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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File number 000-19809
DURA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3645543
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7475 LUSK BLVD., SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE IS (858)457-2553
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ X ] Yes [ ] No
The number of shares of the Registrant's Common Stock outstanding as of July 30,
1999 was 44,133,367.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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DURA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT SHARE AMOUNTS
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<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ---------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 61,945 $ 31,113
Short-term investments 208,333 238,299
Accounts and other receivables 32,474 24,627
Inventory 14,574 9,006
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Total current assets 317,326 303,045
License agreements and product rights 383,173 377,250
Property 93,316 85,374
Other assets 66,382 59,790
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Total $ 860,197 $ 825,459
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,263 $ 8,893
Accrued liabilities 64,355 46,557
Current portion of long-term obligations 4,896 6,798
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Total current liabilities 82,514 62,248
Convertible subordinated notes 287,500 287,500
Other long-term obligations 64,212 65,339
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Total liabilities 434,226 415,087
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Shareholders' equity:
Preferred stock, par value $.001, shares authorized - 5,000,000; no
shares issued or outstanding
Common stock, par value $.001, shares authorized - 200,000,000;
issued and outstanding - 44,131,169 and 44,083,652, respectively 44 44
Additional paid-in capital 608,142 607,436
Accumulated other comprehensive income (loss) (642) 454
Warrant subscriptions receivable (7,914) (9,385)
Accumulated deficit (145,602) (160,951)
Treasury stock, at cost; 2,402,500 and 2,327,500 shares, respectively (28,057) (27,226)
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Total shareholders' equity 425,971 410,372
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Total $ 860,197 $ 825,459
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</TABLE>
See accompanying notes to consolidated financial statements.
2
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DURA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 51,321 $ 34,912 $ 106,402 $ 70,798
Contract 16,685 17,026 32,850 29,906
--------- --------- --------- ---------
Total revenues 68,006 51,938 139,252 100,704
--------- --------- --------- ---------
Operating costs and expenses:
Cost of sales 10,379 7,457 20,870 15,550
Clinical, development and regulatory 12,474 11,488 23,965 21,077
Selling, general and administrative 33,587 22,946 70,877 45,461
--------- --------- --------- ---------
Total operating costs and expenses 56,440 41,891 115,712 82,088
--------- --------- --------- ---------
Operating income 11,566 10,047 23,540 18,616
--------- --------- --------- ---------
Other:
Interest income 4,249 5,937 8,552 11,354
Interest expense (4,308) (3,069) (8,372) (6,210)
Other - net (19) (519) (247) (506)
--------- --------- --------- ---------
Total other (78) 2,349 (67) 4,638
--------- --------- --------- ---------
Income before income taxes 11,488 12,396 23,473 23,254
Provision for income taxes 3,905 4,219 8,125 7,913
--------- --------- --------- ---------
Net income $ 7,583 $ 8,177 $ 15,348 $ 15,341
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per share:
Basic $ 0.17 $ 0.18 $ 0.35 $ 0.33
Diluted $ 0.17 $ 0.17 $ 0.34 $ 0.32
Weighted average number of common shares:
Basic 44,085 46,302 44,092 46,139
Diluted 45,085 48,073 45,328 48,321
</TABLE>
See accompanying notes to consolidated financial statements.
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DURA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(UNAUDITED)
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1999 1998
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<S> <C> <C>
Net cash provided by operating activities $ 43,283 $ 43,633
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Investing activities:
Sales and maturities of short-term investments 189,435 201,454
Purchases of short-term investments (161,565) (179,606)
Product acquisitions (24,024) (5,000)
Capital expenditures (12,249) (18,582)
Other (4,393) (363)
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Net cash used for investing activities (12,796) (2,097)
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Financing activities:
Issuance of common stock and warrants - net 2,176 5,537
Principal payments on long-term obligations (1,000)
Repurchase of common stock (831)
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Net cash provided by financing activities 345 5,537
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Net increase in cash and cash equivalents 30,832 47,073
Cash and cash equivalents at beginning of period 31,113 72,003
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Cash and cash equivalents at end of period $ 61,945 $ 119,076
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Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest (net of amounts capitalized) $ 8,585 $ 5,832
Income taxes $ 1,436 $ 3,479
</TABLE>
See accompanying notes to consolidated financial statements.
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DURA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by Dura Pharmaceuticals, Inc. ("Dura" or the "Company") in accordance with the
instructions to Form 10-Q. The consolidated financial statements reflect all
adjustments, consisting of only normal recurring accruals, which are, in the
opinion of management, necessary for a fair statement of the results of the
interim periods presented. These consolidated financial statements and notes
thereto should be read in conjunction with the audited financial statements and
notes thereto included in the Company's annual report on Form 10-K for the year
ended December 31, 1998. The results of operations for the interim periods are
not necessarily indicative of results to be expected for any other interim
period or for the year as a whole.
The consolidated financial statements include the accounts of Dura and its
wholly owned subsidiaries. All intercompany transactions and balances are
eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the consolidated financial statements and related
notes. Changes in those estimates may affect amounts reported in future periods.
2. REPORTING COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130") requires reporting and displaying comprehensive income
and its components which, for Dura, includes net income and unrealized gains
and losses on investments. In accordance with SFAS 130, the accumulated
balance of other comprehensive income (loss) is disclosed as a separate
component of shareholders' equity.
For the three months and six months ended June 30, 1999 and 1998, comprehensive
income consisted of (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 7,583 $ 8,177 $ 15,348 $ 15,341
Other comprehensive loss:
Unrealized loss on
investments (869) (167) (1,096) (83)
-------- -------- -------- --------
Comprehensive income $ 6,714 $ 8,010 $ 14,525 $ 15,258
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
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3. COMMITMENTS AND CONTINGENCIES
TERMINATION OF MERGER AGREEMENT WITH SCANDIPHARM, INC. - On December 1, 1997,
the Company terminated a merger agreement with Scandipharm, Inc. entered into
on October 20, 1997. On January 16, 1998, Scandipharm filed suit against the
Company for breach of contract. On January 20, 1998, the Company filed suit
against Scandipharm seeking a declaratory judgment that Dura's termination of
the merger agreement did not breach the agreement and for damages against
Scandipharm. The Company believes that it had the right to terminate the
merger agreement, that Scandipharm's claims in its lawsuit and its claims for
damages are without merit and intends to defend against them vigorously. The
Company also believes that the outcome of this matter will not have a
material adverse effect on the Company's financial condition or operations.
SHAREHOLDER CLASS ACTION LITIGATION - Commencing on January 27, 1999, several
class action suits were filed against the Company, various current or former
officers and directors of the Company, and one of the Company's investment
bankers in the United States District Court for the Southern District of
California. The lawsuits allege violations of the federal securities laws,
and purport to seek damages on behalf of a class of shareholders who
purchased Dura common stock during a defined period. The Company believes
that the claims in the lawsuits are without merit and intends to defend
against them vigorously.
4. SEGMENT INFORMATION
The Company operates in two business segments: (1) Pharmaceutical Products
and (2) Research and Development. The Pharmaceutical Products segment markets
prescription pharmaceutical products for the treatment of allergies, asthma,
pneumonia, and related respiratory conditions. The Research and Development
segment manages the development of Spiros-Registered Trademark-, the
Company's proprietary dry powder delivery technology. Each of the Company's
segments operates solely within the United States. Four wholesale customers
accounted for 15%, 14%, 11%, and 11% of pharmaceutical product sales,
respectively, for the first half of 1999, while one wholesale customer
accounted for 13% of pharmaceutical product sales for the first half of 1998.
The following table summarizes information about the Company's operating
segments (in thousands) for:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------------------------------- -------------------------------------------------
Pharmaceutical Research and Pharmaceutical Research and
Products Development Consolidated Products Development Consolidated
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues 1999 $ 51,588 $ 16,418 $ 68,006 $107,255 $ 31,997 $139,252
1998 $ 35,086 $ 16,852 $ 51,938 $ 71,277 $ 29,427 $100,704
Operating income 1999 $ 8,408 $ 3,158 $ 11,566 $ 17,806 $ 5,734 $ 23,540
1998 $ 4,687 $ 5,360 $ 10,047 $ 11,147 $ 7,469 $ 18,616
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and the accompanying notes included in Item 1 of this
quarterly report, as well as the audited financial statements and
accompanying notes and Management's Discussion and Analysis of Financial
Condition and Results of Operations for the year ended December 31, 1998
contained in our 1998 annual report on Form 10-K. See "Risks and
Uncertainties" below for trends and uncertainties known to us that could
cause reported financial information not to be necessarily indicative of
future results.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Pharmaceutical sales for the three months ended June 30, 1999 increased $16.4
million, or 47%, over 1998. This increase is due primarily to sales of
Maxipime-Registered Trademark-, Azactam-Registered Trademark- and
Myambutol-Registered Trademark- which we acquired in the second half of 1998.
