<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
August 31, 2000
Date of Report - (Date of earliest event reported)
DURA PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Charter)
DELAWARE 000-19809 95-3645543
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
7475 LUSK BOULEVARD, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE IS (858) 457-2553
<PAGE>
ITEM 2. ACQUISITION OF ASSETS
On August 31, 2000, we completed the acquisition of Spiros Development
Corporation II, Inc. ("Spiros Corp. II"). Pursuant to the agreement and plan of
merger between Spiros Corp. II and us dated March 20, 2000, for each share of
Spiros Corp. II's callable common stock, the Spiros Corp. II stockholders
received $13.25 in cash and a five-year warrant with a calculated value of $3.22
to purchase 0.19 shares of our common stock exercisable at $17.94 per share. The
total consideration to be paid by us under the merger agreement will approximate
$106 million, including $85.4 million in cash. The cash portion of the
consideration was paid from our existing cash and short-term investments. The
principal assets acquired through the merger include the right to use our
proprietary Spiros dry powder drug delivery systems with specified compounds
that had previously been licensed to Spiros Corp. II as well as its cash on hand
of approximately $30 million.
Included in this report are audited financial statements of Spiros Corp. II as
of December 31, 1998 and 1999 and for the periods ended December 31, 1997, 1998
and 1999, and unaudited financial statements as of June 30, 2000 and for the
periods ended June 30, 1999 and 2000.
Also included in this report are the unaudited pro forma consolidated balance
sheet as of June 30, 2000 and the unaudited pro forma consolidated statements of
operations for the six months ended June 30, 2000 and the year ended December
31, 1999, which give effect to the acquisition of Spiros Corp. II as if it
occurred as of June 30, 2000 for the consolidated balance sheet and as of
January 1, 1999 for the consolidated statements of operations. These unaudited
pro forma consolidated financial statements have been prepared by our management
based on Spiros Corp. II's and our historical financial statements and on the
assumptions and adjustments as discussed in the accompanying notes to the pro
forma consolidated financial statements. The merger will be accounted for as a
purchase, and the pro forma financial information gives effect to the
preliminary allocation of the purchase price to the acquired assets and
liabilities. The final purchase price allocation will be made at a future date
based on an independent valuation, which may result in adjustments to the
preliminary allocation.
In management's opinion, all pro forma adjustments necessary to fairly state the
unaudited pro forma financial information have been made. Such pro forma
adjustments will change based upon our future operations and expenditure of cash
through the completion of this merger. The unaudited pro forma consolidated
financial statements are not necessarily indicative of what actual results of
operations would have been for the periods had the acquisition occurred on the
dates indicated. In addition, such pro forma financial statements do not purport
to indicate our results of future operations or financial position from the date
of the merger forward.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired.
2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Spiros Development Corporation II, Inc.
We have audited the accompanying balance sheet of Spiros Development
Corporation II, Inc. (a development stage company) as of December 31, 1999,
and the related statements of operations, stockholders' equity and cash flows
for the year then ended and for the period September 23, 1997 (inception)
through December 31, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements as of
December 31, 1998, and for the period September 23, 1997 (inception) through
December 31, 1997 and 1998 were audited by other auditors whose report dated
February 9, 1999 expressed an unqualified opinion on those statements. The
financial statements for the period September 23, 1997 (inception) through
December 31, 1998 include no revenues and a net loss of $50.7 million,
respectively. Our opinion on the statements of operations, stockholders'
equity and cash flows for the period September 23, 1997 (inception) through
December 31, 1999, insofar as it relates to amounts for prior periods through
December 31, 1998, is based solely on the report of other auditors.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit and the report of other auditors provide
a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Spiros Development Corporation II, Inc. at December
31, 1999, and the results of its operations and its cash flows for the year then
ended and the period from September 23, 1997 (inception) through December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
San Diego, California
March 21, 2000
3
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Spiros Development Corporation II, Inc.:
We have audited the accompanying balance sheet of Spiros Development Corporation
II, Inc. (a development stage company) (the "Company") as of December 31, 1998,
and the related statements of operations, stockholders' equity and cash flows
for the year ended December 31, 1998 and the period September 23, 1997 (date of
incorporation) through December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998, and the
results of its operations and its cash flows for the year ended December 31,
1998 and the period September 23, 1997 (date of incorporation) through December
31, 1997 in conformity with accounting principles generally accepted in the
Unites States of America.
