AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 14, 2000
REGISTRATION NO. 333-35512
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
DURA PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 5122 95-3645543
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Number) Identification No.)
Incorporation or Organization)
--------------------------
7475 LUSK BOULEVARD
SAN DIEGO, CALIFORNIA 92121
(858) 457-2553
(Address, Including Zip Code and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
--------------------------
CAM L. GARNER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
DURA PHARMACEUTICALS, INC.
7475 LUSK BOULEVARD
SAN DIEGO, CALIFORNIA 92121
(858) 457-2553
(Name, Address, Including Zip Code and Telephone Number,
Including Area Code, of Agent for Service)
COPIES TO:
FAYE H. RUSSELL, ESQ. JOSEPH J. GIUNTA, ESQ.
RICHARD S. CHERNICOFF, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
BROBECK, PHLEGER & HARRISON LLP 300 SOUTH GRAND AVENUE
12390 EL CAMINO REAL LOS ANGELES, CA 90071-3144
SAN DIEGO, CALIFORNIA 92130 (213) 687-5000
(858) 720-2500
--------------------------
Approximate date of commencement of proposed sale to the public:
Upon consummation of the merger described in this registration statement.
--------------------------
If any of the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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[LOGO]
SPIROS DEVELOPMENT CORPORATION II, INC.
7475 LUSK BOULEVARD
SAN DIEGO, CALIFORNIA 92121
AUGUST 1, 2000
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders of
Spiros Development Corporation II, Inc., which will be held at our offices, 7475
Lusk Blvd., San Diego, California, on August 31, 2000, beginning at 9:00 a.m.
After careful consideration and upon receiving the unanimous recommendation
of a special committee of independent members of the board, our board of
directors has approved a merger agreement that would result in Dura
Pharmaceuticals, Inc. acquiring us. If the merger is completed, for each share
of our callable common stock you own, you will receive $13.25 in cash and a
five-year warrant to purchase a fractional share of Dura's common stock. Dura
will apply to have the warrants listed on The Nasdaq Stock Market under the
symbol "DURAZ" and Dura's common stock is listed on The Nasdaq Stock Market
under the symbol "DURA." Dura will issue up to 6,355,000 warrants in connection
with the merger and has registered 2,539,458 shares of its common stock which,
depending on market conditions, may be issuable upon exercise of the warrants.
Details of the business to be conducted at the special meeting are given in
the notice of special meeting and balance of this document.
In order for us to have an efficient meeting, please sign, date and return
the enclosed proxy promptly in the accompanying reply envelope. You may also
vote by telephone or by using the Internet. Please see the instructions included
with your proxy card.
The board of directors recommends that you vote to adopt the merger
agreement.
YOU SHOULD CONSIDER THE "RISK FACTORS" DESCRIBED BEGINNING AT PAGE 10, AS
WELL AS ALL OF THE OTHER INFORMATION INCLUDED AND INCORPORATED BY REFERENCE IN
THIS DOCUMENT IN MAKING YOUR DECISION.
We look forward to seeing you at the special meeting.
Sincerely, Sincerely,
David S. Kabakoff William H. Rastetter
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER CHAIRMAN OF THE SPECIAL COMMITTEE
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE MERGER, PASSED ON THE MERITS OR FAIRNESS OF THE
MERGER OR ISSUANCE OF THE WARRANTS TO PURCHASE SHARES OF DURA'S COMMON STOCK TO
BE ISSUED IN CONNECTION WITH THE MERGER. FURTHERMORE, THE SECURITIES AND
EXCHANGE COMMISSION HAS NOT DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL AND IT IS NOT SOLICITING
AN OFFER TO BUY SECURITIES IN ANY JURISDICTION WHERE OFFERS OR SALES ARE NOT
PERMITTED.
This proxy statement/prospectus is dated July , 2000 and was first mailed
to our stockholders on or about August 1, 2000.
SPIROS DEVELOPMENT CORPORATION II, INC.
7475 LUSK BOULEVARD
SAN DIEGO, CALIFORNIA 92121
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
August 1, 2000
A special meeting of the stockholders of Spiros Development Corporation
II, Inc. will be held at our offices at 7475 Lusk Boulevard, San Diego,
California 92121, on Thursday, August 31, 2000 beginning at 9:00 a.m. to
consider and vote upon a proposal to adopt the agreement and plan of merger,
dated as of March 20, 2000, by and among Dura Pharmaceuticals, Inc., Starfish
Acquisition Corp., Inc. and us.
We will transact no other business at the special meeting, except such
business as may properly be brought before the special meeting or any
adjournment of it by the board of directors.
Stockholders of record at the close of business on July 21, 2000 are
entitled to vote at the special meeting. We will make a list of stockholders
entitled to vote at the special meeting available for inspection at our offices.
Whether or not you plan to attend the special meeting in person, please sign,
date and return the enclosed proxy in the reply envelope or vote by telephone or
by using the Internet. Please see the instructions included in your proxy card.
Please assist us in preparing for the special meeting by promptly returning your
proxy.
By Order of the Board of Directors
John R. Cook
SECRETARY
Dated: August 1, 2000
THIS DOCUMENT INCORPORATES BY REFERENCE IMPORTANT BUSINESS AND FINANCIAL
INFORMATION ABOUT DURA THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS DOCUMENT.
THE INFORMATION WHICH IS INCORPORATED BY REFERENCE IN THIS DOCUMENT IS AVAILABLE
WITHOUT CHARGE TO YOU UPON WRITTEN OR ORAL REQUEST. PLEASE MAKE YOUR REQUESTS
TO:
Dura Pharmaceuticals, Inc.
7475 Lusk Boulevard
San Diego, California 92121
Attention: Corporate Secretary
(800) 859-8585
TO OBTAIN TIMELY DELIVERY, YOU MUST REQUEST THIS INFORMATION NO LATER THAN
, 2000.
TABLE OF CONTENTS
PAGE
----
SUMMARY.............................. 1
RISK FACTORS......................... 10
SPECIAL FACTORS...................... 16
INFORMATION REGARDING FORWARD-LOOKING
STATEMENTS......................... 39
THE SPECIAL MEETING.................. 40
INTERESTS OF CERTAIN PERSONS IN THE
MERGER............................. 42
THE MERGER........................... 43
THE MERGER AGREEMENT................. 54
RELATED AGREEMENTS................... 61
DESCRIPTION OF THE WARRANTS.......... 62
SELECTED FINANCIAL DATA.............. 64
OUR MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............. 65
MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................ 66
CHANGE IN ACCOUNTANTS................ 67
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK...... 68
DESCRIPTION OF OUR BUSINESS.......... 68
OUR PRINCIPAL STOCKHOLDERS........... 79
PAGE
----
SECURITY OWNERSHIP OF OUR
MANAGEMENT......................... 80
RELATED PARTY TRANSACTIONS........... 80
RIGHTS OF DISSENTING STOCKHOLDERS.... 80
LEGAL MATTERS........................ 84
EXPERTS.............................. 84
INCORPORATION BY REFERENCE........... 84
WHERE YOU CAN FIND MORE
INFORMATION........................ 85
STOCKHOLDER PROPOSALS................ 85
INDEX TO FINANCIAL
STATEMENTS......................... F-1
ANNEX A--MERGER AGREEMENT............ A-1
ANNEX B--OPINION OF SG COWEN
SECURITIES CORPORATION............. B-1
ANNEX C--OPINION OF MERRILL LYNCH,
PIERCE, FENNER & SMITH
INCORPORATED....................... C-1
ANNEX D--SECTION 262 OF THE DELAWARE
GENERAL CORPORATION LAW............ D-1
i
QUESTIONS AND ANSWERS ABOUT THE MERGER
The following questions and answers are intended to address briefly some
commonly asked questions regarding the merger. These questions and answers may
not address all questions that may be important to you as a Spiros Corp. II
callable common stockholder. Please refer to the more detailed information
contained elsewhere in this document, the annexes to this document and the
documents referred to or incorporated by reference in this document.
Q: WHAT AM I BEING ASKED TO VOTE UPON?
A: Our board of directors is asking you to vote to adopt a merger agreement
which provides that Dura will acquire Spiros Corp. II by merging a wholly
owned subsidiary of Dura's with Spiros Corp. II. Spiros Corp. II will be the
surviving corporation in the merger.
Q: WHAT IS DURA'S RELATIONSHIP TO US?
A: Dura is the holder of 100% of our special common stock which entitles it to
purchase all of our outstanding callable common stock at predetermined
prices ranging from $27.96 to $45.95 per share. As holder of our special
common stock, Dura's prior written approval is required in order for our
board to take specific actions and Dura is also entitled to elect two of the
five directors on our board. We do not have our own employees or facilities
and rely on Dura to provide services to us. In addition, Dura holds an
option from us to acquire rights for the use of Spiros technology with
albuterol and a second product. Dura also performs all development of the
Spiros products on our behalf.
Q: WHY IS DURA PROPOSING TO ACQUIRE US?
A: Dura is proposing to acquire us because it believes that ownership of all of
the rights to products being developed by us which use Spiros technology
will be more valuable for its stockholders than a license to such rights,
another means to acquire access to the Spiros technology.
Q: WHY ARE WE PROPOSING TO BE ACQUIRED?
A: We are proposing to be acquired because we believe that, although the merger
consideration you will receive is less than the consideration you would
receive if Dura exercised its purchase option, the merger at the price
offered is the best alternative reasonably available to maximize value for
you at this time. The special committee, with the assistance of its counsel
and financial advisor, considered many factors which are described in detail
in this document.
Q: WHY DO WE BELIEVE THE ACQUISITION IS FAIR?
A: We believe that the acquisition is fair to you because the proposed merger is
the result of arm's length negotiations between Dura and a special committee
of our board of directors comprised entirely of directors who are not
officers or directors of Dura.
Q: WHAT WILL YOU RECEIVE IN THE MERGER?
A: For each share of our callable common stock, you will receive $13.25 in cash
and a warrant to purchase a fractional share of Dura common stock. The
warrant will be immediately exercisable at $17.94 per share and will expire
five years from the date the merger is completed. The exact fraction of a
share of Dura common stock purchasable under the warrant will be determined
based on the average closing price of Dura's common stock for the 10 trading
days prior to the day of the special meeting and will result in a calculated
value, using a financial model, between $3.22 and $1.81 per warrant.
ii
Q: WHAT DO YOU NEED TO DO NOW?
A: Please mail your signed proxy card in the enclosed return envelope as soon as
possible or vote by telephone or by using the Internet, so that your shares
may be represented at the special meeting. Please see the instructions
included with your proxy card.
Q: CAN YOU CHANGE YOUR VOTE AFTER YOU HAVE SENT A PROXY AUTHORIZATION?
A: Yes. A vote can be changed at any time before the proxy is voted at the
special meeting. This can be done in one of two ways. First, you can send a
written notice to your broker stating that you would like to revoke your
proxy. Second, you can complete and deliver a new proxy to your broker.
Also, if your shares are held in your own name, and not by your broker in
"street name," you may revoke your proxy by appearing at the special meeting
and voting in person. Otherwise, you may appear at the meeting with a signed
revocation and a legal proxy from your broker allowing you to vote your
shares in person. Currently, all of our callable common stock is held in
"street name."
Q: BECAUSE YOUR SHARES ARE HELD IN "STREET NAME" BY A BROKER, WILL THE BROKER
VOTE THE SHARES FOR YOU?
A: Your broker will vote the shares only if you provide your broker instructions
on how to vote. Follow the directions provided by your broker regarding how
to instruct your broker to vote the shares. Without instructions, the shares
will not be voted.
Q: WHEN DO WE EXPECT THE MERGER TO BE COMPLETED?
A: We are working with Dura to complete the merger as soon as possible. We
expect to complete the merger in the third quarter of 2000.
Q: WILL YOU RECOGNIZE GAIN OR LOSS ON THE TRANSACTION?
A: Yes. If the merger is completed, you will recognize gain or loss for federal
income tax purposes upon receipt of the cash and warrant to purchase shares
of Dura common stock in the merger. You are urged to consult your own tax
advisor to determine your particular tax consequences.
Q: WHO CAN HELP ANSWER YOUR QUESTIONS?
A: If you have questions about the merger or if you need additional copies of
this document or the enclosed proxy, you should contact:
Georgeson Shareholder Communications Inc.
17 State Street, 10th Floor
New York, NY 10004
(800) 223-2064
Q: WHEN WILL YOUR SHARES BE SURRENDERED?
A: After the special meeting, if the merger agreement has been adopted, Dura
will notify your broker and thereafter, your broker will surrender your
shares of callable common stock for exchange.
Q: WHERE CAN I FIND MORE INFORMATION ABOUT SPIROS CORP. II?
A: We file periodic reports and other information with the SEC. You may read and
copy this information at the SEC's public reference facilities. Please call
the SEC at 1-800-SEC-0330 for information about these facilities. This
information is also available at the Internet site maintained by the SEC at
http://www.sec.gov.
iii
SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING
ELSEWHERE IN THIS DOCUMENT AND THE DOCUMENTS THAT WE INCORPORATE BY REFERENCE.
THIS DOCUMENT AND THE DOCUMENTS THAT WE INCORPORATE BY REFERENCE CONTAIN FORWARD
LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. DURA'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD LOOKING
STATEMENTS AS A RESULT OF THE FACTORS SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS DOCUMENT AND THE DOCUMENTS THAT WE INCORPORATE BY REFERENCE.
THE COMPANIES
DURA PHARMACEUTICALS, INC.
7475 Lusk Boulevard
San Diego, California 92121
(800) 859-8585
Dura is a specialty pharmaceutical company that develops, markets and sells
prescription products that treat respiratory conditions and infectious diseases.
Dura has built an effective sales and marketing organization that includes
approximately 475 territories and focuses on the high prescribing physician
groups in its target markets. Dura currently markets a portfolio of 12 patent
protected and/or branded prescription products. Dura's proprietary
Spiros-Registered Trademark- pulmonary drug delivery system, which Dura is
developing to improve the delivery of inhaled medications, represents a
significant opportunity and is an essential component of Dura's future growth.
Leveraging both its sales and marketing organization by opportunistically
acquiring products and late-stage product development candidates and its Spiros
platform technology by developing products for delivery through the Spiros
system are essential to Dura's future growth.
SPIROS DEVELOPMENT CORPORATION II, INC.
7475 Lusk Boulevard
San Diego, California 92121
(800) 859-8585
We were incorporated in Delaware on September 23, 1997 for the purpose of
continuing the development of the Spiros dry powder pulmonary drug delivery
system and to conduct formulation work, clinical trials and commercialization
for specified leading asthma and chronic obstructive pulmonary disease drugs for
use with the Spiros technology.
We commenced operations on December 22, 1997 when we and Dura completed a
$101 million initial public offering of 6,325,000 units, each unit consisting of
one share of our callable common stock and one warrant to purchase one-fourth of
one share of Dura's common stock. The offering resulted in net proceeds to us of
approximately $94 million. Concurrent with the offering, Dura contributed
$75 million to our operations. Substantially all funds from the offering, the
$75 million contribution, and interest earned on these funds have been and are
expected to be paid to Dura for the development and commercialization of Spiros
technology and the use of Spiros technology with applications for albuterol,
beclomethasone, budesonide, ipratropium, albuterol-ipratropium combination, and
additional designated compounds, if any. Current product development efforts are
focused on beclomethasone and budesonide. We may also expend funds on
enhancements to the existing Spiros technology and development of a next
generation inhaler technology.
The warrants issued in our initial public offering are exercisable through
December 31, 2002 at an exercise price of $54.84 per share of Dura common stock.
As of ________, 2000, Dura's common stock was trading at . As of
January 3, 2000, the callable common stock and the warrant began trading
publicly as separate securities. As the holder of 100% of our special common
stock, Dura has a right through December 31, 2002 to purchase all, but not less
than all, of the then outstanding shares of our callable common stock at
predetermined prices. From July 1, 2000, through September 30, 2000, the
exercise price of the option is $27.96 per share. The purchase price may be
paid, at Dura's option, in cash, shares of Dura's common stock or a combination
of cash and stock. In addition, Dura holds an option through specified dates, to
acquire for cash exclusive rights for the use of Spiros
1
technology with albuterol and with a second product other than albuterol.
In connection with the initial public offering, we entered into a number of
agreements with Dura under which Dura currently performs development of the
Spiros products as further discussed under "The Merger--Relationship between us
and Dura." We do not have our own research, development, clinical, licensing,
administration, manufacturing or marketing employees or facilities, and thus are
entirely dependent on Dura in those areas.
THE MERGER (SEE PAGE )
To effect the merger, we will be merged with Starfish Acquisition
Corp., Inc., a wholly owned subsidiary of Dura. As a result, we will become a
wholly owned subsidiary of Dura.
After the merger, you will receive $13.25 in cash and a warrant to purchase
a fractional share of Dura common stock for each share of our callable common
stock you own. The exact fraction of a share of Dura common stock purchasable
under the warrant will be determined based on the average closing price of
Dura's common stock for the 10 trading days prior to the date of the special
meeting and will result in a calculated value, using the Black-Scholes option
pricing model, for each warrant between $3.22 and $1.81. The Black-Scholes
option pricing model is a financial model that calculates the value of a warrant
to purchase a share of common stock based upon the exercise price of the
warrant, the duration of the warrant and assumptions as to risk-free rates of
return and the volatility of the underlying common stock. As of ,
2000, the last trading day before the printing of this document, the fraction of
a share purchasable under each warrant would have been with a Black-
Scholes calculated value of . For ten business days before the special
meeting, you may call Dura at (800) 859-8587 ext. 6404 to obtain the calculated
value of the warrant as of the end of business on the previous day. There can be
no assurance, however, that the fraction issuable will be the same at the
closing date or that the market price of the warrant will equal the
Black-Scholes value of the warrant. See "Description of the Warrants" for an
illustration of the warrant valuation and further information regarding the
warrant.
Dura expects to pay a total of approximately $88.7 million in cash, which
includes expenses related to the merger, and to issue up to 6,355,000 warrants
to purchase fractional shares of Dura common stock. Dura intends to pay the cash
portion of the merger consideration out of its available working capital
resources. If Dura were to exercise its purchase option from July 1, 2000 to
September 30, 2000, it would have the right to purchase each share of our
callable common stock for $27.96 per share or an aggregate of $176.8 million. By
comparison, under the merger agreement Dura will purchase each share of our
callable common stock for $13.25 in cash and a warrant to purchase a fractional
share of Dura common stock with a calculated value of between $3.22 and $1.81
per share or an aggregate of between $104.1 million and $95.2 million.
We and Dura incorporate by reference the full text of the merger agreement
and its exhibits, which are attached as Annex A. YOU SHOULD CAREFULLY READ THE
ENTIRE MERGER AGREEMENT.
RELATIONSHIP BETWEEN US AND DURA (SEE PAGE __)
Dura is the holder of 100% of our special common stock which entitles it to
purchase all of our outstanding callable common stock at predetermined prices
ranging from $27.96 to $45.95 per share. As holder of our special common stock,
Dura is also entitled to elect two of the five directors to our board. Until the
expiration of Dura's purchase option on December 31, 2002, Dura's prior written
approval is required, as holder of a majority of our special common stock, in
order for the board to take the following actions:
- the allotment or issue of shares or other securities of us or the creation
of any right to such an allotment or issue;
- the reduction of our authorized capital stock;
2
- the alteration of or any change to the rights, powers, preferences and
restrictions of the special common stock;
- outstanding borrowings of an aggregate of more than $1 million at any one
time;
- the sale or other disposition of or the creation of any lien or liens on
the whole or a material part of our business or assets;
- the declaration or payment of dividends or the making of any other
distributions to our stockholders;
- the merger, consolidation or reorganization of us with or into any other
corporation;
- the sale, liquidation or other disposition of all or substantially all of
our assets;
- the alteration or amendment of the provisions of our certificate of
incorporation containing the stock purchase option and providing for the
election of directors; and
- the adoption, amendment or repeal of our bylaws.
We do not have our own employees or facilities and rely on Dura to provide
these services to us. In addition, Dura holds an option from us to acquire
rights for the use of Spiros technology with albuterol and a second product.
Dura also performs development of the Spiros products.
RECOMMENDATION OF THE SPECIAL COMMITTEE AND OUR BOARD OF DIRECTORS (SEE
PAGE )
A special committee of our board of directors comprised entirely of
directors who are not officers or directors of Dura was formed to consider
strategic alternatives available to us. At a meeting held on March 20, 2000, the
special committee unanimously determined that the merger is fair to you, and in
your best interests and resolved to recommend that our board of directors:
- determine that the merger is fair and in your best interests;
- approve the merger and warrant agreements and the transactions
contemplated thereby; and
- recommend that you vote for adoption of the merger agreement.
On March 20, 2000, our board of directors met, and upon recommendation of
the special committee, with two directors who are also officers of Dura
abstaining, approved and authorized the merger, the merger agreement, the
warrant agreement and the transactions contemplated thereby, and adopted the
determination and recommendation of the special committee.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (SEE PAGE )
When you consider the merger agreement and the recommendation of the special
committee and our board of directors that you vote to adopt the merger
agreement, you should be aware that our officers and directors and their
associates may have interests in the merger that are different from, or in
addition to, your interests.
OPINION OF OUR FINANCIAL ADVISOR (SEE PAGE )
SG Cowen Securities Corporation, financial advisor to the special committee,
delivered its oral opinion on March 20, 2000, later confirmed in writing as of
the same date, that as of that date and on the basis of and subject to the
matters described in the opinion, the consideration to be paid to the holders of
our callable common stock under the merger agreement was fair, from a financial
point of view, to the holders of our callable common stock. The full text of the
written opinion of SG Cowen, which sets forth assumptions made, matters
considered and the scope of the review undertaken, is attached as Annex B. The
opinion is addressed to the special committee and is not a recommendation as to
how the holders of our callable common stock should vote at the special meeting.
YOU SHOULD CAREFULLY READ SG COWEN'S ENTIRE OPINION.
3
CONDITIONS TO THE MERGER (SEE PAGE )
We and Dura will not complete the merger unless a number of conditions are
satisfied or waived by us and Dura. These include:
- approval by our stockholders;
- expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act;
- registration under the Securities Act of 1933 of the warrants and the
shares of Dura common stock which will be issued if the warrants are
exercised; and
- approval for listing on The Nasdaq Stock Market of the warrants and the
shares of Dura common stock which will be issued if the warrants are
exercised.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE )
The merger may be abandoned, at any time before we and Dura complete it and
before or after you approve it, in the following circumstances:
- by our and Dura's mutual written consent;
- by us or Dura, if the merger is not completed before September 30, 2000
through no fault of the party wishing to terminate the merger agreement;
- by us or Dura, if a final decree, law, rule, regulation, order or
injunction prevents the completion of the merger or if Dura is compelled
to dispose of or hold separate any portion of our assets or properties;
- by us, if our board of directors accepts a superior merger proposal in the
manner permitted by the merger agreement;
- by us, if Dura's representations and warranties become untrue or if Dura
breaches its covenants in a material way;
- by Dura, if we take action in furtherance of a competing proposal or
transaction; or
- by Dura, if our representations and warranties become untrue or if we
breach our covenants in a material way.
ACCOUNTING TREATMENT (SEE PAGE )
Dura will account for the merger using the purchase method of accounting
under generally accepted accounting principles.
EXPENSES (SEE PAGE )
We and Dura will bear our respective expenses incurred in connection with
the merger.
THE MERGER WILL BE A TAXABLE TRANSACTION (SEE PAGE )
The merger will be a taxable transaction. Upon completion of the merger, you
generally will recognize capital gain or loss for United States federal income
tax purposes upon receipt of the cash and warrant to purchase shares of Dura
common stock in the merger. You are urged to consult your own tax advisor.
VOTE REQUIRED OF OUR STOCKHOLDERS (SEE PAGE )
The vote required of our stockholders at the special meeting is:
- a majority of the outstanding shares of our callable common stock; and
- the affirmative vote of the holder of the issued and outstanding shares of
our special common stock, all of which are held by Dura.
We and Dura entered into a voting agreement with the holders of
approximately 22% of our outstanding shares of callable common stock. Those
stockholders agreed to vote for the adoption of the merger agreement.
OWNERSHIP OF SHARES BY OUR DIRECTORS AND OFFICERS (SEE PAGE )
As of March 1, 2000, our directors and executive officers owned of record
29,960 shares of our callable common stock, representing less than 1% of our
outstanding shares. Each of our directors and executive officers and Dura
intends to vote to adopt the merger agreement.
4
DISSENTERS' RIGHTS (SEE PAGE )
You have dissenters' rights under Delaware law in connection with the
merger.
COMPARISON OF RIGHTS OF DURA'S STOCKHOLDERS AND OUR STOCKHOLDERS (SEE PAGE )
If the merger is completed, holders of our callable common stock will
receive warrants and, upon exercise of those warrants, will become stockholders
of Dura. As stockholders of Dura, their rights will be governed by the Delaware
General Corporation Law and Dura's certificate of incorporation and bylaws.
REGULATORY MATTERS (SEE PAGE )
We made all required filings under the Hart-Scott-Rodino Antitrust
Improvements Act, and the waiting period under that act was terminated on
June 12, 2000.
STOCK EXCHANGE LISTING (SEE PAGE )
Dura will apply to have the warrants listed on The Nasdaq Stock Market under
the symbol "DURAZ" and Dura's common stock is listed on The Nasdaq Stock Market
under the symbol "DURA."
SELECTED HISTORICAL FINANCIAL DATA
We and Dura are providing the following historical financial information to
aid you in your analysis of the financial aspects of the merger. The information
is only a summary, and you should read it together with Dura's and our financial
statements included elsewhere in this document or incorporated by reference into
this document and other financial information from which this information was
derived.
DURA
The following table sets forth Dura's historical financial data for each
fiscal year from the fiscal year ended December 31, 1995 to the fiscal year
ended December 31, 1999 and for the three months ended March 31, 1999 and 2000.
Net income (loss) per share is computed on the basis described in the notes to
Dura's consolidated financial statements.
You should read the following selected consolidated financial data with the
consolidated financial statements and the notes to those financial statements
and "Management's discussion and analysis of financial condition and results of
operations" of Dura incorporated by reference into this document. The statement
of operations data below for each of the three years in the period ended
December 31, 1999, and the balance sheet data at December 31, 1998 and 1999, are
derived from, and are qualified by reference to, Dura's audited consolidated
financial statements which are incorporated by reference into this document and
should be read in conjunction with those financial statements and related notes.
The statement of operations data for the fiscal years ended December 31, 1995
and 1996 are derived from audited financial statements of Dura not included or
incorporated by reference into this document. The statement of operations data
for the three months ended March 31, 1999 and 2000 and the balance sheet data at
March 31, 2000 are derived from unaudited consolidated financial statements of
Dura which are incorporated by reference into this document and should be read
in conjunction with those financial statements and related notes. Please note
that historical results are not necessarily indicative of the results to be
expected in the future.
5
The numbers in the table below are in thousands, except per share data.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Total revenues..................... $ 51,502 $104,119 $181,323 $199,152 $301,426 $ 35,799 $ 71,247
Operating income (loss)............ $(37,252) $ 21,647 $(78,017) $ (7,409) $ 49,057 $ 11,975 $ 13,904
Net income (loss).................. $(35,778) $ 24,328 $(84,692) $ 2,733 $ 30,004 $ 7,766 $ 12,458
Net income (loss) per share:
Basic............................ $ (1.53) $ 0.68 $ (1.93) $ 0.06 $ 0.68 $ 0.18 $ 0.28
Diluted.......................... $ (1.53) $ 0.60 $ (1.93) $ 0.06 $ 0.66 $ 0.17 $ 0.27
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments........... $ 67,820 $240,345 $385,221 $269,412 $274,413 $299,237
Working capital.................... $ 59,105 $219,864 $392,870 $248,237 $255,925 $269,425
Total assets....................... $143,997 $504,670 $774,880 $825,459 $883,474 $911,664
Long-term obligations.............. $ 15,427 $ 6,670 $297,064 $352,839 $354,154 $354,879
Stockholders' equity............... $109,097 $443,577 $429,277 $410,372 $441,739 $456,204
Dura's selected consolidated financial data reflect various product rights
and company acquisitions, including the following:
- the Entex-Registered Trademark- product line, Ceclor-Registered Trademark-
CD and Keftab-Registered Trademark- in 1996;
- Nasarel-Registered Trademark- and Nasalide-Registered Trademark- in 1997;
- Myambutol-Registered Trademark- in 1998; and
- Maxipime-Registered Trademark- and Azactam-Registered Trademark- in 1998.
Please refer to note 4 of the notes to Dura's consolidated financial
statements incorporated by reference into this document for a more detailed
description of the recent product rights and company acquisitions.
In 1995, 1997 and 1998, Dura incurred charges for acquired in-process
technology, purchase options and other nonrecurring items totaling
$43.8 million, $137.6 million and $29.3 million, respectively, as described in
note 12 of the notes to Dura's consolidated financial statements incorporated by
reference into this document. In addition, the nonrecurring consolidation of DJ
Pharma, Inc.'s operations in 1998 reduced net income by $4.9 million. In 1999,
Dura incurred a $3.5 million charge for the settlement of the Scandipharm
litigation. For a discussion of this charge, please see note 13 of the notes to
Dura's consolidated financial statements incorporated by reference into this
document. If these charges were excluded, Dura would have reported net income of
$8.0 million, or $0.34 per share (basic) and $0.28 per share (diluted) for 1995,
net income of $47.4 million, or $1.08 per share (basic) and $0.99 per share
(diluted) for 1997, net income of $25.5 million, or $0.55 per share (basic) and
$0.53 per share (diluted) for 1998, and net income $32.4 million, or $0.73 per
share (basic) and $0.71 per share (diluted) for 1999.
SPIROS CORP. II
The following selected financial data should be read with our financial
statements and the notes to those statements and "Our Management's discussion
and analysis of financial condition and results of operations" included
elsewhere in this document. The statement of operations data for the period
September 23, 1997 (date of incorporation) through December 31, 1997 and the
year ended December 31, 1998 and the balance sheet data at December 31, 1998,
are derived from our financial statements which have been audited by Deloitte &
Touche LLP, our independent auditors during that time period. The balance sheet
data at December 31, 1997 are derived from our audited financial statements. The
statement of operations data for the year ended December 31, 1999 and the
balance sheet data at December 31, 1999, are derived from our financial
statements which have been audited by Ernst & Young LLP, our current independent
auditors, and are included elsewhere in this
6
document. The statement of operations data for the three months ended March 31,
1999 and 2000 and the period September 23, 1997 (date of incorporation) through
March 31, 2000, and the balance sheet data at March 31, 2000 are derived from
unaudited financial statements of Spiros Corp. II which are included elsewhere
in this document. Please note that historical results are not necessarily
indicative of the results to be expected in the future.
The numbers in the table below are in thousands, except per share data.
SEPTEMBER 23, 1997 THREE MONTHS SEPTEMBER 23, 1997
(DATE OF YEAR ENDED ENDED (DATE OF
INCORPORATION) DECEMBER 31, MARCH 31, INCORPORATION)
THROUGH ------------------- ------------------- THROUGH
DECEMBER 31, 1997 1998 1999 1999 2000 MARCH 31, 2000
------------------- -------- -------- -------- -------- -------------------
STATEMENT OF OPERATIONS DATA:
Operating loss............... $ (7,146) $(51,825) $(60,405) $(13,593) $(15,250) $(134,626)
Interest income.............. $ 222 $ 8,239 $ 5,341 $ 1,587 $ 875 $ 14,677
Net loss..................... $ (6,924) $(43,793) $(55,064) $(12,006) $(14,375) $(120,156)
Net loss per share:
Basic and diluted.......... $ (1.09) $ (6.92) $ (8.71) $ (1.90) $ (2.27) $ (19.00)
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments..... $170,506 $123,604 $ 71,043 $ 55,820
Working capital.............. $162,081 $118,918 $ 64,246 $ 50,106
Total assets................. $170,506 $123,796 $ 71,139 $ 55,933
Stockholders' equity......... $162,081 $118,918 $ 64,246 $ 50,106
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT
PER SHARE DATA)
The following unaudited pro forma condensed consolidated financial
information illustrates the effects of the merger as if it occurred as of
March 31, 2000 for the condensed consolidated balance sheet and as of
January 1, 1999 for the condensed consolidated statement of operations. These
unaudited pro forma condensed consolidated financial statements have been
prepared by Dura's management based on Dura's and our historical financial
statements and on the assumptions and adjustments as discussed in the
accompanying notes to the pro forma condensed 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
our acquired assets. 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. Those pro forma
adjustments will change based upon our future operations and expenditure of cash
through the completion of the merger. The unaudited pro forma condensed
consolidated financial statements are not necessarily indicative of what actual
results of operations would have been for the period had the acquisition
occurred on the date indicated. In addition, the pro forma financial statements
do not purport to indicate the results of future operations or the financial
position of Dura from the date of the merger forward.
7
PRO FORMA PRO FORMA
DURA SPIROS CORP. II ADJUSTMENTS CONSOLIDATED
-------- ---------------- ----------- ------------
YEAR ENDED DECEMBER 31, 1999:
Total revenues................................ $301,426 $(55,496) $245,930
Operating income (loss)....................... $ 49,057 $(60,405) $ 3,327 $ (8,021)
Net income (loss)............................. $ 30,004 $(55,064) $ 17,771 $ (7,289)
Net income (loss) per share:
Basic....................................... $ 0.68 $ (8.71) $ (0.17)
Diluted..................................... $ 0.66 $ (8.71) $ (0.17)
THREE MONTHS ENDED MARCH 31, 2000:
Total revenues................................ $ 85,779 $(13,828) $ 71,951
Operating income (loss)....................... $ 13,904 $(15,250) $ 855 $ (491)
Net income (loss)............................. $ 12,458 $(14,375) $ 4,912 $ 2,995
Net income (loss) per share:
Basic....................................... $ 0.28 $ (2.27) $ 0.07
Diluted..................................... $ 0.27 $ (2.27) $ 0.06
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET AS OF MARCH 31, 2000:
Cash, cash equivalents and short-term
investments................................. $299,237 $ 55,820 $(89,706) $265,361
Working capital............................... $269,425 $ 50,106 $(89,706) $229,825
Total assets.................................. $911,664 $ 55,933 $(95,400) $872,197
Long-term obligations......................... $354,879 $354,879
Stockholders' equity.......................... $456,204 $ 50,106 $(89,706) $416,604
The adjustment to total revenues relates to the elimination of intercompany
revenue from Spiros Corp. II. This adjustment is substantially offset by a
reduction in operating expenses relating to intercompany development expenses.
The adjustment to net income relates primarily to a reduction of $14.4 million
for the year ended December 31, 1999 and $4.1 million for the three months ended
March 31, 2000 to the pro forma consolidated provision for income taxes
resulting from the recognition of the income tax benefit on Spiros Corp. II's
pre-tax loss. This tax benefit was not recognized by Spiros Corp. II on a
stand-alone basis due to the uncertainty of its ability to generate future
taxable income necessary to realize this benefit. However, when considered on a
combined basis, the amount of pre-tax income generated by Dura was adequate to
utilize a portion of the tax benefit from pre-tax losses of Spiros Corp. II.
MARKET PRICE AND DIVIDEND INFORMATION (SEE PAGE )
On March 20, 2000, the last trading day before announcement of the execution
and delivery of the merger agreement, the closing prices per share of Dura
common stock and our callable common stock on The Nasdaq Stock Market were
$13.188 and $12.625, respectively. On , 2000, the latest practicable
trading day before the printing of this document, the closing prices per share
of Dura common stock and our callable common stock on The Nasdaq Stock Market
were $ and $ , respectively.