Gross profit (pharmaceutical sales less cost of sales) for the three months
ended June 30, 1999 increased $13.5 million, or 49%, over 1998 due to the
increase in pharmaceutical sales. Gross profit as a percentage of sales
increased slightly to 80% in 1999 compared to 79% in 1998.
Contract revenue relates primarily to amounts received by us for the
development of our Spiros-Registered Trademark- pulmonary drug delivery
system. Under agreements with multiple companies, we conduct feasibility
testing and development work on various compounds for use with Spiros.
Contract revenues include payment for feasibility and development work
performed by us as well as milestone and technology access payments. Contract
revenues for the three months ended June 30, 1999 were $16.7 million, a
decrease of 2% from the same period in 1998. Contract revenues from Spiros
Development Corporation II, Inc. totaled $12.7 million for the three months
ended June 30, 1999, consistent with the same period in 1998. Contract
revenues may fluctuate from period to period based on the level of research
funding received as well as the achievement of milestones and receipt of
technology access payments from our partners.
Clinical, development and regulatory expenses for the three months ended June
30, 1999 increased $1 million, or 9%, over 1998 due to additional expenses
incurred under feasibility and development agreements covering the use of
various compounds with Spiros as discussed above.
Selling, general and administrative expenses for the three months ended June
30, 1999 increased $10.6 million, or 46%, over 1998, and increased as a
percentage of total revenues from 44% in 1998 to 49% in 1999. The dollar and
percentage increases are primarily due to costs incurred to expand our field
sales force from approximately 313 representatives in the second quarter of
1998 to approximately 397 representatives in the second quarter of 1999 as
well as to promote our recently acquired products, Maxipime and Azactam, and
an increase in the amortization of our recently acquired product rights.
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Interest income for the three months ended June 30, 1999 decreased $1.7
million, or 28%, from 1998 due to lower balances of cash and short-term
investments resulting from the acquisition of product rights and the
repurchase of shares of our common stock in the second half of 1998.
Interest expense for the three months ended June 30, 1999 increased $1.2
million, or 40%, over 1998 due to interest expense on obligations incurred in
connection with the acquisition of product rights completed in the second
half of 1998.
We record interim provisions for income taxes based on the estimated
effective combined tax rate to be applicable for the fiscal year. We
reevaluate this estimate each quarter based on forecasts of pre-tax income
for the year as well as anticipated adjustments from statutory federal and
state tax rates. Our effective tax rate was 34% for the three months ended
June 30, 1999 and 1998.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Pharmaceutical sales for the six months ended June 30, 1999 increased $35.6
million, or 50%, over 1998. This increase is due primarily to sales of
Maxipime, Azactam, and Myambutol (acquired in the second half of 1998) and
growth in prescription demand for Ceclor-Registered Trademark- CD and
Nasarel-Registered Trademark-, partially offset by a decline in sales of
certain of our cough, cold and allergy products resulting from lower
prescription volume for those products. Gross profit for the six months ended
June 30, 1999 increased $30.3 million, or 55%, over 1998 due to the increase
in pharmaceutical sales. Gross profit as a percentage of sales increased from
78% in 1998 to 80% in 1999 due primarily to changes in product mix.
Contract revenue for the six months ended June 30, 1999 increased $2.9
million, or 10%, over 1998 due to increased development activity covering the
use of various compounds with Spiros, conducted on behalf of Spiros Corp. II
and Eli Lilly and Company. Contract revenue from Spiros Corp. II for the six
months ended June 30, 1999 was $24.9 million compared to $23 million for the
same period in 1998.
Clinical, development and regulatory expenses for the six months ended June
30, 1999 increased $2.9 million, or 14%, over 1998 due to additional expenses
incurred under feasibility and development agreements covering the use of
various compounds with Spiros as discussed above.
Selling, general and administrative expenses for the six months ended June
30, 1999 increased $25.4 million, or 56%, over 1998, and increased as a
percentage of total revenues from 45% in 1998 to 51% in 1999. The dollar and
percentage increases are primarily due to costs incurred to expand the number
of our field sales force from 314 representatives in the first half of 1998
to 394 representatives in the first half of 1999 as well as to promote our
recently acquired products, Maxipime and Azactam, and an increase in the
amortization of our recently acquired product rights.
Interest income for the six months ended June 30, 1999 decreased $2.8
million, or 25%, from 1998 due to lower balances of cash and short-term
investments resulting from the acquisition of product rights and the
repurchase of shares of our common stock in the second half of 1998.
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Interest expense for the six months ended June 30, 1999 increased $2.2
million, or 35%, over 1998 due to interest expense on obligations incurred in
connection with the acquisition of product rights completed in the second
half of 1998.
We record interim provisions for income taxes based on the estimated
effective combined tax rate to be applicable for the fiscal year. We
reevaluate this estimate each quarter based on forecasts of pre-tax income
for the year as well as anticipated adjustments from statutory federal and
state tax rates. Our effective tax rate was 35% for the six months ended June
30, 1999 as compared to 34% for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments totaled $270.3 million at
June 30, 1999 as compared to $269.4 million at December 31, 1998. Working
capital decreased by $6 million from $240.8 million at December 31, 1998 to
$234.8 million at June 30, 1999.
We have issued $287.5 million principal amount of notes due July 15, 2002
with interest payable semiannually at a coupon rate of 3.5%. The notes are
convertible, at the option of the holder, into shares of common stock at any
time prior to maturity or redemption at a conversion price of $50.635 per
share.
In addition to the notes, as of June 30, 1999, we had outstanding an
aggregate of $69.1 million in current and other long-term obligations, of
which $4.9 million is to be paid during the next 12 months. As of June 30,
1999, additional future contingent obligations existed relating to product
acquisitions. Payments totaling approximately $128 million, estimated based
on historical sales levels of the related products, are contingent upon the
amount of future sales of certain products, and approximately $68 million are
contingent upon the continued absence of competing formulations of certain
products as defined in the respective agreements. Such contingent amounts are
payable through 2004, including approximately $38 million contingently due
within the next 12 months.
We anticipate that our existing capital resources and cash generated from
operations will be sufficient to finance our operations through at least the
next 12 months. Product or company acquisitions or in-licensing
opportunities, however, may require significant additional resources. Such
additional resources may not be available when needed or on terms acceptable
to us. We are 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 for such acquisitions.
YEAR 2000
We utilize computer systems throughout our business to carry out our
day-to-day operations. Beginning in 1997, we implemented a program designed
to enable our computer operating systems to process data having dates on or
after January 1, 2000. The program assesses our
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information technology systems as well as technology systems embedded in our
facilities and equipment.
The first phase in our year 2000 program was to identify the systems with
year 2000 exposure. This phase was completed during 1998. Substantially all
the hardware and software comprising our information technology systems were
replaced in 1997 with systems that we believe are year 2000 compliant.
Accordingly, no further evaluation or testing of these systems has been
undertaken. We are also currently upgrading and testing other systems to make
them year 2000 compliant.
We have contacted our significant suppliers, customers, and key business
partners to determine if our business may be affected if these parties fail
to address their year 2000 issues. We intend to monitor the progress made by
these parties and to address any risks arising from their failure to
adequately prepare for the year 2000. In addition, we will test key
interfacing data systems with our business partners to ensure that all
measures taken to become year 2000 compliant are effective.
We are developing a contingency plan to address any year 2000 exposures from
internal and third-party systems that may not be adequately remediated or
replaced. While it is difficult to identify all potential year 2000
exposures, the greatest risks to us are our inability to receive and process
orders from our customers and our vendors' inability to supply product
inventory. If necessary, our contingency plan will address these risks by
identifying alternative suppliers, stocking additional inventory, and
developing back-up systems to process sales orders.