/s/ Deloitte & Touche LLP
San Diego, California
February 9, 1999
4
<PAGE>
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999 2000
--------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,535 $ 13,325 $ 15,167
Short-term investments 103,069 57,718 24,184
Other current assets 192 96 75
--------- --------- ---------
Total current assets 123,796 71,139 39,426
--------- --------- ---------
TOTAL $ 123,796 $ 71,139 $ 39,426
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Payable to Dura Pharmaceuticals, Inc. $ 4,597 $ 6,720 $ 5,697
Accrued liabilities 281 173 484
--------- --------- ---------
Total current liabilities 4,878 6,893 6,181
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Special common stock, par value $1.00,
1,000 shares authorized, issued
and outstanding 1 1 1
Callable common stock, par value $.001,
7,500,000 shares authorized;
6,325,000 shares issued and outstanding 6 6 6
Additional paid-in capital 169,404 170,191 170,517
Accumulated other comprehensive income (loss) 224 (171) (66)
Accumulated deficit (50,717) (105,781) (137,213)
--------- --------- ---------
Total stockholders' equity 118,918 64,246 33,245
--------- --------- ---------
TOTAL $123,796 $ 71,139 $ 39,426
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 23, SEPTEMBER 23,
1997 1997
(DATE OF (DATE OF
INCORPORATION) INCORPORATION)
THROUGH YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999 1999
-------------- ------------ ------------ --------------
EXPENSES (with related party, Note 5):
Research and development $ 7,040 $ 50,799 $ 59,211 $ 117,050
General and administrative 106 1,026 1,194 2,326
---------- --------- --------- -----------
Operating loss 7,146 51,825 60,405 119,376
---------- --------- --------- -----------
Interest income 222 8,239 5,341 13,802
---------- --------- --------- -----------
LOSS BEFORE INCOME TAXES (6,924) (43,586) (55,064) (105,574)
PROVISION FOR INCOME TAXES 207 207
---------- --------- --------- -----------
NET LOSS $ (6,924) $ (43,793) $ (55,064) $ (105,781)
========== ========= ========= ===========
NET LOSS PER SHARE:
Basic and diluted $ (1.09) $ (6.92) $ (8.71) $ (16.72)
========== ========= ========= ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES:
Basic and diluted 6,325 6,325 6,325 6,325
<CAPTION>
SEPTEMBER 23,
1997
(DATE OF
SIX MONTHS SIX MONTHS INCORPORATION)
ENDED ENDED THROUGH
JUNE 30, JUNE 30, JUNE 30,
1999 2000 2000
---------- ------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
EXPENSES (with related party, Note 5):
Research and development $ 26,608 $ 31,143 $ 148,193
General and administrative 556 1,856 4,182
-------- --------- -----------
Operating loss 27,164 32,999 152,375
-------- --------- -----------
Interest income 2,997 1,567 15,369
-------- --------- -----------
LOSS BEFORE INCOME TAXES (24,167) (31,432) (137,006)
PROVISION FOR INCOME TAXES 207
-------- --------- -----------
NET LOSS $(24,167) $(31,432) $ (137,213)
======== ======== ===========
NET LOSS PER SHARE:
Basic and diluted $ (3.82) $ (4.97) $ (21.69)
======== ======== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES:
Basic and diluted 6,325 6,325 6,325
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SPECIAL CALLABLE
COMMON STOCK COMMON STOCK ADDITIONAL
------------------- ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------------- ---------------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 23, 1997 (Date
of Incorporation)
Sale of special common stock 1 $ 1
Sale of callable common stock $ 6,325 $ 6 $ 93,961
Contribution from Dura
Pharmaceuticals, Inc. 75,000
Compensation expense for stock
options granted 16
Comprehensive loss:
Net loss
Unrealized gain on investments
Comprehensive loss
----- ------ ------- ------- ----------
BALANCE, DECEMBER 31, 1997 1 1 6,325 6 168,977
----- ------ ------- ------- ----------
Additional issuance costs on sale of
callable common stock (71)
Compensation expense for stock
options granted 498
Comprehensive loss:
Net loss
Unrealized gain on investments
Comprehensive loss
----- ------ ------- ------- ----------
BALANCE, DECEMBER 31, 1998 1 1 6,325 6 169,404
----- ------ ------- ------- ----------
Compensation expense for stock
options granted 787
Comprehensive loss:
Net loss
Unrealized loss on investment
Comprehensive loss
----- ------ ------- ------- ----------
BALANCE, DECEMBER 31, 1999 1 $ 1 6,325 $ 6 $ 170,191
----- ------ ------- ------- ----------
UNAUDITED:
Compensation expense for stock
options granted 326
Comprehensive loss:
Net loss
Unrealized gain on investments
Comprehensive loss
----- ------ ------- ------- ----------
BALANCE, JUNE 30, 2000 1 $ 1 6,325 $ 6 $ 170,517
----- ------ ------- ------- ----------
<CAPTION>
ACCUMULATED
COMPREHENSIVE OTHER COMP. ACCUMULATED
LOSS INCOME DEFICIT TOTAL
----------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 23, 1997 (Date
of Incorporation)
Sale of special common stock $ 1
Sale of callable common stock 93,967
Contribution from Dura
Pharmaceuticals, Inc. 75,000
Compensation expense for stock
options granted 16
Comprehensive loss:
Net loss $ (6,924) $ (6,924) (6,924)
Unrealized gain on investments 21 $ 21 21
-----------
Comprehensive loss (6,903)
=========== -------- ----------- ----------
BALANCE, DECEMBER 31, 1997 21 (6,924) 162,081
-------- ----------- ----------
Additional issuance costs on sale of
callable common stock (71)
Compensation expense for stock
options granted 498
Comprehensive loss:
Net loss (43,793) (43,793) (43,793)
Unrealized gain on investments 203 203 203
-----------
Comprehensive loss (43,590)
=========== -------- ----------- ----------
BALANCE, DECEMBER 31, 1998 224 (50,717) 118,918
-------- ----------- ----------
Compensation expense for stock
options granted
787
Comprehensive loss:
Net loss (55,064) (55,064) (55,064)
Unrealized loss on investments (395) (395) (395)
------------
Comprehensive loss $ (55,459)
============ -------- ----------- ----------
BALANCE, DECEMBER 31, 1999 $ (171) $ (105,781) $ 64,246
========= =========== ==========
UNAUDITED:
Compensation expense for stock
options granted 326
Comprehensive loss:
Net loss (31,432) (31,432) (31,432)
Unrealized gain on investments 105 105 105
------------
Comprehensive loss $ (31,327)
============ -------- ----------- ----------
BALANCE, JUNE 30, 2000 $ (66) $ (137,213) $ 33,245
======== =========== ==========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 23, 1997
(DATE OF
INCORPORATION)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
------------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (6,924) $ (43,793)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Compensation expense for stock options granted 16 498
Changes in assets and liabilities:
Other current assets (192)
Payable to Dura Pharmaceuticals, Inc. 7,110 (2,513)
Accrued liabilities 26 255
----------- -----------
Net cash provided by (used in) operating activities 228 (45,745)
----------- -----------
INVESTING ACTIVITIES:
Purchases of short-term investments (31,450) (142,908)
Sales and maturities of short-term investments 71,513
----------- -----------
Net cash provided by (used in) investing activities (31,450) (71,395)
----------- -----------
FINANCING ACTIVITIES:
Net proceeds from issuance of special common and
callable common stock 93,968 (71)
Contribution from Dura Pharmaceuticals, Inc. for purchase option 75,000
Increase (decrease) in payable to Dura Pharmaceuticals, Inc.
