 stock option plan (the "Plan") provides for the grant of
options to officers and other key employees of the Company, and to certain
directors, consultants and independent contractors of the Company, to
purchase up to 7,607,360 shares of the Company's common stock. The Plan
provides for the automatic issuance of options to purchase 8,000 and 30,000
shares of the Company's common stock to non-employee Board members at the
date of each annual shareholders' meeting and upon initial election to the
Board of Directors, respectively. Generally, options are to be granted at
prices equal to at least 100% of the fair market value of the stock at the
date
-21-
<PAGE>
of grant, expire not later than ten years from the date of grant and become
exercisable ratably over a four-year period following the date of grant.
The Plan provides that in the event of a corporate transaction, as defined,
all outstanding options shall become fully exercisable immediately prior to
the effective date of such transaction and shall terminate upon such
effective date. The Board of Directors may also grant officers of the Company
limited stock appreciation rights in tandem with their outstanding options.
In addition, limited stock appreciation rights are granted in connection with
all automatic option grants under the Plan. Upon the occurrence of a hostile
takeover, as defined, each outstanding option with such a limited stock
appreciation right in effect for at least six months will automatically be
canceled in return for a cash distribution from the Company in an amount
equal to the excess of the takeover price, as defined, over the aggregate
exercise price. As of December 31, 1996 and 1997, options to purchase 176,000
and 212,000 shares of common stock, respectively, were outstanding with
limited stock appreciation rights.
-22-
<PAGE>
The following table summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
Weighted average
Shares exercise price
per share
------------------------------------
Options Options available
outstanding for grant
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Balance, January 1, 1995 3,125,718 150,672 $ 2.68
Options authorized 1,000,000
Options granted 1,100,606 (1,100,606) $10.29
Options exercised (1,093,848) $ 1.21
Options canceled (80,108) 80,108 $ 4.79
- ----------------------------------------------------------------------------------------------------
Balance, December 31, 1995 3,052,368 130,174 $ 5.89
Options authorized 1,500,000
Options granted 1,339,500 (1,339,500) $28.95
Options exercised (953,414) $ 3.20
Options canceled (53,944) 53,944 $21.48
- ----------------------------------------------------------------------------------------------------
Balance, December 31, 1996 3,384,510 344,618 $15.52
Options authorized 1,600,000
Options granted 1,935,175 (1,935,175) $36.42
Options exercised (745,020) $ 6.40
Options canceled (805,478) 805,478 $35.71
- ----------------------------------------------------------------------------------------------------
Balance, December 31, 1997 3,769,187 814,921 $22.67
-----------------------------------------------------
Exercisable, December 31, 1995 1,524,090 $ 3.91
---------------
Exercisable, December 31, 1996 1,327,622 $ 6.99
---------------
Exercisable, December 31, 1997 1,386,911 $12.61
---------------
</TABLE>
-23-
<PAGE>
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------------------------------------
Range of exercise Number Weighted Weighted Number Weighted
prices outstanding average average exercisable average
remaining exercise price exercise price
contractual life
(years)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.25 - $ 5.00 385,995 5.2 $ 3.12 375,474 $ 3.08
$ 5.01 - $10.00 619,467 7.2 $ 6.74 399,270 $ 6.79
$10.01 - $20.00 619,898 7.9 $14.49 258,395 $14.24
$20.01 - $30.00 1,207,015 9.0 $26.25 327,152 $27.13
$30.01 - $40.00 298,117 9.6 $36.25 13,459 $35.29
$40.01 - $52.88 638,695 9.9 $44.81 13,161 $44.41
- ------------------------------------------------------------------------------------------------------------
3,769,187 8.3 $22.67 1,386,911 $12.61
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." In accordance with the provisions
of SFAS No. 123, the Company applies Accounting Principles Board Opinion No.