Dura has never declared or paid cash dividends on its capital stock. We have
never declared or paid cash dividends on our capital stock. Dura currently
intends to retain all available funds for use in its business and does not
anticipate paying any cash dividends in the foreseeable future. Any future
determination relating to Dura's dividend policy will be made at the discretion
of Dura's board of directors and will depend on a number of factors, including
future earnings, capital requirements, financial condition and future prospects
and other factors Dura's board of directors may deem relevant.
COMPARATIVE PER SHARE DATA
The following tables present unaudited historical and pro forma per share
data that reflect the completion of the merger based upon Dura's and our
historical financial statements.
8
The pro forma adjustments are based upon available information and assumptions
Dura believes are reasonable in the circumstances. The pro forma data is not
necessarily indicative of the results of future operations or the actual results
that may have occurred had the merger been completed at the beginning of the
periods presented. You should read the data presented below together with the
historical financial statements, including applicable notes, and the unaudited
pro forma condensed combined financial data.
The historical book value per share was calculated by dividing shareholders'
equity by the number of shares of common stock outstanding at the end of each
period. The pro forma combined book value per share was calculated by dividing
pro forma combined shareholders' equity by the number of Dura common shares
outstanding at the end of the period and does not assume the exercise of any
warrants. This data should be read in conjunction with the selected historical
financial data, the unaudited pro forma combined condensed financial information
and Dura's and our separate historical financial statements and notes to the
financial statements, included elsewhere in this document or incorporated by
reference into this document.
DURA SPIROS CORP. II PRO FORMA
ACTUAL ACTUAL CONSOLIDATED
-------- ---------------- ------------
YEAR ENDED AND AT DECEMBER 31, 1999:
Net income (loss) per common share:
Basic.................................................... $ 0.68 $(8.71) $(0.17)
Diluted.................................................. $ 0.66 $(8.71) $(0.17)
Cash dividend per common share............................. $ -- $ -- $ --
Book value per common share................................ $ 9.99 $10.16 $ 9.43
THREE MONTHS ENDED AND AT MARCH 31, 2000:
Net income (loss) per common share:
Basic.................................................... $ 0.28 $(2.27) $ 0.10
Diluted.................................................. $ 0.27 $(2.27) $ 0.10
Cash dividend per common share............................. $ -- $ -- $ --
Book value per common share................................ $10.29 $ 7.92 $ 9.42
WHERE YOU CAN FIND MORE INFORMATION
We and Dura each file annual, quarterly and special reports, proxy
statements and other information with the SEC.
You may read and copy any reports, statements or other information on file
at the SEC's public reference room located at 450 Fifth Street, NW, Washington,
D.C. 20549 or at one of the SEC's other public reference rooms in New York City
and Chicago. Please call the SEC at 1-800-SEC-0330 for further information on
the public reference rooms. SEC filings are also available to the public from
commercial document retrieval services and at the Internet world wide web site
maintained by the SEC at WWW.SEC.GOV.
Dura has filed a registration statement on Form S-4 to register with the SEC
the warrants to purchase shares of Dura common stock which you will receive in
the merger and the shares of common stock underlying the warrants. This document
is Dura's prospectus and is part of that registration statement on Form S-4.
You may obtain any documents we or Dura file with the SEC through the SEC's
public reference rooms or the SEC's internet world wide web site described
above. Documents are also available from Dura without charge and may be obtained
by a request in writing or by telephone at the following address:
Dura Pharmaceuticals, Inc.
7475 Lusk Boulevard
San Diego, California 92121
Attention: Corporate Secretary
(800) 859-8585
If you would like to request documents from Dura, please do so by
, 2000 to receive them before the special meeting.
9
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AS WELL AS OTHER
INFORMATION PROVIDED TO YOU IN AND INCORPORATED BY REFERENCE IN THIS DOCUMENT IN
DECIDING HOW TO VOTE, INCLUDING INFORMATION IN THE SECTION ENTITLED "INFORMATION
REGARDING FORWARD LOOKING STATEMENTS." THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW ARE NOT THE ONLY ONES FACING DURA AND US. ADDITIONAL RISKS AND
UNCERTAINTIES NOT PRESENTLY KNOWN TO DURA OR US OR THAT WE AND DURA CURRENTLY
BELIEVE ARE IMMATERIAL MAY ALSO IMPAIR DURA'S AND OUR RESPECTIVE OR COMBINED
BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, DURA'S AND
OUR BUSINESSES, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY
ADVERSELY AFFECTED, THE VALUE OF THE DURA COMMON STOCK COULD DECLINE, AND YOU
MAY LOSE ALL OR PART OF YOUR INVESTMENT.
WE AND DURA FACE RISKS ASSOCIATED WITH THE MERGER
THE MERGER WILL SIGNIFICANTLY REDUCE DURA'S CONTRACT REVENUES AND WILL LIKELY
RESULT IN A MATERIAL CHARGE TO ITS EARNINGS IN THE PERIOD IN WHICH THE MERGER
OCCURS.
Dura records contract revenue for payments we make for development costs
that Dura incurs on our behalf and for technology access fees. Dura's contract
revenues from us totaled $55.5 million for the year ended December 31, 1999. The
merger will result in a significant reduction of contract revenue to Dura. In
addition, Dura expects that a material charge for acquired in-process technology
will likely be recorded in the period in which the merger is completed.
THE FRACTIONAL SHARES OF DURA COMMON STOCK UNDERLYING EACH WARRANT WILL VARY AS
DURA'S STOCK PRICE CHANGES AND YOU MAY NOT BE SURE HOW MANY SHARES WILL BE
ISSUABLE UNDER EACH WARRANT UNTIL AFTER YOU HAVE CAST YOUR VOTE.
Under the merger agreement, each share of our callable common stock will be
converted into the right to receive $13.25 in cash and a warrant to purchase a
fractional share of Dura common stock. The fraction of a share of Dura common
stock issuable under the warrant will be determined based on the average closing
price of Dura common stock for the 10 trading days prior to the special meeting
and will result in a calculated value, using the Black-Scholes option pricing
model, for each warrant of between $3.22 and $1.81. As of , 2000, the
last trading day before the printing of this document, the fraction of a share
purchasable under each warrant would be with a Black-Scholes calculated
value of . There can be no assurance, however, that the fraction issuable
will be the same at the closing date or that the market price of the warrant
will equal the Black-Scholes calculated value of the warrant. The price of Dura
common stock at the date of the special meeting may vary from the price on the
date of this document and on the date of the closing of the merger and that
variance could affect the value of the warrant. The trading price of Dura's
common stock may vary because of:
- changes in Dura's or our business, operations or prospects;
- market assessments of the likelihood that the merger will be completed;
- the timing of the completion of the merger;
- the prospects of post-merger operations;
- regulatory considerations; and
- general market and economic conditions and other factors.
We and Dura urge you to obtain the current market price of Dura's common
stock.
10
FAILURE TO COMPLETE THE MERGER COULD NEGATIVELY IMPACT OUR STOCK PRICE AND
FUTURE BUSINESS AND OPERATIONS.
If the merger is not completed for any reason, we may be subject to a number
of material risks, including the following:
- our existing working capital and expected interest revenue will not be
sufficient to fund our cash requirements through the end of 2000;
- raising additional cash to fund our ongoing activities is likely to be
very difficult in light of the contractual arrangements between us and
Dura;
- the price of our callable common stock may decline to the extent that the
current market price of our callable common stock reflects a market
assumption that the merger will be completed; and
- various costs of the merger, such as legal and accounting fees and the
expenses and fairness opinion fees of our financial advisor, must be paid
even if the merger is not completed.
Further, if the merger is terminated and our board of directors determines
to seek another merger or business combination, we may not be able to find a
partner willing to pay an equivalent or more attractive price than the price to
be paid in the merger.
DURA FACES RISKS ASSOCIATED WITH ITS OPERATIONS THAT WILL NOT BE REDUCED BY THE
MERGER
BEFORE DURA CAN MARKET ANY PRODUCT, INCLUDING ANY SPIROS PRODUCT, DURA WILL HAVE
TO OBTAIN REQUIRED GOVERNMENTAL APPROVALS, WHICH IS A DIFFICULT AND TIME
CONSUMING PROCESS, AND 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. 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. The FDA may never approve any of the products currently in
development by Dura or in collaboration with third parties. For example, Dura is
currently conducting clinical trials of Beclomethasone Spiros and Budesonide
Spiros. If the clinical trials of either of these products are not successful or
if Dura does not receive FDA approval for these products at the conclusion of
the clinical trials, it will prevent or at least delay sales of these products
and negatively affect Dura's revenues.
ALTERNATIVE SUPPLIERS TO DURA'S THIRD-PARTY MANUFACTURERS MAY NOT BE AVAILABLE
ON A TIMELY BASIS, WHICH COULD IMPAIR DURA'S ABILITY TO MEET ITS SHIPPING
REQUIREMENTS AND RESULT IN REDUCED PHARMACEUTICAL SALES.
Dura does not have the capability to manufacture the pharmaceutical products
it currently sells. As a result, Dura is dependent on third-party contract
manufacturers for the supply of all of its 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 Dura to secure alternative
sources of supply in a timely manner. This would impair Dura's ability to ship
product to its customers and would result in reduced pharmaceutical sales and
increased expenses associated with identifying and qualifying alternate
manufacturers.
11
DURA INTENDS TO CONTINUE TO PURSUE ITS STRATEGY OF ACQUIRING COMPLEMENTARY
PRODUCTS AND LATE-STAGE PRODUCT DEVELOPMENT CANDIDATES, WHICH, IF SUCCESSFUL,
COULD RESULT IN SIGNIFICANT CHARGES TO EARNINGS AND REQUIRE THE USE OF CAPITAL
RESOURCES.
As part of its business strategy, Dura intends to continue to pursue the
acquisition of complementary products and late-stage product development
candidates. These acquisitions could result in significant charges to earnings
in the related period as well as require the use of a large amount of Dura's
available capital resources. For example, in December 1998, we acquired
exclusive U.S. distribution rights for the patented hospital antibiotic products
Maxipime-Registered Trademark- IV/IM (cefepime HCl) and
Azactam-Registered Trademark- IV/IM (aztreonam) from Bristol-Myers Squibb
Company for an initial payment of $60 million, a payment of $70 million due in
2003 and additional contingent payment amounts. Depending on the acquisition
opportunities available and Dura's use of existing funds to satisfy existing
capital and operating needs, Dura may need to raise additional funds to finance
these transactions. If adequate funds are not available when needed on terms
acceptable to Dura, its ability to complete acquisitions could be limited. Dura
may not have sufficient funds to develop any late-stage product development
candidates that it may acquire, any development it conducts may not be
successful and any funds it spends on product development may reduce its
earnings below the levels expected by securities analysts. Further,
reimbursement from third-party payors may not be available to enable Dura to
achieve market acceptance of any products it may acquire or develop or to
maintain price levels sufficient to realize an appropriate return on its
investment in these products.
DURA COULD HAVE DIFFICULTY COMMERCIALIZING THE SPIROS PRODUCTS IF EITHER IT OR
THE THIRD-PARTY MANUFACTURERS IT RELIES ON DO NOT SUCCESSFULLY EXPAND THEIR
MANUFACTURING CAPABILITY AND COMPLY WITH GOVERNMENT REGULATIONS.
Dura will need to significantly expand its current manufacturing operations
and comply with regulations prescribed by various regulatory agencies to achieve
the quality and required levels of production of Spiros products to be
commercially successful. In addition, Dura's 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
other governmental authorities. Dura intends to utilize third parties to produce
components of and to assemble the Spiros inhaler. Those third parties have only
produced limited quantities of components and assembled limited numbers of
inhalers. The 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. Those third parties may not be successful in
attaining acceptable service levels or meeting regulatory requirements which
would have an adverse effect on Dura's ability to commercialize the Spiros
products.
IF DURA LOSES KEY PERSONNEL OR IS UNABLE TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL AS NECESSARY, IT COULD IMPAIR ITS OPERATIONS AND DELAY ITS PRODUCT
DEVELOPMENT PROGRAMS.
Dura's success depends on the principal members of its scientific and
management staff. If Dura loses the services of one or more of these people, it
may be unable to achieve its development objectives.
None of Dura's employees, other than Cam L. Garner, Dura's chairman and
chief executive officer, Robert S. Whitehead, Dura's president and chief
operating officer, and David S. Kabakoff, Ph.D., president, Dura Technologies,
is currently employed under an employment contract. Each of Mr. Garner, Mr.
Whitehead and Dr. Kabakoff are employed under separate letter agreements with
expiration dates of May 31, 2001, July 1, 2000 and April 30, 2001, respectively.
Each contract automatically renews for successive one-year periods.
Dura may not be able to recruit and retain management and qualified
scientific personnel to perform research and development work in the future due
to intense competition for personnel among
12
pharmaceutical and other technology-based businesses, universities and research
institutions, particularly in the San Diego area. Recruiting and retaining
experienced sales personnel is equally difficult but essential to the success of
Dura's operations. As of May 31, 2000, Dura had 975 employees, of which
approximately 225 were in research and development and approximately 550 were in
sales and marketing.
DURA'S HOSPITAL SALES FORCE IS NEW AND MAY NOT BE ABLE TO EFFECTIVELY MARKET
MAXIPIME AND AZACTAM DIRECTLY TO HOSPITALS, WHICH COULD RESULT IN REDUCED SALES
OF THESE PRODUCTS.
Effective January 1, 1999, Dura acquired the rights to Maxipime and Azactam,
its first acquisition of products used in hospitals. Under a co-promotion
agreement with Bristol-Myers Squibb Company, Bristol-Myers Squibb Company's
hospital sales force promoted the products during 1999, while Dura built its
hospital sales force. Beginning in 2000, Dura assumed full responsibility for
promoting these products. Dura has had no previous experience promoting and
selling hospital products. Dura may not be able to generate the same volume of
sales with respect to these products as Bristol-Myers Squibb Company. If Dura is
not able to effectively promote these products solely through its own hospital
sales force, its pharmaceutical sales could be reduced.
DURA MAY HAVE TO REFINANCE $287.5 MILLION OF OUTSTANDING NOTES ON TERMS THAT MAY
NOT BE ATTRACTIVE.
Dura issued $287.5 million principal amount of 3 1/2% convertible
subordinated notes due July 2002. Dura may desire to refinance the notes at a
time when it is not able to do so or on terms that are not attractive to Dura.
Any inability to refinance the notes on attractive terms would increase Dura's
borrowing costs and reduce its earnings, or result in significant dilution to
its stockholders and decrease the market value of its common stock.
SEASONALITY AND THE TIMING AND SEVERITY OF THE WINTER COLD AND FLU SEASON COULD
HAVE AN ADVERSE EFFECT ON DURA'S OPERATING RESULTS.
Historically, as a result of the winter cold and flu season, industry-wide
demand for respiratory products such as those sold by Dura has been stronger in
the first and fourth quarters than in the second and third quarters of the year.
In addition, variations in the timing and severity of the winter cold and flu
season have influenced Dura's results of operations in the past and may
influence them again in the future. For example, the short flu season during the
first quarter of 2000 negatively impacted sales of Ceclor CD.
COMPETITION FOR THE ACQUISITION OF RIGHTS TO NEW PRODUCTS AND TECHNOLOGIES MAY
PREVENT DURA FROM ACHIEVING TARGETED GROWTH RATES.
Dura's strategy for growth is dependent, in part, on its ability to continue
to acquire rights to new products and technologies, such as the December 1998
acquisition of exclusive distribution rights to Maxipime and Azactam. The
failure to successfully acquire, develop or market new products or technologies
would limit the future growth of Dura's business. Other companies, including
those with substantially greater resources, are competing with Dura for the
rights to these products. Dura may not be able to acquire additional products or
technologies on acceptable terms, or at all.
GROSS MARGINS ON DURA'S PHARMACEUTICAL PRODUCTS MAY DECREASE AS A RESULT OF
COMPETITIVE PRESSURES.
Dura does not have proprietary protection for several of the products it
sells, and other pharmaceutical companies sell substitutes for such products. In
addition, the average selling prices for many of Dura's products may decline
over time due to competitive and reimbursement pressures. Dura may not be
successful in any efforts it takes to mitigate the effect of a decline in
average selling prices. Dura's commercial success will depend in part on the
prices that third-party healthcare payors, such as
13
government and private health insurers and managed care organizations, are
willing to pay for its 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 Dura's average selling prices would also
reduce the gross margins it achieves and negatively impact Dura's business.
DURA'S INABILITY TO OBTAIN PATENTS AND PROTECT ITS PROPRIETARY RIGHTS COULD HAVE
A DETRIMENTAL EFFECT ON DURA'S COMMERCIAL SUCCESS.
Dura's ability to obtain patents on current or future products or
technologies, defend its 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 from the applications Dura has filed. Even
if issued or licensed to Dura, patents may not be enforceable, provide
substantial protection from competition or be of commercial benefit to Dura.
Even if all these are true, Dura may not possess the financial resources
necessary to enforce or defend any patent rights it obtains. Dura's commercial
success will also depend upon avoiding the infringement of patents issued to
competitors and upon maintaining the technology licenses upon which specified
Dura products are based. Litigation, which is costly, may be necessary to
enforce Dura's patent and license rights or to determine the scope and validity
of proprietary rights of third parties. If any of its products or technologies
are found to infringe upon patents or other rights owned by third parties, Dura
could be required to obtain a license to continue to manufacture or market such
products or technologies. Licenses to such patent rights may not be available to
Dura on commercially reasonable terms, or at all. If it does not obtain such
licenses, Dura could encounter delays in marketing affected products or
technologies or Dura could find that the development, manufacture or sale of
products requiring such licenses is not possible.
DURA IS INVOLVED IN A LAWSUIT AND CANNOT PREDICT THE ULTIMATE OUTCOME OR
POSSIBLE LOSS THAT COULD RESULT FROM THE LAWSUIT.
In January 1999, several class action suits were filed against Dura and a
number of current or former officers and directors of Dura in the United States
District Court for the Southern District of California. The lawsuits, which have
been consolidated into one action, allege violations of the federal securities
laws, and purport to seek damages on behalf of a class of shareholders who
purchased Dura's common stock during a defined period. The ultimate outcome of
this lawsuit and any other suits in which Dura may become involved cannot be
predicted. An adverse outcome in any of these actions could require Dura to make
a significant cash payment and could reduce Dura's earnings.
IF DURA BECOMES SUBJECT TO PRODUCT LIABILITY CLAIMS, IT MAY RESULT IN REDUCED
DEMAND FOR ITS PRODUCTS OR DAMAGES THAT EXCEED ITS INSURANCE COVERAGE.
Dura faces an inherent business risk of exposure to product liability claims
in the event that the use of its products or technologies is alleged to have
resulted in adverse effects. Such liability might result from claims made
directly by healthcare institutions, contract laboratories or others selling or
using such products. Dura currently maintains product liability insurance
coverage of $30 million; however, any product liability claim in excess of its
insurance coverage would have to be paid out of our cash reserves which would
reduce our capital resources. The level or breadth of insurance coverage that
Dura currently maintains may not be sufficient to fully cover potential claims.
Dura currently has no plans to expand or increase its product liability
insurance coverage. Adequate insurance coverage may not be available in the
future at acceptable costs, if at all, or in sufficient amounts to protect Dura
against any such liability.
14
DURA FACES RISKS ASSOCIATED WITH ITS MARKET
MANY POTENTIAL COMPETITORS WHO HAVE GREATER RESOURCES AND EXPERIENCE THAN DURA
MAY DEVELOP PRODUCTS AND TECHNOLOGIES THAT MAKE DURA'S PRODUCTS AND TECHNOLOGIES
OBSOLETE.
Many companies, including large pharmaceutical firms with financial and
marketing resources and development capabilities substantially greater than
Dura's, are developing, marketing and selling products that compete with those
that Dura offers or plans to offer. Dura's current competitors include
Bristol-Meyers Squibb Company, Schering Plough, Hoffman LaRoche, American Home
Products and Glaxo Wellcome. Dura's failure to effectively respond to the
competitive pressures of its industry would have an adverse effect on its
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 Dura's current or
future products. The industry is characterized by rapid technological change,
and competitors may develop their products more rapidly than Dura does.
Competitors may also be able to complete the regulatory process sooner, and
therefore, may begin to market their products in advance of Dura's products.
SOME OF DURA'S CHARTER AND OTHER CONTRACTUAL PROVISIONS MAY PREVENT A CHANGE OF
CONTROL THAT COULD BE BENEFICIAL TO DURA'S STOCKHOLDERS.
Some provisions of Dura's charter documents, outstanding securities,
including warrants, options and Dura's notes, specified contracts of Dura,
including the executive severance agreements, and Dura's stockholder rights plan
could make it more difficult for a third party to acquire Dura without approval
of its board of directors. As a result of these provisions, Dura could delay,
deter or prevent a takeover attempt or third party acquisition that its
stockholders consider to be in their best interests, including a takeover
attempt that results in a premium over the market price for the shares held by
its stockholders.
DURA'S STOCK PRICE HISTORICALLY HAS BEEN VOLATILE, WHICH MAY MAKE IT MORE
DIFFICULT FOR YOU TO RESELL DURA'S COMMON STOCK WHEN YOU WANT AT PRICES YOU FIND
ATTRACTIVE.
The market prices for securities of emerging companies, including Dura's,
have historically been highly volatile. For example, from May 1998 to June 2000,
Dura's common stock has closed as high as $28.50 per share and as low as $8.19
per share. Factors contributing to this volatility have included:
- Dura's financial results;
- the results of clinical testing of Dura's or its competitors' products;
- regulatory developments for Dura's or its competitors' products;
- technological innovations for Dura's or its competitors' products;
- new commercial products introduced by its competitors;
- changes to government regulations;
- regulatory decisions on commercialization of products;
- developments concerning proprietary rights; and
- Dura's failure to achieve securities analysts' expectations concerning its
earnings per share or revenues.
15
SPECIAL FACTORS
BACKGROUND OF THE MERGER
We were incorporated in Delaware on September 23, 1997 to continue to
develop the Spiros technology, a dry powder pulmonary drug delivery system, and
to conduct formulation work, clinical trials and commercialization for specified
leading asthma and chronic obstructive pulmonary disease drugs for use with
Spiros. We commenced operations on December 22, 1997 when we and Dura completed
an initial public offering of 6,325,000 units, each unit consisting of one share
of our callable common stock and one warrant to purchase one-fourth of one share
of Dura's common stock. The offering resulted in net proceeds to us of
approximately $94 million. Concurrent with the offering, Dura contributed
$75 million to us. Substantially all of these funds have been and are expected
to be paid to Dura for the development and commercialization of Spiros and the
use of Spiros with specified drugs under our agreements with Dura.
In connection with the initial public offering, we entered into a technology
license agreement with Dura. Dura granted us an exclusive, worldwide, perpetual
royalty-bearing license to use the Spiros technology owned by Dura with the
drugs albuterol, beclomethasone, ipratropium, budesonide and a combination of
albuterol and ipratropium. We also entered into a series of agreements with Dura
which provide for the development, marketing and manufacturing of Spiros
technology with specified compounds and for the provision of general and
administrative services by Dura. These agreements are described in greater
detail under "The merger--relationship between us and Dura" beginning on page
. Dura conducts all of our development activities under these agreements, and
we therefore do not maintain any research staff or occupy any research
facilities.
Dura also owns 100% of our special common stock. As the holder of our
special common stock, Dura has an irrevocable option to purchase all, but not
less than all, of the issued and outstanding shares of our callable common stock
at predetermined prices. Dura may exercise the option at any time through the
earlier of:
- December 31, 2002;
- the 90th day after the date we provide Dura with our quarterly financial
statements 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 Spiros technology, but in no event beyond
December 31, 2002; or
- upon termination of the technology license, development or manufacturing
agreements with Dura.
The purchase option exercise price is $27.96 per share through
September 30, 2000, and increases on a quarterly basis to $45.95 per share
through December 31, 2002. The purchase price may be paid, at Dura's discretion,
in cash, shares of Dura common stock, or any combination thereof.
Dura has from time to time been considering potential strategic alternatives
with us. During the fourth quarter of 1999, based on the expectation that our
capital would be exhausted some time during the second half of 2000, Dura's
management determined that it was the appropriate time to evaluate the
acquisition of the rights to use the specified drugs with the Spiros technology
that Dura had initially licensed to us. Dura's management concluded, however,
that in light of the difficulties and delays we have encountered in our
development programs, as well as changes in the markets for our products, its
purchase options negotiated during our initial public offering represented a
significant premium to any currently expected value of our products under
development. Dura's management also analyzed the potential market for Albuterol
Spiros-TM- and concluded that expected market conditions would not improve to
support commercialization of that product in the current Spiros system.
16
In the fourth quarter of 1999, Dura's management discussed the possibility
of acquiring us at a price reflective of the difficulties and delays we have
encountered in our development program. At a December 9, 1999, meeting of Dura's
board of directors, members of Dura's management team and representatives of
Merrill Lynch made preliminary presentations regarding our business and
prospects and discussed potential strategic transactions with us. These
potential transactions included exercising Dura's option to purchase all of our
callable common stock on the originally negotiated terms, both in the near term
and at an unspecified future date, making an additional capital contribution to
us to enable us to continue to operate past 2000, as well as attempting to
negotiate the purchase of all of our callable common stock at a price
significantly below the purchase option price.
At our board's regularly scheduled meeting on December 13, 1999,
Mr. Garner, who serves as one of our directors and chairman of the board and
chief executive officer of Dura, provided our board with a presentation of:
- Dura's current assessment of the status of the Spiros products being
developed by us, which included the observation that our development
programs for the products were either taking longer than Dura expected at
the time of our initial public offering or, in the case of Albuterol, were
no longer commercially feasible in the current Spiros system in Dura's
view;
- the amount of our remaining cash and cash equivalents to fund additional
work by Dura under the development programs;
- the expected future funding required for the products being developed in
those programs to be commercialized, which in Dura's view significantly
exceeded our remaining funds;
- the cost to Dura to execute its option to acquire our callable common
stock at the prices negotiated during our initial public offering which,
when added to the remaining development costs for our products, greatly
reduced the anticipated return on the investment Dura would be making to
acquire and commercialize the products; and
- the expected future funding needs of Dura.
Dr. Kabakoff, our chairman of the board, chief executive officer and
president, who also serves as president, Dura Technologies, informed our board
that in light of the remaining funds available to us, which at the time totaled
approximately $75 million, and the projected costs to complete the remaining
development work for the Spiros products, which significantly exceeded our
available funds, he understood that Dura had begun considering its strategic
alternatives with us. Dr. Kabakoff suggested that, although no decision had been
made about any particular strategic action and no action had been authorized by
Dura's board of directors, it might be appropriate for our board to form a
special committee of independent directors to evaluate and consider strategic
alternatives, including any proposal from Dura. Dr. Kabakoff also recommended
that our board allow the special committee to engage independent legal and
financial advisors to assist in its evaluation.
In response to Dr. Kabakoff's suggestion, our board established a special
committee of independent members of the board, consisting of William H.
Rastetter, Ph.D., chairman of the special committee, Alain B. Schreiber, M.D.
and Sol Lizerbram, RPh., D.O., none of whom are directors or officers of Dura.
Our board also authorized the special committee to engage independent legal and
financial advisors.
From December 13 to December 22, 1999, the special committee conducted
interviews with several independent legal and financial advisors. The special
committee decided to engage Skadden, Arps, Slate, Meagher & Flom LLP and
Baker & McKenzie as the special committee's independent legal advisors and
PaineWebber Incorporated as its financial advisor, a representative of which had
prior relevant experience with similarly structured companies.
17
On December 22, 1999, the special committee held a meeting at which
representatives from Skadden, Arps were present. At that time, the special
committee approved the retention of Skadden, Arps and Baker & McKenzie as the
special committee's legal advisors and PaineWebber as its financial advisor. The
special committee then reviewed our current and projected financial status and
the nature of our relationship with Dura. The special committee requested that
Skadden, Arps review the contractual arrangements between Dura and us and report
on the various alternatives available to us in part because of the terms of
those agreements. The special committee then discussed the next steps, timing
issues and the roles of various parties in the consideration of our strategic
alternatives.
Between December 22, 1999 and January 5, 2000, Skadden, Arps reviewed the
contractual arrangements between Dura and us. Both Skadden, Arps and PaineWebber
requested information from Dura to assist them with formulating their advice to
the special committee regarding the strategic alternatives available to us. No
discussions took place between Dura and us during this time.
In a telephone call on January 10, 2000, Dr. Kabakoff informed
Dr. Rastetter that Dura did not have any definitive plans with respect to its
relationship with us at that time. Dr. Kabakoff noted, however, that Dura was
still exploring the feasibility of making an acquisition proposal for our
callable common stock and that if a proposal were to be made, it would likely be
an all cash offer. Both Dr. Kabakoff and Dr. Rastetter agreed, however, that the
next steps were to continue conducting their respective reviews and exploration
of strategic alternatives and to contact the financial advisors in order to
prepare both PaineWebber and Merrill Lynch, Dura's financial advisor, for the
possibility of an acquisition proposal, if and when one was made.
On January 11, 2000, the special committee held a meeting, which was
attended by representatives of both Skadden, Arps and PaineWebber. PaineWebber
provided the special committee with an overview of the relationship between
companies that were structured similarly to us and Dura. They noted those
companies' different approaches in modifying their relationships to each other
given their respective contractual constraints. Such approaches included
exercising the call options in accordance with the terms of the organizational
documents, negotiating and consummating transactions at prices significantly
below the designated call price and using different forms of considerations
including cash, stock and combinations thereof.
Skadden, Arps then provided the special committee with an overview of the
specific contractual obligations between us and Dura. Skadden, Arps noted that
these obligations included:
- prohibiting us from sharing confidential information without Dura's
consent;
- prohibiting us from accepting third party proposals unless our working
capital was depleted to less than $5 million and Dura elected not to
provide additional funding;
- prohibiting us from raising additional capital by sale of assets, sale of
capital stock or incurring debt without Dura's consent until the earlier
of the expiration of Dura's stock purchase option contained in our
organizational documents or 90 days after our working capital was depleted
to less than $5 million and Dura elected not to provide additional
funding; and
- providing Dura with the option -- but not the obligation -- to call our
common stock at a predetermined price, which was a significant premium to
the initial public offering price.
These restrictions were in place prior to, and fully disclosed in, the initial
public offering.
In light of these contractual restrictions, the special committee then
discussed whether it should seek Dura's consent to reveal confidential
information or pursue offers from other potential acquirors.
18
The special committee determined not to request that Dura reveal
confidential information to third parties at that time because:
- the special committee was convinced that Dura would be extremely reluctant
to allow us to provide confidential information to others, particularly
competitors, at a time when no decision had been made to pursue an
alternative transaction to the acquisition by Dura;
- based on the advice of PaineWebber, the special committee did not believe
that any third parties would be interested in pursuing an acquisition
while Dura's proposal was pending;
- no third party approached us for an alternative transaction after Dura's
proposal was announced; and
- the special committee had the ability to request that Dura reveal
confidential information to third parties after the proposal was announced
on February 14, 2000.
The special committee did not approach third parties for the same reasons
stated above, and because, after consultation with its legal and financial
advisors, the special committee did not consider it necessary or desirable to
contact third parties in advance of evaluating the Dura proposal. If any such
contact became necessary or desirable after such evaluation, we could preserve
the ability to engage in such discussions through contractual provisions, which
could be negotiated as part of any transaction agreement. The agreement
ultimately reached with Dura provided for such ability.
The special committee also considered our ability to raise capital without
Dura's assistance if Dura decided not to provide funding to us when our capital
was exhausted, which is expected to occur in the second half of 2000. The
special committee's financial advisor noted that raising additional cash to fund
our ongoing activities was likely to be very difficult in part because we do not
have our own management and infrastructure independent of Dura and also because
a third party would likely be reluctant to make an investment in us after Dura
had declined to make such an investment and that, if additional cash could not
be raised, the market value of our callable common stock could be materially and
adversely affected. The special committee thus concluded that our ability to
obtain funding independent from Dura at that time did not appear to be a
feasible strategic alternative.
Based on the foregoing, the special committee concluded that a proposal by
Dura to acquire our callable common stock, if made at a fair price, could be the
best alternative presently available to us.
On January 13, 2000, Dr. Rastetter, representatives of PaineWebber and a
representative from Skadden, Arps met with our officers and representatives of
Dura for a due diligence presentation and to review our business potential.
After the due diligence presentation, a representative of PaineWebber met
informally with management of Dura to discuss the possible timing and terms of
an acquisition proposal if one were to be made by Dura.
In a conference call on January 20, 2000, the special committee held a
meeting, which was also attended by representatives of Skadden, Arps and
PaineWebber. At that meeting, the special committee discussed the due diligence
presentation conducted on January 13, 2000. The special committee also decided
to recommend that we engage a different independent accounting firm to conduct
our 1999 year-end audit from the independent accounting firm used by Dura for
its own audit. In a telephone call on January 20, 2000, Dr. Rastetter informed
Dr. Kabakoff of the special committee's recommendation.
On January 24, 2000, our board held a telephonic meeting, which was also
attended by representatives of Skadden, Arps and PaineWebber. At that meeting,
Dr. Kabakoff reviewed the status of our development programs including the
difficulties and delays encountered and reported that Dura was considering
suspending the Albuterol Spiros development program.
19
From February 4 to February 13, 2000, the special committee and its
financial and legal advisors exchanged calls with representatives of Dura and
its financial and legal advisors to determine whether an acquisition proposal
was to be forthcoming from Dura. No acquisition proposal was made by Dura during
this time but both parties continued their respective reviews of our business,
prospects and strategic alternatives.
By letter dated February 14, 2000, Dura proposed to acquire all outstanding
shares of our callable common stock at a cash price of $12.50 per share, subject
to the negotiation and execution of a mutually satisfactory definitive merger
agreement. In the offer, Dura proposed to complete the acquisition by means of a
tender offer followed by merger. Dura also issued a press release announcing the
proposal and its intent to discontinue the development of albuterol in the
current Spiros platform and offered to meet with us to discuss its proposal.
In the afternoon of February 14, 2000, the special committee held a meeting
by telephone with representatives of SG Cowen and Skadden, Arps. Earlier in the
week, the special committee had been informed that the representative it had
been working with at PaineWebber had left PaineWebber to join SG Cowen. Because
of the representative's prior relevant experience with similarly structured
companies, the special committee terminated PaineWebber's engagement and
retained SG Cowen. The PaineWebber engagement letter provided that in the event
such representative was to relocate to another firm, PaineWebber's engagement
could be terminated without cost except for out-of-pocket fees and expenses, SG
Cowen was otherwise retained on substantially the same terms which are described
below in the "Opinion of SG Cowen."
The special committee then discussed and considered the nature and timing of
Dura's proposal, the contents of Dura's press release, Dura's commitment to the
Spiros technology program as well as the potential obstacles to development and
commercialization of the Spiros products. The special committee determined that,
in order to adequately assess the proposal as well as the strategic alternatives
available to us, the special committee would need further information from Dura
before responding. The special committee also requested that SG Cowen prepare
for a preliminary discussion of the financial aspects of the proposal. The
special committee then determined to accept Dura's invitation to meet to discuss
the proposal.
On February 15, 2000, we issued a press release confirming the receipt of
Dura's acquisition proposal. Our press release stated that Dura's offer was
being evaluated by the special committee and that the special committee would be
meeting with Dura in the near future to discuss the proposal.