for issuance costs 1,289 (1,289)
----------- -----------
Net cash provided by (used in) financing activities 170,257 (1,360)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 139,035 (118,500)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 139,035
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 139,035 $ 20,535
=========== ===========
<CAPTION>
SEPTEMBER 23,1997
(DATE OF
INCORPORATION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1999 1999
------------ ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(55,064) $ (105,781)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Compensation expense for stock options granted 787 1,301
Changes in assets and liabilities:
Other current assets 96 (96)
Payable to Dura Pharmaceuticals, Inc. 2,123 6,720
Accrued liabilities (108) 173
-------- -----------
Net cash provided by (used in) operating activities (52,166) (97,683)
-------- -----------
INVESTING ACTIVITIES:
Purchases of short-term investments (29,559) (203,917)
Sales and maturities of short-term investments 74,515 146,028
-------- -----------
Net cash provided by (used in) investing activities 44,956 (57,889)
-------- -----------
FINANCING ACTIVITIES:
Net proceeds from issuance of special common and
callable common stock 93,897
Contribution from Dura Pharmaceuticals, Inc. for purchase option 75,000
Increase (decrease) in payable to Dura Pharmaceuticals, Inc.
for issuance costs
-------- -----------
Net cash provided by (used in) financing activities 168,897
-------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,210) 13,325
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,535
-------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,325 $ 13,325
======== ===========
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 23,1997
(DATE OF
SIX MONTHS SIX MONTHS INCORPORATION)
ENDED ENDED THROUGH
JUNE 30, JUNE 30, JUNE 30,
1999 2000 2000
--------------- -------------- --------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (24,167) $ (31,432) $ (137,213)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Compensation expense for stock options granted 484 326 1,627
Changes in assets and liabilities:
Other current assets 48 20 (76)
Payable to Dura Pharmaceuticals, Inc. 372 (1,022) 5,698
Accrued liabilities (106) 311 484
---------- ---------- ------------
Net cash provided by (used in) operating activities (23,369) (31,797) (129,480)
---------- ---------- ------------
INVESTING ACTIVITIES:
Purchases of short-term investments (20,431) (203,917)
Sales and maturities of short-term investments 49,652 33,639 179,667
---------- ---------- ------------
Net cash provided by (used in) investing activities 29,221 33,639 (24,250)
---------- ---------- ------------
FINANCING ACTIVITIES:
Net proceeds from issuance of special common and
callable common stock 93,897
Contribution from Dura Pharmaceuticals, Inc. for purchase option 75,000
Increase (decrease) in payable to Dura Pharmaceuticals, Inc.
for issuance costs
---------- ---------- ------------
Net cash provided by (used in) financing activities 168,897
---------- ---------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,852 1,842 15,167
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,535 13,325
---------- ---------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,387 $ 15,167 $ 15,167
========== ========== ============
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Spiros Development Corporation II, Inc. (the "Company") was
incorporated in the state of Delaware on September 23, 1997 for the purpose
of continuing the development of Spiros-Registered Trademark-, a dry powder
pulmonary drug delivery system, and to conduct formulation work, clinical
trials and commercialization for certain specified leading asthma and chronic
obstructive pulmonary disease ("COPD") drugs for use with Spiros. The Company
commenced operations on December 22, 1997.
On December 22, 1997, the Company and Dura Pharmaceuticals, Inc.
("Dura") completed an initial public offering (the "Offering") of 6,325,000
Units, each Unit consisting of one share of callable common stock of the Company
and one warrant to purchase one-fourth of one share of Dura common stock. The
offering resulted in net proceeds to the Company of approximately $94 million.
Concurrently, Dura contributed $75 million to the Company. Substantially all
funds from the Offering, the $75 million contribution and interest earned
thereon, are expected to be paid to Dura for the development and
commercialization of Spiros and the use of Spiros with certain drugs pursuant to
various agreements (Note 5). Through December 31, 1999, each share of the
Company's callable common stock was combined to trade publicly as a unit with
the warrant to purchase one-fourth of one share of Dura's common stock at a
price per share of $54.84. As of January 1, 2000, the warrant began trading as a
separate security.
2. DEFINITIVE MERGER AGREEMENT WITH DURA PHARMACEUTICALS, INC.
In March 2000 we entered into a merger agreement with Dura. Under the
agreement, for each share of our callable common stock our shareholders will
receive $13.25 in cash and one five-year warrant to purchase a fractional share
of Dura's common stock at $17.94 per share, which represents a 25% premium over
the average closing price of Dura's common stock for the ten trading days prior
to the date of the merger agreement. The exact fraction of a share of Dura's
common stock purchasable under the warrant will be determined based on the
average closing price of Dura's common stock for the ten trading days prior to
the vote of our shareholders on the merger and will result in a calculated
Black-Scholes value for each warrant of between $3.22 and $1.81. The total
consideration for the merger as of the date of the merger agreement was
calculated to be $100.8 million, or $15.75 per share of callable common stock.
Closing of the transaction is subject to Hart-Scott-Rodino clearance,
effectiveness of the registration statement for Dura's warrants, and our
shareholder approval. We and Dura have received voting agreements in favor of
the merger from holders of approximately 22% of our outstanding callable common
stock. A special committee of independent members of our board, formed in
December 1999 to evaluate our strategic alternatives, has approved the merger
agreement and is recommending that our shareholders approve the merger.
10
<PAGE>
The Company's current development plan and budget for 2000 are expected
to result in the Company expending all cash during the second half of the year.
The development plan and budget for the second half of 2000 are subject to
change in the event the merger with Dura is not completed.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION-Because the Company has not yet completed product
development, obtained regulatory approval, verified the market acceptance and
demand for Spiros or recorded any revenues from its principal operations, its
activities have been accounted for as those of a "development stage enterprise,"
as set forth in Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage Enterprises."