25 and related interpretations in accounting for its stock option plan and,
accordingly, no compensation cost has been recognized for stock options in
1995, 1996 or 1997. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at grant date as prescribed by
SFAS No. 123, net loss for the year ended December 31, 1995 would have been
increased by $351,000 ($0.01 per share, basic and diluted), the net income
for the year ended December 31, 1996 would have been reduced by $2,707,000
($0.08 and $0.07 per share, basic and diluted, respectively) and net loss for
the year ended December 31, 1997 would have been increased by $5,932,000
($0.14 per share, basic and diluted). Pro forma calculations exclude the
effect of stock options granted prior to 1995. Accordingly, the 1995, 1996
and 1997 pro forma adjustments are not indicative of future period pro forma
adjustments when the calculation will reflect all applicable stock options.
The estimated weighted average fair value at grant date for the options
granted during 1995, 1996 and 1997 were $4.54, $13.54 and $14.30 per option,
respectively. The fair value of options at date of grant was estimated using
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield None None None
Expected stock price volatility 40% 40% 40%
Risk-free interest rate 6.2% 6.2% 6.1%
Expected life of options 5 years 5 years 5 years
</TABLE>
-24-
<PAGE>
10. INCOME TAXES
The provision for income taxes consisted of the following components (in
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $235 $3,012 $21,617
State 171 527 2,833
--------- --------- ---------
Total 406 3,539 24,450
--------- --------- ---------
Deferred:
Federal (5,424)
State (221)
--------- --------- ---------
Total (5,645)
--------- --------- ---------
Provision for income taxes $406 $3,539 $18,805
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation of the income tax provision (benefit) based on federal
statutory rates and income (loss) before income taxes to the provision for
income taxes as reported is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Provision (benefit) at statutory rates $(12,027) $ 9,475 $(23,060)
Charges not currently deductible or
recognizable for tax purposes 14,883 43,351
State income taxes, net 171 361 1,779
NOL carryforwards utilized (2,946) (6,852) (1,015)
Change in beginning-of-year
deferred tax valuation allowance (1,545)
Impact of foreign income taxed at
different rates (364)
Federal alternative minimum tax 235 234
Other 90 321 (341)
-------- -------- --------
Provision for income taxes $ 406 $ 3,539 $ 18,805
-------- -------- --------
-------- -------- --------
</TABLE>
-25-
<PAGE>
Deferred tax assets and liabilities reflect the impact of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts recognized for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities as of December
31, 1996 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION> 1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $19,484 $25,422
Capitalized research and development 6,404 8,247
Research and development credits 1,670 2,549
Reserves and accruals not currently deductible 1,560 5,023
Other 341
--------- ---------
Total deferred tax assets 29,118 41,582
Deferred tax liabilities:
Depreciation and amortization (269) (650)
Valuation allowance for deferred tax assets (28,849) (36,022)
--------- ---------
Net deferred tax assets $0 $4,910
--------- ---------
--------- ---------
</TABLE>
The Company has provided a valuation allowance against deferred tax assets
based on management's assessment of the likelihood of realizing those assets.
Realization of deferred tax assets is dependent upon having sufficient taxable
income during the period that temporary differences and carryforwards are
expected to be available to reduce taxable income. During the year ended
December 31, 1997, the balance of the beginning-of-year valuation allowance was
reduced by approximately $1.5 million due to a change in management's judgment
about the realizability of deferred tax assets relating to net operating loss
carryforwards.
At December 31, 1997, the Company had federal net operating loss ("NOL")
carryforwards of approximately $65 million, which begin expiring in 2002. This
amount includes NOL carryforwards totaling approximately $38 million acquired
in connection with the Company's purchase of the callable common stock of
Spiros Corp. The deferred tax asset relating to the Spiros Corp. NOL
carryforwards has been fully reserved. The availability of the NOL
carryforwards is subject to annual limitations pursuant to the "change in
ownership" provisions of Section 382 of the Internal Revenue Code. As such,
approximately $5 million of the total federal NOL carryforwards will be
available for use in 1998; the amount available will increase by approximately
$5 million per year. While the Company believes the annual limitation is
approximately $5 million, this amount is not certain.