On February 17, 2000, Dr. Rastetter and representatives of SG Cowen met with
representatives of Dura and Merrill Lynch to conduct further financial due
diligence. On February 18, 2000, the special committee held a meeting at which
representatives from Skadden, Arps and SG Cowen were present. Dr. Rastetter
provided an overview of the February 17 meeting with Dura. The special committee
discussed Dura's possible exercise of the Spiros product option, which,
depending on the exercise price calculated for such option, could result in less
value to our stockholders than a sale of the entire company, particularly if
further funding was unavailable. The special committee requested that, based on
data provided by us, SG Cowen prepare to discuss with the special committee the
prices at which Dura might seek to exercise the albuterol product option or the
Spiros product option.
At a special committee meeting held on February 22, 2000, SG Cowen and the
special committee held preliminary discussions regarding the financial aspects
of the Dura proposal. The meeting was also attended by representatives of
Skadden, Arps. After discussion and consultation with its advisors and a review
of communications with stockholders to date, the special committee concluded
that it was not in favor of recommending the Dura proposal at the price level
indicated, but determined to seek an increase in the price to a level that would
be acceptable. The special committee authorized Dr. Rastetter to communicate the
special committee's views to Dura.
20
On February 23, 2000, Dr. Rastetter met with Mr. Garner and expressed the
special committee's views regarding Dura's offer of $12.50 per share.
Dr. Rastetter also reviewed the status of stockholder sentiment with respect to
Dura's proposal. Dr. Rastetter then indicated that the special committee might
look favorably on a proposal of $15.50 per share in cash plus a security that
would provide additional value if our technology proved to be commercially
successful. Mr. Garner agreed to consider Dr. Rastetter's suggestions but
indicated that he did not believe that Dura would be willing to increase the
consideration offered to the levels suggested by Dr. Rastetter. Also on this
date, we formally retained Ernst & Young LLP as our independent auditors to
conduct our 1999 year-end audit.
On February 25, 2000, Mr. Garner placed a telephone call to Dr. Rastetter to
inform the special committee that Dura was opposed to a cash price of $15.50 per
share. Mr. Garner noted, however, that Dura was not opposed to the use of a Dura
warrant with a 60-month expiration as part of the transaction consideration, but
that the transaction consideration could not include more than $13.00 per share
in cash plus the warrant. Mr. Garner also expressed reluctance to continue
negotiations if an agreement could not be reached at that price. After further
discussion between Dr. Rastetter and Mr. Garner, Dr. Rastetter asked whether
Dura would consider increasing the cash component of the consideration to
$14.00. Mr. Garner said he would discuss this suggestion with his advisors.
On February 28, 2000, Mr. Garner contacted Dr. Rastetter and informed him
that the most that Dura was prepared to offer was a cash price of $13.25 per
share and a 60-month warrant to purchase a number of shares of Dura common stock
which, when adjusted by a conversion ratio, would yield a calculated
Black-Scholes value of $2.50 per share of our callable common stock, subject to
determining the specific terms of the warrant. Later that afternoon, the special
committee held a meeting with representatives from Skadden, Arps and SG Cowen to
discuss Dura's latest proposal. The special committee then decided that it was
prepared to support a transaction for $13.25 in cash per share and a 60-month
warrant with an exercise price at a 25% premium over the average closing price
of Dura common stock for 10 consecutive trading days ending on the day prior to
public announcement of a definitive agreement for the transaction. This warrant
would entitle the holder to purchase a number of shares of Dura common stock
with a calculated Black-Scholes value, when adjusted by a conversion ratio, of
$2.50 per share of our callable common stock, subject to agreement on a suitable
volatility factor to be used in the calculation. The special committee's support
was subject to the special committee's ability to obtain a fairness opinion from
SG Cowen with respect to the terms of the offer as well as the execution of a
mutually satisfactory definitive merger agreement.
In a facsimile to Mr. Garner dated February 29, 2000, Dr. Rastetter
forwarded a summary of the warrant terms and a sample warrant valuation
calculation prepared by SG Cowen for Dura's review and comment.
In a letter to Dr. Rastetter dated March 2, 2000, Mr. Garner confirmed
Dr. Rastetter's letter of February 29, 2000, which stated that Dura was in
agreement with the summary of the warrant terms except with respect to the time
at which to begin the valuation of the exercise price for the warrant and the
volatility factor with respect to the Black-Scholes calculation. Mr. Garner
indicated that after having discussed the timing of the valuation of the warrant
with Dura's financial and legal advisors, Dura believed that the valuation
should begin at the time the proposed merger is completed and not at the time of
signing the merger agreement. Mr. Garner suggested that both Dura and the
special committee utilize their respective financial advisors to determine the
generally accepted methodology for calculating the appropriate volatility factor
for transactions of this type and the timing of such valuation.
From March 2 to March 12, 2000, Dura's and our financial advisors had
numerous discussions regarding the timing of the valuation of the warrant and
the appropriate volatility factor, but no mutually acceptable parameters were
reached between us and Dura.
21
On March 12, 2000, Dr. Rastetter contacted Mr. Garner regarding the terms of
the warrant and proposed, subject to the approval of the other special committee
members, pricing the warrant at signing but with a collar of 25% above and below
the measurement price in which the calculated value of the warrant would
fluctuate, but outside of which there would be no further change in the
calculated value. After confirming the counter-proposal with the other special
committee members, Dr. Rastetter then forwarded a summary of the newly proposed
terms of the warrant, which was made subject to the review and approval of the
special committee's financial and legal advisors. Mr. Garner informed
Dr. Rastetter that he would review the special committee's counter-proposal with
respect to the warrant with his advisors.
On March 13, 2000, Dr. Rastetter met with Mr. Garner to discuss the special
committee's counter-proposal with respect to the terms of the warrant. At that
time, Mr. Garner presented two separate counter-proposals. The terms of the
counter-proposals by Dura included the following:
- the cash price of $13.25 per share and a warrant to purchase a number of
shares of Dura common stock with a calculated Black-Scholes value which,
when adjusted by a conversion ratio, would yield a calculated value of
$2.50 per share of our callable common stock, using a 65% volatility
factor, subject to adjustment to reflect changes in Dura's stock price
prior to the closing of up to 20% above or below the measurement price
calculated based on the average of the closing prices over 10 consecutive
days prior to public announcement of the transaction terms; or
- the cash price of $13.25 per share and a warrant with a 25% collar above
and below the measurement price calculated based on the average of the
closing prices five days prior to and five days after public announcement
of the transaction terms.
Dr. Rastetter then contacted the other special committee members and SG
Cowen regarding Dura's counter-proposals. The special committee agreed to
recommend the first of the two counter-proposals, subject to the preparation of
a warrant valuation calculation by SG Cowen based on a range of assumptions.
After the distribution of the warrant valuation calculation, the special
committee determined to recommend Dura's counter-proposal of $13.25 in cash per
share and a warrant with the 20% collar above and below the measurement price
calculated based on the average of the closing prices of Dura's common stock
over 10 consecutive days prior to public announcement of the transaction terms,
subject to the satisfactory completion of due diligence, negotiation and
execution of a mutually satisfactory definitive merger agreement, and receipt of
a fairness opinion of SG Cowen.
From February 15 through March 20, 2000, numerous drafts of the proposed
merger agreement and warrant agreement were exchanged between Dura and the
special committee and their respective legal and financial advisors and the
final terms and conditions of such agreements were negotiated. Simultaneously,
both parties' financial and legal advisors completed their respective due
diligence investigations.
On March 20, 2000, Dura's board of directors met by telephone conference to
consider the proposed merger. After presentations by members of Dura's
management team, Merrill Lynch and Dura's counsel, the board of directors of
Dura deliberated about the proposed transaction and then voted unanimously to
approve the merger agreement and the transactions contemplated thereby.
On March 20, 2000, the special committee met with its legal and financial
advisors to consider the merger agreement and the warrant agreement. The special
committee received the oral opinion of SG Cowen, later confirmed in writing as
of the same date, to the effect that, as of the date of the meeting, the
consideration to be received by the holders of our callable common stock in the
merger was fair, from a financial point of view, to the holders of our callable
common stock. After a full discussion with respect to the merger, the merger
agreement and the warrant agreement, and the other alternatives then available
to us, the special committee unanimously determined the merger to be fair to and
in the
22
best interests of, our callable common stockholders and unanimously determined
to recommend that our full board of directors act to approve and authorize the
merger and the merger agreement and the warrant agreement. Thereafter, our board
met, and upon the recommendation of the special committee, and with Mr. Garner
and Dr. Kabakoff abstaining, approved and authorized the merger, the merger
agreement, the warrant agreement and the transactions contemplated thereby.
Also on March 20, 2000, as an inducement to Dura's execution of the merger
agreement, a group of affiliated stockholders, who own approximately 22% of the
outstanding shares of our callable common stock, entered into a written
agreement to vote their shares in favor of the merger.
Following the board meeting, we and Dura executed the merger agreement and
on March 21, 2000, issued a joint press release announcing the execution of the
merger agreement and the principal terms of the proposed transaction.
RECOMMENDATION OF OUR BOARD OF DIRECTORS; OUR REASONS FOR THE MERGER; FAIRNESS
OF THE MERGER
At a meeting held on March 20, 2000, the special committee, based on factors
set forth below, unanimously determined that the merger is fair to, and in the
best interests of, the holders of our callable common stock and resolved to
recommend that our board:
- determine the merger is fair to you and in your best interests;
- approve the merger and the transactions contemplated thereby;
- approve the merger and warrant agreements; and
- recommend that you vote FOR adoption of the merger agreement.
In determining that the merger is fair to you and in your best interests,
and in making its recommendation to our board, the special committee considered
the following factors, which, taken as whole, supported its decision:
- Dura's and our respective financial condition, assets, results of
operations, business, potential contingent liabilities and prospects of
the business separately and as combined, and the risks involved in
achieving those prospects;
- the presentation and oral opinion of SG Cowen delivered to the special
committee on March 20, 2000, to the effect that, as of such date, the
merger consideration to be received by the holders of our callable common
stock in the merger was fair, from a financial point of view, to the
holders of our callable common stock. For a further description of the
opinion of SG Cowen, see "Opinion of SG Cowen;"
- the consideration by the special committee, based in part on the
assistance of its financial and legal advisors, of the feasibility of
various strategic alternatives, including the feasibility of licensing the
technology to a third party, continuing to operate as a stand-alone
entity, sale to a third party or liquidation, and the conclusion of the
special committee that none of such alternatives was either feasible or
more attractive than the merger proposal;
- the terms and conditions of the merger agreement, including the following
factors, which the special committee deemed favorable in reaching its
decision:
- the right of our board to terminate the agreement without a termination
fee in order to proceed with a superior proposal or amend or withdraw
its recommendation under specified circumstances;
- the similarity of the terms of the warrants issued by Dura in
connection with our initial public offering as compared with the terms
of the warrants to be issued in the merger; and
23
- the consideration to be received by you;
- the current and historical market prices of Dura's common stock and our
callable common stock and the fact that the offer represents a significant
premium over such prices as described in the financial analysis prepared
by SG Cowen;
- the fact that our callable common stock is currently trading at a price
per share that is significantly lower than the current purchase option
exercise price and, given our prospects, the significant risk in the view
of the special committee that our callable common stock price will not
reach the purchase option exercise price prior to the expiration of the
purchase option;
- the limited range of alternative transactions available to us in view of
the nature of the contractual arrangements between us and Dura and the
effect on holders of our callable common stock if the merger is not
consummated;
- the fact that our current cash balance is rapidly diminishing and will be
exhausted by the end of 2000, and we have no commitment from Dura to
provide additional funding, and it has no contractual obligation to do so;
- the fact that raising additional cash to fund our ongoing activities is
likely to be very difficult in light of the contractual arrangements
between us and Dura, and if additional cash cannot be raised, the belief
that the value of our callable common stock could be materially and
adversely affected;
- the judgment of the special committee that $13.25 in cash per share and
the inclusion of a Dura warrant as the merger consideration is the highest
price reasonably available to our stockholders for the following reasons:
- the extensive negotiations that occurred between the parties concerning
the terms of the merger and the related agreements;
- the course of negotiations between the parties regarding the offering
price given that Dura originally proposed to acquire us for $12.50 per
share with no warrant, but, following extensive and protracted
negotiations with the special committee, the proposed price was
increased to $13.25 per share and included a new warrant to purchase
shares of Dura's common stock;
- the pursuit of alternative transactions with third parties was deemed
to be an unlikely alternative based, in part, on the special
committee's discussions with its financial advisors and Skadden, Arps'
legal analysis of the existing contractual obligations between us and
Dura; and
- since February 14, 2000, the date on which Dura publicly disclosed its
proposal to acquire us, no competing offers, indications of interest or
proposals by third parties were received by the special committee or
its financial or legal advisors.
The members of the special committee evaluated the factors in light of their
knowledge of our business, their knowledge of the pharmaceutical and related
industries and their business judgment. In view of the wide variety of factors
considered in connection with its evaluation of the merger agreement and the
transactions contemplated thereby, while the special committee believes that
these were all of the material factors considered, the special committee did not
find it practicable to, and did not attempt to assign relative weights to the
factors considered in reaching its decision but considered these factors taken
as a whole in reaching its determination.
The special committee considered the uncertainties associated with any
financial analysis, particularly those involving projections of future
performance. The special committee recognized that these analyses are not
necessarily indicative of actual values or future results which may be
significantly
24
more or less favorable than suggested by the analyses. In addition, the special
committee recognized that analyses relating to the value of businesses do not
purport to be appraisals or to reflect the prices at which businesses or
securities may actually be sold. Specifically, the special committee was aware
of the possibility that if the Spiros products currently under development were
successfully brought to market in a timely manner and at a reasonable expense
then the revenues generated could lead to a higher valuation than that offered
by Dura. However, this possibility did not reflect the need to discount such
valuation for the uncertainty associated with achieving such result. Despite
these potential negative factors, the special committee concluded that the other
factors cited above outweighed them.
With respect to comparing the proposed transaction with the current market
prices, the historical market prices, net book value, going concern value and
discounted cash flow analysis using company forecasts and through licensing the
technology to a third party (the latter of which the special committee viewed as
the most feasible way to effectuate a liquidation if one were to be
contemplated), the special committee relied on the analysis of SG Cowen and
expressly adopts their discussion of such analysis, which is summarized below.
The special committee believes the process it followed in approving the
merger agreement was procedurally fair and unbiased because:
- the special committee consisted of all of our directors who are not
officers or directors of Dura and evaluated all our strategic alternatives
which were reasonably available;
- the members of the special committee will not personally benefit from the
consummation of the transactions contemplated by the merger agreement,
other than in their capacity as holders of stock options exercisable into
our callable common stock;
- the special committee recommended that our independent public accountants
be changed in order to give them additional assurance as to our financial
condition;
- the special committee retained independent legal and financial advisors to
assist it in evaluating our strategic alternatives, including Dura's
acquisition proposal;
- the special committee obtained a fairness opinion of SG Cowen;
- the special committee negotiated with Dura on an arm's length basis and
with the assistance of its advisors;
- the special committee was fully cognizant of the potential conflict of
interest that the other board members could have in the transaction in
light of their management roles at Dura and, therefore, made their
determination independent of any view expressed by any members of our
board who were also employees of Dura; and
- the members of the special committee hold options to purchase shares of
our common stock at prices ranging from $14.00 to $15.81 per share
(See--Interests of certain persons in the merger--for further information)
and, the special committee members believe that these rights to purchase
common stock align their interests with other stockholders and do not
affect their independence in evaluating the transaction.
Following the meeting of the special committee on March 20, 2000, our board
of directors held a meeting and, based in part upon the unanimous recommendation
of the special committee, which recommendation was adopted by our board in all
respects, it determined the merger to be fair to you and in your best interests.
Our board approved the merger, the merger agreement and the warrant agreement.
Mr. Garner and Dr. Kabakoff abstained from this vote of our board. Our board of
directors, with Mr. Garner and Dr. Kabakoff abstaining, recommends unanimously
that you vote FOR adoption of the merger agreement. In addition to the analyses
and conclusions of the special committee, which were adopted by our board of
directors in all respects with Mr. Garner and
25
Dr. Kabakoff abstaining, our board of directors also based its determination on
the arm's length negotiations of the special committee with representatives of
Dura and on the fact that the special committee obtained the fairness opinion of
SG Cowen. In view of the variety of factors considered in connection with its
evaluation of the merger agreement and the related transactions, our board did
not find it practicable to, and did not, quantify or attempt to assign relative
weight to the specific factors considered in reaching its determination.
In the event the merger is not consummated, we intend to continue as an
independent public company and will, subject to the terms of the various
agreements with Dura, attempt to pursue mergers or other strategic alternatives
to realize value from the Spiros technology program for our stockholders.
FINANCIAL PROJECTIONS
We provided SG Cowen and Merrill Lynch with non-public financial projections
prepared by our senior management, in connection with their respective
evaluations of the merger. The material portions of these projections are stated
below:
FISCAL YEAR ENDING DECEMBER 31,
-------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005 2006 2007
-------- -------- -------- -------- -------- -------- -------- --------
Revenues
Beclomethasone..................... -- $ 6.1 $ 30.3 $ 68.2 $ 88.9 $101.7 $116.4 $130.6
Budesonide......................... -- -- 12.9 108.4 168.4 219.5 271.5 322.6
Total revenues..................... -- 6.1 43.1 176.6 $257.3 $321.2 $387.9 $453.2
Gross profit......................... -- 4.6 35.0 149.2 220.3 276.4 335.6 394.0
Operating expenses
Selling, general and
administrative................... 6.0 22.3 81.6 107.7 104.8 107.7 114.9 119.6
Research and development........... 45.6 48.1 7.6 -- -- -- -- --
Technology licensing fee........... 2.0 2.0 2.2 8.8 12.9 16.1 19.4 22.7
Other operating expenses........... 19.5 18.6 0.8 -- -- -- -- --
Operating income (loss)............ (73.2) (86.5) (57.1) 32.6 102.6 152.7 201.3 251.8
Provision for taxes.................. -- -- -- 11.4 35.9 53.4 70.4 88.1
Net income (loss).................... $(73.2) $(86.5) $(57.1) $ 21.2 $ 66.7 $ 99.2 $130.8 $163.7
Neither we nor Dura usually publicly disclose projections of future
revenues, earnings or other financial information. We are not including the
above projections in this document to influence your vote with respect to the
adoption of the merger agreement or your decision with respect to an investment
in shares of Dura common stock. Our projections were based on a variety of
assumptions, including our ability to achieve strategic goals, objectives and
targets over the applicable periods. These assumptions involve judgments with
respect to future business decisions, all of which are difficult or impossible
to predict accurately and many of which are beyond our control.
Our projections were not prepared with a view to public disclosure, use in
this document or compliance with published guidelines of the SEC, nor were they
prepared in accordance with the guidelines established by the American Institute
of Certified Public Accountants for preparation and presentation of financial
projections. Ernst & Young LLP, our independent auditors, nor any other
independent auditors have examined or compiled these projections and does not
assume any responsibility for them. You should also note that these projections
were prepared early in the first quarter of 2000 and does not represent our
current views.
26
OPINION OF SG COWEN SECURITIES CORPORATION
On February 15, 2000, the special committee retained SG Cowen as its
financial advisor to render an opinion to it as to the fairness, from a
financial point of view, to the holders of our callable common stock of the
consideration to be received by them in the merger.
On March 20, 2000, SG Cowen delivered some of its written analyses and its
oral opinion to the special committee, subsequently confirmed in writing as of
the same date, to the effect that, and subject to the various assumptions set
forth therein, as of March 20, 2000, the consideration to be received in the
merger by the holders of our callable common stock was fair, from a financial
point of view, to such holders. The full text of the written opinion of SG
Cowen, dated March 20, 2000, is attached as Annex B and is incorporated by
reference. You are urged to read the entire opinion for the assumptions made,
procedures followed, other matters considered and limits of the review by
SG Cowen.
This summary of the written opinion of SG Cowen is qualified in its entirety
by reference to the full text of the opinion. SG Cowen's analyses and opinion
were prepared for and addressed to the special committee and are directed only
to the fairness, from a financial point of view, of the consideration to be
received in the transaction. SG Cowen's analyses and opinion do not constitute
an opinion as to the merits of the merger or a recommendation to any holder of
our callable common stock as to how to vote on the merger. The consideration to
be received in the transaction was determined through negotiations between the
special committee and Dura and not based on recommendations of SG Cowen.
The following are the material financial and other matters that SG Cowen
reviewed and considered in arriving at its opinion:
- a draft of the merger agreement that SG Cowen received on March 19, 2000;
- items of our publicly available information, including our annual reports
filed on Form 10-K for the years ended December 31, 1997 and December 31,
1998, our quarterly reports filed on Form 10-Q for the quarters ended
March 31, June 30, and September 30, 1999, and our registration statement
originally filed on Form S-1 dated October 10, 1997, as amended, and other
relevant financial and operating data that we furnished to SG Cowen;
- items of publicly available information for Dura, including its annual
reports filed on Form 10-K for the years ended December 31, 1997 and
December 31, 1998, and its quarterly reports filed on Form 10-Q for the
quarters ended March 31, June 30, and September 30, 1999;
- internal financial analyses, financial forecasts, reports and other
information concerning us, prepared by our management;
- discussions SG Cowen had with members of our management concerning our
historical and current business operations, financial conditions and
prospects and other matters SG Cowen deemed relevant;
- discussions SG Cowen had with members of the management of Dura concerning
the historical and current business operations, financial conditions and
prospects of Dura and other matters SG Cowen deemed relevant;
- the reported price and trading histories of the shares of Dura common
stock, the shares of our callable common stock, and the shares of our
callable common stock and warrants to purchase shares of Dura common stock
that traded as a unit through December 31, 1999;
- consensus earnings per share estimates for Dura reported by First Call, a
third-party financial information service, and projections of financial
institutions;
- financial forecasts and other information concerning Dura provided by the
management of Dura;
27
- selected operating results and trading multiples of Dura as compared to
operating results and trading multiples of specified publicly traded
companies SG Cowen deemed relevant;
- selected financial terms of the merger as compared to the financial terms
of selected business combinations SG Cowen deemed relevant;
- based on our forecasts, our cash flows generated on a stand-alone basis to
determine the present value of the discounted cash flows; and
- other information, financial studies, analyses and investigations and
other factors that SG Cowen deemed relevant for the purposes of its
opinion.
In conducting its review and arriving at its opinion, SG Cowen, with the
special committee's consent, assumed and relied, without independent
investigation, upon the accuracy and completeness of all financial and other
information that we or Dura provided to it or which was publicly available.
SG Cowen did not undertake any responsibility for the accuracy, completeness or
reasonableness of, or independently to verify, this information. In addition, SG
Cowen did not conduct any physical inspection of Dura's or our properties or
facilities. SG Cowen further relied upon the assurance of our management that
they were unaware of any facts that would make the information provided to SG
Cowen incomplete or misleading in any respect. SG Cowen assumed that our
forecasts and Dura's forecasts provided to SG Cowen were reasonably prepared by
our and Dura's respective management, on a basis reflecting the best currently
available estimates and good faith judgments of the management teams as to
future performance. Dura's and our management confirmed to SG Cowen, and SG
Cowen assumed that each of our forecasts, Dura's forecasts, the First Call
estimates and the analyst projections for Dura provided a reasonable basis for
its opinion.
SG Cowen did not make or obtain any independent evaluations, valuations or
appraisals of our or Dura's assets or liabilities, nor was SG Cowen furnished
with these materials. With respect to all legal matters relating to us and Dura,
SG Cowen relied on the advice of legal counsel to the special committee. SG
Cowen expressed no opinion with respect to any legal matter. SG Cowen's opinion
was necessarily based upon economic and market conditions and other
circumstances as they existed and could be evaluated by SG Cowen on the date of
its opinion. Moreover, although subsequent developments may affect its opinion,
SG Cowen does not have any obligation to update, revise or reaffirm its opinion
and SG Cowen has expressly disclaimed any responsibility to do so. Additionally,
SG Cowen was not authorized or requested to, and did not, solicit alternative
offers for us or our assets.
In rendering its opinion, SG Cowen assumed, in all respects material to its
analysis, that the representations and warranties of each party contained in the
merger agreement are true and correct, that each party will perform all of the
covenants and agreements required to be performed by it under the merger
agreement and that all conditions to the consummation of the merger will be
satisfied without being waived. SG Cowen assumed that the final form of the
merger agreement would be substantially similar to the last draft received by SG
Cowen prior to rendering its opinion. SG Cowen also assumed that all
governmental, regulatory and other consents and approvals contemplated by the
merger agreement would be obtained and that, in the course of obtaining any of
those consents, no restrictions will be imposed or waivers made that would have
an adverse effect on the contemplated benefits of the transaction.
SG Cowen's opinion does not constitute a recommendation to any holder of our
callable common stock as to how to vote on the proposed transaction. SG Cowen's
opinion does not imply any conclusion as to the likely price or trading range
for the warrant or of the underlying value of Dura common stock following
consummation of the transaction or otherwise, which may vary depending on
numerous factors that generally influence the price of securities. SG Cowen's
opinion is limited to the fairness, from a financial point of view, to the
holders of our callable common stock, of the consideration received in the
merger. SG Cowen expresses no opinion as to the underlying business
28
reasons that may support the decision of the special committee to approve, or
our decision to consummate, the merger.
The following is a summary of the material financial analyses performed by
SG Cowen to arrive at its opinion. Some of the summaries of financial analyses
include information presented in tabular format. In order to fully understand
the financial analyses, the tables must be read together with the text of each
summary. The tables alone do not constitute a complete description of the
financial analyses. Considering the data in the tables without considering the
full narrative description of the financial analyses, including the
methodologies and assumptions underlying the analyses, could create a misleading
or incomplete view of the financial analyses. SG Cowen performed several
procedures, including each of the financial analyses described below, and
reviewed with our management the assumptions on which its analyses were based
and other factors, including our historical and projected financial results. No
limitations were imposed by the special committee with respect to the
investigations made or procedures followed by SG Cowen in rendering its opinion.
ANALYSIS OF PREMIUMS PAID IN SELECTED TRANSACTIONS. SG Cowen reviewed the
premium of the offer price over the trading prices one trading day, 20 trading
days and the average price over the 20 trading days prior to the announcement
date for 17 acquisitions of special purpose funding corporations in the
biotechnology and pharmaceutical industries announced since June 20, 1991. These
included 11 transactions in which the sponsor of the special purpose funding
corporation exercised its right to purchase the stock of the special purpose
funding corporation under the original purchase option and six transactions in
which the stock of the special purpose funding corporation was purchased by the
sponsor in a negotiated transaction.
SG Cowen performed this analysis to compare the consideration offered in
this merger to transactions in the public market. These transactions were
selected because they involve companies in a comparable industry, that of
biotechnology or pharmaceuticals, and as with our relationship to Dura, the
acquired companies in these transactions were formed to fund research and
development activities performed by the acquiring company. SG Cowen included in
its analysis all transactions that it identified as having these
characteristics.
The original purchase option exercised transactions were:
ACQUIRED COMPANY ACQUIRING COMPANY
- -------------------------------------------------- --------------------------------------------------
CliniChem Development Inc. BioChem Pharma Inc.
Neuralab Ltd. Elan Corporation plc
Axogen Ltd. Elan Corporation plc
Allergan Ligand Retinoid Therapeutics, Inc. Allergan Inc. and Ligand Pharmaceuticals Inc.
Advanced Therapeutics Systems Ltd. Elan Corporation plc
Therapeutic Discovery Corporation ALZA Corporation
Drug Research Corporation Elan Corporation plc
Neozyme Corporation Genzyme Corporation
Receptech Corporation Immunex Corporation
Tocor, Inc. Centocor, Inc.
Bio-Electro Systems Inc. ALZA Corporation
The negotiated transactions were:
ACQUIRED COMPANY ACQUIRING COMPANY
- -------------------------------------------------- --------------------------------------------------
PerSeptive Technologies II Corporation PerSeptive Biosystems, Inc.
Neozyme II Corporation Genzyme Corporation
CytoRad, Inc. Cytogen Corporation
Tocor II, Inc. Centocor, Inc.
Aramed, Inc. Gensia Pharmaceuticals, Inc.
SciGenics, Inc. Genetics Institute
29
The following table presents the premium of the offer prices over the
trading prices one day, 20 trading days, and the average price over the 20
trading days prior to the announcement date for the exercised transactions (for
which data were available for eight out of the 11 transactions) and the
negotiated transactions, which in the aggregate, constitute the selected
transactions, and the premiums implied in the merger. Implied premiums in the
merger were based on consideration received in the transaction under the merger
agreement assuming a warrant value equal to $2.50, which was the calculated
value under the merger agreement at the time the merger was announced, and a
closing stock price for our callable common stock on or before February 11,
2000, which was when Dura's first offer was announced.
PREMIUMS PAID FOR: PREMIUM
--------------------------------------------------------------- IMPLIED BY
SELECTED EXERCISED NEGOTIATED CONSIDERATION
TRANSACTIONS TRANSACTIONS TRANSACTIONS TO BE
------------------- ------------------- ------------------- RECEIVED IN
PREMIUMS PAID TO STOCK PRICE: MEDIAN MEAN MEDIAN MEAN MEDIAN MEAN THE MERGER
- ----------------------------- -------- -------- -------- -------- -------- -------- -------------
1 day prior to announcement............. 7.2% 25.8% 5.5% 7.2% 58.2% 47.6% 35.5%
20 days prior to announcement........... 8.3% 31.4% 7.6% 9.8% 49.7% 56.7% 53.7%
20 day average prior to announcement.... 7.3% 28.6% 7.2% 7.9% 60.9% 52.8% 56.0%
SG Cowen noted that the premiums implied by the consideration to be received
in the merger were within ranges implied by premiums in the selected
transactions.
Although the selected transactions were used for comparison purposes, none
of those transactions is directly comparable to this transaction, and none of
the companies in those transactions is directly comparable to us. Accordingly,
an analysis of the results of such a comparison is not purely mathematical, but
instead involves complex considerations and judgments concerning differences in
historical and projected financial and operating characteristics of the
companies involved and other factors that could affect the acquisition value of
those companies or us to which they are being compared.
STOCK TRADING HISTORY. To provide contextual data and comparative market
data, SG Cowen reviewed the historical market prices of our units and our
callable common stock from December 17, 1997, the first trading day of our
units, to March 16, 2000 and for the 12-month period ended March 16, 2000. SG
Cowen noted that over the indicated periods the low and high prices for our
units or our callable common stock were as set forth below. The stock price data
prior to January 1, 2000 represents the price per unit. Each of our units
included one share of our callable common stock and one warrant to purchase
one-fourth of one share of Dura common stock. On January 1, 2000, our units
separated into two publicly traded securities. Over the indicated periods, the
low and high prices for our units or our callable common stock were:
LOW HIGH
------------------- ---------------------
Period beginning December 17, 1997
and ended March 16, 2000.......... $4.38 (Nov. 2, 1999) $19.00 (Jan. 22, 1998)
The 12-month period ended March 16,
2000.............................. $4.38 (Nov. 2, 1999) $13.00 (Feb. 18, 2000)
SG Cowen noted that the per share equity value for our callable common stock
implied in the merger of $15.75 is greater than the high end of our trading
range for the 12-month period ended March 16, 2000 and within our trading range
for the period beginning December 17, 1997 and ended March 16, 2000. The implied
value of $15.75 for our callable common stock in the merger was based on
consideration received in the transaction under the merger agreement assuming a
warrant value equal to $2.50, which was the calculated value under the merger
agreement at the time the merger was announced.
SG Cowen also reviewed the historical market prices of Dura's common stock
from December 17, 1997 (the first trading day of the units) to March 16, 2000
and for the 12-month period ended
30
March 16, 2000. SG Cowen noted that over the indicated periods the low and high
prices for shares of Dura's common stock were:
LOW HIGH
-------- --------
Period beginning December 17, 1997 and ended March 16,
2000...................................................... $8.00 $48.63
The 12-month period ended March 16, 2000.................... $9.75 $19.13
DISCOUNTED CASH FLOW ANALYSIS. SG Cowen estimated ranges of values for our
callable common stock based upon the discounted present value of our projected
after-tax cash flows and the discounted present value of our terminal value at
December 31, 2007, calculated using a perpetual growth rate methodology, based
on:
- our forecasts, and
- our forecasts, assuming the generation of cash flows solely through our
licensing of our technology to a third party in exchange for royalty
payments of 15% to 20% of the revenues set forth in our forecasts.
The purpose of the discounted cash flow analysis is to compare the
consideration received in the merger to the present value of after-tax cash
flows implied by our forecasts. SG Cowen applied the discounted cash flow
methodology to our forecasts because we are a development stage company and the
majority of our value is derived from the sale of our products in the future.
After-tax cash flow was calculated by taking projected earnings before
interest and taxes and subtracting from this amount projected taxes, capital
expenditures, changes in working capital and changes in other assets and
liabilities and adding back projected depreciation and amortization. This
analysis was based upon assumptions described by, projections supplied by and
discussions held with our management. For each scenario, a range of values for
our callable common stock was generated utilizing discount rates ranging from
25% to 35%. In calculating the terminal value, SG Cowen utilized a perpetual
growth rate of zero, which was arrived at through discussions with us regarding
the life cycles of our products.
Utilizing this methodology, the per share equity value ranged from:
LOW HIGH
-------- --------
Based on our forecasts...................................... $ 8.35 $24.14
Based on our forecasts, as adjusted by estimated royalty
payments set forth above.................................. $10.15 $20.21
SG Cowen noted that the equity value per share for our callable common stock
implied in the merger of $15.75 is within the range of values for our callable
common stock indicated by the discounted cash flow analysis.
The summary set forth above does not purport to be a complete description of
all the analyses performed by SG Cowen. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial analyses and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. SG Cowen did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, notwithstanding the separate factors summarized above, SG
Cowen believes, and has advised the special committee that, its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the process underlying its opinion. In performing
its analyses, SG Cowen made numerous assumptions with respect to industry
performance, business and economic conditions and other matters, many of which
are beyond our or Dura's control. These analyses performed by SG Cowen are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by the analyses. In
addition, analyses relating to the value of businesses do not purport to be
appraisals or to reflect the prices at which businesses or securities may
actually be sold. Accordingly, the analyses and estimates are inherently
31
subject to uncertainty, being based upon numerous factors or events beyond the
control of the parties or their respective advisors. SG Cowen does not assume
responsibility if future results are materially different from those projected.
The analyses supplied by SG Cowen and its opinion were among several factors
taken into consideration by the special committee in making its decision to
enter into the merger agreement and should not be considered as determinative of
such decision.
SG Cowen was selected by the special committee to render an opinion to the
special committee because SG Cowen is a nationally recognized investment banking
firm and because, as part of its investment banking business, SG Cowen is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. In addition, the special committee
desired the continued expertise of a representative of PaineWebber who had
recently moved to SG Cowen from PaineWebber. In the ordinary course of its
business, SG Cowen and its affiliates may trade our and Dura's equity and other
securities for their own account and for the accounts of their customers, and,
accordingly, may at any time hold a long or short position in such securities.
SG Cowen and its affiliates in the ordinary course of business may have from
time to time provided, and in the future may provide, commercial and investment
banking services to us and Dura, including serving as a financial advisor on
potential acquisitions and as an underwriter on equity offerings, and may have
received and may in the future receive fees for the rendering of such services.
SG Cowen and its affiliates currently do not provide commercial and investment
banking services to Dura.