We expect to complete our year 2000 evaluation, testing and contingency
planning by September 30, 1999. We estimate that the aggregate costs of our
year 2000 program will be less than $1 million, including costs incurred to
date. This estimate excludes the cost of the information technology systems
implemented in 1997 as the implementation was not in response to the year
2000 issue. The majority of the costs are not expected to be incremental
expenses but rather an allocation of existing resources. The estimated
impact, cost, and timing of our year 2000 program are based on our best
estimates using information currently available. These estimates may not be
achieved, and actual results could differ materially from our plans.
RISKS AND UNCERTAINTIES
FORWARD-LOOKING STATEMENTS. We caution readers that the statements in this
quarterly report that are not descriptions of historical facts may be
forward-looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due
to a number of factors, including those identified below.
SPIROS-REGISTERED TRADEMARK- REQUIRES SIGNIFICANT ADDITIONAL DEVELOPMENT
WHICH IS COSTLY, TIME-CONSUMING AND MAY NEVER BE COMMERCIALLY SUCCESSFUL.
Spiros, our proprietary dry powder pulmonary drug delivery system, will
require significant additional development efforts as well as clinical
testing. This work is very costly and time consuming. Even after spending
significant amounts of money and time, the development and commercialization,
if any, of any Spiros product may not be successful.
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BEFORE WE CAN MARKET ANY SPIROS PRODUCT, WE WILL HAVE TO OBTAIN REQUIRED
GOVERNMENTAL APPROVALS, WHICH IS NOT ASSURED. The development, testing,
manufacturing and marketing of pharmaceutical products are subject to
extensive regulation by governmental authorities, including the FDA. The FDA
must approve each Spiros product before that product can be manufactured or
marketed for commercial sale. Failure to obtain such approvals would have an
adverse effect on our business and results of operations. The review and
approval process mandated by the FDA is very rigorous, requiring extensive
preclinical and clinical testing as well as determining manufacturing
capability and product performance. None of the products currently in
development by Dura or in collaboration with third parties may ever be
approved by the FDA.
OUR REGULATORY APPLICATION SUBMITTED TO THE FDA FOR ALBUTEROL SPIROSTM WILL
NOT BE APPROVED WITHOUT ADDITIONAL CLINICAL TRIALS, WHICH WILL DELAY THE
COMMERCIALIZATION OF ALBUTEROL SPIROS. On November 4, 1998 Dura and Spiros
Corp. II announced the receipt of a complete response letter from the FDA.
The letter indicated that the new drug application submitted by Dura on
behalf of Spiros Corp. II for Albuterol Spiros will not be approved unless
certain deficiencies are addressed. The FDA requested that additional
clinical trials on the Spiros inhaler be completed to ensure the inhaler is
reliable and to replicate clinical outcomes of the initial trials. The FDA
also requested that several chemistry, manufacturing and control issues, as
well as certain electromechanical reliability issues be resolved. As a result
of a series of meetings with the FDA, Dura and Spiros Corp. II have
determined the requirements that they believe will address these issues to
support the resubmission of the new drug application for Albuterol Spiros.
Dura, on behalf of Spiros Corp. II, expects to initiate clinical trials for
Albuterol Spiros in the fourth quarter of 1999 and to commercialize these
products in 2001, pending successful development and FDA approval. We cannot,
however, assure the successful outcome of the additional trials to support
the submission of the new drug application or if the FDA will ever approve
the new drug application for this product.
WE WILL NEED TO SIGNIFICANTLY EXPAND OUR MANUFACTURING CAPABILITY AND COMPLY
WITH GOVERNMENT REGULATIONS BEFORE WE CAN MANUFACTURE ANY SPIROS PRODUCTS. We
will need to significantly expand our current manufacturing operations and
comply with regulations prescribed by various regulatory agencies to achieve
the quality and required levels of production of our products to obtain
marketing approval. In addition, our manufacturing facility must be
registered with and licensed by various regulatory authorities and must
comply with current good manufacturing practice requirements prescribed by
the FDA and the State of California. We intend to utilize third parties to
produce components of and assemble the Spiros inhaler. Such third parties
have only produced limited quantities of components and assembled limited
numbers of inhalers. These third parties will be required to significantly
scale up their activities and to produce components which meet applicable
specifications on a timely and consistent basis. Such third parties may not
be successful in attaining acceptable service levels or meeting regulatory
requirements which would have an adverse effect on our ability to
commercialize the Spiros products.
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WE INTEND TO CONTINUE TO PURSUE OUR STRATEGY OF ACQUIRING COMPLEMENTARY
PRODUCTS AND TECHNOLOGIES WHICH COULD RESULT IN SIGNIFICANT CHARGES TO
EARNINGS AND REQUIRE THE USE OF CAPITAL RESOURCES. As part of our business
strategy, we intend to continue to pursue the acquisition of complementary
product rights and technologies. Such acquisitions could result in
significant charges to earnings in the related period as well as require the
use of a large amount of our available capital resources. Depending on the
acquisition opportunities available and our use of existing funds to satisfy
existing capital and operating needs, we may need to raise additional funds
to finance such transactions. If adequate funds are not available when needed
on terms acceptable to us, our ability to complete acquisitions could be
limited. We may not have sufficient funds to develop any technologies we may
acquire, any development we conduct may not be successful and any funds we
spend on product development may reduce our earnings below the levels
expected by securities analysts. Further, reimbursement may not be available
to enable us to achieve market acceptance of any products we may acquire or
develop or to maintain price levels sufficient to realize an appropriate
return on our investment in these products.
THE PHARMACEUTICAL INDUSTRY IS EXTREMELY COMPETITIVE. Many companies,
including large pharmaceutical firms with financial and marketing resources
and development capabilities substantially greater than ours, are engaged in
developing, marketing and selling products that compete with those that we
offer or plan to offer. Our failure to effectively respond to the competitive
pressures of our industry would have an adverse effect on our business and
results of operations. The selling prices of such products typically decline
as competition increases. Further, other products now in use or under
development by others may be more effective than our current or future
products. The industry is characterized by rapid technological change, and
competitors may develop their products more rapidly than us. Competitors may
also be able to complete the regulatory process sooner, and therefore, may
begin to market their products in advance of our products.
WE NEED TO BUILD A HOSPITAL-BASED FIELD SALES FORCE BY THE END OF 1999 TO BE
ABLE TO EFFECTIVELY MARKET OUR RECENTLY ACQUIRED PRODUCTS, MAXIPIME AND
AZACTAM. Effective January 1, 1999, we acquired the rights to two
hospital-based products, Maxipime (cefepime hydrochloride) for Injection and
Azactam (aztreonam) for Injection. Under a co-promotion agreement with
Bristol-Myers Squibb, the BMS hospital field sales force will continue to
promote the products through the end of 1999, at which point we will assume
full responsibility for promoting these products. In the first quarter of
1999 we built our acute care sales and marketing management team, and by the
end of 1999 we expect to have approximately 100 field sales representatives
and associated field management who will primarily focus on promoting our
hospital-based products. We may not be able to hire qualified field sales
representatives with the necessary experience selling to hospitals. Even if
we are successful in identifying and hiring such representatives, we may not
be able to hire the numbers needed in the appropriate time frame. Our success
with these products is dependent upon effectively building this sales and
marketing capability by the end of 1999.
A PROPOSED NEW ACCOUNTING STANDARD MAY REQUIRE US TO CONSOLIDATE SPIROS CORP.
II WHICH WOULD HAVE AN ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS. In
February 1999, the Financial Accounting Standards Board issued an exposure
draft of a proposed new statement of financial accounting standards entitled
"Consolidated Financial Statements: Purpose and Policy." This proposed
standard, if adopted, would modify existing standards which govern when the
assets, liabilities,
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and operating results of special purpose research and development entities,
like Spiros Corp. II, should be consolidated. The exposure period for
interested parties to comment on the proposed changes ended in May 1999, and
these comments will be considered prior to issuing the standard in its final
form, if one is issued at all. If adopted as initially proposed, this
standard may require us to consolidate the assets, liabilities, and operating
results of Spiros Corp. II into our financial statements. Such consolidation
would have an adverse effect on our results of operations and may have an
adverse effect on the market price of our common stock.