The Company does not provide for income taxes which would be payable if
undistributed earnings of its foreign subsidiaries were remitted because the
Company considers these earnings to be invested indefinitely. During the
-26-
<PAGE>
years ended December 31, 1995, 1996, and 1997 the Company recorded tax
benefits from stock option exercises of $235,000, $2,790,000, and $13,356,000,
respectively, which were credited to shareholders' equity.
11. CHARGES FOR ACQUIRED IN-PROCESS TECHNOLOGY, PURCHASE OPTIONS AND OTHER
NONRECURRING ITEMS
Charges for acquired in-process technology, purchase options and other
nonrecurring items consisted of the following (in thousands):
<TABLE>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Acquired in-process technology $30,773 $45,989
Acquired purchase options 13,000 75,000
Buy-out of royalty agreement 13,780
Impairment of long-term investment 2,870
--------- --------- ---------
Total $43,773 $137,639
--------- --------- ---------
--------- --------- ---------
</TABLE>
ACQUIRED IN-PROCESS TECHNOLOGY - The charges for acquired in-process technology
in 1995 and 1997 relate to the Company's acquisitions of DDSI and of Spiros
Corp., respectively (Note 12). The Company concluded that due to the additional
development, testing, and regulatory approvals required, the commercial
viability of the technology acquired in these acquisitions had not yet been
established. As such, charges to earnings were recorded in the periods in which
the acquisitions occurred for the portion of the purchase price allocated to
in-process technology.
ACQUIRED PURCHASE OPTIONS - In connection with the formation of Spiros Corp. in
1995 and Spiros Corp. II in 1997, the Company contributed $13 million and $75
million, respectively, as consideration for the options to acquire the rights
to certain products from those companies (Note 6). The Company concurrently
recorded charges for these purchase options for the amounts of cash contributed
to Spiros Corp. and Spiros Corp. II.
BUY-OUT OF ROYALTY AGREEMENT - In December 1997, the Company terminated a ten-
year royalty agreement which the Company entered into in 1994. The agreement
required the Company to make quarterly royalty payments based on sales in
specified sales territories. As consideration for terminating the agreement,
the Company made a cash payment of $11.3 million (paid in January 1998) and
issued a warrant to purchase 200,000 shares of the Company's common stock for
$45.12 per share. The estimated fair value of the warrant was $2,480,000 which,
when combined with the cash payment, resulted in a nonrecurring charge of
$13,780,000.
IMPAIRMENT OF LONG-TERM INVESTMENT - The Company periodically evaluates its
ability to recover the carrying value of its long-lived assets. In the fourth
quarter of 1997, the Company concluded that the value of a long-term
-27-
<PAGE>
investment was impaired and, accordingly, wrote down the investment to its
estimated fair value, resulting in a nonrecurring charge of $2,870,000.
12. ACQUISITIONS
The following acquisitions have been accounted for under the purchase method of
accounting and, accordingly, the operating results of these acquisitions are
included in the Company's consolidated results of operations from the date of
acquisition.
DDSI - On December 29, 1995, the Company acquired all of the outstanding
callable common stock of DDSI (Note 6). The purchase price of approximately
$33.5 million consisted of 2,285,108 shares of the Company's common stock. The
net assets acquired included cash of $3.4 million, equipment valued at $380,000
and DDSI's payable to Dura for development and management services of $995,000.
The excess of the purchase price over the fair value of the net assets acquired
of approximately $30.8 million was allocated to in-process technology. The
Company concluded, based on an assessment of the additional development,
testing and regulatory approvals required, that the commercial viability of the
technology had not yet been established. In addition, no alternative future
uses of the technology, not requiring regulatory approval, had been
established. As a result of this assessment, the acquired in-process technology
was expensed as a nonrecurring charge in December 1995.
SPIROS CORP. - On December 19, 1997, the Company acquired all of the
outstanding callable common stock and options of Spiros Corp. (Note 6). The
purchase price of $45.7 million consisted of 896,606 shares of the Company's
common stock and a cash payment of $2 million. The net assets acquired included
cash of $1 million. The excess of the purchase price over the fair value of the
net assets acquired of $44.7 million was allocated to in-process technology.