Under the SG Cowen engagement letter, upon consummation of the transaction,
SG Cowen will be entitled to receive a transaction fee equal to approximately
$1.400 million. We also agreed to pay a fee of $500,000 to SG Cowen for
rendering its opinion, which fee shall be credited against any fee paid upon
consummation of the transaction. Additionally, we agreed to reimburse SG Cowen
for its out-of-pocket expenses, including attorneys' fees, and agreed to
indemnify SG Cowen against specified liabilities, including liabilities under
the federal securities laws. The terms of the fee arrangement with SG Cowen,
which are customary in transactions of this nature, were negotiated at arm's
length between the special committee and SG Cowen. A significant portion of the
fee payable to SG Cowen is contingent upon the completion of the transaction.
DURA'S REASONS FOR THE MERGER
Dura believes that the merger is fair to you because its terms and
conditions were determined as a result of a fair procedure. The special
committee is and was comprised entirely of directors who are not employees or
officers of Dura. The special committee retained independent counsel and
independent financial advisors to help them evaluate the opportunities available
to us. The special committee caused our independent public accountants to be
changed in order to give them additional assurance as to our financial
condition. Dura notes that the merger does not require approval of a majority of
unaffiliated security holders, but given the insignificant portion of the
outstanding shares of callable common stock owned by Dura's affiliates, such a
provision would not meaningfully add to the procedural fairness provided by the
special committee process.
Dura also believes that the merger is fair to you because its terms and
conditions are substantively fair. Dura adopts the financial analysis prepared
by SG Cowen and the analysis of the special committee as part of its conclusion
as to the substantive fairness of the merger to you. However, Dura did not
receive advice from or the opinion of SG Cowen. In addition, Dura retained
Merrill Lynch to evaluate the fairness to Dura, from a financial point of view,
of the consideration to be paid by Dura in the merger. Dura's board of directors
considered the presentation and opinion of Merrill Lynch delivered to it in
determining that the merger was substantively fair to Dura. Dura's belief as to
the substantive fairness of the merger is also supported by the fact that the
beneficial owner of the largest block of our callable common stock was willing
to agree to vote for the proposed merger. Dura did not consider liquidation
value or net book value in its analysis because it believes that those metrics
are not appropriate measures for research and development-related technologies
whose value is only realized in the long-run through commercialization of
products.
32
If Dura were to exercise its purchase option, it would have the right to
purchase our callable common stock for $27.96 per share or an aggregate of
$176.8 million from July 1, 2000 to September 30, 2000. By comparison, under the
merger agreement, Dura will purchase our callable common stock for $13.25 in
cash and a warrant to purchase a fractional share of Dura common stock with a
calculated value of between $3.22 and $1.81 per share or an aggregate of between
$104.2 and $95.3 million.
OPINION OF MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORTED
Dura retained Merrill Lynch to act as its financial advisor with respect to
the merger. As part of the engagement, Dura requested that Merrill Lynch
evaluate the fairness, from a financial point of view, of the consideration to
be paid by Dura in the merger. At the meeting of the board of directors of Dura
on March 20, 2000, Merrill Lynch rendered its oral opinion to the board of
directors of Dura, subsequently confirmed in writing as of March 20, 2000, to
the effect that, as of that date and based upon the assumptions made, matters
considered and limits of their review, as set forth in their opinion, the
consideration to be paid by Dura in the merger was fair, from a financial point
of view, to Dura.
The full text of Merrill Lynch's opinion, which sets forth material
information relating to Merrill Lynch's opinion that the consideration to be
paid by Dura in the merger was fair, from a financial point of view, to Dura,
including the assumptions made, matters considered and qualifications and
limitations on the scope of review undertaken by Merrill Lynch, is attached as
Annex C and is incorporated by reference. This description of Merrill Lynch's
opinion should be reviewed together with the full text of the opinion, and you
are urged to read the opinion and consider it carefully. Merrill Lynch's opinion
is addressed to Dura's board of directors and evaluated only the fairness, from
a financial point of view, of the merger consideration to Dura. The terms of the
merger, including the merger consideration, were determined through negotiations
between us and Dura and were not determined by Merrill Lynch. Merrill Lynch's
opinion does not address the merits of the underlying decision of Dura to engage
in the merger and does not constitute, nor should it be construed as, a
recommendation to any stockholder as to how to vote on the merger or any matter
related to the merger.
In arriving at its opinion, Merrill Lynch, among other things:
- reviewed certain publicly available business and financial information
relating to Dura and us that Merrill Lynch deemed to be relevant;
- reviewed certain other information, furnished by Dura and us to Merrill
Lynch, including financial forecasts relating to the respective business,
earnings, cash flows, assets, liabilities and prospects of Dura and us, as
well as the amount and timing of any cost savings, and related expenses
and synergies expected to result from the merger;
- conducted discussions with members of senior management and
representatives concerning the matters described in the preceding two
clauses, as well as their respective businesses and prospects before and
after giving effect to the merger and the expected synergies;
- reviewed the market prices and valuation multiples for our callable common
stock and compared them with those of certain publicly traded companies
that Merrill Lynch deemed to be relevant;
- reviewed our results of operations and compared them with those of certain
publicly traded companies that Merrill Lynch deemed to be relevant;
- compared the proposed financial terms of the merger with the financial
terms of certain other transactions that Merrill Lynch deemed to be
relevant;
- participated in certain discussions and negotiations among Dura's and our
representatives and their financial and legal advisors;
- reviewed the potential pro forma impact of the merger on Dura;
- reviewed a draft of the merger agreement and the warrant agreement dated
March 20, 2000; and
33
- reviewed such other financial studies and analyses and took into account
such other matters as Merrill Lynch deemed necessary.
In preparing its opinion, Merrill Lynch assumed and relied on the accuracy
and completeness of all information supplied or otherwise made available to it,
discussed with or reviewed by or for it, or that was publicly available, and
Merrill Lynch did not assume any responsibility for independently verifying such
information or undertake an independent evaluation or appraisal of any of our
assets or liabilities, nor was Merrill Lynch furnished with any such evaluation
or appraisal. In addition, Merrill Lynch did not assume any obligation to
conduct, nor did Merrill Lynch conduct, any physical inspection of our
properties or facilities. With respect to the financial forecast information and
the expected synergies to be derived from the merger furnished to or discussed
with Merrill Lynch by Dura and us, Merrill Lynch assumed that this information
had been reasonably prepared and reflected the best then available estimates and
judgment of Dura's and our management as to the expected future financial
performance of Dura or us and the expected synergies to be derived from the
merger. Merrill Lynch also assumed that the final form of the merger agreement
would be substantially similar to the last draft it reviewed.
Merrill Lynch's opinion was necessarily based upon market, economic and
other conditions as they existed and could be evaluated on, and on the
information made available to Merrill Lynch as of, the date of the opinion.
Merrill Lynch assumed that in the course of obtaining the necessary regulatory
or other consents or approvals (contractual or otherwise) for the merger, no
restrictions, including any divestiture requirements or amendments or
modifications, would be imposed that would have a material adverse effect on the
contemplated benefits of the merger. Under its engagement by Dura, Merrill Lynch
has no obligation to update its opinion to take into account events occurring
after the date that its opinion was delivered to Dura's board of directors. As a
result, circumstances could develop prior to consummation of the merger that, if
known at the time Merrill Lynch rendered its opinion, would have altered its
opinion. Merrill Lynch expresses no opinion as to the prices at which the
warrants or the shares of common stock of Dura will trade following the
announcement or consummation of the merger.
The matters considered by Merrill Lynch in arriving at its opinion are based
on numerous macroeconomic, operating and financial assumptions with respect to
industry performance, general business and economic conditions, many of which
are beyond Dura's and our control, and involve the application of complex
methodologies and educated judgment. Any estimates incorporated in the analyses
performed by Merrill Lynch are not necessarily indicative of actual past or
future results or values, which may be significantly more or less favorable than
these estimates. Estimated values do not purport to be appraisals and do not
necessarily reflect the prices at which businesses or companies may be sold in
the future.
At the meeting of Dura's board of directors held on March 20, 2000, Merrill
Lynch presented financial analyses accompanied by written materials in
connection with the delivery of its oral opinion at that meeting and its written
opinion as of March 20, 2000.
The following is a summary of the material financial and comparative
analyses performed by Merrill Lynch in arriving at its opinion. Some of the
summaries of financial analyses include information presented in tables. In
order to fully understand the financial analyses performed by Merrill Lynch, the
tables must be read together with the accompanying text of each summary. The
tables alone do not constitute a complete description of the financial analyses,
including the methodologies and assumptions underlying the analyses, and viewed
in isolation could create a misleading or incomplete view of the financial
analyses performed by Merrill Lynch.
ANALYSIS OF COMPARABLE BUYBACK TRANSACTIONS. Merrill Lynch conducted an
analysis of comparable buyback transactions. Merrill Lynch deemed these buyback
transactions comparable and relevant in evaluating the merger because they
represent instances in which special-purpose research and development companies
were purchased at a discount to the acquiring companies' respective option
contract prices. In addition, these special-purpose research and development
companies were engaged in reasonably similar businesses to that of Spiros and
had reasonably similar operating profiles and financial statistics to those of
Spiros, or were valued in the public market on a basis reasonably similar
34
to that of Spiros. This analysis considered the premiums to pre-announcement
price and premiums to cash value paid in comparable buyback transactions in
order to calculate a range of implied equity values per share of our callable
common stock. Merrill Lynch reviewed and analyzed the following six completed
comparable discounted unit/share buyback transactions:
ACQUIRED COMPANY ACQUIRING COMPANY
- ---------------- -----------------
SciGenics, Inc. Genetics Institute
Aramed, Inc. Gensia Pharmaceuticals, Inc.
Tocor II, Inc. Centocor, Inc.
CytoRad, Inc. Cytogen Corporation
Neozyme II Corporation Genzyme Corporation
PerSeptive Technologies II Corporation PerSeptive Biosystems, Inc.
Merrill Lynch calculated, among these comparable buyback transactions, the
premium of adjusted offer price (which is the offer price adjusted by the
theoretical value of attached warrants in the case of unit buyback transactions)
relative to share prices of the targets before the public announcement of the
transaction (adjusted by the theoretical value of attached warrants in the case
of unit buyback transactions), finding a range from 2% to 120% with a mean value
of 54% and a median value of 51%, and cash value on the balance sheet per share,
finding a range from 13% to 422% with a mean value of 128% and a median value of
61%. Merrill Lynch also calculated the discount of the adjusted offer price
relative to the contract price of the units/shares, finding a range from 20% to
59% with a mean value of 31% and a median value of 27%.
The following table presents the ranges of implied equity values per share
of our callable common stock as compared with the merger consideration of $15.75
per share (consisting of $13.25 in cash and $2.50 in warrants to purchase shares
of Dura common stock) based upon the calculated value at the time the merger was
announced:
IMPLIED EQUITY
VALUE PER SHARE OF
OUR CALLABLE
COMMON STOCK
-------------------
LOW HIGH
-------- --------
Premium to the pre-announcement price....................... $15.69 $20.34
Premium to the cash value................................... $13.98 $20.10
CONSIDERATION IMPLIED IN THE MERGER..................... $15.75
These ranges of implied equity values supported the fairness conclusion
reached by Merrill Lynch. However, none of the buyback transactions that Merrill
Lynch compared to the merger is identical to the merger. Accordingly, a complete
analysis of the results of the foregoing calculations cannot be limited to a
quantitative review of these results and involves complex considerations and
judgments concerning differences in our financial and operating characteristics
which would differentiate our acquisition value from that of the companies to
which we were being compared.
COMPARABLE COMPANY ANALYSIS. Using publicly available information, Merrill
Lynch compared financial and operating information and ratios for the following
research and development companies and used the ratios of market value relative
to cash and share price relative to IPO price for such companies in order to
calculate a range of implied equity values per share of our callable common
stock:
- Crescendo Pharmaceuticals Corporation;
- Intelligent Polymers Limited; and
- Allergan Speciality Therapeutics, Inc.
Merrill Lynch deemed these research and development companies comparable and
relevant in evaluating the merger because they are all publicly traded
special-purpose research and development companies which are engaged in
businesses that are reasonably similar to that of Spiros, and which
35
have operating profiles and financial statistics that are reasonably similar to
those of Spiros, or which are valued in the public markets on a basis reasonably
similar to that of Spiros.
Merrill Lynch analyzed various statistics on the comparable research and
development companies and calculated the market value relative to cash, finding
a mean value of 228.7%, and the share price relative to the research and
development companies' IPO price, finding a mean value of 168.1%.
The following table presents the range of implied equity values per share of
our callable common stock as compared with the merger consideration valued at
$15.75 per share at the time of announcement:
IMPLIED EQUITY
VALUE PER SHARE OF
OUR CALLABLE
COMMON STOCK
----------------------
LOW HIGH
-------- --------
Market value to cash per share.............................. $3.50 $19.67
CONSIDERATION IMPLIED IN THE MERGER..................... $15.75
This range of implied equity values supported the fairness conclusion
reached by Merrill Lynch. However, none of the companies that Merrill Lynch
compared are identical to us. Accordingly, a complete analysis of the results of
the foregoing calculations cannot be limited to a quantitative review of these
results and involves complex considerations and judgments concerning differences
in financial and operating characteristics of these companies and other factors
that could affect the public trading value of these companies, as well as ours.
DISCOUNTED CASH FLOW ANALYSIS. Merrill Lynch also performed a discounted
cash flow analysis based upon financial forecasts provided by Dura's and our
management. The purpose of this discounted cash flow analysis was to estimate
the current value of Spiros based on projections of future cash flow and compare
such valuation to the merger consideration on a per share basis. Utilizing the
forecasts provided, Merrill Lynch calculated a range of equity values per share
based upon the sum of the discounted net present value of our eight-year stream
(2000-2007) of projected unlevered free cash flows plus the discounted net
present value of the terminal value.
In conducting its discounted cash flow analysis, Merrill Lynch utilized
projections representing two cases, the base case and the adjusted base case.
The adjusted base case differs from the base case in that it includes:
- annual management, administrative and technology access fees paid by us to
Dura;
- direct costs incurred by us; and
- tax benefits to Dura expected to result from the merger.
For each case, Merrill Lynch used a 0% to 5% perpetual growth rate post-2007
and the following discount rates:
- 30% to 35% discount rate on operating cash flows;
- 5% discount rate on development costs; and
- 10% discount rate on capital expenditures.
36
The following table presents the ranges of implied equity values per share
for our callable common stock as compared with the Merger consideration valued
at $15.75 per share at the time of announcement:
IMPLIED EQUITY
VALUE PER SHARE OF
OUR CALLABLE
COMMON STOCK
-------------------
LOW HIGH
-------- --------
Base case................................................... $11.16 $20.54
Adjusted base case.......................................... $ 8.50 $18.15
CONSIDERATION IMPLIED IN THE MERGER..................... $15.75
These ranges of implied equity values supported the fairness conclusion
reached by Merrill Lynch.
PRO FORMA MERGER ANALYSIS. Merrill Lynch reviewed projected pro forma
effects of the merger in order to estimate the impact of the merger on Dura's
earnings per share, utilizing financial forecasts for Dura provided by the
management of Dura. Based upon the calculated value at the time the merger was
announced of the merger consideration of $15.75 per share, consisting of cash
and a warrant, for each share of our callable common stock, Merrill Lynch
observed that the merger would be dilutive in 2001 and 2002 and would become
accretive in declining amounts during 2003 through 2005. Given the nature and
circumstances of the proposed transaction, this pro forma merger analysis, when
considered in conjunction with the results of the other analyses described
above, supported the fairness conclusion reached by Merrill Lynch.
OTHER FACTORS. In rendering its opinion, Merrill Lynch considered other
factors, including, among other things, a review of:
- the history of trading prices and volumes for our callable common stock
and units; and
- the history of trading prices for Dura common stock.
Merrill Lynch also analyzed the value of the warrant component of the merger
consideration based upon the Black-Scholes formula for valuing warrants of
publicly traded companies.
Merrill Lynch observed that the aggregate value of the merger consideration
per share of our callable common stock may range from $15.06 to $16.47 at the
closing of the merger depending on the value of the warrant component of the
merger consideration which is subject to adjustment as described in "Description
of the Warrants".
Based upon the calculated value at the time the merger was announced of the
merger consideration of $15.75 per share for each share of our callable common
stock, Merrill Lynch also observed that, the premium of the merger consideration
relative to the pre-announcement price, which was $11.625, the closing price as
of February 11, 2000, the last trading day prior to the announcement of Dura's
initial offer, of our callable common stock is 35% and the premium of the merger
consideration relative to the cash value per share of our callable common stock
is 80%.
The summary set forth above does not purport to be a complete description of
the analyses performed by Merrill Lynch in arriving at its opinion. The
preparation of a fairness opinion is a complex process involving various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances
and, therefore, the opinion is not readily susceptible to partial or summary
description. In arriving at its opinion, Merrill Lynch did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, Merrill Lynch believes that its analyses must be considered
as a whole and that selecting portions of its analyses and of the factors
considered by it, without considering all factors and analyses, could create a
misleading view of the analyses underlying Merrill Lynch's opinion.
Dura retained Merrill Lynch based upon Merrill Lynch's experience and
expertise. Merrill Lynch is an internationally recognized investment banking
firm with substantial experience in mergers and acquisitions transactions.
Merrill Lynch, as part of its investment banking business, is continually
37
engaged in the valuation of businesses and securities in connection with mergers
and acquisitions and for other purposes and has substantial experience in
mergers and acquisitions transactions.
Dura has agreed to pay Merrill Lynch a fee totaling $1.5 million for its
services, excluding reasonable out of pocket expenses incurred by Merrill Lynch,
upon the consummation of the merger. In addition, Dura has agreed to indemnify
Merrill Lynch for selected liabilities arising out of or in conjunction with its
rendering of services under its engagement, including selected liabilities under
the federal securities laws.
Merrill Lynch is currently engaged by Dura with respect to the evaluation of
strategic alternatives under consideration by Dura and has, in the past,
provided financial advisory and financing services to us and Dura and may
continue to do so and has received, and may receive, fees for the rendering of
such services. Merrill Lynch acted as managing underwriter of our initial public
offering.
In addition, in the ordinary course of its business, Merrill Lynch may
actively trade our callable common stock, as well as securities of Dura, for its
own account and for the accounts of its customers and, accordingly, may at any
time hold a long or short position in these securities.
PURPOSES OF THE MERGER AND PLANS OR PROPOSALS
The purpose of the merger is for Dura to acquire us, including all rights to
the use of the Spiros technology with the compounds licensed to us. Subsequent
to the acquisition, all of our callable common stock will be retained by Dura,
which has no present intention to dispose of our callable common stock.
Subsequent to the acquisition, Dura has no plans, proposals or negotiations
relating to any of the following in regard to us:
- extraordinary transactions, such as a merger, reorganization or
liquidation, involving us;
- purchases, sales or transfers of a material amount of our assets;
- material changes in our dividend rate or policy, indebtedness or
capitalization;
- material changes in our corporate structure or business;
- acquisitions by any person of our securities or the disposition of our
securities; or
- any changes in our charter, bylaws or other governing instruments or other
actions that could impede the acquisition of control of us.
Under the terms of the merger agreement, we will maintain a management team
consistent with the management of Dura's other wholly owned subsidiaries, but
our directors will be replaced by the directors of Dura's wholly owned
subsidiary formed in connection with the merger. In connection with the merger:
- our shares of callable common stock will no longer be eligible to be
listed on The Nasdaq Stock Market;
- our shares of callable common stock will become eligible for termination
of registration under Section 12(g)(4) of the Exchange Act; and
- our obligation to file reports under Section 15(d) of the Exchange Act
will be suspended.
38
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
We and Dura may make forward-looking statements in this document and the
documents Dura incorporates by reference, all of which are subject to risks and
uncertainties. Forward-looking statements include information concerning
possible or assumed future business success or financial results. The
forward-looking statements include, but are not limited to, statements as to
expectations regarding:
- future revenue opportunities;
- Dura's integration of our business;
- acquisition of complementary products and late-stage product development
candidates;
- future expense levels, including research and development, selling,
general and administrative expenses, and amortization of goodwill and
other intangibles;
- strategic relationships and distribution relationships;
- future capital needs;
- the emergence of new technologies;
- expansion of marketing and sales forces;
- investment in new product development and enhancements;
- expansion into new markets; and
- future financial pronouncements.
When we or Dura use words like "believe," "expect," "anticipate" or similar
words, those statements are forward-looking statements.
You should note that an investment in the warrants and shares of Dura's
common stock involves risks and uncertainties that affect Dura's future business
success or financial results. Dura's actual results could differ materially from
those anticipated expressly or implicitly in these forward-looking statements as
a result of many factors, including those set forth in "Risk Factors" and
elsewhere in this document and the documents Dura incorporates by reference.
Dura believes that it is important to communicate its expectations to you.
However, there may be events in the future that Dura is not able to predict
accurately or over which Dura has no control. You should be aware that the
occurrence of the events described in the risk factors and elsewhere in this
document and the documents which Dura incorporates by reference could materially
and adversely affect Dura's business, financial condition and operating results.
39
THE SPECIAL MEETING
WE ARE FURNISHING THIS DOCUMENT TO OUR STOCKHOLDERS AS PART OF THE
SOLICITATION BY OUR BOARD OF DIRECTORS OF PROXIES FOR USE AT THE SPECIAL
MEETING.
DATE, TIME AND PLACE
We will hold the special meeting on Thursday, August 31, 2000, beginning at
9:00 a.m. at our offices at 7475 Lusk Boulevard, San Diego, California 92121.
PURPOSE OF THE SPECIAL MEETING; MATTERS TO BE CONSIDERED
At the special meeting, you will be asked to vote on a proposal to adopt the
merger agreement.
You will be asked to consider any other matter properly brought before the
special meeting or any adjournment or postponement of it by our board of
directors. As of the date of this document, our board of directors knows of no
other matter to be considered at the special meeting. We have made no provision
in connection with the merger to grant security holders access to our corporate
files or to obtain counsel or appraisal services for them at our expense.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
Only holders of record of our callable common stock and special common stock
at the close of business on July 21, 2000, the record date, are entitled to vote
at the special meeting. On the record date, 6,325,000 shares of our callable
common stock and 1,000 shares of our special common stock were issued and
outstanding and held by approximately 1,000 holders and one holder of record,
respectively. A quorum will be present at the special meeting if a majority of
the issued and outstanding shares of our callable common stock and our special
common stock entitled to vote on the record date are represented in person or by
proxy. If a quorum is not present at the special meeting, the special meeting
will be adjourned or postponed to solicit additional proxies. No shares voted
against the proposal will be voted in favor of one of these adjournments or
postponements. Our stockholders will be entitled to one vote for each share of
our callable common stock and our special common stock held of record at the
close of business on the record date.
Stockholders on the record date who do not vote in favor of approving the
merger, who file with us before the vote on the merger a written notice of
intent to demand the fair value of their shares and comply with all other
statutory requirements of Section 262 of the Delaware General Corporation Law, a
copy of which is attached to this document as Annex D, will be entitled to
dissenter's rights. If you vote in favor of approving the merger, you will waive
your dissenter's rights. See "Rights of Dissenting Stockholders."
VOTES REQUIRED
The votes required of our stockholders are:
- a majority of the outstanding shares of our callable common stock; and
- the affirmative vote of the holder of the issued and outstanding shares of
our special common stock, all of which shares are held by Dura.
VOTING BY OUR DIRECTORS AND EXECUTIVE OFFICERS AND DURA
At the close of business on the record date, members of our board of
directors and our executive officers owned of record and were entitled to vote
29,960 shares of our callable common stock and no shares of our special common
stock, which represented less than 1% of the outstanding shares. Each of our
directors and executive officers and Dura intends to vote in favor of the
proposal at the special meeting.
40
VOTING OF PROXIES
All shares represented by properly executed proxies received in time for the
special meeting will be voted at the special meeting in the manner specified by
the holders of our callable common stock and special common stock. If you do not
provide voting instructions but properly return a proxy, your shares will be
voted in favor of the proposal.
We will treat shares abstaining from voting at the special meeting as
present for purposes of determining whether a quorum is present at the special
meeting.
Brokers who hold shares of our callable common stock in "street name" for
customers who are the beneficial owners of the shares may not give a proxy to
vote their customers' shares unless specific instructions are received from
their customers. These non-voted shares are referred to as broker non-votes and
will not be counted as present for determining whether there is a quorum at the
special meeting and will have the effect of a vote against the proposal.
John R. Cook and Erle T. Mast, the holders of proxies under the enclosed
proxy cards, may vote all shares represented by proxies in favor of one or more
adjournments or postponements of the special meeting, including adjournments or
postponements to permit further solicitations of proxies. No proxy voted against
the proposal will be voted in favor of one of these adjournments or
postponements. In the event any matter other than the proposal described in this
document is properly brought before the special meeting, your shares of our
callable common stock will be voted by Messrs. Cook and Mast in their
discretion, unless you indicate that you do not wish to grant Messrs. Cook and
Mast that authority.
REVOCABILITY OF PROXIES
You may revoke your proxy at any time prior to its being voted by filing an
instrument of revocation with your broker. You may also revoke your proxy by
filing with your broker a duly executed proxy bearing a later date. If your
shares are held in your own name, and not by your broker in "street name," you
may revoke your proxy by appearing at the special meeting and voting in person.
Currently, all of our callable common stock is held in "street name." Otherwise,
you may appear at the meeting with a signed revocation and a legal proxy from
your broker allowing you to vote your shares in person.
SOLICITATION OF PROXIES
We will bear the cost of the solicitation of proxies from our stockholders.
In addition to solicitation by mail, our directors, officers and employees may
solicit proxies from stockholders by telephone or other electronic means or in
person. We will cause brokerage houses and other custodians, nominees and
fiduciaries to forward solicitation materials to the beneficial owners of shares
of our callable common stock held of record by these persons. We will reimburse
custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses
in doing so. We have engaged Georgeson Shareholder Communications Inc. to
represent us in connection with the solicitation of proxies at a cost to us of
approximately $9,000 plus expenses, and will indemnify them against any losses
arising out of proxy soliciting services on our behalf.
THE MATTER TO BE CONSIDERED AT THE SPECIAL MEETING IS OF GREAT IMPORTANCE TO
ALL OF OUR STOCKHOLDERS. OUR BOARD OF DIRECTORS URGES YOU TO READ AND CAREFULLY
CONSIDER ALL OF THE INFORMATION PRESENTED IN THIS DOCUMENT AND THE DOCUMENTS
INCORPORATED BY REFERENCE. PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY
PROMPTLY IN THE ACCOMPANYING BUSINESS REPLY ENVELOPE. YOU MAY ALSO VOTE BY
TELEPHONE OR BY USING THE INTERNET. YOU WILL RECEIVE SPECIFIC INSTRUCTIONS FROM
YOUR BROKER ON HOW TO VOTE TELEPHONICALLY OR BY USING THE INTERNET. IF YOU VOTE
TELEPHONICALLY OR BY USING THE INTERNET AND WISH TO CHANGE YOUR VOTE, PLEASE
FOLLOW YOUR BROKER'S INSTRUCTIONS INCLUDED WITH YOUR PROXY CARD.
41
INTERESTS OF CERTAIN PERSONS IN THE MERGER
When you consider the recommendation of the special committee and our board
of directors that you vote in favor of adoption of the merger agreement, you
should be aware that some of our officers and directors and their associates
have an interest in the merger in addition to their interests solely as our
stockholders, which are described below. These interest may create potential
conflicts of interest. The special committee and our board was aware of each of
these interests when it considered and approved the merger agreement and the
merger.
Dura will be required to indemnify, to the fullest extent allowed under law,
each individual who is or was one of our officers or directors for all actions
taken in those capacities, or at our request, at or before the completion of the
merger. Dura will honor all of our indemnification obligations to those persons,
whether created by our certificate of incorporation, bylaws or indemnification
agreements, and will not repeal or amend the certificate or by-law provisions or
the indemnification agreements regarding such indemnification in a manner that
could be adverse to the interests of such former directors and officers.
For six years after completing the merger, Dura will also provide officers'
and directors' liability insurance policies covering acts or omissions before
the completion of the merger for each individual covered under our comparable
policy as of the date of the merger agreement. Dura will provide at least the
same coverage and amounts containing terms no less advantageous to such officers
and directors as provided in our comparable policy as of the date of the merger
agreement.
Selected officers of Dura and us and members of our board have received
options to purchase an aggregate of 352,000 shares of our callable common stock.
Each stock option held by members of the special committee will be converted
into the right to receive, upon exercise, the per share merger consideration
described elsewhere in this document. Each of our other stock options will be
converted into the right to receive for each share of our callable common stock
subject to the option cash in an amount equal to the positive difference, if
any, between $13.25 plus the average of the closing trading price of the
warrants for first 10 trading days following completion of the merger (not to
exceed $3.22) minus the exercise price per share for the option.
Under the agreements between Dura and us, Dura conducts our research and
development, provides us with management, administration and clinical services
and is responsible for manufacturing and marketing the Spiros products.
Accordingly, we are dependent on the financial data and analyses provided by
Dura with respect to us, and Dura's interests may not be the same as our
callable common stockholders.
42
THE MERGER
ACCOUNTING TREATMENT AND FUTURE REPORTING
Dura will account for the merger using the purchase method of accounting
under Accounting Principles Board Opinion No. 16. Our results of operations will
be included in Dura's consolidated results of operations following completion of
the merger. Dura expects to incur a significant charge in the period in which
the merger closes relating to the acquisition of our in-process technology, the
amount of which will be determined based on an independent valuation of our
assets and liabilities performed as of the effective date of the merger.
COMPARISON OF RIGHTS OF DURA'S STOCKHOLDERS AND OUR STOCKHOLDERS
The rights of Dura stockholders and our stockholders are currently governed
by the General Corporation Law of the State of Delaware and their and our
respective certificates of incorporation and bylaws. Upon completion of the
merger, the rights of Dura stockholders and of our stockholders who will become
Dura stockholders upon exercise of the warrants received by them in the merger
will be governed by the General Corporation Law of the State of Delaware, Dura's
certificate of incorporation and Dura's bylaws.
The rights of our stockholders under the General Corporation Law of the
State of Delaware are identical to those of Dura stockholders. The rights of our
stockholders under our certificate of incorporation and bylaws prior to the
merger are substantially the same as the rights of Dura stockholders under
Dura's certificate of incorporation and bylaws, with the following principal
exceptions:
EXCULPATION PROVISIONS
SPIROS CORP. II
- Exculpation provision applies to officers, as well as directors; and
- eliminates liability of each director and officer for monetary damages to
the fullest extent permitted under California law.
DURA
- Exculpation provision applies to directors, and does not apply to
officers; and
- does not make specific exculpation provision under California law in its
certificate of incorporation.
RESTRICTIONS ON BUSINESS COMBINATIONS
SPIROS CORP. II
- Must be approved by an affirmative vote of the holder of the issued and
outstanding shares of special common stock.
DURA
- No restrictions on business combinations in its charter.
43
DIRECTORS
SPIROS CORP. II
- Number and term determined by the board, except that until the purchase
option is exercised, expires or terminates, the board shall consist of at
least five members;
- holders of the special common stock are entitled to elect two directors
until the purchase option is exercised, expires or terminates;
- directors, other than those elected by the holders of the special common
stock, may be removed with or without cause by the stockholders;
- directors elected by the holders of the special common stock removed with
or without cause by a vote of more than 50% of the outstanding shares of
special common stock;
- vacancies, other than a vacancy in the director elected by the holders of
the special common stock, filled by board or stockholders; and
- vacancies of director elected by the holders of the special common stock
filled by a vote of more than 50% of the outstanding shares of special
common stock.
DURA
- Number determined by the board;
- two classes of directors with staggered two year terms;
- removal only for cause and by a vote of the majority of the outstanding
shares; and
- vacancies filled only by board but, if filled by less than a majority of
the board, stockholders holding at least 10% of the total shares
outstanding may order an election.
AMENDMENT OF ORGANIZATIONAL DOCUMENTS
SPIROS CORP. II
- Certificate of incorporation may be amended by a vote of the:
- majority of the holders of the outstanding callable common stock;
- with respect to our authorized capital stock and the provisions
regarding election of directors, by the holder of special common stock
in addition to a majority of the callable common stockholders; and
- with respect to the purchase option provisions, by a written
instrument approved by the holder of the special common stock and by
at least two-thirds of the outstanding callable common stock.
DURA
- Certificate of incorporation may be amended by a majority vote of
stockholders; and
- majority vote of board of directors sufficient to effect any amendment to
bylaws.
- with respect to the sections setting forth the amount of the purchase
option exercise price, the periods and conditions under which the
purchase option may be exercised and paid, the type of securities or
method of calculating the number of securities issued upon payment of
the purchase option exercise price, the written approval of the
holders of 90% of the callable common stock.
44
- Bylaws may be amended by the board of directors or majority vote of the
holders of the outstanding callable common stock and special common stock,
each voting separately as a class.
VOTING RIGHTS
SPIROS CORP. II
- One vote per share of the callable common stock on all matters, except as
set forth below;
- special common stock elects two directors; and
- the vote of the holder of special common stock is required to approve:
- allotment or issue of capital stock;
- reduction of authorized capital stock;
- alteration of rights of the special common stock;
- borrowings in excess of $1 million at one time;
- sale or liens on material part of business or assets;
- dividends, mergers or other consolidations or reorganizations;
- sale or disposition of substantially all of assets; and
- alteration of the stock purchase option and election of directors
provisions of the certificate of incorporation, or adoption, amendment
or repeal of the bylaws.
DURA
- One vote per share of common stock and no special voting requirements.
CALIFORNIA INDEMNIFICATION PROVISIONS
SPIROS CORP. II
- Authorized to indemnify directors and officers to the fullest extent
permissible under California law and to provide indemnification for agents
in excess of permitted amounts under section 317 of the California
Corporations Code subject to the limits of section 204 of the California
Corporations Code, with respect to actions for breach of duty.
DURA
- Does not make specific indemnification provision under California law in
its certificate of incorporation.
45
The preceding summary of exceptions is not intended to be complete and is
qualified in its entirety by reference to Dura's certificate of incorporation
and bylaws, and our certificate of incorporation and bylaws. Dura incorporates
by reference its description of its common stock, its certificate of
incorporation and its bylaws and will send copies to our stockholders upon
request of Dura's secretary.
RELATIONSHIP BETWEEN US AND DURA
The following is a summary of various provisions of our agreements with
Dura. The summary is qualified in its entirety by reference to the full text of
such agreements, copies of which may be obtained upon request of Dura's
secretary.
STOCK PURCHASE OPTION
According to our certificate of incorporation, Dura, as holder of all issued
and outstanding shares of special common stock, has the right to purchase all,
but not less than all, of our callable common stock outstanding at the time the
right is exercised. The purchase option is exercisable at any time prior to the
earlier of December 31, 2002 or the 90th day after the date we provide Dura with
notice that we have spent substantially all of our available cash. Dura may, at
its election, extend such period by providing additional funding for the
continued development of the Spiros products, but in no event beyond
December 31, 2002. If the purchase option is exercised, the exercise price,
calculated on a per share basis, will be as follows:
IF OUR CALLABLE COMMON STOCK IS ACQUIRED UNDER THE PURCHASE OPTION EXERCISE PRICE
- ------------------------------------------------------------------ --------------
On or after July 1, 2000 and on or before September 30, 2000... $27.96
On or after October 1, 2000 and on or before December 31, 2000... 29.41
On or after January 1, 2001 and on or before March 31, 2001.... 31.10
On or after April 1, 2001 and on or before June 30, 2001....... 32.88
On or after July 1, 2001 and on or before September 30, 2001... 34.77
On or after October 1, 2001 and on or before December 31, 2001... 36.76
On or after January 1, 2002 and on or before March 31, 2002.... 38.87
On or after April 1, 2002 and on or before June 30, 2002....... 41.10
On or after July 1, 2002 and on or before September 30, 2002... 43.46
On or after October 1, 2002 and on or before December 31, 2002... 45.95
The exercise price was mutually determined by us and Dura, at the time of
our initial public offering, giving consideration to:
- a compound annual rate of return upon exercise, as required by potential
investors, to be achieved upon any exercise of the purchase option;
- the implied returns to investors purchasing securities with a similar
structure historically;
- the comparability of the offering to those prior offerings, the value of
the warrants;
- the nature of Spiros products;
- the agreements between us and Dura; and
- other factors and advice given by the underwriters of the offering.