USE OF ESTIMATES-The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and related notes. Changes in those estimates may affect amounts
reported in future periods.
CASH AND CASH EQUIVALENTS-The Company considers cash equivalents to
include only highly liquid securities with an original maturity of three months
or less. Investments with an original maturity of more than three months from
the date of acquisition are considered short-term investments.
SHORT-TERM INVESTMENTS-The Company has classified all of its short-term
investments as available-for-sale. The entire amount of the Company's portfolio
is available for current operations. Investments are carried at fair value as
determined by quoted market prices, with unrealized gains and losses reported as
accumulated other comprehensive income within stockholders' equity. Investment
income is recognized when earned and includes the amortization of premiums and
discounts on investments. The Company invests its excess cash in money market
and fixed income securities of companies with strong credit ratings and U.S.
government obligations.
RESEARCH AND DEVELOPMENT COSTS-Research and development costs are
expensed as incurred.
STOCK BASED COMPENSATION-As permitted by SFAS No. 123, "Accounting for
Stock Based Compensation," the Company accounts for the costs associated with
stock option grants to employees in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations ("APB 25"). Compensation expense for costs associated with stock
option grants to non-employees is measured based on the fair value of the
options granted and is recognized over the vesting period.
COMPREHENSIVE INCOME-Effective January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 requires reporting and displaying comprehensive
income (loss) and its components which, for the Company, includes net loss and
unrealized income (loss) on investments. In
11
<PAGE>
accordance with SFAS 130, the accumulated balance of other comprehensive income
is disclosed as a separate component of stockholders' equity.
NET LOSS PER SHARE-The Company incurred a net loss for the periods
ended December 31, 1997, 1998 and 1999, and as such, the weighted average number
of shares of Callable Common Stock used for basic and diluted earnings per share
does not include potential common shares from outstanding stock options as their
inclusion would be antidilutive. The weighted average number of shares also
exclude shares of special common stock ("Special Shares") outstanding since such
shares are not entitled to participate in the profits of the Company.
4. SHORT-TERM INVESTMENTS
The following is a summary of short-term investments as of December 31,
1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
UNREALIZED ESTIMATED
COST GAINS (LOSSES) FAIR VALUE
<S> <C> <C> <C>
December 31, 1998:
U.S. government securities $ 5,127 $ 6 $ 5,133
U.S. corporate debt securities 97,718 218 97,936
-------- ----- --------
Total $102,845 $ 224 $103,069
======== ===== ========
December 31, 1999:
U.S. corporate debt securities $ 57,889 $(171) $ 57,718
======== ===== ========
</TABLE>
The following is a summary of the amortized cost and estimated fair
value of short-term investments by contractual maturity at December 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
<S> <C> <C>
Due in one year or less $ 46,702 $ 46,727
Due after one year through two years 11,187 10,991
---------- ---------
Total $ 57,889 $ 57,718
========== =========
</TABLE>
5. ARRANGEMENTS WITH DURA PHARMACEUTICALS, INC.
The Company and Dura are party to various agreements entered into in
December 1997 which provide for the development, marketing, and manufacturing of
Spiros with specified compounds and for the provision of general and
administrative services by Dura. A summary of these agreements is presented
below.
TECHNOLOGY LICENSE AGREEMENT-Under this agreement, Dura granted to the
Company an exclusive, worldwide (except for the use of beclomethasone in certain
parts of Asia), perpetual, royalty-bearing license to use technology owned or
controlled by Dura relating to the use of Spiros (the "Core Technology") with
the following asthma and COPD drugs: albuterol (a beta-agonist), beclomethasone
(an anti-inflammatory), budesonide (an anti-inflammatory),
12
<PAGE>
ipratropium (an anticholinergic), and an albuterol/ipratropium combination drug
(collectively, the "Spiros Products"). In consideration for these rights, the
Company pays an annual technology access fee equal to the greater of (a) 5% of
the net sales of each Spiros Product, or (b) $2 million. For 1998 and 1999, the
Company paid a technology access fee of $2 million. This obligation will
terminate, on a country-by-country basis, (a) within 10 years from the first
sale of such Spiros Product in those countries where no patents covering such
product are issued and (b) in those countries where patents covering the Spiros
Products are issued, upon the last expiration of the applicable patents.
The Technology License Agreement will remain in effect indefinitely,
unless terminated by mutual agreement of the Company and Dura or upon Dura's
exercise or expiration of its Purchase Option (see Note 6).
ALBUTEROL AND PRODUCT OPTION AGREEMENT-Under this agreement, the
Company granted to Dura the option to acquire for specified time periods the
Albuterol Option and the Product Option. Pursuant to the Albuterol Option, Dura
has the right to acquire from the Company all assets related to the use of
Spiros with albuterol. The Albuterol Option is currently exercisable and expires
360 days after receipt of U.S. Food and Drug Administration (the "FDA") approval
to market. Pursuant to the Product Option, Dura has the right to acquire from
the Company all assets and rights related to the use of Spiros with a second
product other than albuterol. The Product Option is currently exercisable and
expires 90 days after receipt of FDA approval to market such Spiros Product. The
formula for determining the purchase price for each of the products is set forth
in the agreement and is based, in part, on the costs incurred by the Company for
the development of the products.
DEVELOPMENT AGREEMENT-Under this agreement, the Company has engaged
Dura to develop Spiros for use with the Spiros Products. Dura furnishes all
labor, supervision, services, supplies, and materials necessary to perform the
development activities and obtain regulatory approvals for the sale and
marketing of the Spiros Products. These activities are carried out by Dura in
accordance with annual workplans and budgets which are subject to approval and
acceptance by the Company's Board of Directors. Payments to Dura for services
provided under the Development Agreement are based on fully-burdened costs
incurred by Dura plus rates ranging from 20% to 25% of such costs.