The Company concluded, based on an assessment of the additional development,
testing and regulatory approvals required, that the commercial viability of the
technology had not yet been established. In addition, no alternative future
uses of the technology, not requiring regulatory approval, have been
established. As a result of this assessment, the acquired in-process technology
was expensed as a nonrecurring charge in December 1997.
The following unaudited pro forma summary presents the consolidated results of
operations as if the acquisition of Spiros Corp. had occurred on January 1,
1996, after giving effect to certain adjustments, including the issuance of
Company common stock. The charge to earnings for acquired in-process technology
is not reflected in the pro forma results as it is nonrecurring. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisition been
made on January 1, 1996, nor is it indicative of future results (in thousands,
except per share amounts).
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Total revenues $85,181 $162,444
Net income (loss) $9,801 $(49,917)
Net income (loss) per share - basic $0.27 $(1.12)
Net income (loss) per share - diluted $0.24 $(1.12)
</TABLE>
-28-
<PAGE>
13. COMMITMENTS AND CONTINGENCIES
EMPLOYEE SAVINGS PLANS - The Company has a 401(k) plan that allows
participating employees to contribute 1% to 15% of their salary, subject to
annual limits. The Board may, at its sole discretion, approve Company
contributions. The Company made contributions to the plan totaling $224,000,
$532,000 and $867,000 in 1995, 1996 and 1997, respectively.
The Company has a non-qualified deferred compensation plan that allows eligible
employees to defer up to 100% of their compensation. As of December 31, 1997,
$5,175,000 has been deferred under this plan which is included in other assets
and other long-term obligations. The amounts deferred under this plan are
transferred to a trust and managed by an investment manager. Included in the
trust investments at December 31, 1997 are 156,250 units of Spiros Corp. II
(Note 6).
LINE OF CREDIT - In April 1997, the Company entered into a loan agreement with
a bank which provides for the borrowing of up to $50 million on an unsecured
basis through May 1, 1999. Borrowings under the agreement bear interest at the
bank's reference rate (8.5% at December 31, 1997) or an offshore rate plus 1.5%
as selected by the Company. The agreement places restrictions on the payment of
cash dividends and on the incurrence of additional indebtedness by the Company.
As of December 31, 1997, no borrowings were outstanding under this agreement.
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 contract. On January
19, 1998, the Company filed suit against Scandipharm seeking a declaratory
judgment that Dura's termination of the merger did not breach the merger
agreement and for damages against Scandipharm. The Company believes that it had
the right to terminate the merger agreement, and that Scandipharm's claims for
specific performance under the agreement or for unspecified damages are without
merit, and that outcome of this matter will not have a material adverse effect
on the Company's financial position or results of operations.
-29-
<PAGE>
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for the
years ended December 31, 1996 and 1997 (in thousands, except per share amounts).
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- --------
<S> <C> <C> <C> <C>
1996
Total revenues $18,587 $18,800 $25,920 $40,812
Operating income 3,712 3,862 4,602 9,471
Net income 4,057 4,609 5,806 9,856
Net income per share - basic 0.13 0.14 0.15 0.24
Net income per share - diluted 0.11 0.12 0.14 0.22
1997
Total revenues $40,893 $43,631 $43,343 $53,456
Operating income (loss) 11,170 12,302 13,377 (114,866)
Net income (loss) 8,787 9,282 11,325 (114,086)
Net income (loss) per share - basic 0.20 0.21 0.26 (2.57)
Net income (loss) per share - diluted 0.19 0.20 0.24 (2.57)
</TABLE>
See Notes 4, 6, 11 and 12 for discussions of transactions which occurred during
1996 and 1997, affecting the comparability of the Company's quarterly results
of operations.