The exercise price may be paid in cash or shares of Dura common stock, or
any combination of cash and stock, at Dura's sole discretion. Any such shares of
Dura common stock will be valued based upon the average of the closing price for
Dura common stock on The Nasdaq Stock Market for 10 trading days immediately
preceding the date of the exercise notice. In the event the purchase option were
transferred, the payment by the subsequent holder of the majority of the special
common stock could also be made in cash or, if such holder or its parent is a
company whose common equity
46
securities are listed on a national securities exchange or admitted to unlisted
trading privileges or listed on The Nasdaq Stock Market, in the sole discretion
of such holder, in shares of such listed common equity security. Dura presently
intends to acquire our callable common stock under the merger agreement, and
therefore does not currently intend to exercise the purchase option described
above.
Dura owns all of our issued and outstanding special common stock, which
grants Dura the purchase option and confers voting and other rights, including
the right to elect two directors to our board. Under our certificate of
incorporation, we are prohibited, until the expiration of the purchase option,
from taking or permitting actions inconsistent with Dura's rights under the
purchase option. Examples of prohibited actions on our part without the consent
of Dura include:
- paying dividends;
- issuing additional shares of capital stock;
- borrowing more than $1 million in total;
- merging, liquidating, or selling all or substantially all of our assets;
or
- altering the terms of the purchase option.
At present, Dura has indicated it has no intention of transferring its
shares of special common stock.
TECHNOLOGY LICENSE AGREEMENT
We entered into a technology license agreement with Dura. Under the
agreement, Dura granted us an exclusive, worldwide, perpetual, royalty-bearing
license to use the core Spiros technology in research, development and
commercialization (except with respect to beclomethasone in Asia) of the Spiros
products, including rights to patents, patent applications and other
intellectual property rights.
As consideration for these license rights granted to us by Dura, we will pay
Dura a technology access fee equal to the greater of 5% of the net sales of each
Spiros product or $2 million for all Spiros products in any calendar year
beginning in 1998. Our obligation will terminate, on a country-by-country basis,
within 10 years from the first sale of that Spiros product in those countries
where no patents covering such product are issued and in those countries where
patents covering the Spiros products are issued, upon the expiration of the
last-to-expire patent covering that Spiros product in such country.
In addition, we granted Dura:
- a worldwide, exclusive, royalty-free license to use the core technology
and the program technology to develop the Spiros products under the terms
of our development agreement;
- a worldwide, exclusive, royalty-bearing license to use the program
technology to sell Spiros products worldwide under the terms of our
manufacturing and marketing agreement;
- upon Dura's exercise of the option for Albuterol Spiros, a worldwide,
exclusive, royalty-free, irrevocable, perpetual license to the program
technology to develop, manufacture and commercialize Albuterol Spiros;
- upon Dura's exercise of the product option, a worldwide, exclusive,
royalty-free, irrevocable, perpetual license to the program technology to
develop, manufacture and commercialize the Spiros product for which the
option is exercised; and
- a worldwide, exclusive, royalty-free, irrevocable, perpetual license to
the program technology, including technology relating to enhancements to
the existing Spiros technology or any next generation inhaler system, to
develop, manufacture and commercialize products other than the Spiros
products, including products that compete with the Spiros products.
47
Under this agreement, Dura must use commercially reasonable efforts to
secure the rights of third parties in technology that is necessary or useful to
the development of the Spiros products. We have no obligation to accept any
grant of such rights or to assume any obligation. If we desire to obtain any of
those rights, we and Dura both agreed to negotiate in good faith regarding the
allocation of any royalty, license fee or other payments payable to the third
party and the assumption of any obligations applicable to that license.
Until the expiration of the purchase option, Dura will direct and cause, at
our expense, appropriate patent applications to be prepared, prosecuted and
maintained with respect to patents licensed to us and with respect to any
technology developed or acquired on behalf of us by Dura. Upon the termination
of the unexercised purchase option, all patents and patent applications
developed or acquired by Dura on our behalf will be assigned to us.
Under the terms of the technology agreement, if we or Dura receive notice of
alleged infringement of any patent, the other party must be notified of the
infringement. All recoveries in any action to enforce patent rights will be
retained by the parties in proportion to costs paid by the parties in enforcing
that action.
We have agreed to indemnify Dura against specified third-party claims,
including patent infringement claims, relating to our use of the program
technology or breach of the technology agreement, development agreement or
manufacturing and marketing agreement. Dura agreed to indemnify us against
specified third-party claims, including patent infringement claims, relating to
Dura's use of the program technology, performance of development or breach of
the three main agreements with Dura.
Prior to the expiration of the purchase option, without Dura's prior written
consent we cannot:
- license, sublicense, encumber or otherwise transfer any rights in the
program technology;
- make, use or sell any of the program technology; or
- authorize, cause or assist in any way any other person to do any of the
above.
Following the expiration or termination of the purchase option, these
limitations will cease to be applicable. Thereafter, we would have the right to
license, sublicense, encumber or otherwise transfer the program technology for
use with any Spiros products that have not been acquired by Dura through the
exercise of either product option. Dura may assign its rights and delegate its
obligations under the technology agreement only to an affiliate of Dura,
selected successors of Dura or specified persons that acquired substantially all
of Dura's assets.
The technology agreement will remain in full force and effect indefinitely,
unless terminated by mutual agreement of the parties or by Dura's exercise of
the purchase option. Either Dura or we may terminate the technology agreement
prior to its expiration if the other party:
- breaches any material obligation under the technology agreement or the
development agreement, which breach continues for a period of 60 days
after written notice of such breach;
- enters into any voluntary proceeding in bankruptcy, reorganization or an
arrangement for the benefit of its creditors, or its board of directors or
stockholders authorize such action; or
- fails to dismiss any such proceeding within 60 days after the same is
involuntarily commenced.
If we terminate the technology agreement, our license to use the program
technology will continue, except with respect to any Spiros products that have
been previously acquired by Dura through exercise of the product options. We
will be free to enter into arrangements with third parties to research, develop
and commercialize the Spiros products. If Dura terminates the technology
agreement:
- our license to use the core Spiros technology under the technology
agreement will terminate;
- all of our rights to the program technology will revert to Dura; and
48
- all rights to develop, use and sell the Spiros products will revert to
Dura.
Both parties will use reasonable efforts for a period of 120 days after the
technology agreement is terminated by Dura to reach agreement on royalties and
other compensation to be paid to us by Dura, solely with respect to the Spiros
products and the program technology. In the absence of such agreement, the
matter will be submitted to binding arbitration. Upon termination of the
technology agreement by us, we may not be able to make alternative arrangements
for the research, development and commercialization of some or all of the Spiros
products.
ALBUTEROL AND PRODUCT OPTION AGREEMENT
We entered into the albuterol and product option agreement with Dura under
which Dura may obtain the assets related to Albuterol Spiros and the assets
related to the other option product.
The assets related to the product acquired under this agreement include:
- the relevant Spiros product;
- the compound as formulated for use in the product;
- a perpetual, sublicensable, non-exclusive, royalty-free license to the
technology owned, developed or acquired by Dura during the term of the
development agreement applicable to the product for use solely with the
product; and
- all applications and documents filed with the FDA or a foreign regulatory
authority to obtain regulatory approval to commence commercial sale or use
of the product.
The option to acquire Albuterol Spiros is currently exercisable and ends on
the earlier of 360 days after receipt of FDA approval to market Albuterol Spiros
or the date Dura ceases to manufacture or market Albuterol Spiros in accordance
with the terms of the manufacturing and marketing agreement.
Upon exercise of the option to acquire Albuterol Spiros, Dura will make a
single payment to us in cash equal to the aggregate purchase option exercise
price, assuming acquisition of all shares of callable common stock in
December 2001, multiplied by a fraction, the numerator of which will equal the
development and commercialization costs and expenses incurred by us in
connection with the development and commercialization of Albuterol Spiros and
the denominator of which will equal the funds available for development of
Spiros products. Proceeds, if any, from the exercise of any product option are
excluded.
The other product option is currently exercisable with respect to each other
Spiros product and ends 90 days after receipt of FDA approval to market such
Spiros product. This option may only be exercised with respect to a single
Spiros product.
Upon exercise of the other product option, Dura will make a single payment
to us in cash equal to 110% of the aggregate purchase option exercise price,
assuming acquisition of all shares of callable common stock in December 2001,
multiplied by a fraction, the numerator of which will equal the development and
commercialization costs and expenses incurred by us in connection with the
development of such product and the denominator of which will equal the funds
available for development of Spiros products. Proceeds, if any, from the
exercise of any product option are excluded.
Any payments received by us with respect to the exercise of either product
option will be available to us to further develop Spiros products.
The product option agreement will automatically terminate in the event that
we terminate the technology agreement, the development agreement or the
manufacturing and marketing agreement, consistent with the terms of those
agreements. Additionally, the product option agreement will terminate on the
date the purchase option terminates, whether by exercise or otherwise. Dura
presently
49
intends to acquire the Spiros products pursuant to the merger and, therefore,
does not currently intend to exercise the albuterol or other product option.
DEVELOPMENT AGREEMENT
We entered into a development agreement with Dura under which Dura agreed to
use commercially reasonable efforts to develop the Spiros products and to make
other development expenditures. Dura furnishes all labor, supervision, services,
supplies and materials necessary to perform the development.
Dura has also agreed to use commercially reasonable efforts to obtain the
rights to, and to sublicense to us, any patent or technology license held by a
third party that Dura reasonably determines to be necessary or useful to enable
Dura to conduct the development. Dura also acts as our exclusive agent for the
filing and prosecuting of all regulatory applications and permits required for
FDA approval in Dura's name and any other necessary regulatory approvals for the
Spiros products. In the event that the purchase option expires unexercised, Dura
will use its reasonable efforts to cause all applications and documents filed
with the FDA or a foreign regulatory authority to obtain regulatory approvals
for the Spiros products, with respect to which Dura has not acquired exclusive
rights, to be assigned to us.
Dura conducts the development in accordance with an annual workplan and
budget. Dura provides us with annual workplans and budgets, which are subject to
approval and acceptance by our board of directors. Dura must report any
significant deviations from an annual workplan and budget in a timely manner.
Further, our reimbursement for expenditures to Dura may not exceed in any
calendar year 120% of the amount allocated in the applicable annual workplan and
budget, unless otherwise approved by us. Under the current development plan and
budget for 2000, we expected to expend 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.
During the term of the development agreement, both companies will provide
the other with quarterly reports with respect to all payments due and all
credits taken for such quarter. Dura's quarterly report to us includes a
statement of the development costs as defined in the agreement incurred during
the quarter and a summary of work performed for us. Additionally, each company
is required to maintain and make available for inspection by an independent
public accountant selected by the requesting party such records of the other
party as may be necessary to verify the accuracy of reports and payments made
under the development agreement. The inspection may occur once in each calendar
year and upon reasonable notice and during regular business hours.
Payments to Dura under the development agreement are made for the full
amount of all of Dura's research and development expenses, general and
administrative expenses, capital equipment costs, and all other costs and
expenses incurred by Dura in performing the activities described above. Our
payments are limited to the maximum amount of the funds we have available.
Development costs will include development expenses, including salaries,
benefits, supplies, and facilities and overhead allocations, that are billed at
a rate of fully burdened cost plus 25%. Services provided by third parties are
billed at a rate of cost plus 20%. This pricing structure is considered by Dura
to be consistent with contractual relationships it has had with other third
parties.
If either Dura or us determines that the development of a particular Spiros
product should be discontinued because continued development is not feasible or
is uneconomic, or that the development should be expanded to include additional
compounds, then both companies will use reasonable efforts to agree on the
nature of the development and the identity of any other compound to be
developed.
Under the development agreement, the costs of the manufacture and sale of
Spiros products to conduct clinical trials necessary to obtain FDA approval or
any other required regulatory approval are
50
included in development costs. Dura will pay us any revenue received from the
sale of such Spiros products prior to receipt of FDA approval to market.
Either company may terminate the development agreement prior to its
expiration if the other party:
- breaches any material obligation under the technology agreement or the
development agreement, which breach continues for a period of 60 days
after written notice thereof;
- enters into any voluntary proceeding in bankruptcy reorganization or an
arrangement for the benefit of its creditors, or its board of directors or
stockholders authorize such action; or
- fails to dismiss any such proceeding within 60 days after the same is
involuntarily commenced.
Dura's obligation to perform development work under the development
agreement terminates when we have cash or cash equivalents of less than
$5 million. We project this to occur during the second half of 2000 based on our
current development program. Dura may elect to provide additional funding for
the development of the Spiros products in its sole discretion.
Dura may assign its rights and delegate its obligations under the
development agreement only to an affiliate of Dura, selected successors of Dura
or selected persons that acquired substantially all of the assets of Dura. We
may not assign our rights or delegate our obligations under the agreement.
MANUFACTURING AND MARKETING AGREEMENT
We entered into a manufacturing and marketing agreement with Dura under
which we granted to Dura an exclusive, worldwide license to manufacture and
market the Spiros products. Dura will pay us on a quarterly basis a royalty of
7% of the net sales of each Spiros product. The royalty begins upon receipt of
FDA approval to market such product. Prior to the expiration of the option to
acquire assets related to Albuterol Spiros, no royalty payment is due with
respect to net sales of Albuterol Spiros.
Under this agreement, Dura agreed to use diligent efforts to commence sales
of each Spiros product promptly upon receiving FDA approval for such product.
Dura will be responsible for maintaining competent, qualified sales personnel
and agreed not to make any representations inconsistent with the approved
labeling of each Spiros product.
"Net sales" for purposes of this agreement and the technology agreement is
defined as the gross amount invoiced for sales of the Spiros products by Dura or
its sublicensees, if any, to third parties less:
- discounts actually allowed;
- credits for claims, allowances, retroactive price reductions or returned
Spiros products;
- prepaid freight charges incurred in transporting Spiros products to
customers;
- sales taxes and other governmental charges actually paid in connection
with the sales, but excluding income taxes; and
- royalty obligations paid to the inventor of some aspects of the Spiros
technology.
Net sales will not include sales between or among Dura, its affiliates and
its sublicensees unless such sales are for end use rather than for purposes of
resale.
This agreement will terminate upon the exercise or termination of the
purchase option or by mutual agreement of the parties at any time. In the event
Dura exercises either product option, this agreement will terminate with respect
to the relevant product, but will otherwise continue in full force and effect.
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SERVICES AGREEMENT
We entered into a services agreement with Dura under which Dura provides
specified management and administrative services to us, performed either
internally or externally on our behalf, at the rate of $100,000 per calendar
quarter. This agreement terminates on the earlier of the exercise of the
purchase option or 12 months after expiration of the purchase option.
SPECIAL COMMON STOCK
There are currently 1,000 shares of our special common stock issued, all of
which are held by Dura. The special common stock does not confer on its holder
the right to vote at any meeting of our stockholders except as required by law
or as described in the next paragraph. The holder of special common stock is
entitled to elect two of our directors. In the event we are dissolved, our
callable common stock has a priority over the special common stock with respect
to return of capital. The special common stock is not otherwise entitled to
participate in any way in our profits or assets. We do not presently intend to
issue any additional shares of special common stock.
Until the expiration of Dura's purchase option, no resolution or act of us
or our board of directors to authorize or permit any of the following will be
effective without the prior written approval of the holders of a majority of the
outstanding special common stock:
- the allotment or issue of shares or other securities of us or the creation
of any right to such an allotment or issue;
- the reduction of our authorized capital stock;
- the alteration of or any change to the rights, powers, preferences and
restrictions of the special common stock;
- outstanding borrowings of an aggregate of more than $1 million at any one
time;
- the sale or other disposition of or the creation of any lien or liens on
the whole or a material part of our business or assets;
- the declaration or payment of dividends or the making of any other
distributions to our stockholders;
- the merger, consolidation or reorganization of us with or into any other
corporation;
- the sale, liquidation or other disposition of all or substantially all of
our assets;
- the alteration or amendment of the provisions of our certificate of
incorporation containing the stock purchase option and providing for the
election of directors; and
- the adoption, amendment or repeal of our bylaws.
As a result, Dura, as the holder of the outstanding special common stock,
could preclude the holders of a majority of the shares of our callable common
stock and our board of directors from taking any of the actions described above
for so long as Dura continues to hold its shares. Dura may transfer or sell all,
but not less than all, of its shares of special common stock. As a result, an
unrelated third party may acquire rights associated with the special common
stock, including the rights discussed in this section. Any resolution to wind up
our affairs or to liquidate us will confer upon the holders of the special
common stock a right to vote. Shares of special common stock will carry a number
of votes equal to the total number of votes carried by our callable common stock
outstanding at that time.
SALES AND MARKETING
We rely entirely on Dura under the manufacturing and marketing agreement for
our sales and marketing efforts. Under the manufacturing and marketing
agreement, Dura is required to submit an annual marketing plan to be approved by
us.
52
DURA'S FUNDING OF THE MERGER
Dura expects to pay a total of approximately $89.7 million in cash, which
includes expenses related to the merger, and to issue up to 6,355,000 warrants
to purchase fractional shares of Dura common stock. Dura had $299.2 million of
cash and short-term investments as of March 31, 2000. Dura intends to pay the
cash portion of the merger consideration out of its available working capital
resources.
EXPENSES
The following table describes the estimated expenses to be incurred in
connection with the merger. We and Dura will each pay our own expenses.
DURA'S SPIROS CORP. II'S
EXPENSES EXPENSES
---------- -----------------
Investment banking................................ $1,700,000 $1,400,000
Legal............................................. 250,000 1,000,000
Accounting........................................ 50,000 50,000
Proxy solicitation................................ 0 25,000
Printing.......................................... 100,000 100,000
Miscellaneous..................................... 50,000 50,000
53
THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the merger
agreement. YOU ARE URGED TO READ THE FULL TEXT OF THE MERGER AGREEMENT WHICH IS
ATTACHED AS ANNEX A CAREFULLY AND IN ITS ENTIRETY.
TERMS OF THE MERGER
GENERAL
The merger agreement contemplates the merger of Starfish Acquisition
Corp., Inc., a wholly owned subsidiary of Dura, into us. After the merger, we
will survive as a wholly owned subsidiary of Dura. The merger will be completed
once Dura files a certificate of merger with the Secretary of State of the State
of Delaware. Dura believes that this filing will occur at the same time as the
closing under the merger agreement which, unless otherwise agreed, will occur as
promptly after June 18, 2000 as is reasonably possible, and not more than three
business days after the satisfaction or waiver of the conditions to the merger.
CONVERSION OF SECURITIES
Once we and Dura complete the merger, the following will occur:
- each share of our callable common stock owned by us as treasury stock and
each share of our callable common stock owned by Dura or any wholly owned
subsidiary of Dura, other than shares of our callable common stock in
accounts for the benefit of third parties, will be cancelled;
- each share of our special common stock owned by Dura, us or any wholly
owned subsidiary of Dura will be cancelled; and
- each share of our callable common stock which has not been cancelled will
be converted into the right to receive $13.25 in cash and a warrant to
purchase a fractional share of Dura common stock.
STOCK OPTIONS AND OTHER STOCK RIGHTS
Each stock option held by the members of the special committee will be
converted into the right to receive, upon exercise, the merger consideration.
Each of our other stock options will be converted into the right to receive cash
in an amount equal to $13.25 per share of callable common stock plus the average
of the closing trading price of the warrants for first 10 trading days following
completion of the merger minus the exercise price for the option.
EXCHANGE OF SHARES
ISSUANCE OF NEW SHARES
Concurrently with completion of the merger, Dura will deposit with
ChaseMellon Shareholder Services, LLC, as exchange agent, sufficient funds and
warrants to satisfy its obligation to the holders of our callable common stock.
Upon surrender of each share of our callable common stock to the exchange agent,
you will receive $13.25 in cash and a certificate representing a Dura warrant.
NO TRANSFERS AFTER COMPLETION
As soon as we complete the merger, our stock transfer books will be closed,
and there will be no further registration of transfers of our stock.
54
NO LIABILITY UNDER ABANDONED PROPERTY LAWS
Neither Dura, the new wholly owned subsidiary nor the exchange agent will be
liable to any of our stockholders for any undistributed cash or warrants that
are delivered to a public official under an applicable abandoned property or
similar laws.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains our representations and warranties relating
to, among other things:
- corporate organization, authority and qualification;
- capitalization;
- authority to execute and validity of the agreement;
- board approval required for the merger;
- stockholder approval required for the merger;
- consents and approvals required for the merger;
- reports and financial statements;
- absence of undisclosed liabilities;
- absence of litigation;
- the information supplied in connection with this document;
- opinion of financial advisor;
- insider interests; and
- brokers and finders.
The merger agreement also contains Dura's representations and warranties as
to, among other things:
- corporate organization, authority and qualification;
- capitalization;
- subsidiaries;
- authority to execute and validity of the agreement;
- warrant shares;
- consents and approvals required for the merger;
- reports and financial statements;
- the information supplied in connection with this document;
- sufficient funds for the merger consideration;
- share ownership;
- operations of Dura's merger subsidiary;
- brokers and finders;
- absence of specified changes or events; and
- absence of litigation.
COVENANTS
We agreed we will generally:
- conduct our business in the ordinary course of business and consistent
with past practice;
- not amend our organizational documents;
- not incur or modify any indebtedness or material contract, other than in
the ordinary course of business and consistent with past practice;
- not incur any debt or obligations under capital leases, modify the terms
of any liability, assume or otherwise become liable for the obligations of
any other person, make any loans to any other person, nor enter into any
material commitment;
55
- not transfer or encumber any assets other than in the ordinary course of
business and consistent with prior practice;
- not make any change in the compensation payable to any of our officers,
directors, employees, agents or consultants;
- not permit any insurance policy naming us as a beneficiary to be cancelled
without the prior written consent of Dura;
- not enter into any transaction relating to the purchase of assets other
than in the ordinary course of business and consistent with prior
practice;
- not pay any of our liabilities other than in the ordinary course of
business and consistent with prior practice;
- not adopt a plan of complete or partial liquidation;
- not change any accounting methods used by us unless required by generally
accepted accounting principles nor make any material election relating to
taxes;
- not take any action that would be likely to prevent the consummation of
the merger; and
- provide Dura with access to our records.
Both we and Dura have also agreed to:
- cooperate with each other in the preparation of information filed with the
SEC, including this document;
- update the other with respect to changes to their respective companies up
until the merger is completed, particularly with respect to any change
that could be expected to violate the merger agreement;
- ensure that there are no material misstatements or omissions contained in
the documents filed with the SEC in connection with the merger; and
- file as soon as practicable notifications under the Hart-Scott Rodino
Antitrust Improvements Act, respond as promptly as practicable to any
inquiries received from the Federal Trade Commission and request early
termination of the Hart-Scott-Rodino Antitrust Improvements Act waiting
period.
NO SOLICITATION OF TRANSACTIONS
We agreed that we will not directly or indirectly solicit or entertain a
proposal by a third party to acquire an interest in us or propose, enter into or
participate in any discussions or negotiations regarding any proposal of that
type, unless our board concludes in good faith, with the advice of an
independent financial advisor, that such a proposal is reasonably likely to be
funded, reasonably capable of being consummated, more favorable to our
stockholders and necessary for the board to fulfill its fiduciary duties to our
stockholders.
If we receive a proposal of that type, we must immediately inform Dura of
the material terms and conditions of such proposal and the identity of the
person making it. We must also keep Dura fully informed regarding any
significant details or developments with respect to the proposal and of all
significant steps we are taking in response to the proposal.
We agreed that neither we nor our board of directors nor any committee
thereof will:
- propose to withdraw or modify its recommendation to approve the merger
agreement;
- propose to approve or recommend any third-party proposal to acquire an
interest in us; or
56
- enter into any agreement with respect to any third-party proposal to
acquire an interest in us.
If, however, the board complies with the provisions regarding third party
proposals described above, the board may, on the third business day following
the receipt of written notice by us to Dura, withdraw or modify its approval or
recommendation of the merger or the merger agreement, approve or recommend a
superior proposal or enter into an agreement with respect to a superior
proposal, provided we have first attempted, upon the request of Dura, to
negotiate in good faith to arrive at adjusted terms in order to proceed with
Dura.
CONDITIONS TO THE MERGER
Dura's and our respective obligations to complete the merger depend on the
satisfaction or waiver by the other party of each of the following conditions:
- the approval of the merger by a majority of the holders of our callable
common stock and a majority of the holders of our special common stock;
- the absence of government authority or stop orders or injunctions
prohibiting the merger;
- expiration of the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act; and
- the effectiveness of, and the absence of stop order proceedings with
respect to, the registration statement of which this document forms a
part.
Our obligation to complete the merger agreement also depends on the
satisfaction or waiver of the conditions that:
- Dura's representations and warranties are true and accurate in all
material respects;
- Dura and its subsidiary comply in all material respects with their
respective covenants and obligations under the merger agreement; and
- the approval for listing on The Nasdaq Stock Market of the warrants to
purchase shares of Dura common stock and the shares of common stock which
may be issued upon exercise of the warrants.
Dura's subsidiary's obligations to complete the merger also depend on the
satisfaction or waiver of the conditions that:
- our representations and warranties are true and accurate in all material
respects;
- we comply in all material respects with our covenants and obligations
under the merger agreement; and
- no circumstances arise that have a significant effect on our business.
Neither party has made a determination as to whether it would waive one or
more of the conditions described above. No party may waive the requirement of
stockholders' approval. If the waiver of any of the conditions constitutes a
material change in the disclosure made in this document, the parties will, to
the extent required by law, circulate a revised proxy statement and resolicit
stockholders' approval.
TERMINATION
The merger may be abandoned, at any time before Dura and we complete the
merger and before or after you approve the merger, in the following
circumstances:
57
- by our and Dura's mutual written consent;
- by either us or Dura, if the merger is not completed before September 30,
2000 through no fault of the party wishing to terminate the merger
agreement;
- by us or Dura, if a final decree, law, rule, regulation, order or
injunction prevents the completion of the merger or if Dura is compelled
to dispose of or hold separate any portion of our assets or properties;
- by us, if our board of directors accepts a superior merger proposal in the
manner permitted by the merger agreement;
- by us, if Dura's representations and warranties become untrue or if Dura
breaches its representations and warranties or covenants in a material
way;
- by Dura, if we take action in furtherance of a competing proposal or
transaction; or
- by Dura, if our representations and warranties become untrue or if we
breach our representations and warranties or its covenants in a material
way.
EXPENSES
All expenses incurred in the merger will be paid by the party incurring the
expenses.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is based on currently existing provisions of the
Internal Revenue Code, existing and proposed treasury regulations, current
administrative rulings and court decisions, all of which are subject to change.
Any change, which may or may not apply retroactively, could alter the tax
consequences described in the following discussion.
You should be aware that this discussion does not deal with all federal
income tax considerations that may be relevant to particular stockholders in
light of their particular circumstances, including stockholders who are dealers
in securities, who are subject to the alternative minimum tax provisions of the
Internal Revenue Code, who are foreign persons, who do not hold our stock as
capital assets or who acquired their shares in connection with stock option
plans or in other compensatory transactions. In addition, the following
discussion does not address:
- the tax consequences of the merger under foreign, state or local tax laws;
- the tax consequences of transactions taking place prior or subsequent to,
or concurrently with, the merger, whether or not the transactions are
undertaken in connection with the merger, including without limitation any
transaction in which shares of our stock are acquired or shares of our
stock are disposed of; or
- the tax consequences of any receipt of rights to acquire warrants to
purchase shares of Dura common stock.
Accordingly, you are urged to consult your own tax advisor as to the
specific tax consequences to you of the merger, including the applicable
federal, state, local and foreign tax consequences.
EFFECT OF THE MERGER
For each share of callable common stock, the merger will be a taxable
transaction for federal income tax purposes. You will recognize gain or loss
equal to the difference between:
- your tax basis in the callable common stock surrendered, and
- the sum of any cash received, plus the fair market value of the warrant
received.
58
In general, for purposes relevant to the merger, a "collapsible corporation"
is a corporation that is formed or availed of principally for the production of
property with a view to the sale or exchange of stock of the corporation by its
stockholders before the corporation has realized two-thirds of the income to be
derived from such property. We and Dura believe that we would be characterized
as a collapsible corporation. In the event that it is determined that we are a
collapsible corporation, gain recognized by stockholders who have owned,
directly or indirectly at any time, more than 5% of the value of our stock might
be treated as ordinary income. An exception is potentially available to greater
than 5% stockholders if the unrealized appreciation in our assets which would
produce ordinary income if sold by us or by any other person who holds directly
or indirectly more than 20% of our stock is less than 15% of our net worth. We
do not believe that we hold any significantly appreciated assets which would
produce ordinary income if sold by us. Other than entities affiliated with
Farallon Capital, LLC, we are not aware of any person who, directly or
indirectly, owns more than 20% by value of our stock. If the unrealized
appreciation as described above is less than 15% of our net worth, stockholders
owning more than 5% but not more than 20% by value of our stock will not
recognize ordinary income unless they are dealers in property of the type held
by us which has appreciated significantly. THOSE OF YOU OWNING DIRECTLY OR
INDIRECTLY MORE THAN 5% OF OUR STOCK SHOULD CONSULT WITH AND MUST RELY ON YOUR
OWN TAX ADVISOR REGARDING THE APPLICATION TO YOU OF THE COLLAPSIBLE CORPORATION
RULES.
If the collapsible corporation rules do not apply to you, the gain or loss
recognized as a result of the merger should generally be treated as capital gain
or loss for federal income tax purposes. For taxpayers other than corporations,
capital gains from sales of assets held for more than one year are subject to
taxation at preferential rates. Deduction of capital loss is limited. Capital
losses generally may be deducted only to the extent of capital gains for federal
income tax purposes, plus an additional amount. For taxpayers other than
corporations, that amount is $3,000 per year. That amount is $1,500 in the case
of a married individual filing a separate return. Capital losses not deductible
in one year may be carried forward and, subject to the limitation, deducted in
subsequent years.
HOLDING OF WARRANTS
The warrants received by you will have a tax basis equal to the fair market
value of each warrant received. The holding period for the warrants will
commence upon completion of the merger.
EXERCISE OF WARRANTS
You will generally not recognize any gain or loss for federal income tax
purposes upon exercise of the warrants. Upon exercise of the warrants, you will
receive shares of Dura common stock with a tax basis equal to your tax basis in
the warrant and the exercise price. The holding period for the shares of Dura
common stock acquired upon exercise of a warrant will begin on the date of
exercise of the warrant.
DISPOSITION OF WARRANTS
In general, the sale, exchange or other taxable disposition of a warrant
will result in gain or loss to you in an amount equal to the difference between
the amount realized on such sale, exchange or other disposition and your tax
basis in the warrant. Gain or loss from the sale or exchange of the warrants
generally will be long-term capital gain or loss if the warrant is held by you
for more than one year at the time of the sale or exchange.
EXPIRATION OF WARRANTS
Upon expiration of a warrant, you will generally realize a long-term capital
loss equal to your tax basis in the warrant.
59
BACKUP WITHHOLDING
Specified payments due to you under the merger may be subject to "backup
withholding" at the rate of 31% for federal income tax purposes unless specified
requirements are satisfied. In order to avoid backup withholding, you generally
must complete Form W-8 if you are a nonresident alien individual or foreign
entity or Form W-9 if you are a United States resident or domestic entity. You
should have a Form W-8 or a Form W-9 on file with your broker.
THE FEDERAL INCOME TAX DISCUSSION ABOVE IS INCLUDED FOR GENERAL INFORMATION
ONLY. YOU SHOULD NOTE THAT THE PARTIES HAVE NOT OBTAINED, AND WILL NOT OBTAIN, A
RULING FROM THE IRS OR AN OPINION OF COUNSEL REGARDING THE MATTERS DESCRIBED
HEREIN. YOU ARE URGED TO CONSULT YOUR TAX ADVISOR WITH RESPECT TO THE TAX
CONSEQUENCES TO YOU OF THE PROPOSED TRANSACTIONS, INCLUDING FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES.
60
RELATED AGREEMENTS
VOTING AGREEMENT
Investment funds managed by Farallon Partners, LLC and investment accounts
managed by Farallon Capital, LLC, have entered into a voting agreement with Dura
and us. The terms of the voting agreement provide that these stockholders will
vote all shares of our callable common stock beneficially owned by them in favor
of the adoption of the merger agreement.
As of March 20, 2000, these stockholders beneficially owned 1,374,400 shares
of our callable common stock, which represented approximately 22% of the
outstanding shares of our callable common stock.
None of the stockholders who are parties to the voting agreement were paid
additional consideration in connection with the execution of the voting
agreement.
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DESCRIPTION OF THE WARRANTS
The following is a brief summary of provisions of the warrants being offered
to you. This summary is not intended to be complete and is qualified in its
entirety by reference to the warrant agreement between Dura and ChaseMellon
Shareholder Services, LLC, as warrant agent. Dura incorporates by reference the
warrant agreement and a copy will be sent to you upon request of Dura's
secretary (see "Summary--Where you can find more information").
The warrants to be issued upon consummation of the merger will be of a
different class than the warrants to purchase Dura common stock currently
outstanding, including the warrants which are listed and traded on The Nasdaq
Stock Market under the symbol "DURAW." As of the date of this document, the
following Dura warrants were outstanding:
- 240,000 Series W warrants to purchase an aggregate of 672,000 shares of
Dura common stock at $2.38 per share;
- 700,000 Series S warrants to purchase an aggregate of 1,680,000 shares of
Dura common stock at $19.47 per share;
- 6,325,000 warrants to purchase an aggregate of 1,581,250 shares of Dura
common stock at $54.84 per share, which are listed and traded on The
Nasdaq Stock Market under the symbol "DURAW;" and
- 200,000 warrants to purchase 200,000 shares of Dura common stock at $45.12
per share.
EXERCISE PRICE AND TERMS
The warrants will be exercisable immediately upon completion of the merger
and for five years thereafter at an exercise price equal to $17.94 per share of
Dura common stock, subject to adjustment for dilution events and other
provisions described below. The number of shares of Dura common stock issuable
under each warrant will be determined based on the average closing price of Dura
common stock for the 10 trading days prior to the day on which we hold the
special meeting. Dura is registering up to 2,539,458 shares of its common stock
issuable under the warrants. The exact number of shares issuable will depend on
market conditons. The calculated Black-Scholes value for each warrant will be
between $3.22 and $1.81. The holder of any warrant may exercise such warrant by
surrendering the certificate representing the warrant to the warrant agent, with
the subscription form properly completed and signed, together with payment of
the exercise price. The warrants may be exercised any time in whole or in part
at the exercise price then in effect until the expiration of the warrants five
years after completion of the merger. No fractional shares of Dura common stock
will be issued upon exercise of the warrants.