MANUFACTURING AND MARKETING AGREEMENT-Under this agreement, the Company
granted to Dura an exclusive, worldwide license to manufacture and market the
Spiros Products. Dura will pay the Company on a quarterly basis a royalty of 7%
of the net sales of each Spiros Product. Prior to the expiration of the Product
Option for albuterol, no royalty payment will be made with respect to net sales
of the albuterol product. The Manufacturing and Marketing Agreement will
terminate upon exercise or termination of the Purchase Option or by mutual
agreement of the Company and Dura at any time. In the event Dura exercises
either of its options under the Albuterol and Product Purchase Option Agreement,
the Manufacturing and Marketing Agreement will terminate with respect to the
applicable Spiros Product.
SERVICES AGREEMENT-Under this agreement, Dura provides certain
management and administrative services to the Company and is compensated
$100,000 per calendar quarter. In
13
<PAGE>
1998, the Company reimbursed Dura $1.3 million for costs and expenses incurred
by Dura in connection with the Offering, net of amounts reimbursed by the
underwriters. The Services Agreement terminates upon exercise by Dura of the
Purchase Option or 12 months after the expiration of the Purchase Option.
The Company's President and Chief Executive Officer, Vice President and
Chief Financial Officer, and Secretary are also officers of Dura. In addition,
two members of the Company's board of directors are officers of Dura, one of
whom is the Company's Chief Executive Officer.
6. STOCKHOLDERS' EQUITY
The Company's authorized capital stock consists of 7,500,000 shares
of Callable Common Stock, of which 6,325,000 shares were issued and
outstanding as of December 31, 1998 and 1999, and 1,000 shares of Special
Shares, all of which were issued and outstanding as of December 31, 1998 and
1999.
Dura, as the holder of 100% of the Special Shares, has an irrevocable
option (the "Purchase Option") to purchase all, but not less than all, of the
issued and outstanding shares of the Company's Callable Common Stock at
predetermined prices. Dura may exercise the Purchase Option at any time through
the earlier of (a) December 31, 2002, (b) the 90th day after the date the
Company provides Dura with quarterly financial statements of the Company showing
cash or cash equivalents of less than $5 million, although Dura may extend such
period by providing additional funding for the continued development of the
Spiros Products, but in no event beyond December 31, 2002, or (c) upon
termination of the Technology License, Development, or the Manufacturing and
Marketing Agreements between the Company and Dura (Note 5). Assuming the
exercise of the Purchase Option, the per share purchase price was $24.01 through
December 31, 1999, and increases on a quarterly basis to $45.95 per share
through December 31, 2002. The Purchase Option price may be paid, at Dura's
discretion, in cash, shares of Dura common stock, or any combination thereof.
Dura has no legal obligation to exercise the Purchase Option. For a description
of the definitive merger agreement with Dura, see Note 2.
As holder of the Special Shares, Dura also has the right to elect two
members of the Company's board of directors (currently comprised of 5 total
members) and must approve certain corporate transactions as set forth in the
Company's Amended and Restated Certificate of Incorporation, including (i) the
allotment or issue of shares or other securities of the Company or the creation
of any right to such an allotment or issue; (ii) the reduction of the Company's
authorized capital stock; (iii) the alteration of or any change to the rights,
powers, preferences and restrictions of the Special Shares; (iv) outstanding
borrowings of an aggregate of more than $1 million at any one time; (v) the sale
or other disposition of or the creation of any lien or liens on the whole or a
material part of the Company's business or assets; (vi) the declaration or
payment of dividends or the making of any other distributions to the Company's
shareholders; (vii) the merger, consolidation or reorganization of the Company
with or into any other corporation; (viii) the sale, liquidation or other
disposition of all or substantially all of the assets of the Company; (ix) the
alteration or amendment of Articles IV or VII of the Company's Amended and
Restated Certificate of Incorporation; and (x) the adoption, amendment or repeal
14
<PAGE>
of the Bylaws of the Company. As holder of the Special Shares, however, Dura
does not have the right to any profits of the Company.
7. STOCK COMPENSATION PLAN
The Company adopted the 1997 Stock Option Plan (the "Plan"), which
provides for the initial issuance of up to 700,000 stock options to employees,
board members, and consultants or other independent advisors who provide
services to the Company. The number of shares issuable under the Plan is subject
to an automatic annual increase on February 15 of each calendar year, beginning
with the 1998 calendar year, by the number of shares necessary to cause the
total number of shares authorized under the Plan to be equal to 15% of the then
outstanding shares of Common Stock of the Company. On February 15, 1998, the
total number of authorized shares increased to 948,750, which has remained
constant through December 31, 1999. Generally, options are to be granted at
prices equal to at least 100% of the fair market value of the Company's Common
Stock at the date of grant, expire not later than 10 years from the date of
grant, and become vested upon Dura's exercise of its Purchase Option (Note 6) or
five years from the date of grant, whichever is earlier. Options shall be
cancelled if the optionee ceases to provide services to the Company prior to the
vesting date.
The following table summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
SHARES WEIGHTED
--------------------------------- AVERAGE
OPTIONS EXERCISE
OPTIONS AVAILABLE FOR PRICE PER
OUTSTANDING GRANT SHARE
----------- ------------- ---------
<S> <C> <C> <C>
Balance, September 23, 1997 (date of incorporation)
Options authorized 700,000
Options granted 548,000 (548,000) $ 14.00
---------- --------- -------
Balance, December 31, 1997 548,000 152,000 $ 14.00
Options authorized 248,750
Options granted 272,000 (272,000) $ 14.35
---------- --------- -------
Balance, December 31, 1998 820,000 128,750 $ 14.12
Options granted 12,500 (12,500) $ 14.00
Options cancelled (78,000) 78,000 $ 14.01
---------- --------- -------
Balance, December 31, 1999 754,500 194,250 $ 14.13
========== ========= =======
</TABLE>
No options were exercisable as of December 31, 1998 and 1999.