-30-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Dura Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Dura
Pharmaceuticals, Inc. and subsidiaries as of December 31, 1996 and 1997, and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Dura Pharmaceuticals, Inc. and
subsidiaries as of December 31, 1996 and 1997 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
San Diego, California
January 20, 1998
<PAGE>
CORPORATE INFORMATION
DIRECTORS
Cam L. Garner
Chairman, President and
Chief Executive Officer
Dura Pharmaceuticals, Inc.
James C. Blair, Ph.D.
General Partner
Domain Associates
Herbert J. Conrad
Senior Vice President
Hoffmann-La Roche, retired
Joseph C. Cook, Jr.
Principal
Life Science Advisors, LLC
David F. Hale
President and Chief Executive Officer
Women First Health Care, Inc.
David S. Kabakoff, Ph.D.
Executive Vice President
Dura Pharmaceuticals, Inc.;
President and Chief Executive Officer
Spiros Development Corp. II
Gordon V. Ramseier
Executive Director
The Sage Group
Charles G. Smith, Ph.D.
Private Consultant
Walter F. Spath
Senior Vice President, Sales and Marketing
Dura Pharmaceuticals, Inc.
OFFICERS
Cam L. Garner
Chairman, President and
Chief Executive Officer
David S. Kabakoff, Ph.D.
Executive Vice President
Julia R. Brown
Senior Vice President,
Business Development
James W. Newman
Senior Vice President, Finance and
Administration, and Chief Financial Officer
Charles W. Prettyman
Senior Vice President,
Development and Regulatory Affairs
Walter F. Spath
Senior Vice President, Sales and Marketing
Mitchell R. Woodbury
Senior Vice President,
General Counsel and Secretary
Chester Damecki
Vice President, Operations
Malcolm R. Hill, Pharm.D.
Vice President, Clinical Development
Robert W. Keith
Vice President, Managed Care
Erle T. Mast
Vice President, Finance
David M. Preston
Vice President, Marketing
Robert K. Schultz, Ph.D.
Vice President, Product Development
Clyde L. Witham
Vice President, Science and Technology
Michael T. Borer
General Manager, Health Script
Corporate Headquarters
7475 Lusk Boulevard
San Diego, California 92121
Telephone (619) 457-2553
AUDITORS
Deloitte & Touche LLP
San Diego, California
SHAREHOLDERS
At March 1, 1998, there were
approximately 450 holders of record of Dura's
common stock.
DIVIDENDS
No cash dividends were declared
or paid in 1995, 1996 or 1997.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, LLC
400 S. Hope St., 4th Floor
Los Angeles, California 90071
(213) 553-9719
REQUESTS FOR INFORMATION
Copies of the Form 10-K filed with the Securities and Exchange Commission,
financial communications and general information on the Company are available
without charge upon request to Investor Relations, Dura Pharmaceuticals, 7475
Lusk Boulevard, San Diego, California 92121.
ANNUAL MEETING
The annual meeting of shareholders will be held at 10 a.m., Thursday, May 21,
1998 at the La Jolla Marriott,
4240 La Jolla Village Drive, La Jolla, California.
MARKET INFORMATION ON COMMON STOCK
Dura Pharmaceuticals' common stock is traded on the Nasdaq National Market
under the symbol "DURA." The following table reflects the range of high and low
trade prices of Dura's common stock by quarter for 1995, 1996, and 1997. This
information is based upon prices reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
1995 HIGH LOW
------ ------
<S> <C> <C>
First Quarter $7 1/2 $5 3/4
Second Quarter $9 7/8 $6 1/2
Third Quarter $17 1/2 $9 1/8
Fourth Quarter $17 3/4 $13 1/4
1996
First Quarter $26 3/8 $16 3/4
Second Quarter $34 1/2 $23 11/16
Third Quarter $40 $21 3/8
Fourth Quarter $47 3/4 $31 1/2
1997
First Quarter $44 5/8 $33 5/8
Second Quarter $43 1/4 $25
Third Quarter $44 3/4 $33 3/8
Fourth Quarter $52 7/8 $43 1/4
</TABLE>
-31-
<PAGE>
Dura-Tap-Registered Trademark-/PD, Furadantin-Registered Trademark- and Rondec-
Registered Trademark- are registered trademarks of the Company. The Company
claims common law trademark rights to Dura-Vent-Registered Trademark-/DA and
D.A. Chewable. Entex-Registered Trademark-, Nasarel-Registered Trademark- and
Nasalide-Registered Trademark- are registered trademarks of Dura (Bermuda)
Trading Company Limited. Tornalate-Registered Trademark- is a registered
trademark of Sanofi-Winthrop, Inc. Crolom is a trademark of Bausch & Lomb
Pharmaceuticals, Inc. Capastat-Registered Trademark-, Seromycin-Registered
Trademark-, Ceclor-Registered Trademark-, Ceclor-Registered Trademark- CD,
Keftab-Registered Trademark- and Lorabid-Registered Trademark- are registered
trademarks of Eli Lilly and Company.