As of , 2000, the last trading day before the printing of this
document, the fraction of a share purchasable under each warrant would be
with a Black-Scholes calculated value of . There can be no assurance,
however, that the fraction issuable will be the same at the closing date or that
the market price of the warrant will equal the Black-Scholes value of the
warrant.
ADJUSTMENTS
The exercise price and the number of shares of Dura common stock purchasable
upon the exercise of the warrants are subject to adjustment upon the occurrence
of the following:
- stock splits, stock combinations, rights offerings, stock dividends or
other special dividends with respect to Dura common stock;
- capital reorganizations of Dura;
- any reclassification of Dura common stock;
62
- any consolidation or merger or any other business combination of Dura with
or into another corporation; and
- any sale, lease or transfer to any person of all or substantially all of
the assets of Dura.
WARRANTHOLDER IS NOT A STOCKHOLDER
The warrants do not confer upon the holder any voting, preemptive or other
rights as a stockholder of Dura.
TRANSFER, EXCHANGE AND EXERCISE
The warrants are in registered form and may be presented to ChaseMellon
Shareholder Services, LLC, as the warrant agent, for transfer or exchange, or
exercise accompanied by payment of the exercise price, at any time prior to the
fifth anniversary from the date of issuance at which time the warrants become
void and of no value.
DURA COMMON STOCK UNDERLYING THE WARRANTS
Based on Dura's various 10-day average stock prices, a holder of one warrant
would have the right to receive, upon exercise, a fraction of Dura common stock
as follows:
BLACK-SCHOLES
PREMIUM/ CALCULATION OF FRACTION OF DURA CALCULATED VALUE
(DISCOUNT) TO DURA WARRANT VALUE COMMON STOCK PER SHARE
DURA 10-DAY 10-DAY AVERAGE OF ONE SHARE HOLDER OF ONE OF SPIROS CORP. II
AVERAGE COMMON STOCK PRICE ENDING OF DURA WARRANT MAY CALLABLE
STOCK PRICE ON MARCH 17, 2000 EXERCISE PRICE COMMON STOCK PURCHASE COMMON STOCK
- --------------------- ------------------ -------------- -------------- ---------------- -------------------
$ 8.00 (44.3)% $17.94 $ 3.34 0.5420 $1.81
$10.00 (30.3)% $17.94 $ 4.71 0.3851 $1.81
$11.48 (20.0)% $17.94 $ 5.78 0.3137 $1.81
$12.92 (10.0)% $17.94 $ 6.86 0.3137 $2.15
$14.35(a) 0.0% $17.94 $ 7.97 0.3137 $2.50
$15.79 10.0% $17.94 $ 9.11 0.3137 $2.86
$17.22 20.0% $17.94 $10.28 0.3137 $3.22
$19.00 32.4% $17.94 $11.76 0.2743 $3.22
$21.00 46.3% $17.94 $13.45 0.2397 $3.22
- ------------------------
(a) Represents the average stock price for Dura common stock for the
10 consecutive trading days ending on and including March 17, 2000.
The exercise price used above is based on a 25% premium to $14.35, the
average price for Dura common stock for the 10 consecutive trading days ending
on and including March 17, 2000. The Black-Scholes calculation of warrant value
is based on the following assumptions:
- risk-free rate equal to 6.43%;
- volatility of 65.0%; and
- 5 years to expiration from date of issue.
As of , 2000, the last trading day before the printing of this
document, the fraction of a share purchasable under each warrant would be
with a Black-Scholes calculated value of . There can be no assurance,
however, that the fraction issuable will be the same at the closing date or that
the market price of the warrant will equal the Black-Scholes value of the
warrant.
63
SELECTED FINANCIAL DATA
The following selected financial data should be read with our financial
statements and the notes to those statements and "Our Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this document. The statement of operations data for the period
September 23, 1997 (date of incorporation) through December 31, 1997 and the
year ended December 31, 1998 and the balance sheet data at December 31, 1998,
are derived from our financial statements which have been audited by Deloitte &
Touche LLP, our independent auditors during that time period. The balance sheet
data at December 31, 1997 is derived from our audited financial statements. The
statements of operations data for the year ended December 31, 1999 and the
balance sheet data at December 31, 1999, are derived from our financial
statements which have been audited by Ernst & Young LLP, our current independent
auditors, and are included elsewhere in this document. The statement of
operations data for the three months ended March 31, 1999 and 2000 and the
period September 23, 1997 (date of incorporation) through March 31, 2000, and
the balance sheet data at March 31, 2000 are derived from unaudited financial
statements of Spiros Corp. II which are included elsewhere in this document.
Please note that historical results are not necessarily indicative of the
results to be expected in the future.
The numbers in the table below are in thousands, except per share data.
SEPTEMBER 23, 1997 THREE MONTHS SEPTEMBER 23, 1997
(DATE OF ENDED (DATE OF
INCORPORATION) YEAR ENDED YEAR ENDED MARCH 31, INCORPORATION)
THROUGH DECEMBER 31, DECEMBER 31, ------------------- THROUGH
DECEMBER 31, 1997 1998 1999 1999 2000 MARCH 31, 2000
------------------ ------------- ------------- -------- -------- ------------------
STATEMENT OF OPERATIONS DATA:
Operating loss................ $ (7,146) $(51,825) $(60,405) $(13,593) $(15,250) $ 134,626
Interest income............... $ 222 $ 8,239 $ 5,341 $ 1,587 $ 875 $ 14,677
Net loss...................... $ (6,924) $(43,793) $(55,064) $(12,006) $(14,375) $(120,156)
Net loss per share:
Basic and diluted........... $ (1.09) $ (6.92) $ (8.71) $ (1.90) $ (2.27) $ (19.00)
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments...... $170,506 $123,604 $ 71,043 $ 55,820
Working capital............... $162,081 $118,918 $ 64,246 $ 50,106
Total assets.................. $170,506 $123,796 $ 71,139 $ 55,933
Shareholders' equity.......... $162,081 $118,918 $ 64,246 $ 50,106
64
OUR MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
We were incorporated in Delaware on September 23, 1997 for the purpose of
continuing the development of the Spiros technology, a dry powder pulmonary drug
delivery system, and to conduct formulation work, clinical trials and
commercialization for specified leading asthma and chronic obstructive pulmonary
disease drugs for use with Spiros. We commenced operations on December 22, 1997.
On December 22, 1997, we and Dura completed an initial public offering of
6,325,000 units, each unit consisting of one share of our callable common stock
and one warrant to purchase one-fourth of one share of Dura common stock at a
price of $54.84 per share. The offering resulted in net proceeds to us of
approximately $94 million. Concurrently, Dura contributed $75 million to us. We
expect to pay to Dura substantially all funds from the offering and the
$75 million contribution from Dura and interest earned on these funds for the
development and commercialization of Spiros technology and the use of Spiros
technology with specified drugs under our various agreements with Dura. See "The
Merger--Relationship between us and Dura."
Under our current development plan and budget for 2000 we expect to expend
all of our cash during the second half of the year. The development plan and
budget for the second half of 2000 are subject to review and change in the event
the merger with Dura is not completed.
In the event the merger is not completed, Dura, as holder of 100% of the
outstanding shares of our special common stock, still has an irrevocable option
to purchase all, but not less than all, of the issued and outstanding shares of
our callable common stock at predetermined prices. Dura may exercise the
purchase option at any time through the earlier of:
- December 31, 2002;
- the 90th day after the date we provide Dura with our quarterly financial
statements 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 Spiros technology, but in no event beyond
December 31, 2002; or
- upon termination the technology license, development, or the manufacturing
agreements with Dura.
The purchase option exercise price per share is $27.96 through
September 30, 2000, and increases on a quarterly basis to $45.95 per share
through December 31, 2002. The purchase price may be paid, at Dura's discretion,
in cash, shares of Dura common stock, or any combination thereof.
In December 1997, we entered into a technology license agreement with Dura.
Dura granted us an exclusive, worldwide, perpetual royalty-bearing license to
use technology owned by Dura relating to the use of Spiros technology with the
asthma and COPD drugs albuterol, beclomethasone, ipratropium, budesonide, and a
combination of albuterol and ipratropium. We also executed a series of
agreements with Dura which provide for the development, marketing, and
manufacturing of Spiros technology with specified compounds and for the
provision of general and administrative services by Dura. Because Dura conducts
all of our current activities under these agreements, we do not maintain any
research staff or occupy any research facilities.
RESULTS OF OPERATIONS
We incurred net losses of $43.8 million and $55.1 million for the years
ended December 31, 1998 and 1999, respectively. For 1998 and 1999, research and
development costs totaled $50.8 million and $59.2 million, respectively, and
general and administrative expenses totaled $1 million and $1.2 million,
65
respectively. The research and development expenses were for Spiros
technology-related activities performed by Dura under agreements with us. Our
interest income for 1998 and 1999 totaled $8.2 million and $5.3 million,
respectively. The decline results from lower balances of cash and short-term
investments during 1999 versus 1998. We expect our interest income to continue
to decrease in 2000 as our funds are used to continue the development of the
Spiros products.
We incurred net losses of $12 million and $14.4 million for the three months
ended March 31, 1999 and 2000, respectively. Research and development costs
totaled $13.3 million and $14.8 million for the first quarter of 1999 and 2000,
respectively, and general and administrative expenses totaled $277,000 and
$483,000, respectively, for the same periods. The research and development
expenses were for Spiros-related activities performed by Dura under agreements
with us. Our interest income for the first quarter of 1999 and 2000 totaled $1.6
million and $875,000, respectively. The decline results from lower balances of
cash and short-term investments during the first quarter of 2000 versus the
first quarter of 1999. We expect our interest income to continue to decrease in
2000 as our funds are used to continue the development of the Spiros products.
We commenced operations in December 1997 and incurred a net loss of
$6.9 million for the period ended December 31, 1997 on research and development
expenses of $7 million. The lower amount of revenues and expenses in 1997
reflect the fact that our operations commenced that year.
LIQUIDITY AND CAPITAL RESOURCES
Our initial capitalization totaled $169 million, consisting of net proceeds
from our initial public offering of approximately $94 million and a $75 million
contribution from Dura. At March 31, 2000, we had cash, cash equivalents, and
short-term investments totaling $55.8 million and working capital totaling
$50.1 million, a decrease of $15.2 million and $14.1 million, respectively, from
December 31, 1999. Our existing working capital and expected interest income
will not be sufficient to fund our cash requirements through December 31, 2000.
Based on our current development plan and budget for the Spiros products, we
expect to expend all of our existing cash during the second half of 2000.
Further, we do not believe that our existing funds will be sufficient to
complete the development of any Spiros product. In the event the merger with
Dura is not consummated, the use of our existing funds will require Dura to
consider whether to exercise its option to purchase our callable common stock
under the contractual terms, which it may not be prepared to do at that time.
Until the expiration of Dura's option, we are restricted from raising additional
funds without Dura's consent. While Dura may, at its sole option, provide funds
for further development of the Spiros products or infuse additional capital into
us through the exercise of Dura's product purchase options, it is not obligated
to do so. If Dura fails to provide additional funding, we will explore the other
strategic alternatives available to us, including liquidation, sale to a third
party, or licensing of the technology. There can be no assurance that any of
these alternatives will be successful.
As noted above, in March 2000, we entered into a definitive merger agreement
with Dura for the acquisition by Dura of all the outstanding shares of our
callable common stock. Under the merger agreement, Dura will purchase each share
of callable common stock for $13.25 in cash plus a five-year warrant to purchase
a fractional share of Dura common stock at $17.94 per share. Closing of the
merger is subject to approval by our stockholders.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low sale prices of the units, of
which our callable common stock was a part through December 31, 1999, and
thereafter of our callable common stock as reported on The Nasdaq Stock Market,
without retail mark-up, mark-down, or commissions, for the last two years by
quarter. Each unit consisted of one share of our callable common stock and a
warrant
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for Dura common stock. As of January 3, 2000, the callable common stock and the
warrant began trading publicly as separate securities.
UNITS
-------------------
HIGH LOW
-------- --------
2000
First Quarter.............................. $14.25 $ 6.875
Second Quarter............................. $15.00 $13.125
Third Quarter (through , 2000)......... $ -- $ --
1999
First Quarter.............................. $10.38 $ 8.13
Second Quarter............................. $10.63 $ 8.38
Third Quarter.............................. $ 9.00 $ 6.50
Fourth Quarter............................. $ 8.25 $ 4.38
1998
First Quarter.............................. $19.00 $ 13.75
Second Quarter............................. $17.38 $ 15.88
Third Quarter.............................. $17.00 $ 9.38
Fourth Quarter............................. $11.75 $ 6.63
As of March 1, 2000, the closing price of our callable common stock was
$12.50. As of March 1, 2000 there were approximately 1,000 beneficial holders of
record of our callable common stock and one holder of record of special common
stock.
We have not paid any dividends on our callable common stock and do not
expect to do so in the foreseeable future. Holders of our callable common stock
are entitled to receive any such dividends as may be recommended by the board of
directors and approved by the holder of the special shares. The special common
stock is not entitled to receive dividends.
On December 22, 1997, we and Dura completed an initial public offering of
6,325,000 units. Each unit consisted of one share of our callable common stock
and one warrant to purchase one-fourth of one share of Dura common stock,
pursuant to a registration statement on Form S-1/S-3 (No. 333-37673/37673-01).
The registration statement was declared effective on December 16, 1997. The net
proceeds from the offering were invested in cash, cash equivalents and
short-term investments. As of December 31, 1999, we had used $97.7 million of
our cash, cash equivalents and short-term investments, all of which has been
paid to Dura, for our operating activities and had $64.2 million of working
capital.
CHANGE IN ACCOUNTANTS
On February 23, 2000, we engaged Ernst & Young LLP as our independent
auditors to audit our financial statements in place of Deloitte & Touche LLP,
our former independent auditors. In the course of reviewing and evaluating our
strategic alternatives, the special committee recommended to our board of
directors that we engage a different independent accounting firm to conduct our
1999 year-end audit from the independent accounting firm used by Dura for its
own audit. The decision to change independent auditors was approved by our board
of directors and by our audit committee.
During the period ended December 31, 1999, and the subsequent period through
February 23, 2000, there were no disagreements or reportable events between the
former independent auditors and us on any matter relating to accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures. In addition, the former independent auditors' report on our
financial statements for the year ended December 31, 1998, and the periods
September 23, 1997 (date of incorporation) through December 31, 1997 and 1998,
contained no adverse opinions or disclaimers of opinion, and was not qualified
or modified as to uncertainty, audit scope or accounting principles.
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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 affect the investment income we
earn on our investments and, therefore, impact our cash flows and results of
operations. We are not exposed to risks for changes in foreign currency exchange
rates, commodity prices, or any other market rates.
DESCRIPTION OF OUR BUSINESS
OVERVIEW
We were incorporated in Delaware in September 1997 to continue the
development of the Spiros technology, a dry powder pulmonary drug delivery
system, and to conduct formulation work, clinical trials and commercialization
for specified leading asthma and chronic obstructive pulmonary disease drugs for
use with the Spiros technology.
We commenced operations on December 22, 1997 when we and Dura completed a
$101 million initial public offering of 6,325,000 units, each unit consisting of
one share of our callable common stock and one warrant to purchase one-fourth of
one share of Dura's common stock. The offering resulted in net proceeds to us of
approximately $94 million. Our offering was underwritten by Merrill
Lynch & Co. and Donaldson, Lufkin & Jenrette Securities Corporation. Concurrent
with the offering, Dura contributed $75 million to our operations. Substantially
all funds from the offering, the $75 million contribution, and interest earned
on these funds have been and are expected to be paid to Dura for the development
and commercialization of Spiros technology and the use of Spiros technology with
applications for albuterol, beclomethasone, budesonide, ipratropium,
albuterol-ipratropium combination, and additional designated compounds, if any.
Current product development efforts are focused on beclomethasone and
budesonide. We have also considered expending funds on enhancements to the
existing Spiros technology and development of a next generation inhaler
technology.
The warrants issued in our initial public offering are exercisable through
December 31, 2002 at an exercise price of $54.84 per share of Dura common stock.
As of _______, 2000, Dura's common stock was trading at . As of
January 3, 2000, the callable common stock and the warrant began trading
publicly as separate securities. As holder of 100% of our special common stock,
Dura has a right through December 31, 2002 to purchase all, but not less than
all, of the then outstanding shares of our callable common stock at
predetermined prices. From July 1, 2000 through September 30, 2000, the exercise
price of the option is $27.96 per share. The purchase price may be paid, at
Dura's option, in cash, shares of Dura's common stock or a combination of cash
and stock. In addition, Dura holds an option through specified dates, to acquire
for cash exclusive rights for the use of Spiros technology with albuterol and
with a second product other than albuterol.
In connection with our initial public offering, we entered into a number of
agreements with Dura under which Dura currently performs development of the
Spiros products as further discussed in "The Merger--Relationship between us and
Dura." We do not have our own research, development, clinical, licensing,
administration, manufacturing or marketing employees or facilities, and thus are
entirely dependent on Dura in those areas.
ASTHMA AND COPD MARKET
Asthma is a complex physiological disorder characterized by airway
hyperactivity to a variety of stimuli such as dust, pollen, stress or physical
exercise, resulting in airway obstruction that is partially or temporarily
reversible. The U.S. asthma population has grown steadily in recent years. COPD
is a
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complex condition comprising a combination of chronic bronchitis, emphysema and
airway obstruction. The disease affects males more often than females and is
exacerbated by smoking and other insults to the lung. Incidence is as high as
20% of the adult male population, though only a minority are clinically
disabled. The U.S. combined market for inhaled therapeutic drugs to treat asthma
and COPD was approximately $2.1 billion in 1998.
PULMONARY DRUG DELIVERY SYSTEMS
Inhaled therapeutic drugs have been shown to be effective in treating or
preventing the symptoms of asthma, COPD and other respiratory diseases. When
treating respiratory diseases, inhalation delivery puts the drug directly into
the lung for topical treatment. If administered in capsule, tablet or liquid
form, rather than through inhalation, the patient must take sufficient drug
dosages to achieve a systemic therapeutic blood level to benefit the lungs. In
many instances, this may cause serious side effects by affecting other organs.
Because inhaled therapy delivers the drug directly into the lungs, it provides
comparable efficacy with less risk of systemic side effects at greatly reduced
dosages. Inhalation delivery also yields a fast onset of action, reducing the
time for patient relief.
TRADITIONAL INHALATION DELIVERY DEVICES
Most currently-approved inhalation devices are one of the following three
types:
METERED DOSE INHALERS. Metered dose inhalers, also known as MDIs, are
currently the most widely used inhalation delivery system due to their relative
convenience and portability. MDIs consist of a suspension or solution of drug
filled into a canister, sealed with a metering valve and pressurized using a
propellant, most commonly a chloroflorcarbon or CFC. Unfortunately, it is
estimated that only 10% to 20% of the dose from an MDI actually reaches the
lung, with the remainder of the drug being deposited in the mouth and throat or
the stomach where it has no therapeutic effect and may cause unwanted side
effects. The limited amount of drug that reaches the lung is caused primarily by
the inability of most patients to coordinate their inhalation with the
initiation of the delivery system and the resulting high velocity of the
propellant-driven aerosol. To increase the amount of drug that actually reaches
the lung, patients are sometimes prescribed spacers to use with their MDIs,
thereby increasing the complexity and reducing the portability of the device.
JET NEBULIZERS. Jet nebulizers aerosolize a liquid solution of medicine,
either ultrasonically or with compressed air, creating a fine mist that patients
inhale slowly over several minutes. Jet nebulizers are much larger than other
inhalation delivery systems and, because of their size, are primarily used to
deliver aerosol to hospitalized patients, patients with acute asthma and
patients unable to coordinate the use of other inhalation delivery devices. Jet
nebulizers are generally considered to be less convenient and less portable
because of their size and the complexity of use.
DRY POWDER INHALERS. Dry powder inhalers represent a significant
advancement in the development of inhalation delivery systems. Dry powder
inhalers are relatively convenient and portable, and are CFC-free. They are
breath actuated, so they eliminate the need for the press-and-breathe
coordination associated with MDIs. Although dry powder inhalers overcome the
need to coordinate inhalation with the initiation of the device, currently
marketed dry powder inhalers require high inspiratory flow rates, making the
ultimate dose delivered to the patient dependent on the patient's inspiratory
effort. This high inspiratory flow rate is difficult to achieve for children,
the elderly and patients with breathing difficulties.
We anticipate that dry powder inhalers like Spiros will gradually replace
MDIs as the leading pulmonary delivery systems, due primarily to the phasing out
of CFC propellants and coordination problems associated with many MDIs. Some
companies are studying alternative propellants, such as hydrofluorocarbons, for
use in MDIs. We believe, however, that any product using an alternative
69
propellant will still suffer from many of the limitations of currently marketed
MDIs, including the need for patients to coordinate breathing with actuation of
the drug delivery system. In Europe, where several pharmaceutical companies have
marketed dry powder inhalers for a number of years, sales of dry powder inhalers
had increased to 27% of the total sales of inhaled asthma products in 1999.
POTENTIAL ADVANTAGES OF SPIROS
We believe Spiros, if approved by the FDA, may provide advantages over other
currently available pulmonary drug delivery systems:
- INSPIRATORY FLOW RATE INDEPENDENCE AND LOW FLOW RATE CAPABILITY. Spiros is
designed to deliver a relatively consistent drug dose to the lungs over a
wide range of inspiratory flow rates, which can vary depending on a
patient's health, age, effort or physical abilities. Tests of Spiros on
human subjects have shown a relatively consistent amount of drug
deposition throughout the clinically relevant inspiratory range. Existing
dry powder inhalers can vary significantly in their level of drug
deposition depending on the patient's inspiratory flow rate. Many of them
also require high inspiratory flow rates for the patient to obtain the
labeled dose of the drug. Therefore, they may deliver significantly less
drug at the lower flow rates typically associated with compromised
pulmonary function.
- MINIMUM NEED FOR PATIENT COORDINATION. Spiros is breath actuated and does
not require the user to coordinate inhalation and actuation of the drug
delivery system. MDIs generally require users to coordinate their
breathing with initiation of the MDI. Studies indicate that a significant
percentage of patients, particularly young children and the elderly, do
not use MDIs correctly. Spiros is designed to solve these coordination
problems by delivering the drug to patient's lungs as they inhale.
- PATIENT CONVENIENCE. Spiros is designed to be convenient for patients,
with features such as breath actuation and portability due to its light
weight and small size, quick delivery time, simple operation, dose
delivery feedback and multi-dose capability. Spiros also allows the
patient to see the actual number of doses remaining in a cassette or
blister pack and an LED light alerts the patient of the need to replace
Spiros prior to the end of its useful life.
- FREE OF CHLOROFLUOROCARBON PROPELLANTS. Spiros does not use CFCs while
most MDIs, currently the most popular form of aerosol drug delivery, use
CFCs. CFC propellants have ozone destructive characteristics. Virtually
all of the world's industrial nations, under the auspices of the United
Nations Environmental Program, have pledged to cease use of CFCs by the
year 2000. Continued use of CFCs in medical products has been permitted
under annual exemptions. As a result of the planned phase out of CFCs, we
believe that dry powder inhalers will become a leading method for
pulmonary drug delivery.
THE SPIROS PULMONARY DRUG DELIVERY SYSTEM
Spiros technology uses electromechanical energy to aerosolize
pharmaceuticals in dry powder formulations for delivery to the lungs while
providing advantages over traditional pulmonary delivery systems.
CORE TECHNOLOGY
The core technology contained in the Spiros system is an aerosol generator
that uses electromechanical energy to disperse dry powder to form an aerosol for
inhalation. The main components of the aerosol generator include the impeller,
the motor, the breath-actuated switch, and the dosing chamber. When the switch
is activated, the electric circuit is completed and the impeller rotates. The
action of the impeller on the dry powder formulation supplies the energy to
disperse the
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drug and provide a cloud of aerosolized drug for inhalation. The cloud of
aerosolized drug is suspended in the dosing chamber and is delivered to the
lungs only as the patient inhales. This technology controls both the powder
dispersion to form the aerosol and allows for patient-actuated inhalation,
making the drug delivery independent of the inspiratory force generated by the
patient. Virtually the same dose is delivered at low and high inspiratory
efforts, making the system relatively flow rate independent.
Products are currently under development in two separate Spiros systems, a
cassette system and a blisterdisk system, both using the same core technology
with different powder storage systems. Because of the physical and chemical
requirements of the specific drugs deliverable by Spiros technology, as well as
the varying needs of the patients and marketplace, we believe that our cassette
and blisterdisk systems will provide flexibility for delivery of many different
types of drugs.
CASSETTE SYSTEM. The cassette system was the first Spiros system developed.
The powder storage device in this system is a 30-dose plastic cassette packed in
a foil pouch. To use the cassette system, a patient first removes the cassette
from the pouch and opens the lid of the Spiros generator to load the cassette.
When the lid is closed, the cassette rotates to deliver a dose of drug into the
dosing chamber. An impeller is located within the dosing chamber. When the
patient inhales through the mouthpiece, the impeller is automatically activated
at a relatively low flow rate. The action of the impeller on the powder in the
chamber generates the aerosol, which the patient inhales. When the cassette is
empty, the patient opens the lid, removes the empty cassette and loads a new
cassette.
BLISTERDISK SYSTEM. Although many drugs and powder formulations are
sufficiently stable using the cassette system, some drugs, are sensitive to
relative humidity. We have developed a blisterdisk system for drugs that require
a barrier against moisture or light. This system uses powder-filled sealed foil
blisters, which prevent moisture contact with the powder. The powder storage
device in this system is a 16-dose blisterdisk and is sufficiently flexible to
accommodate a wide variety of drugs. To use the blisterdisk system, a patient
opens the mouthpiece cover, pushes a button to open the blister and inhales
through the mouthpiece to actuate the impeller and aerosolize the dose. As the
patient closes the mouthpiece cover, the next blister is advanced to the dosing
position. When the blisterdisk is empty, the patient opens the lid, removes the
empty blisterdisk and loads a new blisterdisk.
SPIROS PRODUCTS IN DEVELOPMENT
Five compounds were initially selected to be developed for delivery through
Spiros technology: a beta-agonist, albuterol, two steroids, beclomethasone and
budesonide, an anticholinergic, ipratropium, and a combination of albuterol and
ipratropium. However, to focus resources on the development of the steroid
products, we have suspended funding for work on albuterol, ipratropium and the
albuterol-ipratropium combination products.
ALBUTEROL. Albuterol was the first product developed in the Spiros system.
On our behalf, Dura filed a new drug application for Albuterol Spiros in 1997
and in November 1998 received a complete response letter from the FDA. The
response letter indicated that the new drug application would not be approved
unless specified deficiencies were addressed. The FDA requested that several
chemistry, manufacturing, and control issues, as well as specified
electromechanical reliablility issues, be resolved. After several meetings with
the FDA, the requirements that would address the issues raised by the FDA and
support a resubmission of the Albuterol Spiros new drug application were
identified. The chemistry, manufacturing and control issues for Albuterol Spiros
were being addressed at the time we made our decision to suspend funding for the
future development of Albuterol Spiros.
BECLOMETHASONE. Beclomethasone is a steroid used to treat the inflammatory
component of asthma and selected symptoms of COPD. Sales of beclomethasone in
1998 in the major countries of the world were approximately $700 million. In the
first quarter of 1997, Dura completed dose ranging
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studies for a one dosage strength of beclomethasone in the Spiros cassette
system under an investigational new drug application. In the fourth quarter of
1997, Dura commenced a late-stage 12-week trial in humans to demonstrate safety
and efficacy. Enrollment of patients was completed by the second quarter of
1998. The study demonstrated that Beclomethasone Spiros provided improved
potency and comparable safety and efficacy to the approved MDI product to which
it was compared. After receiving feedback from the FDA, we reformulated
Beclomethasone Spiros and finalized the commercial Spiros inhaler design. In the
fourth quarter of 1999, Dura, on our behalf, initiated the first in a new series
of pivotal clinical studies for Beclomethasone Spiros. An important objective of
these studies is to demonstrate the reliability of the Spiros system, to confirm
the results of the earlier trials and to demonstrate that comparable efficacy
and potentially improved safety may be achieved with Beclomethasone Spiros using
lower dosages than currently approved MDI formulations. If the clinical trials
are successful, we currently plan to file a new drug application for
Beclomethasone Spiros in the first half of 2001 and, if the product is approved
by the FDA, to launch the product in 2002.
BUDESONIDE. Budesonide is a new generation steroid used to treat the
inflammatory component of asthma. Sales of budesonide in 1998 in the major
countries of the world were approximately $720 million. Dura, on our behalf,
initiated screening of patients for a dose-targeting study for Budesonide Spiros
in the first quarter of 2000 and plans to begin a pivotal clinical program in
the second half of 2000. If the clinical trials are successful, we currently
plan to file a new drug application for Budesonide Spiros in 2002 and, if the
product is approved by the FDA, to launch the product in 2003.
OTHER PRODUCT DEVELOPMENT EFFORTS
On our behalf, Dura's scientists have recently invented a new technology for
forming aerosols from powder formulations. This new technology builds on earlier
work with Spiros technology and its aerosol delivery system, using a motorless
inhaler system which can use existing powder storage systems or new unit dose
systems. Broad patent coverage is being sought for this new technology.
Our board of directors has the right, with the consent of Dura, to select
additional designated compounds for the treatment of respiratory diseases,
including asthma, allergy, cystic fibrosis or respiratory infection for delivery
using Spiros technology. However, we have decided to focus our resources on the
development of the steroid products and do not anticipate that we will select
any additional designated compounds for development.
SALES AND MARKETING
We rely entirely on Dura under the manufacturing and marketing agreement for
our sales and marketing efforts. Under the manufacturing and marketing
agreement, Dura is required to submit an annual marketing plan to be approved by
us.
COMPETITION
There are at least 10 companies currently involved in the development,
marketing or sales of single and/or multiple dose dry powder pulmonary drug
delivery systems. Many of these companies, which include 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 our proposed products. In addition, Dura may
develop or acquire products, which may compete with Spiros products. 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 we are able. 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 believe that competition among both prescription
72
pharmaceuticals and pulmonary delivery systems will be based on, among other
things, product efficacy, safety, reliability, availability and price.
MANUFACTURING
A substantial amount of the work under the development agreement and the
manufacturing and marketing agreement will be conducted at Dura's facilities.
Dura believes that its available facilities are sufficient to satisfy its
obligations under the development agreement and the manufacturing and marketing
agreement. However, the same facilities may be used by Dura for work performed
on its own account and in the performance of third-party contracts.
PATENTS AND PROPRIETARY RIGHTS
Dura presently holds 12 U.S. patents and 13 U.S. patent applications
relating to the Spiros technology to be further developed by us. The issued
patents include a patent with claims covering the use in Spiros technology of an
impeller to create an aerosol cloud of a drug intended for inhalation, which
expires in 2011. Dura has also filed specified continuations in part and foreign
patent applications relating to Spiros technology. All of the above patents and
patent applications, relating to the Spiros technology, together with their
respective continuations in part and foreign patent applications, have been
licensed to us for specified users under the technology agreement. Until the
expiration or termination of the purchase option, Dura is required to file
patent applications, at our expense, with respect to inventions included in our
technology. Dura will be the owner, while we will be the exclusive licensee for
use with the Spiros products of any patents included in our technology. Our
success will therefore depend in part upon the ability of Dura or us, as the
case may be, to obtain strong patent protection both in the United States and
other countries.
On our behalf, Dura's scientists have recently invented a new technology for
forming aerosols from powder formulations. This new technology builds on earlier
work with Spiros technology and its aerosol delivery system, using a motorless
inhaler system which can use existing powder storage systems or new unit dose
systems. Broad patent coverage is being sought for this new technology.
We consider the protection of discoveries in connection with our development
activities important to our business. We intend to seek patent protection in the
U.S. and selected foreign countries where deemed appropriate. Dura has also
filed foreign patent applications relating to selected aspects of Spiros
technology.
We also rely upon trade secrets, unpatented proprietary know-how and
continuing technological innovation to develop our competitive position. For a
discussion of risks related to our intellectual property rights, see "Risk
Factors."
GOVERNMENT REGULATION
The manufacturing and marketing of Spiros products are subject to regulation
by Federal and state government authorities. In the U.S., pharmaceuticals and
drug delivery systems, including Spiros technology, are also subject to rigorous
FDA regulation and may be subject to regulation by other jurisdictions,
including the state of California. The federal Food, Drug, and Cosmetic Act and
the Public Health Service Act govern the testing, manufacture, safety, efficacy,
labeling, storage, record keeping, approval, advertising and promotion of Spiros
products. Product development and approval within this regulatory framework
takes a number of years and involves the expenditure of substantial resources.
To obtain FDA approval for each of the Spiros products, Dura, on our behalf,
must conduct each of the following steps and possibly others:
- laboratory and possibly animal tests;
73
- the submission to the FDA of an investigational new drug, or IND,
application, which must become effective before human clinical trials may
commence;
- adequate and well-controlled human clinical trials to establish safety and
efficacy;
- the submission of an NDA to the FDA for marketing approval; and
- FDA approval of the NDA prior to any commercial sale or shipment.
The NDA must include, in addition to a compilation of preclinical and
clinical data, complete information about product performance and manufacturing
facilities and processes. Prior to completion of the regulatory review process,
the FDA may conduct an inspection of the facility, manufacturing procedures,
operating systems and personnel qualifications. In addition to obtaining FDA
approval for each product, each domestic drug and/or device manufacturing
facility must be registered with and approved by the FDA. Domestic manufacturing
facilities are subject to biennial inspections by the FDA and inspections by
other jurisdictions and must comply with good manufacturing practice for both
drugs and devices. To supply products for use in the U.S., foreign manufacturing
establishments must comply with current good manufacturing practice and other
requirements and are subject to periodic inspection by the FDA or by regulatory
authorities in such countries under reciprocal agreements with the FDA.
Preclinical testing includes laboratory evaluation of product chemistry and
animal studies, if appropriate, to assess the safety and efficacy of the product
and its formulation. The results of the preclinical tests are submitted to the
FDA as part of an IND application, and unless the FDA objects, the IND
application will become effective 30 days following its receipt by the FDA, thus
allowing the product to be tested in humans.
Clinical trials involve the administration of the pharmaceutical product to
healthy volunteers or to patients identified as having the condition for which
the pharmaceutical agent is being tested. The pharmaceutical product is
administered under the supervision of a qualified principal investigator.
Clinical trials are conducted in accordance with Good Clinical Practice and
protocols previously submitted to the FDA as part of the IND application that
detail the objectives of the study, the parameters used to monitor safety and
the efficacy criteria evaluated. Each clinical study is conducted under the
auspices of an independent Institutional Review Board, or IRB, at the
institution at which the study is conducted. The IRB considers, among other
things, the design of the study, ethical factors, the safety of the human
subjects and the possible liability risk for the institution.
Clinical trials for new products are typically conducted in three sequential
phases that may overlap. In Phase I, the initial introduction of the
pharmaceutical into healthy human volunteers, the emphasis is on testing for
safety and adverse effects, dosage tolerance, metabolism, distribution,
excretion and clinical pharmacology. Phase II involves studies in a limited
patient population to determine the initial efficacy of the pharmaceutical for
specific targeted indications, to determine dosage tolerance and optimal dosage
and to identify possible adverse side effect and safety risks. Once a compound
is found to be effective and to have an acceptable safety profile in Phase II
evaluations, Phase III trials are undertaken to more fully evaluate clinical
outcomes. The FDA reviews both the clinical plans and the results of the trials
and may require the study to be discontinued at any time if there are
significant safety issues.