16
<PAGE>
The following table summarizes information concerning outstanding
options as of December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING WEIGHTED
CONTRACTUAL AVERAGE
RANGE OF NUMBER LIFE EXERCISE
EXERCISE PRICES OUTSTANDING (YEARS) PRICE
--------------- ----------- ----------- ---------
<S> <C> <C> <C>
$14.00 - $15.88 754,500 8.2 $14.13
</TABLE>
In accordance with SFAS No. 123, the Company applies the provisions of APB 25 in
accounting for stock options granted to employees and, accordingly, no
compensation expense has been recognized for options granted to officers and
members of the Company's board of directors. In accordance with SFAS 123,
options granted to non-employees are accounted for based on their estimated fair
value. Compensation expense equal to the options' estimated fair value is
recognized over the expected vesting period. During 1997, the Company granted
341,000 options to non-employees, for which the Company recorded compensation
expense of $16,000, $384,000, and $374,000 for the periods ended December 31,
1997, 1998, and 1999, respectively. During 1998, the Company granted 232,000
options to non-employees, for which the Company recorded compensation expense of
$114,000 and $400,000 for the years ended December 31, 1998 and 1999,
respectively. During 1999, the Company granted 12,500 options to non-employees
for which the Company recorded compensation expense of $13,000. Stock options
granted to non-employees are generally in exchange for clinical development,
product development, manufacturing development, and legal and other corporate
services provided on behalf of the Company. If the Company had elected to
recognize compensation expense for options granted to employees based on the
estimated fair value of the options as of the grant date, the net loss for the
periods ended December 31, 1997, 1998, and 1999 would have been increased by
$10,000, $271,000 and $402,000, respectively. The estimated weighted average
fair value at grant date of options granted during the periods ended December
31, 1997, 1998 and 1999 was $4.58, $3.99, and $2.62, respectively. The fair
value was estimated using the Black-Scholes option-pricing model with the
following assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield............................... None None None
Expected stock price volatility....................... 30% 30% 30%
Risk-free interest rate............................... 5.7% 4.4-5.7% 5%
Expected life of options.............................. 4 years 3.1-3.9 years 1.6-1.8 years
</TABLE>
8. INCOME TAXES
The provision for income taxes for the year ended December 31, 1998
totaled $207,000, which consisted entirely of current state income taxes. There
was no provision for income taxes for 1999. As of December 31, 1998 and 1999,
the Company had deferred tax assets totaling approximately $20.5 million and
$42.8 million, respectively, which primarily relate to federal and state net
operating loss carryforwards which approximate $104 million for federal and $24
million for state purposes as of December 31, 1999. The federal tax loss
carryforwards begin to
17
<PAGE>
expire in 2012, and the state tax loss carryforwards begin to expire in 2002.
Because the Company performs research and development and the prospect of
generating future earnings is uncertain, the deferred tax assets have been fully
reserved.
9. ACQUISITION OF THE COMPANY BY DURA (UNAUDITED)
On August 31, 2000, Dura completed its acquisition of the Company.
Pursuant to the merger agreement, for each share of the Company's callable
common stock, stockholders received $13.25 in cash and a five-year warrant
with a calculated value of $3.22 to purchase 0.19 shares of Dura common stock
exercisable at $17.94 per share. The total consideration to be paid under the
merger agreement will approximate $106 million, or $16.47 per share of the
Company's callable common stock.
18
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 2000
IN THOUSANDS
SPIROS PRO FORMA PRO FORMA
DURA CORP. II ADJUSTMENTS CONSOLIDATED
------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 137,172 $ 15,167 $ (90,201) (2b) $ 62,138
Short-term investments 157,910 24,184 182,094
Accounts and other receivables 48,675 (5,697) (2a) 42,978
Inventory 14,481 14,481
Other current assets 5,052 75 5,127
--------- -------- --------- ---------
Total current assets 363,290 39,426 (95,898) 306,818
License agreements and product rights 413,102 413,102
Property 92,288 92,288
Other assets 57,562 57,562
--------- -------- --------- ---------
TOTAL $ 926,242 $ 39,426 $ (95,898) $ 869,770
========= ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,947 $ 5,697 $ (5,697) (2a) $ 14,947
Accrued liabilities 86,359 484 86,843
Current portion of long-term obligations 1,931 1,931
--------- -------- --------- ---------
Total current liabilities 103,237 6,181 (5,697) 103,721
Convertible subordinated notes 287,500 287,500
Other long-term obligations 68,288 68,288
--------- -------- --------- ---------
Total liabilities 459,025 6,181 (5,697) 459,509
Stockholders' equity:
Common stock 44 7 (7) (2b) 44
Additional paid-in capital 581,538 170,517 (150,150) (2b) 601,905
Accumulated other comprehensive income (loss) (1,056) (66) 66 (2b) (1,056)
Warrant subscriptions receivable (4,261) 4,261 (2b) -
Accumulated deficit (109,048) (137,213) 55,629 (2b) (190,632)
--------- -------- --------- ---------
Total stockholders' equity 467,217 33,245 (90,201) 410,261
--------- -------- --------- ---------
TOTAL $ 926,242 $ 39,426 $ (95,898) $ 869,770
========= ======== ========= =========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
19
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1999
IN THOUSANDS, EXCEPT PER SHARE DATA
SPIROS PRO FORMA PRO FORMA
DURA CORP. II ADJUSTMENTS CONSOLIDATED
------------- ------------ ------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Sales $ 231,776 $ 231,776
Contract 69,650 $ (55,496) (3a) 14,154
----------- --------- ----------
Total revenues 301,426 (55,496) 245,930
----------- --------- ----------
OPERATING COSTS AND EXPENSES:
Cost of sales 45,839 45,839
Clinical, development and regulatory 52,977 $ 59,211 (58,423) (3b) 53,765
Selling, general and administrative 133,311 1,194 (400) (3b) 134,105
Product rights amortization 20,242 20,242
----------- -------- --------- ----------
Total operating costs and expenses 252,369 60,405 (58,823) 253,951
----------- -------- --------- ----------
OPERATING INCOME (LOSS) 49,057 (60,405) 3,327 (8,021)
----------- -------- --------- ----------
OTHER:
Interest income 17,363 5,341 22,704
Interest expense (18,175) (18,175)
Other (net) (3,797) (3,797)