WE COMPETE WITH MANY COMPANIES FOR THE ACQUISITION OF RIGHTS TO NEW PRODUCTS
AND TECHNOLOGIES. Our strategy for growth is dependent, in part, on our
ability to continue to acquire rights to new products and technologies. The
failure to successfully acquire, develop or market new products or
technologies would have an adverse effect on our business, including our
ability to achieve our targeted growth rates. Other companies, including
those with substantially greater resources, are competing with us for the
rights to such products. We may not be able to acquire additional products or
technologies on acceptable terms, or at all.
GROSS MARGINS ON PHARMACEUTICAL PRODUCTS MAY DECREASE AS A RESULT OF A NUMBER
OF FACTORS OUTSIDE OUR CONTROL, WHICH WOULD HAVE AN ADVERSE EFFECT ON OUR
BUSINESS. We do not have proprietary protection for several of the products
we sell and substitutes for such products are sold by other pharmaceutical
companies. In addition, the average selling prices for many of our products
may decline over time due to competitive and reimbursement pressures. We may
not be successful in any efforts we take to mitigate the effect of a decline
in average selling prices. Our commercial success will depend in part on the
price that third-party healthcare payors, such as government and private
health insurers and managed care organizations, are willing to pay for our
products. Third-party payors continually challenge the pricing of medical
products and services. Many managed care organizations limit the number of
pharmaceutical products they approve for reimbursement. The competition
between pharmaceutical companies to get their products approved for
reimbursement may also result in downward pricing pressure in the industry.
Any of these factors causing a decline in average selling prices would also
reduce the gross margins we achieve and negatively impact our business.
ALTERNATIVE SUPPLIERS TO OUR THIRD-PARTY MANUFACTURERS MAY NOT BE AVAILABLE
ON A TIMELY BASIS WHICH WOULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS. We do
not have the capability to manufacture the pharmaceutical products we
currently sell. As a result, we are dependent on third-party contract
manufacturers for the supply of all of our products. These products are
supplied under short-term and long-term supply agreements. If these
manufacturers were unable to supply product, it could be difficult for us to
secure alternative sources of supply in a timely manner. This would impair
our ability to ship product to our customers and could have an adverse effect
on our business and results of operations.
OUR EXERCISE OF THE SPIROS CORP. II STOCK PURCHASE OPTION MAY HAVE AN ADVERSE
EFFECT ON OUR BUSINESS. We have an option to purchase the outstanding shares
of callable common stock of Spiros Corp. II that expires on the earlier of
(i) December 31, 2002 or (ii) the 90th day after the date we provide Dura
with our quarterly financial statements showing cash and cash equivalents of
less than $5 million. We may or may not exercise this option. If we exercise
the option, we will be required to make a substantial cash payment or to
issue shares of our common stock, or both. A payment in cash would reduce our
capital resources. A payment in shares of our common stock would result in a
decrease in the percentage ownership of our
13
<PAGE>
shareholders at that time and have a dilutive effect on future earnings per
share. If we exercise the option, it will likely require us to record a
significant charge to earnings in the related period. If we do not exercise
our stock purchase option prior to its expiration, our rights to Spiros with
respect to certain compounds (including beclomethasone, budesonide and
albuterol) will terminate.
WE ALSO HOLD OPTIONS TO PURCHASE FROM SPIROS CORP. II CERTAIN RIGHTS TO
ALBUTEROL SPIROS AND RIGHTS TO USE SPIROS WITH AN ADDITIONAL PRODUCT OTHER
THAN ALBUTEROL. We may or may not exercise either of these options. If we
exercise either of our product options, we will need to make a significant
cash payment which could have an adverse effect on our capital resources. Any
such cash payment also may result in a significant charge to our earnings in
the period we exercise the option. We may not have sufficient capital
resources to exercise the product options, which may result in our loss of
valuable rights, unless we exercise our Spiro Corp. II stock purchase option
as discussed above.
OUR ABILITY TO OBTAIN PATENTS AND PROTECT OUR PROPRIETARY RIGHTS IS UNCERTAIN
AND COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS. Our ability to obtain
patents on current or future products or technologies, defend our patents,
maintain trade secrets and operate without infringing upon the proprietary
rights of others both in the U.S. and abroad is uncertain. Patents may never
issue. Even if issued or licensed to us, patents may not be enforceable,
provide substantial protection from competition or be of commercial benefit
to us. Even if all these are true, we may not possess the financial resources
necessary to enforce or defend any patent rights we obtain. Our commercial
success will also depend upon avoiding the infringement of patents issued to
competitors and upon maintaining the technology licenses upon which certain
of our products are based. Litigation, which is costly, may be necessary to
enforce our patent and license rights or to determine the scope and validity
of proprietary rights of third parties. If any of our products or
technologies are found to infringe upon patents or other rights owned by
third parties, we could be required to obtain a license to continue to
manufacture or market such products or technologies. Licenses to such patent
rights may not be available to us on commercially reasonable terms, if at
all. If we do not obtain such licenses, we could encounter delays in
marketing affected products or technologies or we could find that the
development, manufacture or sale of products requiring such licenses is not
possible.
OUR STOCK PRICE IS VOLATILE. The market prices for securities of emerging
companies, including ours, have historically been highly volatile. Future
announcements concerning us or our competitors may have a significant impact on
the market price of our common stock. Such announcements might include:
- - financial results,
- - the results of clinical testing of our or our competitors' products,
- - regulatory developments,
- - technological innovations,
- - new commercial products,
- - changes to government regulations,
- - regulatory decisions on commercialization of products,
- - developments concerning proprietary rights,
- - litigation or public concern as to safety of our products, or
14
<PAGE>
- - our failure to achieve securities analysts' expectations concerning our
earnings per share or revenues.
WE ARE INVOLVED IN CERTAIN LAWSUITS AND CANNOT PREDICT THEIR OUTCOME. We are
involved in certain lawsuits as described in note 3 of the notes to consolidated
financial statements. The outcome of these lawsuits and any other suits we may
become involved in cannot be predicted. An adverse outcome in any of these
actions could have an adverse effect on our business or results of operations.
SEASONALITY AND THE TIMING AND SEVERITY OF THE WINTER COLD AND FLU SEASON CAN
HAVE AN ADVERSE EFFECT ON OUR OPERATING 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 our results of operations in the
past.
OUR PRODUCTS MAY CAUSE PRODUCT LIABILITY CLAIMS OR MAY NEED TO BE RECALLED,
EITHER OF WHICH WOULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS. We face an
inherent business risk of exposure to product liability claims in the event that
the use of our products or technologies is alleged to have resulted in adverse
effects. The level or breadth of any insurance coverage we currently maintain
may not be sufficient to fully cover potential claims. Adequate insurance
coverage may not be available in the future at acceptable costs, if at all.
CERTAIN OF OUR CHARTER AND OTHER CONTRACTUAL PROVISIONS MAY PREVENT A CHANGE OF
CONTROL WHICH COULD BE BENEFICIAL TO OUR SHAREHOLDERS. Certain provisions of our
charter documents, outstanding securities, including certain warrants, options
and our notes, and our shareholder rights plan may have the effect of delaying,
deferring or preventing a change in control. This could deprive you of an
opportunity to receive a premium for your shares of common stock.
WE MAY NOT ADEQUATELY ADDRESS YEAR 2000 ISSUES WHICH COULD HAVE AN ADVERSE
EFFECT ON OUR BUSINESS. We have evaluated our systems to assess their year 2000
compliance, and we are currently upgrading and testing those systems. We are
also completing our audits of the compliance efforts of our significant
suppliers, customers and key business partners to determine the extent to which
our business may be affected if these parties fail to address their year 2000
issues. We estimate that the aggregate costs of our year 2000 program will be
less than $1 million, including costs incurred to date. There can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. Our failure to adequately address our year 2000
risks would have an adverse effect on our business and results of operations.