The results of the preclinical and clinical trials for pharmaceutical drug
products such as those being developed by Dura, on our behalf, are submitted to
the FDA in the form of an NDA for marketing approval. FDA approval can take
several months to several years, or approval may be denied. The approval process
can be affected by a number of factors, including the severity of the side
effects, the availability of alternative treatments and the risks and benefits
demonstrated in clinical trials. Additional animal studies or clinical trials
may be requested during the FDA review process and may delay marketing approval.
After FDA approval for the initial indication, further clinical trials are
necessary to gain approval for the use of the product for any additional
indications. The FDA may also
74
require post-marketing testing and surveillance to monitor for adverse effects,
which can involve significant additional expense.
The FDA has considerable discretion to decide what requirements must be met
prior to approval. We believe, based upon the FDA's historical practice with
respect to drug inhalers, that the FDA will regulate each combination of Spiros
technology with a compound as a discrete pharmaceutical or drug product
requiring separate approval as a new drug.
The Federal Food, Drug, and Cosmetic Act permits the export of unapproved
drugs to a foreign country, provided the product complies with the laws of that
country and has valid marketing authorization in at least one of a list of
designated "Tier 1" countries. Once a product is exported to a qualified foreign
country, we will be subject to the applicable foreign regulatory requirements
governing human clinical trials and marketing approval in that country. The
requirements relating to the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country and there can be
no assurance that we will be able to meet and fulfill the statutory requirements
in a particular country.
RESEARCH AND DEVELOPMENT EXPENSES
We incurred research and development expenses for the period from
September 23, 1997 (date of incorporation) through December 31, 1997, the years
ended December 31, 1998 and 1999, and the three months ended March 31, 2000 of
$7.0 million, $50.8 million, $59.2 million and $14.8 million, respectively.
HUMAN RESOURCES
We have no employees. Our officers, Dr. David S. Kabakoff, chairman,
president and chief executive officer, Erle T. Mast, vice president and chief
financial officer, and John R. Cook, secretary, are also employees of Dura.
PROPERTY
Our corporate offices are located in Dura's executive offices in San Diego,
California. We do not own or lease any facilities.
RISKS AND UNCERTAINTIES
SPIROS TECHNOLOGY 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.
WE MAY NOT HAVE SUFFICIENT FUNDS TO COMPLETE THE DEVELOPMENT OF ANY SPIROS
PRODUCT.
Based on our current development plan and budget for the Spiros projects, we
expect to expend all of our existing funds in the second half of 2000. As a
result, we do not believe that our current available funds will be adequate to
complete the development or regulatory review process for any of the Spiros
products. Until the expiration of Dura's purchase option, we are significantly
restricted from raising additional funds without Dura's consent. While Dura may,
at its sole option, provide funds for further development of the Spiros products
or provide additional cash to us through the exercise of the albuterol or
product purchase options, it is not obligated to do so. Dura may not have
adequate information available to it when our funds are depleted to make a
decision on the exercise of the albuterol or product option. If the purchase
option or either the albuterol or product options is not
75
exercised by Dura, and the merger agreement is not completed, we would have to
raise substantial funding while hiring, or otherwise obtaining access to,
research and management personnel to perform the work now performed by Dura. We
may not be successful in doing any of these tasks.
DURA MAY NOT EXERCISE ITS OPTIONS.
In the event the merger with Dura is not completed, Dura is not obligated to
exercise its stock purchase option, the albuterol purchase option or the second
product purchase option, and it will exercise these options only if Dura's board
of directors determines that it is in Dura's best interest to do so. Even if the
Spiros products are developed and approved, if Dura does not exercise any of its
options, we will be required to find alternative ways to commercially market or
exploit the Spiros products. We may not be able to do so. If we attempt to
develop or market the Spiros products ourselves, we will require substantial
additional funds. We may not be able to raise funds when needed. Similarly, if
we elect to license the Spiros products to third parties, such arrangements, if
available, may be on terms less favorable to us than the terms of our
arrangements with Dura.
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 could result in Dura not exercising its purchase option for our
callable common stock. 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 may ever be approved by the FDA.
WE ARE DEPENDENT ON DURA FOR ALL ACTIVITIES IN THE DEVELOPMENT OF SPIROS
PRODUCTS.
We do not have manufacturing or marketing capabilities. We and Dura will
determine specified activities to be undertaken under the development agreement.
In all events Dura will have substantial influence over all activities and
procedures, including the timing and priorities of these activities and
procedures, to be undertaken under our agreements with Dura. Dura has no
obligation to complete any development or other activity after all of our funds
have been spent. Dura's own projects and other third party projects may compete
for time and resources with our projects. The resources that Dura uses for our
projects may therefore be limited.
Under our agreements with Dura, we are obligated to use only Dura's
facilities for manufacturing in the U.S. during the term of the manufacturing
and marketing agreement. Dura has the right to use contract manufacturers and
currently plans to rely on third parties to manufacture specified components of
Spiros. Dura's facilities or those of its contract manufacturers may not be
adequate for our needs. In addition, Dura or its contract manufacturers may
require additional FDA approvals prior to commencing manufacturing of Spiros
products. The Spiros products may not be manufacturable, whether by Dura or a
contract manufacturer, on a commercial scale, for commercially reasonable cost
or on a timely basis. We have no experience in sales, marketing or distribution.
Under the manufacturing and marketing agreement, Dura has exclusive worldwide
marketing rights to the Spiros products. Dura's sales and marketing force may
not be able to establish commercially successful sales and distribution
capabilities for the Spiros products.
DURA WILL NEED TO SIGNIFICANTLY EXPAND ITS MANUFACTURING CAPABILITY AND
COMPLY WITH GOVERNMENT REGULATIONS BEFORE IT CAN MANUFACTURE ANY SPIROS PRODUCTS
ON OUR BEHALF.
If Dura or other third parties are not successful in attaining acceptable
manufacturing quality levels or meeting regulatory requirements, our ability to
commercialize the Spiros products will be adversely affected. Dura will need to
significantly expand its current manufacturing operations and comply with
regulations prescribed by various regulatory agencies to achieve the quality and
required
76
levels of production of our products to obtain marketing approval. In addition,
Dura's 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. Any third
parties used in manufacturing Spiros will be required to significantly scale up
their activities and to produce components which meet applicable specifications
on a timely and consistent basis.
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 plan to offer. Our failure to effectively respond to the
competitive pressures of our industry would have an adverse effect on our
ability to effectively sell our products. 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 DO NOT HAVE A LONG OPERATING HISTORY AND WE MAY NEVER ACHIEVE
PROFITABILITY OR PAY DIVIDENDS.
We have a limited operating history upon which investors may base an
evaluation of our likely financial performance. We anticipate that substantially
all of our available funds will be expended prior to the receipt of any
significant revenues, resulting in significant losses. Further, even if the
Spiros products are developed or marketed under the agreements with Dura, they
may not be able to be marketed profitably. Even if such Spiros products are
commercialized profitably, we may never recover our initial losses. We are
prevented from paying dividends on our common stock without the approval of
Dura, and accordingly, do not expect to pay any dividends.
POTENTIAL COMPETITION FROM DURA MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
Dura is engaged in ongoing licensing and development of new products. While
Dura has exclusively licensed to us the rights to develop, manufacture and
commercialize the specified Spiros products, Dura is not prohibited from
developing other products using Spiros, including those products that may
compete with our Spiros products, or from in-licensing or acquiring products
that may compete with the Spiros products. Dura's activities may lead to the
development, in-licensing or acquisition of products that compete with our
Spiros products. It is possible that Dura's rights with respect to such
competitive products could reduce Dura's incentive to exercise the albuterol
option, the other product option or the stock purchase option.
DURA HAS THE ABILITY TO LIMIT SPECIFIED ACTIVITIES.
Until the expiration of the purchase option, Dura must approve specified
activities, including:
- issuing our securities;
- borrowing an aggregate of more than $1 million at any one time;
- selling a material part of our business or assets;
- declaring or paying dividends or making any other distributions to our
stockholders;
- merging or consolidating with any other corporation; and
- adopting, amending or repealing our bylaws.
Accordingly, Dura could preclude our stockholders and board of directors
from taking any of these actions prior to the expiration of the purchase option.
Dura, as holder of all of our outstanding special common stock, may transfer or
sell all, but not less than all, of its shares. As a result, an unrelated third
party may acquire rights associated with the special common stock, including the
rights discussed
77
in this section and the right to exercise the albuterol option, the product
option and the purchase option. An acquiror of the special common stock may not
have the same financial resources or development, manufacturing or marketing
capabilities as Dura, which may reduce the likelihood of the exercise of the
albuterol option, the other product option or the stock purchase option.
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 hold or obtain.
Our commercial success will also depend upon avoiding the infringement of
patents issued to competitors and upon maintaining the technology licenses upon
which specified Dura 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 callable
common stock. Such announcements might include:
- financial results;
- the results of clinical testing or other developments with 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
- our failure to achieve securities analysts' expectations concerning our
earnings per share.
78
OUR PRINCIPAL STOCKHOLDERS
The following are the only persons we know of to beneficially own more than
5% of our callable common stock or our special common stock as of March 1, 2000.
Except as indicated in the footnotes to this table, the entities named in the
table have sole voting and investment power with respect to all shares of
callable common stock or special common stock shown as beneficially owned by
them. Percentage of ownership is calculated under SEC Rule 13d-3(d)(1).
NUMBER
NUMBER OF SHARES PERCENTAGE
NAME AND ADDRESS OF SHARES UNDERLYING OF SHARES
TITLE OF CLASS OF BENEFICIAL OWNER OWNED OPTIONS OUTSTANDING
- -------------- -------------------------------------------- --------- ---------- -----------
Callable Dura Pharmaceuticals, Inc.(1) 0 6,325,000 100%
Common Stock.... 7475 Lusk Blvd.
San Diego, California 92121
Callable Funds managed by Farallon Partners, 1,374,400 0 21.7%
Common Stock.... L.L.C.(2)
One Maritime Plaza, Suite 1324
San Francisco, California 94111
Callable Elan International Services, Ltd.(3) 937,500 0 14.8%
Common Stock.... 102 St. St. James Court
Flatts, Smiths FL04
Bermuda
Callable HBK Investments, L.P.(4) 935,400 0 14.8%
Common Stock.... 300 Crescent Court, Suite 700
Dallas, Texas 75201
Callable Lehman Brothers Holdings Inc.(5) 441,400 0 7.0%
Common Stock.... 3 World Financial Center, 24th Floor
New York, New York 10285
Special Dura Pharmaceuticals, Inc.(1) 1,000 0 100%
Common Stock.... 7475 Lusk Blvd.
San Diego, California 92121
- ------------------------
(1) Pursuant to Amendment No. 2 to Schedule 13D dated February 14, 2000. Dura
holds beneficially and of record all shares of our special common stock.
Dura is also deemed, under the rules and regulations of the SEC, to be the
beneficial owner of all of the outstanding shares of our callable common
stock by virtue of its stock purchase option to acquire all of our callable
common stock.
(2) Pursuant to Amendment No. 1 to Schedule 13D dated March 21, 2000. Such
entities reported shared voting and dispositive power over the shares, and
specified affiliates disclaim beneficial ownership. Selected Farallon
entities entered into a voting agreement under which they agreed to vote in
favor of the merger with Dura.
(3) Pursuant to Schedule 13D dated March 12, 1998.
(4) Pursuant to Schedule 13D dated February 15, 2000.
(5) Pursuant to Amendment No. 1 to Schedule 13G dated December 31, 1998.
79
SECURITY OWNERSHIP OF OUR MANAGEMENT
The following table sets forth information regarding the ownership of our
callable common stock as of March 1, 2000, by each director, by our chairman,
president and chief executive officer, by our other executive officers, and by
our directors and executive officers as a group. The address for each beneficial
owner listed below is 7475 Lusk Blvd., San Diego, California 92121. The persons
named in the table have sole voting and investment power with respect to all
shares of our callable common stock shown as beneficially owned by them, subject
to community property laws, where applicable. Percentage of ownership is
calculated under SEC Rule 13d-3(d)(1). Asterisk denotes ownership of less than
1%.
NAME OF NUMBER OF PERCENTAGE OF
TITLE OF CLASS BENEFICIAL OWNER SHARES OWNED SHARES OUTSTANDING
- ---------------------- ------------------------------------ ------------ ------------------
Callable Common Stock Sol Lizerbram 0 *
Callable Common Stock William H. Rastetter 0 *
Callable Common Stock Alain B. Schreiber 0 *
Callable Common Stock Cam L. Garner 18,250 *
Callable Common Stock David S. Kabakoff 10,660 *
Callable Common Stock Erle T. Mast 1,050 *
Callable Common Stock Directors and executive officers
as a group (6 persons) 29,960 *
RELATED PARTY TRANSACTIONS
Dr. Kabakoff currently serves as president, Dura Technologies, and
Mr. Garner serves as chairman and chief executive officer of Dura. Under various
agreements, we have engaged Dura to develop products to which we have rights,
for use with Spiros technology, a proprietary dry powder pulmonary drug delivery
system. For fiscal year 1999, we incurred research and development expenses of
$59.2 million for activities conducted under the agreements with Dura.
Dura has a purchase option which entitles it to purchase all, but not less
than all, of our callable common stock. The purchase option is exercisable at
any time before December 31, 2002, which exercise period may be shortened or
lengthened in specified circumstances. If the purchase option is exercised, the
per share exercise price is $27.96 for the quarter ended September 30, 2000, and
increases on a quarterly basis to $45.95 per share through December 31, 2002.
The purchase option exercise price may be paid in cash or shares of common stock
of Dura, or any combination of the foregoing, at Dura's sole discretion. Dura
has no legal obligation to exercise the purchase option. Dura owns all of our
issued and outstanding special common stock which confers specified voting and
other rights, including the right to elect two of our directors. In addition,
Dura holds an option to acquire our exclusive rights for use of the Spiros
system with albuterol and with a second product other than albuterol. The
purchase price for these options is payable in cash.
RIGHTS OF DISSENTING STOCKHOLDERS
Under the Delaware General Corporation Law, any holder of our callable
common stock who does not wish to accept the merger consideration in respect of
shares of our callable common stock has the right to dissent from the merger and
to seek an appraisal of and to be paid the fair cash value, exclusive of any
element of value arising from the accomplishment or expectation of the merger,
for the stockholder's shares, judicially determined, and paid to the stockholder
in cash, together with a fair rate of interest, if any, so long as that the
stockholder fully complies with the provisions of Section 262
80
of the Delaware General Corporation Law. We have attached a copy of Section 262
as Annex D to this document.
Making sure that you actually perfect your appraisal rights can be
complicated. The procedural rules are specific and must be followed precisely.
Failure to comply with the procedure may cause a termination of your appraisal
rights. The following information is intended as a brief summary of the material
provisions of the statutory procedures you must follow in order to perfect your
appraisal right. Please review Annex D for the complete procedure. Neither we
nor Dura will give you any notice other than as described in this document and
as required by the Delaware General Corporation Law.
APPRAISAL RIGHTS PROCEDURES
If you are a callable common stockholder and you wish to exercise your
appraisal rights, you must cause your broker to satisfy the provisions of
Section 262 of the Delaware General Corporation Law. Section 262 requires the
following:
- YOUR BROKER MUST CAUSE THE DEPOSITORY TRUST COMPANY TO MAKE A WRITTEN
DEMAND FOR APPRAISAL. Your broker must cause The Depository Trust Company
to deliver a written demand for appraisal to us before the vote on the
adoption of the merger agreement is taken at the special meeting. This
written demand for appraisal must be separate from The Depository Trust
Company proxy. A vote against the merger agreement will not alone
constitute demand for appraisal.
- YOUR BROKER MUST CAUSE THE DEPOSITORY TRUST COMPANY TO REFRAIN FROM VOTING
IN FAVOR OF THE MERGER. Your broker must cause The Depository Trust
Company not vote for adoption of the merger agreement. If you cause your
broker to vote in favor of the adoption of the merger agreement, this will
terminate your right to appraisal. You can also terminate your right to
appraisal if your broker returns a signed proxy and fails to vote against
adoption of the merger agreement or fails to note that you are abstaining
from voting. Your appraisal rights will be terminated even if your broker
previously filed a written demand for appraisal.
- YOU MUST CONTINUOUSLY HOLD YOUR SHARES OF CALLABLE COMMON STOCK. You must
continuously hold your shares of callable common stock, from the date you
make the demand for appraisal through the closing of the merger. If you
are the record holder of our callable common stock on the date the written
demand for appraisal is made but thereafter transfer the shares prior to
the completion of the merger, you will lose any right to appraisal in
respect of those shares. You should read the paragraphs below for more
details on making a demand for appraisal.
- YOU MUST A FILE PETITION. Your broker must cause The Depository Trust
Company to file, within 120 days after the completion of the merger, a
petition in the Delaware Court of Chancery demanding a determination of
the fair value of our callable common stock.
A written demand for appraisal of shares of our callable common stock is
only effective if it is signed by, or for, The Depository Trust Company on
behalf of the the stockholder of record who owns such shares at the time the
demand is made. The demand must be signed as the stockholder's name appears on
their shares of our callable common stock certificate(s). If you are the
beneficial owner of shares of our callable common stock, but not the stockholder
of record, you must have the stockholder of record sign a demand for appraisal.
If you elect to exercise appraisal rights, The Depository Trust Company will
mail or deliver a written demand to Spiros Development Corporation II, Inc.,
7475 Lusk Boulevard, San Diego, California 92121, Attention: Corporate
Secretary.
It is important that we receive all written demands before the vote on the
adoption of the merger agreement is taken at the special meeting. The written
demand for appraisal should specify the
81
applicable participant in The Depository Trust Company, the stockholder's name
and mailing address, the number of shares of stock owned, and that the
stockholder is demanding appraisal of that stockholder's shares.
If you fail to comply with any of these conditions and the merger becomes
effective, you will only be entitled to receive the merger consideration
provided in the merger agreement.
WRITTEN NOTICE
Within 10 days after the closing of the merger, we must give written notice
that the merger has become effective to each stockholder who has fully complied
with the conditions of Section 262.
PETITION WITH THE CHANCERY COURT
Within 120 days after the completion of the acquisition, either the
surviving corporation or any stockholder who has complied with the conditions of
Section 262 of the Delaware General Corporation Law, may file a petition in the
Delaware Court of Chancery. This petition should request that the court
determine the value of the shares of stock held by all of the stockholders who
are entitled to appraisal rights. If you intend to exercise your rights of
appraisal, you should cause your broker to have The Depository Trust Company
file such a petition in the chancery court. We have no intention at this time to
file such a petition. Because we have no obligation to file such a petition, if
you do not cause your broker to have The Depository Trust Company file such a
petition within 120 days after the completion of the acquisition, you will lose
your rights of appraisal.
WITHDRAWAL OF DEMAND
If you change your mind and decide you no longer want appraisal rights, you
may cause your broker to have The Depository Trust Company withdraw your demand
for appraisal rights at any time within 60 days after the completion of the
acquisition. You may also cause your broker to have The Depository Trust Company
withdraw your demand for appraisal rights after 60 days after the completion of
the acquisition, but only with our written consent. If you effectively cause
your broker to have The Depository Trust Company withdraw your demand for
appraisal rights, you will receive the merger consideration provided in the
merger agreement.
REQUEST FOR APPRAISAL RIGHTS STATEMENT
If you have complied with the conditions of Section 262 of the Delaware
General Corporation Law, you are entitled to receive a statement from us. This
statement will set forth the number of shares that have demanded appraisal
rights, and the number of stockholders who own those shares. In order to receive
this statement, you must send a written request to us within 120 days after the
completion of the acquisition. After the completion of the acquisition, we have
10 days after receiving a request to mail you the statement.
CHANCERY COURT PROCEDURES
If you cause your broker to have The Depository Trust Company properly
file a petition for appraisal in the Delaware Court of Chancery and deliver a
copy to us, we will then have 20 days to provide the court with a list of the
names and addresses of all stockholders who have demanded appraisal rights and
have not reached an agreement with us as to the value of their shares. The court
will then send notice to all of the stockholders who have demanded appraisal
rights. If the chancery court thinks it is appropriate, it has the power to
conduct a hearing to determine whether the stockholders have fully complied with
Section 262 of the Delaware General Corporation Law and whether they are
entitled to appraisal rights under that law. The court may also require you to
submit your stock certificates to the Registry in Chancery so that it can note
on the certificates that an
82
appraisal proceeding is pending. If you do not follow the court's directions,
you may be dismissed from the proceeding.
APPRAISAL OF SHARES
After the Court of Chancery determines which stockholders are entitled to
appraisal rights, the court will appraise the shares of stock. To determine the
fair value of the shares, the court will consider all relevant factors except
for any appreciation or depreciation due to the anticipation or accomplishment
of the acquisition. After the court determines the fair value of the shares, it
will direct us to pay that value to the stockholders who are entitled to
appraisal rights. The chancery court can also direct us to pay interest, simple
or compound, on that value if the chancery court determines that interest is
appropriate. In order to receive payment for your shares, you must then
surrender your stock certificates to us.
The Court of Chancery could determine that the fair value of shares of stock
is more than, the same as, or less than the merger consideration. In other
words, if you demand appraisal rights, you could receive less consideration than
you would under the merger agreement. You should also be aware that an opinion
of an investment banking firm that the merger is fair, from a financial point of
view, is not an opinion that the merger consideration is the same as the fair
value under Section 262 of the Delaware General Corporation Law.
COSTS AND EXPENSES OF APPRAISAL PROCEEDING
The costs of the appraisal proceeding may be assessed against us and the
stockholders participating in the appraisal proceeding, as the Court of Chancery
deems equitable under the circumstances. You can request that the court
determine the amount of interest, if any, we should pay on the value of stock
owned by stockholders entitled to the payment of interest. You may also request
that the court allocate the expenses of the appraisal action incurred by any
stockholder pro rata against the value of all of the shares entitled to
appraisal.
LOSS OF STOCKHOLDER'S RIGHTS
If you cause your broker to have The Depository Trust Company demand
appraisal rights, after the closing of the acquisition you will not be entitled
to:
- for any purpose, vote the shares of stock for which you have demanded
appraisal rights;
- receive payment of dividends or any other distribution with respect to
such shares, except for dividends or distributions, if any, that are
payable to holders of record as of a record date prior to the completion
of the acquisition; or
- receive the payment of the consideration provided for in the merger
agreement unless you properly withdraw your demand for appraisal.
If no petition for an appraisal is filed within 120 days after the
completion of the acquisition, your right to an appraisal will cease. You may
withdraw your demand for appraisal and accept the merger consideration by
delivering to us a written withdrawal of your demand, except that:
- any attempt to withdraw made more than 60 days after the completion of the
acquisition will require our written approval; and
- an appraisal proceeding in the Court of Chancery cannot be dismissed
unless the court approves.
If you fail to comply strictly with the procedures described above you will
lose your appraisal rights. Consequently, if you wish to exercise your appraisal
rights, we strongly urge you to consult a legal advisor before attempting to
exercise your appraisal rights.
83
LEGAL MATTERS
The validity of the warrants to purchase shares of Dura common stock and the
shares of Dura common stock underlying such warrants offered by this document
will be passed upon for Dura by Brobeck, Phleger & Harrison LLP, San Diego,
California. As of April 21, 2000, affiliates of Brobeck, Phleger & Harrison LLP
beneficially owned a total of approximately 1,500 shares of Dura common stock,
1,000 warrants to purchase shares of Dura common stock and 1,000 shares of our
callable common stock.
EXPERTS
Our financial statements at December 31, 1999 and for the year ended
December 31, 1999, included in this proxy statement/prospectus, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
filed with this document, and are included in reliance upon such report given on
the authority of such firm as experts in accounting and auditing.
Our financial statements as of December 31, 1998 and for the year ended
December 31, 1998 and for the period September 23, 1997 (date of incorporation)
through December 31, 1997 included in this proxy statement/prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing in this document, and have been so included in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
The financial statements incorporated in this proxy statement/prospectus by
reference from Dura's Annual Report on Form 10-K for the year ended
December 31, 1999 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report which is incorporated by reference, and have
been so incorporated in reliance upon the report of that firm given upon their
authority as experts in accounting and auditing.
INCORPORATION BY REFERENCE
The SEC allows Dura to "incorporate by reference" the information Dura files
with it, which means that Dura can disclose important information to you by
referring you to that information. The information incorporated by reference is
considered to be part of this document, and later information filed with the SEC
will update and supersede this information. Dura incorporates by reference the
documents listed below and any future filings made with the SEC under
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until
the day on which we hold the special meeting.
- Dura's annual report on Form 10-K for the year ended December 31, 1999;
- Dura's quarterly report on Form 10-Q for the quarter ended March 31, 2000;
- Dura's current report on Form 8-K filed March 21, 2000; and
- The description of Dura's common stock contained in its registration
statement on Form 8-A as filed with the SEC on December 12, 1997.
Any statement contained in this document or in a document incorporated or
deemed to be incorporated by reference in this document shall be deemed to be
modified or superseded for purposes of this document to the extent that a
statement contained or in any applicable prospectus supplement or any other
subsequently filed document which also is or is deemed to be incorporated by
reference in this document modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this document.
84
WHERE YOU CAN FIND MORE INFORMATION
Dura has filed with the SEC a registration statement on Form S-4 under the
Securities Act of 1933 with respect to the offer and sale of the warrants and
the shares of Dura common stock issuable upon exercise of the warrants. This
document does not contain all the information contained in the registration
statement. For further information with respect to Dura, the warrants and the
shares of Dura common stock issuable upon exercise of the warrants, Dura refers
you to the registration statement and the exhibits and schedules filed with the
registration statement. Dura has described all material information for each
contract, agreement or other document filed with the registration statement in
this document. However, statements contained in this document as to the contents
of any contract, agreement or other document referred to are not necessarily
complete. As a result, you should refer to the copy of the contract, agreement
or other document filed as an exhibit to the registration statement for a
complete description of the matter involved.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information that Dura file at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. The SEC's filings, including the
registration statement are also available to you without charge on their web
site http://www.sec.gov.
STOCKHOLDER PROPOSALS
We expect the acquisition to be completed and therefore do not expect to
hold a 2000 annual meeting of stockholders. Under the present rules of the SEC,
the deadline for our stockholders to submit proposals to be considered for
inclusion in our proxy statement for our 2000 annual meeting of stockholders was
December 18, 1999. In the event that the merger is not completed and we do hold
our 2000 annual meeting of stockholders, your proposals may be included in our
annual meeting proxy statement if they comply with the rules and regulations
promulgated by the SEC and our bylaws. In addition, the proxy solicited by our
board of directors for our special meeting of stockholders will confer
discretionary authority to vote on any stockholder proposal presented at that
meeting, unless we received notice of such proposal not later than ____________,
2000.
85
INDEX TO FINANCIAL STATEMENTS
SPIROS DEVELOPMENT CORPORATION II, INC.
PAGE
--------
Ernst & Young LLP Independent Auditors' Report.............. F-2
Deloitte & Touche LLP Independent Auditors' Report.......... F-3
Balance Sheets as of December 31, 1998 and 1999............. F-4
Statements of Operations for the Years Ended December 31,
1998 and 1999, and the Periods September 23, 1997 (Date of
Incorporation) through December 31, 1997 and 1999......... F-5
Statement of Shareholders' Equity for the Period September
23, 1997 (Date of Incorporation) through December 31,
1999...................................................... F-6
Statements of Cash Flows for the Years Ended December 31,
1998 and 1999, and the Periods September 23, 1997 (Date of
Incorporation) through December 31, 1997 and 1999......... F-8
Notes to Financial Statements............................... F-9
UNAUDITED FINANCIAL STATEMENTS
Balance Sheet as of March 31, 2000.......................... F-16
Statements of Operations for the Three Months Ended
March 31, 1999 and 2000 and for the Period September 23,
1997 (Date of Incorporation) through March 31, 2000....... F-17
Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 2000 and for the Period September 23,
1997 (Date of Incorporation) through March 31, 2000....... F-18
Notes to Financial Statements............................... F-19
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Consolidated Financial
Information............................................... F-21
Unaudited Pro Forma Condensed Consolidated Balance Sheet as
of March 31, 2000......................................... F-22
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Three Months Ended March 31, 2000...... F-23
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Year Ended December 31, 1999........... F-24
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Information..................................... F-25
F-1
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, shareholders' 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, shareholders' 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
F-2
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, shareholders'
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 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 generally accepted accounting principles.
/s/ Deloitte & Touche LLP
San Diego, California
February 9, 1999
F-3
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
1998 1999
-------- ---------
CURRENT ASSETS:
Cash and cash equivalents................................. $ 20,535 $ 13,325
Short-term investments.................................... 103,069 57,718
Other current assets...................................... 192 96
-------- ---------
Total current assets.................................. 123,796 71,139
-------- ---------
TOTAL....................................................... $123,796 $ 71,139
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Payable to Dura Pharmaceuticals, Inc...................... $ 4,597 $ 6,720
Accrued liabilities....................................... 281 173
-------- ---------
Total current liabilities............................. 4,878 6,893
-------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
SHAREHOLDERS' EQUITY:
Special common stock, par value $1.00, 1,000 shares
authorized, issued and outstanding...................... 1 1
Callable common stock, par value $.001, 7,500,000 shares
authorized; 6,325,000 shares issued and outstanding..... 6 6
Additional paid-in capital................................ 169,404 170,191
Accumulated other comprehensive income (loss)............. 224 (171)
Accumulated deficit....................................... (50,717) (105,781)
-------- ---------
Total shareholders' equity............................ 118,918 64,246
-------- ---------
TOTAL....................................................... $123,796 $ 71,139
======== =========
See accompanying notes to financial statements.
F-4
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999, AND
THE PERIODS SEPTEMBER 23, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1997 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 23, 1997 SEPTEMBER 23, 1997
(DATE OF INCORPORATION) (DATE OF 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
See accompanying notes to financial statements.
F-5
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD SEPTEMBER 23, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1999
(IN THOUSANDS)
SPECIAL CALLABLE
COMMON STOCK COMMON STOCK ADDITIONAL ACCUMULATED
------------------- ------------------- PAID-IN COMPREHENSIVE OTHER COMP.
SHARES AMOUNT SHARES AMOUNT CAPITAL LOSS INCOME
-------- -------- -------- -------- ---------- ------------- -----------
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....................... $ (6,924)
Unrealized gain on
investments.................. 21 $ 21
---------
Comprehensive loss........... (6,903)
-------- ---- ----- -- -------- ========= -----
BALANCE, DECEMBER 31, 1997....... 1 1 6,325 6 168,977 21
-------- ---- ----- -- -------- -----
Additional issuance costs on sale
of callable common stock....... (71)
Compensation expense for stock
options granted................ 498
Comprehensive loss:
Net loss....................... (43,793)
Unrealized gain on
investments.................. 203 203
---------
Comprehensive loss........... (43,590)
-------- ---- ----- -- -------- ========= -----
BALANCE, DECEMBER 31, 1998....... 1 1 6,325 6 169,404 224
-------- ---- ----- -- -------- -----
Compensation expense for stock
options granted................ 787
Comprehensive loss:
Net loss....................... (55,064)
Unrealized loss on
investments.................. (395) (395)
---------
Comprehensive loss........... $ (55,459)
-------- ---- ----- -- -------- ========= -----
BALANCE, DECEMBER 31, 1999....... 1 $ 1 6,325 $6 $170,191 $(171)
======== ==== ===== == ======== =====
F-6
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD SEPTEMBER 23, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1999 (CONTINUED)
(IN THOUSANDS)
ACCUMULATED
DEFICIT TOTAL
----------- --------
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)
Unrealized gain on investments............................ 21
Comprehensive loss
--------- -------
BALANCE, DECEMBER 31, 1997.................................. (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)
Unrealized gain on investments............................ 203
Comprehensive loss
--------- -------
BALANCE, DECEMBER 31, 1998.................................. (50,717) 118,918
--------- -------
Compensation expense for stock options granted.............. 787
Comprehensive loss:
Net loss.................................................. (55,064) (55,064)
Unrealized loss on investments............................ (395)
Comprehensive loss
--------- -------
BALANCE, DECEMBER 31, 1999.................................. $(105,781) $64,246
========= =======
See accompanying notes to financial statements.
F-7
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999, AND
THE PERIODS SEPTEMBER 23, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1997 AND 1999
(IN THOUSANDS)
SEPTEMBER 23, 1997 SEPTEMBER 23, 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
------------------ ------------ ------------ ------------------
OPERATING ACTIVITIES:
Net loss.......................... $ (6,924) $ (43,793) $(55,064) $(105,781)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Compensation expense for stock
options granted............... 16 498 787 1,301
Changes in assets and
liabilities:
Other current assets.......... (192) 96 (96)
Payable to Dura
Pharmaceuticals, Inc........ 7,110 (2,513) 2,123 6,720
Accrued liabilities........... 26 255 (108) 173
-------- --------- -------- ---------
Net cash provided by (used
in) operating
activities................ 228 (45,745) (52,166) (97,683)
-------- --------- -------- ---------
INVESTING ACTIVITIES:
Purchases of short-term
investments..................... (31,450) (142,908) (29,559) (203,917)
Sales and maturities of short-term
investments..................... 71,513 74,515 146,028
-------- --------- -------- ---------
Net cash provided by (used
in) investing
activities................ (31,450) (71,395) 44,956 (57,889)
-------- --------- -------- ---------
FINANCING ACTIVITIES:
Net proceeds from issuance of
special common and callable
common stock.................... 93,968 (71) 93,897
Contribution from Dura
Pharmaceuticals, Inc. for
purchase option................. 75,000 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) 168,897
-------- --------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................. 139,035 (118,500) (7,210) 13,325
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD............... 139,035 20,535
-------- --------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................ $139,035 $ 20,535 $ 13,325 $ 13,325
======== ========= ======== =========
See accompanying notes to financial statements.
F-8
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.
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
F-9
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 shareholders' 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 accordance with SFAS 130, the
accumulated balance of other comprehensive income is disclosed as a separate
component of shareholders' 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.
F-10
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. SHORT-TERM INVESTMENTS
The following is a summary of short-term investments as of December 31, 1998
and 1999 (in thousands):
UNREALIZED ESTIMATED
COST GAINS (LOSSES) FAIR VALUE
-------- -------------- ----------
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
======== ===== ========
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):
ESTIMATED
COST FAIR VALUE
-------- ----------
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
======= =======
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), 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).
F-11
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. ARRANGEMENTS WITH DURA PHARMACEUTICALS, INC. (CONTINUED)
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 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. SHAREHOLDERS' 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
F-12
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
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
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.
F-13
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK COMPENSATION PLAN (CONTINUED)
The following table summarizes stock option activity under the Plan:
SHARES
--------------------------- AVERAGE
OPTIONS EXERCISE
OPTIONS AVAILABLE FOR PRICE PER
OUTSTANDING GRANT SHARE
----------- ------------- ---------
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
======= ========
No options were exercisable as of December 31, 1998 and 1999.
The following table summarizes information concerning outstanding options as
of December 31, 1999:
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
RANGE OF NUMBER CONTRACTUAL LIFE EXERCISE
EXERCISE PRICES OUTSTANDING (YEARS) PRICE
- --------------------- ----------- ---------------- --------
$14.00-$15.88 754,500 8.2 $14.13
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
F-14
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK COMPENSATION PLAN (CONTINUED)
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:
1997 1998 1999
-------- --------------------- ---------------------
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
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 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.