Ceftin-Registered Trademark- and Rotohaler are registered and common law
trademarks of Glaxo Wellcome. Suprax-Registered Trademark- is a registered
trademark of Lederle Laboratories. Vantin-Registered Trademark- is a
registered trademark of Pharmacia & Upjohn. Cefzil-Registered Trademark- is a
registered trademark of Bristol-Myers Squibb Co. Cedax-Registered Trademark-
is a registered trademark of Schering Corporation. Turbuhaler-Registered
Trademark- is a registered trademark of Astra Pharmaceuticals. Spinhaler-
Registered Trademark- is a registered trademark of Fisons Limited.
Internet web site: Dura Pharmaceuticals' web site at http://www.durapharm.com
contains recent press releases, product summaries and company history.
-32-
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-34551 on Form S-8 and Registration Statement Nos. 33-71798, 33-99722,
33-93914 and 333-37955 on Form S-3 of Dura Pharmaceuticals, Inc. of our
report dated January 20, 1998, incorporated by reference in this Annual
Report on Form 10-K of Dura Pharmaceuticals, Inc. for the year ended December
31, 1997.
/s/ Deloitte & Touche LLP
San Diego, California
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated balance sheet as of December 31, 1997, and the related
consolidated statements of operations for the year ended December 31, 1997 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> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 72,003
<SECURITIES> 313,218
<RECEIVABLES> 40,987
<ALLOWANCES> 0
<INVENTORY> 15,201
<CURRENT-ASSETS> 441,409
<PP&E> 54,220
<DEPRECIATION> 5,695
<TOTAL-ASSETS> 774,880
<CURRENT-LIABILITIES> 48,539
<BONDS> 287,500
0
0
<COMMON> 46
<OTHER-SE> 429,231
<TOTAL-LIABILITY-AND-EQUITY> 774,880
<SALES> 0
<TOTAL-REVENUES> 181,323
<CGS> 32,081
<TOTAL-COSTS> 121,701
<OTHER-EXPENSES> 137,639
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,816
<INCOME-PRETAX> (65,887)
<INCOME-TAX> 18,805
<INCOME-CONTINUING> (84,692)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (84,692)
<EPS-PRIMARY> (1.93)
<EPS-DILUTED> (1.93)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEETS AS OF 12-31-95 AND 1996, RESPECTIVELY &
THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED 12-31-95
& 1996, RESPECTIVELY, & THE NOTES THERETO, & IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS & NOTES.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 25,554 131,101
<SECURITIES> 42,266 109,244
<RECEIVABLES> 6,957 24,092
<ALLOWANCES> 0 0
<INVENTORY> 3,069 7,544
<CURRENT-ASSETS> 78,458 271,981
<PP&E> 17,509 30,276
<DEPRECIATION> 1,376 2,776
<TOTAL-ASSETS> 143,997 504,670
<CURRENT-LIABILITIES> 18,741 52,117
<BONDS> 6,611 0
0 0
0 0
<COMMON> 216,514 525,350
<OTHER-SE> (107,417) (81,773)
<TOTAL-LIABILITY-AND-EQUITY> 143,997 504,670
<SALES> 0 0
<TOTAL-REVENUES> 51,502 104,119
<CGS> 10,618 21,301
<TOTAL-COSTS> 44,981 82,472