For a more complete description of the initiatives we have implemented with
respect to the year 2000 issue, please see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Year 2000."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our excess cash and short-term investments in U.S. government and
corporate debt securities with high quality credit ratings and maturities of
less than two years. These investments are not held for trading or other
speculative purposes. Changes in interest rates
15
<PAGE>
affect the investment income we earn on our investments and, therefore,
impact our cash flows and results of operations. At June 30, 1999, we had
outstanding subordinated notes totaling $287.5 million which mature in July
2002. The notes have a fixed interest rate of 3 1/2 percent. Accordingly,
while changes in interest rates may affect the fair market value of the
notes, they do not impact our cash flows or results of operations. As of June
30, 1999, the notes had a fair market value of $218.5 million. We are not
exposed to risks for changes in foreign currency exchange rates, commodity
prices, or any other market rates.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See note 3 to the consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 20, 1999, the Company's Annual Meeting of Stockholders was held at the
offices of the Company for the following purposes:
(a) The following three directors were elected to serve two-year terms to
expire at the 2001 Annual Meeting of Stockholders:
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
Herbert J. Conrad 37,631,969 1,137,396
Gordon V. Ramseier 38,104,794 664,571
Charles G. Smith 38,108,864 660,501
</TABLE>
The following directors were elected at the May 21, 1998 Annual Meeting
of Stockholders and are currently serving terms that will expire in
2000.
James C. Blair
Joseph C. Cook, Jr.
Cam L. Garner
David F. Hale
David S. Kabakoff
(b) The Stockholders approved the amendment to the Company's 1992 Stock
Option Plan to increase the number of authorized shares of Common Stock
available for issuance and to adjust the automatic grant provisions of
the Plan. The total number of votes cast for, against and abstained was
22,915,618, 15,739,370 and 131,377, respectively.
(c) The Stockholders ratified the appointment of Deloitte & Touche LLP as
the Company's independent public accountants for the year ending
December 31, 1999. The total number of votes cast for, against and
abstained was 38,611,403, 93,234, and 64,728, respectively.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No.
10.1 1992 Stock Option Plan, as amended and restated
11 Statements re Computations of Net Income Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DURA PHARMACEUTICALS, INC.
Date August 10, 1999 /s/ Michael T. Borer
- --------------------- --------------------
(Michael T. Borer)
------------------
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
18
<PAGE>
EXHIBIT 10.1
DURA PHARMACEUTICALS, INC.
1992 STOCK OPTION PLAN
AS AMENDED AND RESTATED MARCH 3, 1999
-------------------------------------
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
A. IMPLEMENTATION. This 1992 Stock Option Plan ("Plan") was
implemented as of December 9, 1992 ("Effective Date"), to enable Dura
Pharmaceuticals, Inc. ("Company") to grant options to the following eligible
individuals ("Eligible Individuals") in order to attract them and to retain
their services: (a) key employees (including officers and directors) of the
Company or its subsidiaries or any parent corporation who are primarily
responsible for the management, growth and financial success of the Company
or its subsidiaries, (b) non-employee members of the Board of Directors
("Board") of the Company or any of its subsidiaries, and (c) consultants and
independent contractors who perform valuable services for the Company or its
subsidiaries.
B. SUCCESSOR PLAN. This Plan is a successor to the Company Stock
Option Plan that was adopted by the Board in 1983 ("1983 Plan"). No further
option grants (including, but not limited to automatic option grants) will be
made under the 1983 Plan on and after the Effective Date of this Plan. All
options outstanding under the 1983 Plan on the Effective Date have been
incorporated into this Plan and will be treated as outstanding options under
this Plan. Each outstanding option so incorporated will continue to be
governed solely by the express terms and conditions of the instruments
evidencing such grant. No provision of this Plan will be deemed to affect or
otherwise modify the rights or obligations of the holders of such
incorporated options with respect to their acquisition of shares of the
Company's Common Stock under the terms of the incorporated options.
II. ADMINISTRATION OF THE PLAN
A. COMMITTEE. The Plan will be administered by the Board of
Directors or by a committee or committees appointed by the Board, and
consisting of two or more members of the Board. The Board may delegate the
responsibility for administration of the Plan with respect to designated
classes of optionees to different committees, subject to such limitations as
the Board deems appropriate. With respect to any matter, the term
"Committee," when used in this Plan, will refer to the committee that has
been delegated authority with respect to such matter. Members of a committee
will serve for such term as the Board may determine, and will be subject to
removal by the Board at any time.
B. SECTION 16(b) COMMITTEE. Notwithstanding any other provision
of this Agreement, each grant of an option or other transaction between the
Company and any Section 16 Insider shall be valid and enforceable only if
approved by the Board of Directors or by a committee composed exclusively of
two or more Non-Employee Directors. For this
<PAGE>
purpose, a "Section 16 Insider" shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of
the 1934 Act, and a Non-Employee Director shall have the meaning set forth in
Rule 16b-3(b)(3).
C. AUTHORITY. Any Committee will have full authority to
administer the Plan within the scope of its delegated responsibilities,
including authority to interpret and construe any relevant provision of the
Plan, to adopt such rules and regulations as it may deem necessary, and to
determine the terms of grants made under the Plan (which need not be
identical). Decisions of a Committee made within the discretion delegated to
it by the Board will be final and binding on all persons.
III. STOCK SUBJECT TO THE PLAN
A. NUMBER OF SHARES. Shares of the Company's Common Stock
available for issuance under the Plan shall be drawn from either the
Company's authorized but unissued shares of Common Stock or from reacquired
shares of Common Stock, including shares repurchased by the Company on the
open market. The maximum number of shares of Common Stock that may be issued
over the term of the Plan shall not exceed 10,107,360 shares, subject to
adjustment from time to time in accordance with the provisions of this
Section. To the extent one or more outstanding options under the 1983 Plan
that have been incorporated into this Plan are subsequently exercised, the
number of shares issued with respect to each such option will reduce, on a
share-for-share basis, the number of shares available for issuance under this
Plan.
B. EXPIRED OPTIONS. Should an outstanding option under this Plan
(including any outstanding option under the 1983 Plan incorporated into this
Plan) expire or terminate for any reason prior to exercise in full (including
any option cancelled in accordance with the cancellation-regrant provisions
of this Plan), the shares subject to the portion of the option not so
exercised will be available for subsequent option grant under this Plan.
Shares subject to any option or portion thereof cancelled in accordance with
the stock appreciation (or limited stock appreciation) rights provisions of
this Plan will not be available for subsequent option grant under the Plan.
C. ADJUSTMENTS. If any change is made to the Common Stock
issuable under the Plan (including Common Stock issuable under an Automatic
Option Grant) by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Company's receipt of
consideration, then appropriate adjustments will be made to (i) the number
and/or class of shares issuable under the Plan, (ii) the number and/or class
of shares and price per share in effect under each outstanding option under
the Plan, (iii) the maximum number and/or class of shares for which any one
participant may be granted stock options and separately exercisable stock
appreciation rights in any fiscal year or over the term of the Plan and (iv)
the number and/or class of shares and price per share in effect under each
outstanding option incorporated into this Plan from the 1983 Plan. The
purpose of these adjustments will be to preclude the enlargement or dilution
of rights and benefits under the options.
2
<PAGE>
ARTICLE TWO
STANDARD OPTION PROVISIONS
I. TERMS AND CONDITIONS OF OPTIONS
A. COMMITTEE DISCRETION.
(1) Except as provided under the Automatic Option Grant
provisions of this Plan, the Committee will have full authority to determine
which Eligible Individuals are to receive option grants under the Plan, the
number of shares to be governed by each such grant, whether the option is to
be an incentive stock option ("Incentive Option") that satisfies the
requirements of Section 422 of the Internal Revenue Code or a non-qualified
option not intended to satisfy such requirements ("Non-Qualified Option"),
the time or times at which each such option is to become exercisable, and the
maximum term for which the option is to remain outstanding.
(2) Notwithstanding any other provision of this Plan, no
individual shall be granted stock options or separately exercisable stock
appreciation rights for more than 400,000 shares in the aggregate in any
fiscal year or for more than 1,500,000 shares in the aggregate over the
lifetime of the Plan.
B. TERM. No option granted under the Plan will be exercisable
after the expiration of 10 years from the date the option was granted.
C. PRICE. The exercise price per share shall be fixed by the
Plan Administrator but shall not be less than 100% percent of the Fair Market
Value per share of Common Stock on the option grant date, provided that the
Plan Administrator may fix the exercise price at less than 100% if the
optionee, at the time of the option grant, shall have made a payment to the
Company (including payment made by means of an agreed salary reduction) equal
to the excess of the Fair Market Value of the Common Stock on the option
grant date over such exercise price.