----------- -------- ----------
Total other (4,609) 5,341 732
----------- -------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 44,448 (55,064) 3,327 (7,289)
PROVISION (BENEFIT) FOR INCOME TAXES 14,444 (14,444) (3c)
----------- -------- --------- ----------
NET INCOME (LOSS) $ 30,004 $(55,064) $ 17,771 $ (7,289)
=========== ======== ========= ==========
NET INCOME PER SHARE - BASIC $ 0.68 $ (0.17)
=========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES - BASIC 44,132 44,132
=========== ==========
NET INCOME PER SHARE - DILUTED $ 0.66 $ (0.17)
=========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES - DILUTED 45,672 44,132
=========== ==========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
IN THOUSANDS, EXCEPT PER SHARE DATA
SPIROS PRO FORMA PRO FORMA
DURA CORP. II ADJUSTMENTS CONSOLIDATED
------------- ------------ ------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Sales $ 128,206 $ 128,206
Contract 39,103 $ (29,221) (3a) 9,882
----------- --------- ----------
Total revenues 167,309 (29,221) 138,088
----------- --------- ----------
OPERATING COSTS AND EXPENSES:
Cost of sales 26,076 26,076
Clinical, development and regulatory 30,811 $ 31,143 (30,817) (3b) 31,137
Selling, general and administrative 72,956 1,856 (200) (3b) 74,612
Product rights amortization 10,916 10,916
----------- -------- --------- ----------
Total operating costs and expenses 140,759 32,999 (31,017) 142,741
----------- -------- --------- ----------
OPERATING INCOME (LOSS) 26,550 (32,999) 1,796 (4,653)
----------- -------- --------- ----------
OTHER:
Interest income 9,895 1,567 11,462
Interest expense (8,624) (8,624)
Other (net) 3,450 3,450
----------- -------- ----------
Total other 4,721 1,567 6,288
----------- -------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 31,271 (31,432) 1,796 1,635
PROVISION (BENEFIT) FOR INCOME TAXES 9,373 (8,882) (3c) 491
----------- -------- --------- ----------
NET INCOME (LOSS) $ 21,898 $(31,432) $ 10,678 $ 1,144
=========== ======== ========= ==========
NET INCOME PER SHARE - BASIC $ 0.49 $ 0.03
=========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES - BASIC 44,389 44,389
=========== ==========
NET INCOME (LOSS) PER SHARE - DILUTED $ 0.48 $ 0.02
=========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES - DILUTED 46,002 46,002
=========== ==========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
21
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
1. THE MERGER
On August 31, 2000, we completed our acquisition of Spiros Corp. II. Pursuant
to the merger agreement for each share of Spiros Corp. II's callable common
stock, the Spiros Corp. II stockholders received $13.25 in cash and a
five-year warrant with a calculated value of $3.22 to purchase 0.19 shares of
our common stock exercisable at $17.94 per share. The total consideration to
be paid under the merger agreement will be approximately $106 million. The
calculated value of each warrant was determined using the Black-Scholes
option pricing model with a risk free interest rate of 6.43%, volatility of
65%, and a 5-year expiration from the date of issuance.
The acquisition will be accounted for as a purchase. For purposes of preparing
the pro forma financial information, we have assumed that the excess of the
purchase price over the fair value of the net tangible assets ("excess purchase
price") to be acquired will be assigned to in-process technology. The charge to
earnings for acquired in-process technology has not been reflected in the pro
forma consolidated statement of operations, as it is nonrecurring. This charge
is, however, reflected in the pro forma consolidated balance sheet. We will
obtain an independent valuation of the assets and liabilities acquired which
will be used as the basis for the final purchase price allocation. In the event
that the independent valuation does not support the assignment of the entire
excess purchase price to in-process technology, a portion of the excess purchase
price will be recorded as intangible assets and will be amortized over their
estimated useful lives.
The estimated purchase price as of June 30, 2000 has been determined as follows:
<TABLE>
<S> <C>
Cash paid for callable common stock........................ $83,806
Cash paid for options...................................... 1,620
Estimated fair value of warrants issued.................... 20,367
Estimated transaction expenses............................. 4,775
-------
Total estimated purchase price........................... $110,568
</TABLE>
For purposes of preparing the pro forma financial information, the
estimated purchase price has been allocated as follows:
<TABLE>
<S> <C>
Cash....................................................... $29,393
Other current assets....................................... 75
Current liabilities assumed................................ (484)
In-process technology...................................... 81,584
--------
$110,568
</TABLE>
Spiros Corp. II's in-process technology being acquired by us through the merger
consists of the exclusive right to use the Spiros dry powder pulmonary delivery
system with the following respiratory drugs: albuterol, beclomethasone,
budesonide, ipratropium, and an albuterol/ipratropium
22
<PAGE>
combination drug. Dura already owns the right to use the core technology of the
Spiros systems with other products and for other uses.
The development of these drugs for use with the Spiros system is very complex.
Each drug represents a separate and distinct product that requires its own
development program and must be approved for marketing by the FDA as a new drug.
While significant progress has been made in the development of the Spiros
technology, a high degree of uncertainty remains as to when or, if ever, the FDA
will approve any of these products and Dura will realize any benefit from them.
The FDA has not approved any Spiros product to date. The only new drug
application filed for a Spiros product was deemed to be non-approvable by the
FDA in 1998.
On July 24, 2000, we announced the implementation of a refocused strategy. As
part of this strategy, we will, upon the successful completion of the proposed
merger, discontinue the development of all motorized Spiros cassette programs,
including the use of beclomethasone and budesonide in that system. We intend to
focus our development efforts on next generation, motorless Spiros systems which
are designed to be smaller, lighter, and significantly less costly to
manufacture. With this change in strategy, all future development by us of the
drugs we are acquiring from Spiros Corp. II will be for use in the motorless
Spiros systems.