<OTHER-EXPENSES> 43,773 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 906 674
<INCOME-PRETAX> (35,372) 27,867
<INCOME-TAX> 406 3,539
<INCOME-CONTINUING> (35,778) 24,328
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (35,778) 24,328
<EPS-PRIMARY> (1.53) 0.68
<EPS-DILUTED> (1.53) 0.60
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated balance sheets as of 3/30/1997, 6/30/1997, and
9/30/1997, and the related consolidated statements of operations for the
quarters ended 3/30/1997, 6/30/1997, and 9/30/1997 and the notes thereto, and
is qualified in its entirety by reference to such consolidated financial
statements and notes.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 63,059 41,008 166,583
<SECURITIES> 193,789 145,186 288,127
<RECEIVABLES> 19,027 22,975 27,849
<ALLOWANCES> 0 0 0
<INVENTORY> 8,305 13,792 15,858
<CURRENT-ASSETS> 284,180 222,961 498,417
<PP&E> 34,111 44,000 48,946
<DEPRECIATION> 3,346 4,044 4,798
<TOTAL-ASSETS> 518,147 535,536 821,105
<CURRENT-LIABILITIES> 53,615 57,017 41,141
<BONDS> 0 0 287,500
0 0 0
0 0 0
<COMMON> 528,069 531,377 533,047
<OTHER-SE> (73,036) (62,659) (50,750)
<TOTAL-LIABILITY-AND-EQUITY> 518,147 535,536 821,105
<SALES> 0 0 0
<TOTAL-REVENUES> 40,893 84,523 127,867
<CGS> 7,970 15,946 23,373
<TOTAL-COSTS> 21,753 45,105 67,845
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 14,404 29,573 45,752
<INCOME-TAX> 5,617 11,504 16,357
<INCOME-CONTINUING> 8,787 18,069 29,395
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 8,787 18,069 29,395
<EPS-PRIMARY> 0.20 0.42 0.67
<EPS-DILUTED> 0.19 0.38 0.62
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated balance sheets as of 3/30/1996, 6/30/1996, and 9/30/1996,
and the related consolidated statements of operations for the quarters ended
3/30/1996, 6/30/1996, and 9/30/1996 and the notes thereto, and is qualified in
its entirety by reference to such consolidated financial statements and notes.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 21,008 107,003 33,849
<SECURITIES> 40,972 100,595 53,389
<RECEIVABLES> 9,227 9,397 15,523
<ALLOWANCES> 0 0 0
<INVENTORY> 3,540 3,294 7,743
<CURRENT-ASSETS> 75,274 220,706 111,423
<PP&E> 19,253 20,822 22,907
<DEPRECIATION> 1,630 1,908 2,283
<TOTAL-ASSETS> 146,973 300,198 334,556
<CURRENT-LIABILITIES> 16,568 19,208 44,872
<BONDS> 6,471 0 0
0 0 0
0 0 0
<COMMON> 217,354 369,219 371,406
<OTHER-SE> (103,222) (98,257) (92,050)
<TOTAL-LIABILITY-AND-EQUITY> 146,973 300,198 334,556
<SALES> 0 0 0
<TOTAL-REVENUES> 18,587 37,386 63,307
<CGS> 3,623 7,422 12,553
<TOTAL-COSTS> 14,762 29,813 38,581
<OTHER-EXPENSES> 113 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 294 518 (4,060)
<INCOME-PRETAX> 4,327 9,465 16,233
<INCOME-TAX> 270 800 1,762
<INCOME-CONTINUING> 4,057 8,665 14,471
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 4,057 8,665 14,471
<EPS-PRIMARY> 0.13 0.27 0.42
<EPS-DILUTED> 0.11 0.23 0.37
</TABLE>