D. EXERCISE AND PAYMENT. After any option granted under the Plan
becomes exercisable, it may be exercised by notice to the Company at any time
prior to the termination of such option. The option price will be payable in
full in cash or check made payable to the Company; provided, however, that
the Committee may, either at the time the option is granted or at the time it
is exercised and subject to such limitations as it may determine, authorize
payment of all or a portion of the option price in one or more of the
following alternative forms:
(1) a promissory note authorized pursuant to Section IV of
this Article; or
(2) full payment in shares of Common Stock valued as of the
exercise date and held for the requisite period to avoid a charge to the
Company's earnings; or
(3) full payment through a sale and remittance procedure
under which the option holder delivers a properly executed exercise notice
together with irrevocable instructions
3
<PAGE>
to a broker to promptly deliver to the Company the amount of sale proceeds to
pay the option prices.
For purposes of Subparagraphs (1) and (3) immediately above, the
Exercise Date shall be the date on which written notice of the exercise of
the option is delivered to the Company. In all other cases, the Exercise
Date will be the date on which written notice and actual payment is received
by the Company.
The sale and remittance procedure authorized for the exercise of
outstanding options under this Plan shall be available for all options
granted under this Plan on or after the Effective Date and for all
non-qualified options outstanding under the 1983 Plan and incorporated into
this Plan. The Plan Administrator may also allow such procedure to be
utilized in connection with one or more disqualifying dispositions of
Incentive Option shares effected after the Effective Date, whether such
Incentive Options were granted under this Plan or the 1983 Stock Option Plan.
E. SHAREHOLDER RIGHTS. An option holder will have no shareholder
rights with respect to any shares covered by an option (including an
Automatic Option Grant) prior to the Exercise Date of the option, as defined
in the immediately preceding Paragraph and in the Automatic Option Grant
provisions of Section II of Article Three of this Plan.
F. SEPARATION FROM SERVICE. The Committee will determine whether
options will continue to be exercisable, and the terms of such exercise, on
and after the date that an optionee ceases to be employed by, or to provide
services to, the Company or its subsidiaries provided, however, that in no
event will an option be exercisable after the specified expiration date of
the option term. The date of termination of an optionee's employment or
services will be determined by the Committee, which determination will be
final.
G. INCENTIVE OPTIONS. Options granted under the Plan that are
intended to be Incentive Options will be subject to the following additional
terms:
(1) DOLLAR LIMITATION. The aggregate fair market value
(determined as of the respective date or dates of grant) of the Common Stock
for which one or more options granted to any Employee after December 31, 1986
under this Plan (or any other option plan of the Company or its parent or
subsidiary corporations) may for the first time become exercisable as
incentive stock options under the Federal tax laws during any one calendar
year shall not exceed the sum of $100,000. To the extent the Employee holds
two or more such options which become exercisable for the first time in the
same calendar year, the foregoing limitation on the exercisability of such
options as incentive stock options under the Federal tax laws shall be
applied on the basis of the order in which such options are granted.
(2) 10% SHAREHOLDER. If any employee to whom an Incentive
Option is to be granted pursuant to the provisions of the Plan is, on the
date of grant, the owner of stock (determined with application of the
ownership attribution rules of Section 424(d) of the Internal Revenue Code)
possessing more than 10% of the total combined voting power of all classes of
stock of his or her employer corporation or of its parent or subsidiary
corporation ("10%
4
<PAGE>
Shareholder"), then the following special provisions will apply to the option
granted to such individual:
(i) The option price per share of the stock subject to
such Incentive Option will not be less than 110% of the Fair Market Value of
the option shares on the date of grant; and
(ii) The option will not have a term in excess of 5
years from the date of grant.
(3) PARENT AND SUBSIDIARY. For purposes of this Section,
"parent corporation" and "subsidiary corporation" will have the meaning
attributed to those terms, as they are used in Section 422(b) of the Internal
Revenue Code.
(4) EMPLOYEES. Incentive Options may only be granted to
employees of the Company or its subsidiaries.
H. FAIR MARKET VALUE. For all purposes under this Plan
(including, but not limited to Automatic Option Grants) the fair market value
per share of Common Stock on any relevant date under the Plan ("Fair Market
Value") will be determined as follows:
(1) If the Common Stock is not at the time listed or admitted
to trading on any national stock exchange but is traded in the
over-the-counter market, the fair market value will be the mean between the
highest bid and lowest asked prices (or, if such information is available,
the closing selling price) per share of Common Stock on the date in question
in the over-the-counter market, as such prices are reported by the National
Association of Securities Dealers on the Nasdaq National Market. If there are
no reported bid and asked prices (or closing selling price) for the Common
Stock on the date in question, then the mean between the highest bid price
and lowest asked price (or the closing selling price) on the last preceding
date for which such quotations exist will be determinative of fair market
value.
(2) If the Common Stock is at the time listed or admitted to
trading on any national stock exchange, then the fair market value will be
the closing selling price per share of Common Stock on the date in question
on the stock exchange determined by the Committee to be the primary market
for the Common Stock, as such price is officially quoted in the composite
tape of transactions on such exchange. If there is no reported sale of
Common Stock on such exchange on the date in question, then the fair market
value will be the closing selling price on the exchange on the last preceding
date for which such quotation exists.
(3) If the Common Stock is at the time neither listed nor
admitted to trading on any stock exchange nor traded in the over-the-counter
market, then the fair market value will be determined by the Committee after
taking into account such factors as the Committee shall deem appropriate.
I. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of
the Optionee, Incentive Options shall be exercisable only by the Optionee and
shall not be assignable or transferable other than by will or by the laws of
descent and distribution following the Optionee's death. However, a
Non-Qualified Option may be assigned in whole or in part during the
5
<PAGE>
Optionee's lifetime. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant
to the assignment. The terms applicable to the assigned portion shall be the
same as those in effect for the option immediately prior to such assignment
and shall be set forth in such documents issued to the assignee as the Plan
Administrator may deem appropriate.
II. STOCK APPRECIATION RIGHTS
If, and only if the Committee, in its discretion, elects to
implement an option surrender program under the Plan, one or more option
holders may, upon such terms as the Committee may establish at the time of
the option grant or at any time thereafter, be granted the right to surrender
all or part of an unexercised option in exchange for a distribution equal in
amount to the excess of (i) the Fair Market Value (at date of surrender) of
the shares for which the surrendered option or portion thereof is at the time
exercisable over (ii) the aggregate option price payable for such shares.
The distribution to which an option holder becomes entitled under this
Section may be made in shares of Common Stock, valued at Fair Market Value at
the date of surrender, in cash, or partly in shares and partly in cash, as
the Committee, in its sole discretion, deems appropriate.
III. CORPORATE TRANSACTION/CHANGE OF CONTROL/HOSTILE TAKEOVER
A. CORPORATE TRANSACTION. In the event of any of the following
transactions ("Corporate Transaction"):
(1) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is
to change the state of the Company's incorporation,
(2) the sale, transfer or other disposition of all or
substantially all of the assets of the Company in liquidation or dissolution
of the Company,
(3) any reverse merger in which the Company is the surviving
entity but in which fifty percent (50%) or more of the Company's outstanding
voting stock is transferred to holders different from those who held such
securities immediately prior to such merger, or
(4) an acquisition by any person or related group of persons
(other than the Company or a person that directly or indirectly controls, is
controlled by or is under common control with, the Company) of ownership of
more than fifty percent (50%) of the Company's outstanding Common Stock,
pursuant to a tender or exchange offer,
the exercisability of each option at the time outstanding under this
Article Two shall automatically accelerate so that each such option shall,
immediately prior to the specified effective date for the Corporate
Transaction, become fully exercisable with respect to the total number of
shares of Common Stock at the time subject to such option and may be
exercised for all or any portion of such shares. Upon the consummation of
the Corporate Transaction, all outstanding options under this Article Two
shall terminate and cease to be outstanding.
6
<PAGE>
B. HOSTILE TAKEOVER. One or more officers of the Company subject
to the short-swing profit restrictions of the Federal securities laws may, in
the Committee's sole discretion, be granted, in tandem with their outstanding
options, limited stock appreciation rights as described below. In addition
all Automatic Option Grants under this Plan will be made in tandem with
limited stock appreciation rights as described below.