Spiros Corp. II has conducted substantially all of the development work
performed to date on the motorless Spiros systems. In addition, certain of the
work it has done with the motorized cassette system, including pulmonary drug
delivery and manufacturing technology it has developed and data it has obtained
from certain clinical studies, will be utilized by us in the development of the
motorless system. We expect to initiate the first human clinical trial with the
motorless Spiros system within the next 12 months and to be able to commence
pivotal clinical trials with the system in 2002.
The most significant assumptions we have made in estimating the value of Spiros
Corp. II's in-process technology include:
- that the results we achieve in human clinical trials with the next
generation, motorless Spiros systems will be as good as the results we
have achieved in preclinical work with these systems to date;
- that we will not experience any material difficulties or delays in the
development of our Spiros products;
- that the development costs and costs to launch and market our products
in the next generation, motorless Spiros systems, which we estimate
will exceed $100 million, will not increase;
- that the markets for our Spiros products will continue to grow at the
rates we have assumed and we will achieve the market shares for these
products we have assumed;
- that competitors will not develop products that are significant
improvements over the therapies available today or over our Spiros
products in the next generation, motorless Spiros systems;
- that we will achieve the manufacturing cost savings we anticipate with
the next generation, motorless Spiros systems; and
- that we will receive broad patent protection for the next generation,
motorless Spiros systems.
23
<PAGE>
These assumptions involve judgments regarding future events, all of which are
difficult to predict accurately and most of which are beyond our control.
2. PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
The pro forma consolidated balance sheet (unaudited) includes the adjustments
necessary as if the acquisition of Spiros Corp. II had occurred on June 30,
2000. The adjustments are summarized as follows (in thousands):
(a) To eliminate intercompany accounts payable and receivable.
<TABLE>
<S> <C> <C>
Accounts payable........................ $5,697
Accounts receivable..................... $5,697
</TABLE>
(b) To record the issuance of warrants to purchase shares of our common
stock with an estimated value of $15.8 million and a cash payment of
$90.2 million (including merger expenses) for the acquisition of Spiros
Corp. II, the elimination of its equity accounts, the reduction of
warrant subscriptions receivable and a charge to earnings resulting
from the assumed allocation of assumed acquisition cost to in-process
technology.
<TABLE>
<S> <C> <C>
Common stock............................................. $7
Additional paid-in capital............................... 170,517
Accumulated deficit (charge to in-process technology).... 81,584
Cash..................................................... $90,201
Additional paid-in capital............................... 20,367
Accumulated other comprehensive loss..................... 66
Warrant subscriptions receivable......................... 4,261
Accumulated deficit...................................... 137,213
</TABLE>
The elimination of the warrant subscriptions receivable reflects the allocation
of a portion of Spiros Corp. II's cash to pay down the receivable. We issued
warrants as part of Spiros Corp. II's 1997 public offering of units. A portion
of the cash paid to us by Spiros Corp. II for development and administrative
services was allocated to the warrant subscriptions receivable. As such, a
portion of Spiros Corp. II's cash will be allocated to the unpaid balance of the
receivable as part of the purchase price allocation.
3. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
The unaudited pro forma consolidated statement of operations includes the
adjustments necessary to reflect the merger as if it had occurred on January 1,
1999. The pro forma adjustments are summarized as follows (in thousands):
24
<PAGE>
(a) To eliminate contract revenue recognized by us related to activities
conducted on Spiros Corp. II's behalf. Because a pro rata portion of
the amounts paid by Spiros Corp. II to us is allocated to warrant
subscriptions receivable, the contract revenue recognized by us does
not equal the total research and development and general and
administrative expenses recorded by Spiros Corp. II.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1999 June 30, 2000
----------------- -------------
<S> <C> <C>
Contract revenue.... $55,496 $29,221
</TABLE>
(b) To eliminate the research and development and general administrative
expenses recognized by Spiros Corp. II related to activities conducted
by us.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
1999 2000
------------ -----------------
<S> <C> <C>
Clinical, development and regulatory..... $58,423 $30,817
General and administrative............... 400 200
</TABLE>
(c) To record the reduction in the provision for income taxes related to
the decrease in pro forma consolidated income before income taxes.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1999 June 30, 2000
----------------- -------------
<S> <C> <C>
Provision for income tax........ $14,444 $8,882
</TABLE>
Spiros Corp. II recognized no income tax benefit in its historical financial
statements for the increase in its deferred tax assets due to the uncertainty
regarding its ability to realize those assets. Accordingly, the unaudited pro
forma adjustment for the provision for income taxes for the year ended
December 31, 1999 was determined by combining Spiros Corp. II's and our
results of operations for the period and calculating the provision for income
taxes as if the acquisition had occurred on January 1, 1999.
The weighted average number of shares used to calculate pro forma net income per
share for the year ended December 31, 1999 and the six months ended June 30,
2000 is based on the historical weighted average shares outstanding for us. No
adjustment has been made to reflect the issuance of the warrants to purchase
shares of our common stock in connection with the merger as discussed in note 1
because the effect would be anti-dilutive. Potential dilutive common shares
25
<PAGE>
which total 12,246,822 at December 31, 1999 and 11,670,582 at June 30, 2000 are
excluded from dilutive pro forma net income per share as their inclusion would
be anti-dilutive.
(c) Exhibits.
23.1 Independent Auditors' Consent, Ernst & Young LLP
23.2 Independent Auditors' Consent, Deloitte & Touche LLP
99.1 Press Release dated August 31, 2000
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report on Form 8-K to be signed on its
behalf by the undersigned hereunto duly authorized.
Dura Pharmaceuticals, Inc.
Date: SEPTEMBER 15, 2000 /S/ MITCHELL R. WOODBURY
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Senior Vice President and General Counsel
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