(1) Upon the occurrence of a Hostile Takeover, each
outstanding option with such a limited stock appreciation right in effect for
at least six (6) months will automatically be cancelled in return for a cash
distribution from the Company in an amount equal to the excess of (i) the
Takeover Price (defined below) of the shares of Common Stock at the time
subject to the cancelled option (whether or not the option is otherwise at
the time exercisable for such shares) over (ii) the aggregate exercise price
payable for such shares. The cash distribution payable upon such cancellation
shall be made within five (5) days following the consummation of the Hostile
Takeover. Neither the approval of the Committee nor the consent of the Board
shall be required in connection with such option cancellation and cash
distribution.
(2) For purposes of the limited stock appreciation rights
described above, the following definitions shall be in effect:
(i) A Hostile Takeover shall be deemed to occur upon
the acquisition by any person or related group of persons (other than the
Company or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Company) of ownership of more than 50%
of the Company's outstanding Common Stock (excluding the Common Stock
holdings of officers and directors of the Company who participate in this
Plan) pursuant to a tender or exchange offer which the Board does not
recommend the Company's shareholders accept.
(ii) The Takeover Price per share shall be deemed to be
equal to the greater of (a) the Fair Market Value per share on the date of
cancellation, or (b) the highest reported price per share paid in effecting
the Hostile Takeover. However, if the cancelled option is an Incentive
Option, the Takeover Price shall not exceed the clause (a) price per share.
C. COMPANY RIGHTS. The grant of options (including Automatic
Option Grants) under this Plan shall in no way affect the right of the
Company to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
IV. LOANS OR GUARANTEE OF LOANS
The Committee may assist any optionee (including any officer) in
the exercise of one or more outstanding options under this Article by (a)
authorizing the extension of a loan to such optionee from the Company, (b)
permitting the optionee to pay the option price for the purchased Common
Stock in installments over a period of years or (c) authorizing a guarantee
by the Company of a third-party loan to the optionee. The terms of any loan,
installment method of payment or guarantee (including the interest rate and
terms of repayment) will be established by the Committee in its sole
discretion. Loans, installment payments and guarantees may be
7
<PAGE>
granted without security or collateral (other than to optionees who are
consultants or independent contractors, in which event the loan must be
adequately secured by collateral other than the purchased shares), but the
maximum credit available to the optionee shall not exceed the sum of (i) the
aggregate option price (less par value) of the purchased shares plus (ii) any
federal and state income and employment tax liability incurred by the
optionee in connection with the exercise of the option. Automatic Option
Grants will not be subject to these loan and loan guarantee provisions.
V. CANCELLATION AND REGRANT OF OPTIONS
The Committee shall have the authority to effect, at any time and
from time to time, with the consent of the affected optionees, the
cancellation of any or all outstanding options under this Article (including
outstanding options under the 1983 Plan incorporated into this Plan) and to
grant in substitution new options under the Plan covering the same or
different numbers of shares of Common Stock but having an option price per
share not less than 100% of the fair market value of the Common Stock on the
new grant date. Automatic Option Grants will not be subject to these
cancellation and regrant provisions.
VI. REPURCHASE RIGHTS
The Committee may in its discretion determine that it shall be a
term and condition of one or more options exercised under the Plan that the
Company (or its assigns) shall have the right, exercisable upon the
optionee's separation from service with the Company and its subsidiaries, to
repurchase any or all of the shares of Common Stock previously acquired by
the optionee upon the exercise of such option. Any such repurchase right
shall be exercisable upon such terms and conditions (including the
establishment of the appropriate vesting schedule and other provisions for
the expiration of such right in one or more installments) as the Committee
may specify in the instrument evidencing such right. The Committee shall
also have full power and authority to provide for the automatic termination
of these repurchase rights, in whole or in part, and thereby accelerate the
vesting of any or all of the purchased shares.
8
<PAGE>
ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
The provisions of this Article Three reflect the amendments to the
Automatic Option Grant Program authorized by the Board on March 3, 1999,
subject to stockholder approval at the 1999 Annual Meeting.
I. GRANTS
A. AUTOMATIC OPTION GRANTS. Non-employee members of the Board
will automatically be granted Non-Qualified Options to purchase the number of
shares of Common Stock set forth below (subject to adjustment under Section
III(D) of Article One of this Plan) on the dates and pursuant to the terms
set forth below ("Automatic Option Grants").
B. CONTINUING DIRECTORS. On the date of each Annual Stockholders
Meeting, beginning with the Annual Meeting in calendar year 2000, each
continuing non-employee member of the Board will receive an Automatic Option
Grant to purchase 6,000 shares of Common Stock; provided, however, that an
individual who has not served as a non-employee member of the Board for the
immediately preceding 180 days will not receive such a grant.(1)
C. NEW DIRECTORS. Each individual person who is first elected or
appointed as a non-employee member of the Board on or after May 20, 1999 will
receive, on the effective date of such initial election or appointment, an
Automatic Option Grant to purchase 15,000 shares of Common Stock.(2)
D. SPECIAL OPTION GRANT. Each individual serving as a
non-employee Board member on May 20, 1999 shall receive at that time a
one-time Automatic Option Grant for 15,000 shares. Such grant shall be in
substitution for the Automatic Option Grant which would otherwise be made to
such individual at the 1999 Annual Stockholders Meeting pursuant to the
provisions of Section I(B) of this Article Three.
II. TERMS
The terms applicable to each Automatic Option Grant will be as
follows:
A. PRICE. The option price per share will be equal to 100% of
the Fair Market Value of a share of Common Stock on the date of grant.
- -------------------
(1) The reduction in the number of shares subject to this grant from 8,000
to 6,000 shares was authorized by the Board on March 3, 1999, subject to
stockholder approval at the 1999 Annual Meeting. If so approved, this change
shall become effective as of the Annual Meeting in calendar year 2000.
(2) The reduction in the number of shares subject to this grant from
30,000 to 15,000 shares was authorized by the Board on March 3, 1999, subject
to stockholder approval at the 1999 Annual Meeting. If so approved, this
change shall become effective on May 20, 1999.
9
<PAGE>
B. OPTION TERM. Each Automatic Option Grant will have a maximum
term of 10 years measured from the automatic grant date.
C. EXERCISABILITY. Each Automatic Option Grant will become
exercisable for all Automatic Option Grant shares one (1) year after the
automatic grant date, provided the optionee continues to serve as a Board
member throughout that one (1)-year period.
D. PAYMENT. Upon exercise of the option, the option price for
the purchased shares will become payable immediately in one or more of the
following alternative forms: cash, shares of Common Stock held for the
requisite period to avoid a charge to the Company's reported earnings and
valued at Fair Market Value on the Exercise Date (as defined below), or
pursuant to a sale and remittance procedure under which the option holder
delivers a properly executed exercise notice together with irrevocable
instructions to a broker to promptly deliver to the Company the amount of
sale proceeds to pay the option price. For these purposes, the Exercise Date
shall be the date on which written notice of the exercise of the option is
delivered to the Company. Except to the extent the sale and remittance
procedure specified above is utilized for the exercise of the option, payment
of the exercise price for the purchased shares must accompany the notice.
E. EFFECT OF TERMINATION OF BOARD MEMBERSHIP.
(1) Should the optionee cease to be a Board member for any
reason (other than death) while holding one or more Automatic Option Grants,
then the optionee will have 6 months following the date of such cessation of
Board membership in which to exercise each such option for any or all of the
shares of Common Stock for which the option is exercisable at the time Board
membership ceases; provided however, that in no event may such an option be
exercised after the expiration of its 10-year term.
(2) Should the optionee die while holding one or more
Automatic Option Grants, then each such option may subsequently be exercised,
for any or all of the shares of Common Stock for which the option is
exercisable at the time of the optionee's death, by the personal
representative of the optionee's estate or by the person or persons to whom
the option is transferred pursuant to the optionee's will or in accordance
with the laws of descent and distribution following optionee's death. Any
such exercise must, however, occur before the earlier of (i) the expiration
of the option's 10-year term, or (ii) 12 months after the date of the
optionee's death.
F. ACCELERATION. Automatic Option Grants will be subject to
acceleration and termination in the event of a Corporate Transaction as
described in Article Two, Section III(A) of this Plan.
G. HOSTILE TAKEOVER. Automatic Option Grants will be granted in
tandem with limited stock appreciation rights, as described in the Hostile
Takeover provisions contained in Article Two, Section III(B) of this Plan.
10
<PAGE>
ARTICLE FOUR
MISCELLANEOUS
I. AMENDMENT OF THE PLAN
A. GENERAL RULES. The Board shall have complete and exclusive
power and authority to amend or modify the Plan in any or all respects
whatsoever. However, no such amendment or modification shall, without the
consent of the option holders, adversely affect rights and obligations with
respect to options at the time outstanding under the Plan. In addition,
certain amendments may be made conditional on first having obtained
stockholder approval if required by the Board or pursuant to any applicable
laws or regulations.
B. AUTOMATIC OPTION GRANTS. Amendment of the Automatic Option
Grant provisions of this Plan is subject to the requirements outlined above.
In addition, the Automatic Option Grant provisions of this Plan may not be
amended more than once every 6 months, other than to comport with changes in
the Internal Revenue Code or rules thereunder.
C. AMENDMENT OF OPTIONS. The Committee shall have full power and
authority to modify or waive any or all of the terms, conditions or
restrictions applicable to any outstanding option, to the extent not
inconsistent with the Plan; provided, however, that no such modification or
waiver shall (1) without the consent of the option holder, adversely affect
the holder's rights thereunder or (2) affect any outstanding option granted
pursuant to the Automatic Option Grant provisions of this Plan except to the
extent necessary to conform to any amendment to this Plan.
II. TAX WITHHOLDING
A. OBLIGATION. The Company's obligation to deliver shares or
cash upon the exercise of stock options or stock appreciation rights granted
under the Plan is subject to the satisfaction of all applicable Federal,
State and local income and employment tax withholding requirements.
B. STOCK WITHHOLDING. The Plan Administrator may, in its
discretion and upon such terms and conditions as it may deem appropriate
(including the applicable safe-harbor provisions of SEC Rule 16b-3) provide
any or all holders of outstanding option grants under the Plan with the
election to have the Company withhold, from the shares of Common Stock
otherwise issuable upon the exercise of such options, one or more of such
shares with an aggregate fair market value equal to the designated percentage
(any multiple of 5% specified by the optionee) of the Federal and State
income and employment withholding taxes ("Withholding Taxes") incurred in
connection with the acquisition of such shares. In lieu of such direct
withholding, one or more optionees may also be granted the right to deliver
shares of Common Stock to the Company in satisfaction of such Withholding
Taxes. The withheld or delivered shares shall be valued at the Fair Market
Value on the applicable determination date for such Taxes or such other date
required by the applicable safe-harbor provisions of SEC Rule 16b-3.
11
<PAGE>
III. EFFECTIVE DATE AND TERM OF PLAN
A. IMPLEMENTATION. This Plan, as successor to the Company's 1983
Stock Option Plan, became effective as of the Effective Date, and no further
option grants shall be made under the 1983 Plan on or after the Effective
Date of this Plan. The Plan was amended on March 3, 1999 (the "1999
Amendment") to effect the following changes: (i) increase the number of
shares of Common Stock available for issuance by an additional 1,500,000
shares, (ii) reduce the number of shares of Common Stock for which an
Automatic Option Grant is to be made to a newly-elected or appointed
non-employee Board member under Section I(C) of Article Three from 30,000
shares to 15,000 shares, effective May 20, 1999, (iii) reduce the number of
shares of Common Stock for which an Automatic Option Grant is to be made on
an annual basis to each continuing non-employee Board member under Section
I(B) of Article Three from 8,000 shares to 6,000 shares, effective as of the
calendar year 2000 Annual Stockholders Meeting, and (iv) effect a one-time
Automatic Option Grant of 15,000 shares to each individual serving as a
non-employee Board member on May 20, 1999 pursuant to Section I(D) of Article
Three. The 1999 Amendment is subject to stockholder approval at the 1999
Annual Meeting, and no option grants made on the basis of the share increase
authorized by that amendment shall become exercisable in whole or in part
unless and until the 1999 Amendment is approved by the stockholders. Should
such stockholder approval not be obtained at the 1999 Annual Meeting, then
the 1,500,000 share increase shall not be implemented, and none of the
revisions to the Automatic Option Grant Program under Article Three shall
become effective. Subject to the foregoing limitations, options may be
granted under the Plan at any time before the date fixed herein for the
termination of the Plan.
B. TERMINATION. Unless sooner terminated due to a Corporate
Transaction or a Change in Control, the Plan will terminate upon the earlier
of (i) December 8, 2002, or (ii) the date on which all shares available for
issuance under the Plan have been issued or cancelled pursuant to exercise,
surrender or cash-out of options. If the date of termination is determined
under clause (i) above, then options outstanding on such date shall
thereafter continue to have force and effect in accordance with the
provisions of the instruments evidencing those options.
C. ADDITIONAL SHARES. Options to purchase shares of Common Stock
may be granted under the Plan which are in excess of the number of shares
then available for issuance under the Plan, provided any excess shares
actually issued are held in escrow until shareholder approval is obtained for
a sufficient increase in the number of shares available for issuance under
the Plan. If such shareholder approval is not obtained within twelve (12)
months after the date the first such excess option grants are made, then (i)
any unexercised excess options shall terminate and cease to be exercisable
and (ii) the Corporation shall promptly refund the purchase price paid for
any excess shares actually issued under the Plan and held in escrow, together
with interest (at the applicable Short Term Federal Rate) for the period the
shares were held in escrow.
IV. USE OF PROCEEDS
Any cash proceeds received by the Company from the sale of shares
pursuant to options granted under the Plan shall be used for general
corporate purposes.
12
<PAGE>
V. REGULATORY APPROVALS
The implementation of the Plan, the granting of any option under the
Plan, and the issuance of stock upon the exercise or surrender of any such
option shall be subject to the procurement by the Company of all approvals and
permits required by regulatory authorities having jurisdiction over the Plan,
the options granted under it and the stock issued pursuant to it.
VI. NO EMPLOYMENT/SERVICE RIGHTS
Neither the establishment of this Plan, nor any action taken under the
terms of this Plan, nor any provision of this Plan shall be construed so as to
grant any individual the right to remain in the employ or service of the Company
(or any parent or subsidiary corporation) for any period of specific duration,
and the Company (or any parent or subsidiary corporation retaining the services
of such individual) may terminate such individual's employment or service at any
time and for any reason, with or without cause.
13
<PAGE>
EXHIBIT 11
DURA PHARMACEUTICALS, INC.
STATEMENTS RE COMPUTATIONS OF NET INCOME PER SHARE
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET INCOME PER SHARE - BASIC
Net Income $ 7,583 $ 8,177 $15,348 $15,341
------- ------- ------- -------
------- ------- ------- -------
Weighted average number of common shares:
Common stock 44,085 46,302 44,092 46,139
------- ------- ------- -------
------- ------- ------- -------
Net Income per share $ 0.17 $ 0.18 $ 0.35 $ 0.33
------- ------- ------- -------
------- ------- ------- -------
NET INCOME PER SHARE - DILUTED
Net Income $ 7,583 $ 8,177 $15,348 $15,341
------- ------- ------- -------
------- ------- ------- -------
Weighted average number of common and common
equivalent shares assuming issuance
of all dilutive contingent shares:
Common stock 44,085 46,302 44,092 46,139
Stock options 562 621 778 718
Warrants 438 1,150 458 1,464
------- ------- ------- -------
Total 45,085 48,073 45,328 48,321
------- ------- ------- -------
------- ------- ------- -------
Net Income per share $ 0.17 $ 0.17 $ 0.34 $ 0.32
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999, AND THE RELATED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 61,945
<SECURITIES> 208,333
<RECEIVABLES> 32,474
<ALLOWANCES> 0
<INVENTORY> 14,574
<CURRENT-ASSETS> 317,326
<PP&E> 93,316
<DEPRECIATION> 0
<TOTAL-ASSETS> 860,197
<CURRENT-LIABILITIES> 82,514
<BONDS> 287,500
0
0
<COMMON> 44
<OTHER-SE> 425,927
<TOTAL-LIABILITY-AND-EQUITY> 860,197
<SALES> 106,402
<TOTAL-REVENUES> 139,252
<CGS> 20,870
<TOTAL-COSTS> 115,712
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,372
<INCOME-PRETAX> 23,473
<INCOME-TAX> 8,125
<INCOME-CONTINUING> 15,348
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,348
<EPS-BASIC> .35
<EPS-DILUTED> .34
</TABLE>