F-15
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
MARCH 31, 2000
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 25,713
Short-term investments.................................... 30,107
Other current assets...................................... 113
---------
Total current assets.............................. 55,933
---------
TOTAL....................................................... $ 55,933
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Payable to Dura Pharmaceuticals, Inc...................... $ 5,694
Accrued liabilities....................................... 133
---------
Total current liabilities......................... 5,827
---------
SHAREHOLDERS' EQUITY:
Special common stock, par value $1.00, 1,000 shares
authorized, issued, and outstanding..................... 1
Callable common stock, par value $.001, 7,500,000 shares
authorized; 6,325,000 shares issued and outstanding..... 6
Additional paid-in capital................................ 170,376
Accumulated other comprehensive loss...................... (121)
Accumulated deficit....................................... (120,156)
---------
Total shareholders' equity........................ 50,106
---------
TOTAL....................................................... $ 55,933
=========
See accompanying notes to financial statements.
F-16
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
AND THE PERIOD SEPTEMBER 23, 1997
(DATE OF INCORPORATION)
THROUGH MARCH 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 23, 1997
THREE THREE (DATE OF
MONTHS MONTHS INCORPORATION)
ENDED ENDED THROUGH
MARCH 31, MARCH 31, MARCH 31,
1999 2000 2000
--------- --------- ------------------
EXPENSES (WITH RELATED PARTY):
Research and development............................. $ 13,316 $ 14,767 $ 131,817
General and administrative........................... 277 483 2,809
--------- --------- ----------
OPERATING LOSS......................................... 13,593 15,250 134,626
--------- --------- ----------
INTEREST INCOME........................................ 1,587 875 14,677
--------- --------- ----------
Loss Before Income Taxes............................... (12,006) (14,375) (119,949)
PROVISION FOR INCOME TAXES............................. 207 207
--------- --------- ----------
NET LOSS............................................... $ (12,006) $ (14,375) $ (120,156)
========= ========= ==========
NET LOSS PER SHARE:
Basic and diluted.................................... $ (1.90) $ (2.27) $ (19.00)
========= ========= ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic and diluted.................................... 6,325 6,325 6,325
========= ========= ==========
See accompanying notes to financial statements.
F-17
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 2000
AND FOR THE PERIOD SEPTEMBER 23, 1997
(DATE OF INCORPORATION)
THROUGH MARCH 31, 2000
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 23, 1997
THREE THREE (DATE OF
MONTHS MONTHS INCORPORATION)
ENDED ENDED THROUGH
MARCH 31, MARCH 31, MARCH 31,
1999 2000 2000
--------- --------- ------------------
NET CASH USED IN OPERATING ACTIVITIES.................. $ (11,424) $ (15,273) $ (112,956)
--------- --------- ----------
INVESTING ACTIVITIES:
Purchases of short-term investments.................. (11,264) (203,917)
Sales and maturities of short-term investments....... 29,367 27,661 173,689
--------- --------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES................................. 18,103 27,661 (30,228)
--------- --------- ----------
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
--------- --------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.... 168,897
--------- --------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............. 6,679 12,388 25,713
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....... 20,535 13,325
--------- --------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............. $ 27,214 $ 25,713 $ 25,713
========= ========= ==========
See accompanying notes to financial statements.
F-18
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by Spiros
Development Corporation II, Inc. ("Spiros Corp. II" or the "Company") in
accordance with the instructions to Form 10-Q. The 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
periods presented. For more complete financial information, these financial
statements and notes thereto should be read in conjunction with the audited
financial statements and notes thereto for the periods ended December 31, 1999
included in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission. The results of operations for the interim periods are
not necessarily indicative of results to be expected for any other interim
periods or for the year as a whole.
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.
2. ORGANIZATION
Spiros Corp. II was incorporated in the state of Delaware on September 23,
1997 for the purpose of continuing the development of Spiros(R), 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 at a price per
share of $54.84. 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. Through December 31, 1999, each share of the
Company's callable common stock traded publicly as a unit with the warrant to
purchase one-fourth of one share of Dura's common stock. As of January 1, 2000,
the warrant began trading as a separate security.
3. DEFINITIVE MERGER AGREEMENT WITH DURA PHARMACEUTICALS, INC.
In March 2000 we entered into a merger agreement with Dura. Under the
agreement, each holder of our callable common stock will receive $13.25 in cash
and a warrant to purchase a fractional share of Dura's common stock. The warrant
will be immediately exercisable 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, and will expire five
years from the date the merger is completed. 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 stockholders on the merger and will result in a calculated
value, using the Black-Scholes option pricing model, for each warrant between
$3.22 and $1.81. Closing of the transaction is subject to our stockholder
approval, expiration or termination of the applicable waiting
F-19
period under the Hart-Scott-Rodino Antitrust Improvements Act, registration of
the warrant and the shares of Dura's common stock which will be issued if the
warrants are exercised, and approval for listing on Nasdaq of the warrants and
Dura's underlying common stock. 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 stockholders approve the merger.
We expect to deliver a proxy statement describing the terms of the merger
agreement in greater detail to our stockholders in the near term.
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.
4. REPORTING COMPREHENSIVE LOSS
Comprehensive loss includes net loss and unrealized gains and losses on
investments. The accumulated balance of other comprehensive loss is disclosed as
a separate component of stockholders' equity. For the three months ended March
31, 1999 and 2000, and the period September 23, 1997 (date of incorporation)
through March 31, 2000, comprehensive loss consisted of (in thousands):
SEPTEMBER 23, 1997
(DATE OF
THREE MONTHS THREE MONTHS INCORPORATION)
ENDED ENDED THROUGH
MARCH 31, 1999 MARCH 31, 2000 MARCH 31, 2000
-------------- -------------- ------------------
Net loss......................................... $ (12,006) $ (14,375) $ (120,156)
Other comprehensive income (loss):
Unrealized gain (loss) on investments.......... (63) 50 (121)
--------- --------- ----------
Comprehensive loss............................... $ (12,069) $ (14,325) $ (120,277)
========= ========= ==========
F-20
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated balance sheet as of
March 31, 2000 and the unaudited pro forma condensed consolidated statements of
operations for the three months ended March 31, 2000 and the year ended
December 31, 1999 give effect to the merger of Dura and us as if it occurred as
of March 31, 2000 for the condensed consolidated balance sheet and as of
January 1, 1999 for the condensed consolidated statements of operations. These
unaudited pro forma condensed consolidated financial statements have been
prepared by Dura's management based on Dura's and our historical financial
statements and on the assumptions and adjustments as discussed in the
accompanying notes to the pro forma condensed 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
our 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 condensed
consolidated financial statements are not necessarily indicative of what actual
results of operations would have been for the period had the acquisition
occurred on the date indicated. In addition, such pro forma financial statements
do not purport to indicate the results of future operations or financial
position of Dura from the date of the merger forward.
F-21
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2000
(IN THOUSANDS)
SPIROS PRO FORMA PRO FORMA
DURA CORP. II ADJUSTMENTS CONSOLIDATED
--------- --------- ----------- ------------
ASSETS
Cash, cash equivalents, and short-term
investments................................. $ 299,237 $ 55,820 $(89,706)(2b) $ 265,351
Other current assets.......................... 70,769 113 (5,694)(2a) 65,188
License agreements and product rights......... 393,532 393,533
Property and other assets..................... 148,125 148,125
--------- --------- -------- ---------
TOTAL......................................... $ 911,664 $ 55,933 $(95,400) $ 872,197
========= ========= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Total current liabilities................... $ 100,581 $ 5,827 $ (5,694)(2a) $ 100,714
Convertible subordinated notes.............. 287,500 287,500
Other long-term obligations................. 67,379 67,379
--------- --------- -------- ---------
Total liabilities......................... 455,460 5,827 (5,694) 455,593
SHAREHOLDERS' EQUITY:
Common stock................................ 44 7 (7)(2b) 44
Additional paid-in capital.................. 581,155 170,376 (154,563)(2b) 596,968
Accumulated other comprehensive loss........ (1,305) (121) 121 (2b) (1,305)
Warrant subscriptions receivable............ (5,202) 5,202 (2b)
Accumulated deficit......................... (118,488) (120,156) 59,541 (2b) (179,103)
--------- --------- -------- ---------
Total shareholders' equity................ 456,204 50,106 (89,706) 416,604
--------- --------- -------- ---------
TOTAL......................................... $ 911,664 $ 55,933 $(95,400) $ 872,197
========= ========= ======== =========
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-22
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SPIROS PRO FORMA PRO FORMA
DURA CORP. II ADJUSTMENTS CONSOLIDATED
-------- -------- ----------- ------------
REVENUES:
Sales........................................ $67,325 $67,325
Contract..................................... 18,454 $(13,828)(3a) 4,626
------- -------- -------
Total revenues............................. 85,779 (13,828) 71,951
------- -------- -------
OPERATING COSTS AND EXPENSES:
Cost of sales................................ 14,172 14,172
Clinical, development and regulatory......... 14,804 $ 14,767 (14,583)(3b) 14,988
Selling, general and administrative.......... 37,510 483 (100)(3b) 37,893
Product rights amortization.................. 5,389 5,389
------- -------- -------- -------
Total operating costs and expenses......... 71,875 15,250 (14,683) 72,442
------- -------- -------- -------
OPERATING INCOME (LOSS)........................ 13,904 (15,250) 855 (491)
------- -------- -------- -------
OTHER:
Interest income.............................. 4,751 875 5,626
Interest expense............................. (4,300) (4,300)
Other (net).................................. 3,443 3,443
------- -------- -------
Total other................................ 3,894 875 4,769
------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES.............. 17,798 (14,375) 855 4,278
PROVISION (BENEFIT) FOR INCOME TAXES........... 5,340 (4,057)(3c) 1,283
------- -------- -------- -------
NET INCOME (LOSS).............................. $12,458 $(14,375) $ 4,912 $ 2,995
======= ======== ======== =======
NET INCOME (LOSS) PER SHARE--BASIC............. $ 0.28 $ 0.07
======= =======
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES--BASIC................................ 44,335 44,335
======= =======
NET INCOME (LOSS) PER SHARE--DILUTED........... $ 0.27 $ 0.06
======= =======
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES--DILUTED.............................. 46,158 46,158
======= =======
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-23
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SPIROS PRO FORMA PRO FORMA
DURA CORP. II ADJUSTMENTS CONSOLIDATED
-------- -------- ----------- ------------
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 (LOSS) PER SHARE--BASIC............ $ 0.68 $ (0.17)
======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES--BASIC............................... 44,132 44,132
======== ========
NET INCOME (LOSS) PER SHARE--DILUTED.......... $ 0.66 $ (0.17)
======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES--DILUTED............................. 45,672 44,132
======== ========
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-24
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
1. THE MERGER
On March 20, 2000, Dura entered into a merger agreement to acquire us. Under
the agreement, each holder of our callable common stock will receive $13.25
in cash and a warrant to purchase a fractional share of Dura common stock.
The exercise price of the warrant will be $17.94 per share of Dura common
stock. The exact fraction of a share of Dura common stock purchasable under
the warrant will be determined based on the average closing price of Dura
common stock for the 10 trading days prior to the vote of our stockholders
on the merger and will result in a calculated value, using the Black-Scholes
option pricing model, for each warrant between $3.22 and $1.81. If the
average closing price of Dura common stock is between $11.48 and $17.22 per
share, then the fractional share will be .314 of a share. If the average
closing price is above $17.22 per share, then the fractional share will
decline such that the Black-Scholes calculated value of the warant will
remain constant at $3.22. If the average closing price is less than
$11.48 per share, then the fractional share will increase such that
Black-Scholes calculated value will remain constant at $1.81. For purposes
of our pro forma calculations, we have assumed the mid-point range of the
warrants' estimated value of $2.50.
The Black-Scholes calculation of warrant value is based on a risk free
interst rate of 6.43%, volatility of 65%, and a 5 year expiration from the
date of issuance.
Each stock option held by members of the special committee of our board of
directors will be converted into the right to receive, upon exercise, the
per share merger consideration described above. Each of our other stock
options will be converted into the right to receive, for each share of our
callable common stock subject to the option, cash in an amount equal to the
positive difference, if any, between $13.25 plus the average of the closing
trading price of the Dura warrants for the first 10 trading days following
completion of the merger (not to exceed $3.22) minus the exercise price per
share for the option (ranging from $14.00 to $15.88 per share). As of
March 31, 2000, there were 734,500 options outstanding. For purposes of our
pro forma calculations, we have assumed that the average trading price of
the Dura warrants is $2.50, the mid point of warrants' estimated value.
The acquisition will be accounted for as a purchase. For purposes of
preparing the pro forma financial information, Dura has 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 condensed consolidated statement of
operations, as it is nonrecurring. This charge is, however, reflected in the
pro forma condensed consolidated balance sheet. Upon completion of the
merger, Dura 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 useful lives, estimated
to be 5 years.
The estimated purchase price has been determined as follows:
Cash paid for callable common stock......................... $ 83,806
Cash paid for options....................................... 1,125
Estimated fair value of warrants issued..................... 15,813
Estimated transaction expenses.............................. 4,775
--------
Total estimated purchase price............................ $105,519
========
F-25
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
1. THE MERGER (CONTINUED)
For purposes of preparing the pro forma financial information, the estimated
purchase price has been allocated as follows:
Cash........................................................ $ 44,924
Other current assets........................................ 113
Current liabilities assumed................................. (133)
In process technology....................................... 60,615
--------
$105,519
========
Our in-process technology being acquired by Dura 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 combination drug. Dura
already owns the core technology of the Spiros system. We own only the
rights to use the Spiros system with these specified drugs.
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.
As discussed below, the only new drug application filed for a Spiros product
was deemed to be non-approvable by the FDA.
Currently, we are actively developing only beclomethasone and budesonide. We
have performed only minimal development work on ipratropium and the
albuterol/ipratropium combination drug to date. In 1998, we received a
letter from the FDA stating that the new drug application filed in 1997 for
the approval of Albuterol Spiros was not approvable. The FDA requested that
we address several chemistry, manufacturing and control issues, as well as
electromechanical reliability issues of the Spiros inhaler. Several pivotal
clinical studies must be repeated to support a resubmission of the Albuterol
Spiros new drug application. Earlier this year, we suspended development
work on Albuterol Spiros to focus our resources on beclomethasone and
budesonide which we judged to be the most commercially attractive
opportunities for us.
In the fourth quarter of 1999, we commenced the first of a series of pivotal
clinical studies for Beclomethasone Spiros. The objective of these studies
is to demonstrate the reliability of the Spiros system, to confirm the
results of earlier trials and to demonstrate patient safety and efficacy. If
these studies are successful, we expect to file a new drug application for
Beclomethasone Spiros in 2001 and, if the product is approved by the FDA, to
launch the product in 2002.
With respect to Budesonide Spiros, we initiated screening of patients for a
dose-targeting study in the first quarter of 2000 and plan to initiate the
pivotal clinical program in late 2000. If the clinical trials are
successful, we expect to file a new drug application for Budesonide Spiros
in late 2002 and, if the product is approved by the FDA, to launch the
product in 2003.
The most significant assumptions we have made in estimating the value of our
in-process technology include:
- that we will not experience any material difficulties or delays in the
remaining development of, or preparation of regulatory filings for, the
Spiros products;
F-26
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
1. THE MERGER (CONTINUED)
- that the FDA will approve our products in a timely manner and we will
launch the products within the timeframes we have assumed;
- that the markets for our 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 the Spiros products;
- that anticipated development costs and costs to launch and market our
products will not increase; and
- that anticipated manufacturing costs for our products will not increase
due to higher component costs, lower volumes, or other developments;
These assumptions involve judgments regarding future events, all of which
are difficult to predict accurately and most of which are beyond our
control.
2. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The unaudited pro forma condensed consolidated balance sheet includes the
adjustments necessary as if the merger had occurred on March 31, 2000. The
adjustments are summarized as follows (in thousands):
(a) To eliminate intercompany accounts payable and receivable.
Accounts payable........................................ $ 5,694
Accounts receivable..................................... $ 5,694
(b) To record the issuance of warrants to purchase shares of Dura common
stock with an estimated value of $15.8 million and a cash payment of
$88.7 million (including merger expenses) for the acquisition of us, the
elimination of our 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
(in thousands). The elimination of the warrant subscriptions receivable
reflects the allocation of a portion of Spiros Corp. II's cash to pay
down the receivable. Dura issued warrants as part of Spiros Corp. II's
1997 public offering of units. A portion of the cash paid to Dura by
Spiros Corp. II for development and administrative services is allocated
by Dura 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.
Common stock............................................ $ 7
Additional paid-in capital.............................. 170,376
Accumulated deficit (charge to in-process technology)... 60,615
Cash.................................................... $ 89,706
Additional paid-in capital.............................. 15,813
Accumulated other comprehensive loss.................... 121
Warrant subscriptions receivable........................ 5,202
Accumulated deficit..................................... 120,156
F-27
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
3. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
The unaudited pro forma condensed 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):
(a) To eliminate contract revenue recognized by Dura related to activities
conducted on our behalf. Because a pro rata portion of the amounts paid
by us to Dura is allocated to warrant subscriptions receivable, the
contract revenue recognized by Dura does not equal the total research and
development and general and administrative expenses recorded by us (in
thousands).
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 2000 DECEMBER 31, 1999
------------------ -----------------
Contract revenue........................... $13,828 $55,496
(b) To eliminate the research and development and general administrative
expenses recognized by us related to activities conducted by Dura (in
thousands).
Clinical, development and regulatory....... $14,583 $58,423
General and administrative................. 100 400
(c) To record the reduction in the provision for income taxes related to the
decrease in pro forma consolidated income before income taxes (in
thousands).
Provision for income tax................... $ 4,057 $14,444
We recognized no income tax benefit in our historical financial statements
for the increase in our deferred tax assets due to the uncertainty regarding
our 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 Dura's and our results of
operations for the period and calculating the provision for income taxes as
if the merger had occurred on January 1, 1999.
The weighted average number of shares used to calculate pro forma net income
per share for the three months ended March 31, 2000 and the year ended
December 31, 1999 is based on the historical weighted average shares
outstanding for Dura. No adjustment has been made to reflect the issuance of
the warrants to purchase shares of Dura common stock in connection with the
merger as discussed in note 1 because the effect would be anti-dilutive.
Potential dilutive common shares which total 11,409,902 at March 31, 2000
and 12,246,822 at December 31, 1999 are excluded from dilutive pro forma net
income per share as their inclusion would be anti-dilutive.
F-28
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
DURA PHARMACEUTICALS, INC.,
STARFISH ACQUISITION CORP., INC.
AND
SPIROS DEVELOPMENT CORPORATION II, INC.
DATED AS OF
MARCH 20, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A-1
TABLE OF CONTENTS
PAGE
--------
ARTICLE I DEFINITIONS AND INTERPRETATION............................................ A-4
Section 1.1 Definitions................................................. A-4
Section 1.2 Interpretation.............................................. A-7
ARTICLE II THE MERGER............................................................... A-8
Section 2.1 The Merger.................................................. A-8
Section 2.2 Directors and Officers of the Surviving Corporation......... A-8
Section 2.3 Effective Time.............................................. A-8
Section 2.4 Closing..................................................... A-8
Section 2.5 Subsequent Actions.......................................... A-9
ARTICLE III CONVERSION OF SECURITIES................................................ A-9
Section 3.1 Conversion of Capital Stock................................. A-9
Section 3.2 Exchange of Certificates.................................... A-9
Section 3.3 Dissenting Shares........................................... A-10
Section 3.4 Company Stock Option Plans.................................. A-11
Section 3.5 Certain Adjustments......................................... A-11
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................ A-11
Section 4.1 Organization; Qualification................................. A-11
Section 4.2 Capitalization.............................................. A-11
Section 4.3 Authorization, Validity of Agreement, Company Action........ A-12
Section 4.4 Board Approvals Regarding Transactions...................... A-12
Section 4.5 Vote Required............................................... A-12
Section 4.6 Consents and Approvals, No Violations....................... A-12
Section 4.7 Reports and Financial Statements............................ A-13
Section 4.8 No Undisclosed Liabilities.................................. A-13
Section 4.9 Litigation.................................................. A-13
Section 4.10 Information Supplied........................................ A-14
Section 4.11 Opinion of Financial Advisor................................ A-14
Section 4.12 Insider Interests........................................... A-14
Section 4.13 Brokers or Finders.......................................... A-14
ARTICLE V REPRESENTATIONS AND WARRANTIES OF the Parent AND Merger Sub............... A-15
Section 5.1 Organization; Qualification................................. A-15
Section 5.2 Capitalization.............................................. A-15
Section 5.3 Subsidiaries................................................ A-15
Section 5.4 Authorization, Validity of Agreement, Necessary Action...... A-16
Section 5.5 Warrant Shares.............................................. A-16
Section 5.6 Consents and Approvals, No Violations....................... A-16
Section 5.7 Reports and Financial Statements............................ A-16
Section 5.8 Information Supplied........................................ A-17
Section 5.9 Sufficient Funds............................................ A-17
Section 5.10 Share Ownership............................................. A-17
Section 5.11 Merger Sub's Operations..................................... A-17
Section 5.12 Brokers or Finders.......................................... A-17
Section 5.13 Litigation.................................................. A-17
A-2
PAGE
--------
ARTICLE VI COVENANTS................................................................ A-18
Section 6.1 Interim Operations of the Company........................... A-18
Section 6.2 Access...................................................... A-19
Section 6.3 Reasonable Efforts.......................................... A-19
Section 6.4 No Solicitation of Competing Transaction.................... A-20
Section 6.5 Publicity 24................................................ A-21
Section 6.6 Notification of Certain Matters............................. A-22
Section 6.7 Directors' and Officers' Insurance and Indemnification...... A-22
Section 6.8 State Takeover Laws......................................... A-22
Section 6.9 Merger Sub Compliance....................................... A-23
Section 6.10 Preparation of Proxy Statement; The Special Meeting......... A-23
ARTICLE VII CONDITIONS.............................................................. A-23
Section 7.1 Conditions to Each Party's Obligation to Effect the
Merger...................................................... A-23
Section 7.2 Company's Obligations to Effect the Merger.................. A-24
Section 7.3 Conditions to the Parent's and Merger Sub's Obligations to
Effect the Merger........................................... A-24
ARTICLE VIII TERMINATION............................................................ A-25
Section 8.1 Termination................................................. A-25
Section 8.2 Effect of Termination....................................... A-25
ARTICLE IX MISCELLANEOUS............................................................ A-26
Section 9.1 Fees and Expenses........................................... A-26
Section 9.2 Amendment and Modification.................................. A-26
Section 9.3 Nonsurvival of Representations and Warranties............... A-26
Section 9.4 Notices..................................................... A-26
Section 9.5 Counterparts................................................ A-27
Section 9.6 Entire Agreement; No Third Party Beneficiaries.............. A-27
Section 9.7 Severability................................................ A-27
Section 9.8 Governing Law............................................... A-27
Section 9.9 Enforcement................................................. A-27
Section 9.10 Extension, Waiver........................................... A-28
Section 9.11 Assignment.................................................. A-28
Exhibit A--Form of Parent Warrant Agreement
Exhibit B--Terms of the Parent Warrants
A-3
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of March 20, 2000 (this "Agreement"),
by and among Dura Pharmaceuticals, Inc., a Delaware corporation (the "Parent"),
Starfish Acquisition Corp., Inc., a Delaware corporation and a wholly owned
subsidiary of the Parent ("Merger Sub"), and Spiros Development Corporation
II, Inc., a Delaware corporation (the "Company"). Certain capitalized terms used
without definition in this Agreement have the respective meanings ascribed to
them in Article I.
WHEREAS, the board of directors of each of the Parent, Merger Sub and the
Company has approved, and deems it fair to, advisable and in the best interests
of its respective stockholders to consummate the acquisition of the Company by
the Parent upon the terms and subject to the conditions set forth herein; and
WHEREAS, in furtherance of such acquisition, the board of directors of each
of the Parent, Merger Sub and the Company has approved this Agreement and the
Merger in accordance with the DGCL and upon the terms of and subject to the
conditions in this Agreement; and
WHEREAS, a committee of the board of directors of the Company comprised
exclusively of directors not affiliated with the Parent or Merger Sub has
determined that the terms and conditions set forth in this Agreement and the
consideration paid to the holders of shares of Callable Common Stock, par value
$0.001 per share, of the Company (other than the Parent and Merger Sub), are
fair to such holders and recommended this Agreement as fair to, advisable and in
the best interests of such stockholders; and
WHEREAS, the board of directors of the Company has determined that the
consideration to be paid for each Share (other than Shares owned by the Parent
and Merger Sub) pursuant to this Agreement is fair to the holders of such Shares
and has resolved to recommend that the holders of such Shares adopt this
Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements in this Agreement, the
parties hereto, intending to be legally bound, agree as follows:
ARTICLE I
DEFINITIONS AND INTERPRETATION
Section 1.1 DEFINITIONS. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context clearly requires otherwise:
"Acquisition Proposal" shall mean any proposal or offer (a) to acquire
(i) all or a substantial part of the business or properties of such Person or
any capital stock of such Person, whether by merger, tender offer, exchange
offer, sale of assets, consolidation, other business combination,
recapitalization, reorganization, liquidation, dissolution or other transactions
involving such Person, any division or operating or principal business unit of
such Person or (ii) ten percent or more of the capital stock or other equity
interests in such Person or (b) of one or more transactions which could
reasonably be expected, individually or in the aggregate, to frustrate, prevent
or delay the Merger or any of the other Transactions.
"Actions" means any action, suit, proceeding, arbitration, investigation,
mediation or other dispute resolution forum before any Government Entity
(including any court or administrative law judge), arbitrator, mediator or any
other Person acting with the power of any of the foregoing.
"Affiliate" shall have the meaning set forth in Rule 12b-2 of the Exchange
Act.
"Associate" shall have the meaning set forth in Rule 12b-2 of the Exchange
Act.
A-4
"Balance Sheet" shall mean the most recent audited consolidated balance
sheet of the Company included in the Company Financial Statements.
"Balance Sheet Date" shall mean the date of the Balance Sheet.
"Business Day" means any day other than a Saturday, a Sunday or a day on
which commercial banks in The City of New York are permitted by law, rule or
regulation to be closed.
"Certificate of Merger" shall mean the certificate of merger to be filed
with the Secretary of State of the State of Delaware pursuant to Section 2.3.
"Closing" shall mean the closing referred to in Section 2.4.
"Closing Date" shall mean the date and time at which the Closing occurs.
"Company Agreement" shall mean any note, bond, mortgage, indenture, or
material lease, license, contract, agreement or other instrument or obligation
to which the Company is a party or by which it or any of its properties or
assets may be bound.
"Company Callable Common Stock" shall mean the Callable Common Stock, $0.001
par value per share, of the Company.
"Company Financial Statements" shall mean each of the audited financial
statements and unaudited condensed interim financial statements (including any
related notes and schedules) included (or incorporated by reference) in the
Company SEC Documents.
"Company Material Adverse Effect" shall mean a material adverse effect on or
development with respect to (a) the business, condition (financial or
otherwise), assets or results of operations of the Company or (b) the ability of
the Company to timely consummate any of the Transactions.
"Company SEC Documents" shall mean each form, report, schedule, statement
and other document required to be filed by the Company through the date of this
Agreement under the Exchange Act or the Securities Act, including any amendment
to such document through the date of this Agreement, whether or not such
amendment is required to be so filed.
"Company Special Common Stock" shall mean the Special Common Stock, par
value $1.00 per share, of the Company.
"Company Stock Option" shall mean an option to purchase Shares which has
been granted by the Company and which is outstanding at the Effective Time.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"DGCL" shall mean the General Corporation Law of the State of Delaware.
"Dissenting Shares" shall mean any Shares as to which the holder thereof has
demanded appraisal with respect to the Merger in accordance with Section 262 of
the DGCL and as of the Effective Time has neither effectively withdrawn nor lost
the right to such appraisal.
"Effective Time" shall mean the date and time at which the Certificate of
Merger is duly filed with the Secretary of State of the State of Delaware or
such other date and time as is agreed upon by the parties and specified in the
Certificate of Merger.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exchange Agent" shall mean the bank or trust company designated by the
Parent to act as agent for the holders of the Shares pursuant to
Section 3.2(a).
"GAAP" shall mean United States generally accepted accounting principles.
A-5
"Governmental Entity" shall mean a federal, state, local or foreign court,
arbitral tribunal, administrative agency or commission or other governmental or
other regulatory authority or agency or any Person exercising the authority of
any of the foregoing.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"IRS" shall mean the United States Internal Revenue Service or any successor
agency performing similar functions under the Code.
"Indemnified Party" shall mean each present and former officer and director
of the Company and each Person who becomes one of the foregoing prior to the
Effective Time.
"Knowledge of the Special Committee" shall mean the actual knowledge of the
members of the Special Committee without any obligation to conduct any
investigation or inquiry.
"Merger" shall mean the merger of Merger Sub into the Company referred to in
Section 2.4.
"Merger Consideration" shall mean (a) an amount of cash equal to $13.25,
which amount shall not include interest, regardless of when paid, and (b) the
right to receive one Parent Warrant.
"Merger Sub Common Stock" shall mean common stock, par value $0.001 per
share, of Merger Sub.
"NMS" shall mean the Nasdaq National Market of The Nasdaq Stock Market.
"Parent Common Stock" shall mean shares of Common Stock, par value $0.001
per share, of the Parent.
"Parent Convertible Notes" shall mean the 3 1/2% Convertible Subordinated
Notes due July 15, 2002 issued by the Parent.
"Parent Financial Statements" shall mean each of the audited consolidated
financial statements and unaudited condensed consolidated interim financial
statements (including any related notes and schedules) included (or incorporated
by reference) in the Parent SEC Documents.
"Parent Material Adverse Effect" shall mean a material adverse effect on or
development with respect to (a) the business, condition (financial or
otherwise), assets or results of operations of the Parent and its Subsidiaries,
taken as a whole, or (b) the ability of the Parent and Merger Sub to timely
consummate any of the Transactions.
"Parent SEC Documents" shall mean each form, report, schedule, statement and
other document required to be filed by the Parent through the date of this
Agreement under the Exchange Act or the Securities Act, including any amendment
to such document through the date of this Agreement, whether or not such
amendment is required to be so filed.
"Parent Warrant" shall mean a warrant to purchase a fraction of a share of
Parent Common Stock issued pursuant to the Parent Warrant Agreement whose form
and terms are set forth in Exhibit A and Exhibit B, respectively, attached
hereto.
"Parent Warrant Agreement" shall mean the warrant agreement, substantially
in the form attached to this Agreement as Exhibit A, by and between the Parent
and ChaseMellon Shareholder Services, L.L.C., as warrant agent.
"Parent Warrant Value" shall mean the average of closing price of the Parent
Warrants as reported on the NMS for the ten consecutive trading days following
the date during which the Closing Date occurs; PROVIDED that in no event shall
the Parent Warrant Value exceed $3.22.
"Person" shall mean a natural Person, partnership (general or limited),
corporation, limited liability company, business trust, joint stock company,
trust, unincorporated association, joint venture, Governmental Entity or other
entity or organization.
A-6
"Registration Statement" shall mean the registration statement on Form S-4
to be filed by the Parent relating to the offer and sale of the Parent Warrants
to be issued pursuant to this Agreement.
"SEC" shall mean the United States Securities and Exchange Commission.
"Schedule 13E-3" shall mean the transaction statement on Schedule 13E-3 to
be filed by the Company, the Parent and Merger Sub with the SEC in connection
with the Transactions.
"Share(s)" shall mean outstanding share(s) of Company Callable Common Stock.
"Special Committee" means the Special Committee of the board of directors of
the Company formed on December 13, 1999.
"Special Meeting" shall mean the special meeting of stockholders of the
Company convened for the purpose of voting on the adoption of this Agreement.
"Spread" shall mean, with respect to each Company Stock Option, the positive
difference, if any, between (a) $13.25 plus the Parent Warrant Value and
(b) the exercise price per share of Company Callable Common Stock for such
Company Stock Option.
"Subsidiary" shall mean, with respect to any party, any corporation or other
organization, whether incorporated or unincorporated, of which (a) at least a
majority of the securities or other interests having by their terms ordinary
voting power to elect a majority of the board of directors or others performing
similar functions with respect to such corporation or other organization is,
directly or indirectly, owned or controlled by such party or by any one or more
of its Subsidiaries, or by such party and one or more of its Subsidiaries or
(b) such party or any other Subsidiary of such party is a general partner
(excluding any such partnership where such party or any Subsidiary of such party
does not have a majority of the voting interest in such partnership).
"Superior Proposal" shall mean an unsolicited Acquisition Proposal (but
changing the ten percent amount in clause (a)(ii) of the definition of
Acquisition Proposal to fifty percent) not resulting from, arising out of or
otherwise by virtue of any breach of Section 6.4(a) which satisfies both
subsection (x) and subsection (y) of Section 6.4(a).
"Transactions" shall mean the transactions provided for or contemplated by
this Agreement.
"Voting Debt" shall mean indebtedness having general voting rights and debt
convertible into securities having such rights.
Section 1.2 INTERPRETATION.
(a) When a reference is made in this Agreement to a Section or Article, such
reference shall be to a section or article of this Agreement unless otherwise
clearly indicated to the contrary.
(b) Whenever the words "include," "includes" or "including" are used in this
Agreement they shall be deemed to be followed by the words "without limitation."
(c) The words "hereof," "herein" and "herewith" and words of similar import
shall, unless otherwise stated, be construed to refer to this Agreement as a
whole and not to any particular provision of this Agreement, and article,
section, paragraph, exhibit and schedule references are to the articles,
sections, paragraphs, appendix and schedules of this Agreement unless otherwise
specified.
(d) The plural of any defined term shall have a meaning correlative to such
defined term, and words denoting any gender shall include both genders and the
neuter. Where a word or phrase is defined herein, each of its other grammatical
forms shall have a corresponding meaning.
(e) A reference to any party to this Agreement or any other agreement or
document shall include such party's successors and permitted assigns.
A-7
(f) A reference to any legislation or to any provision of any legislation
shall include any modification, amendment or re-enactment thereof, any
legislative provision substituted therefor and all regulations and statutory
instruments issued thereunder or pursuant thereto.
(g) The parties have participated jointly in the negotiation and drafting of
this Agreement. In the event an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if drafted jointly
by the parties, and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any provisions of this
Agreement.
(h) No prior draft nor any course of performance or course of dealing shall
be used in the interpretation or construction this Agreement.
(i) The captions and headings of the Articles and Sections of this Agreement
are for reference purposes only and shall not be used in the construction or
interpretation of this Agreement.
ARTICLE II
THE MERGER
Section 2.1 THE MERGER. Subject to the satisfaction or waiver of
conditions in this Agreement, at the Effective Time, the Company and Merger Sub
shall consummate a merger pursuant to which (a) Merger Sub shall be merged with
and into the Company and the separate corporate existence of Merger Sub shall
thereupon cease, (b) the Company shall be the surviving corporation in the
Merger (sometimes referred to as the "Surviving Corporation") and shall continue
to be governed by the laws of the State of Delaware and (c) the separate
corporate existence of the Company with all its rights, privileges, immunities,
powers and franchises shall continue unaffected by the Merger. Pursuant to the
Merger, (x) the certificate of incorporation of Merger Sub, as in effect
immediately prior to the Effective Time, shall be the certificate of
incorporation of the Surviving Corporation until thereafter amended as provided
by law and such certificate of incorporation and (y) the by-laws of Merger Sub,
as in effect immediately prior to the Effective Time, shall be the by-laws of
the Surviving Corporation until thereafter amended as provided by law, by such
certificate of incorporation or by such by-laws. The Merger shall have the
effects specified in the DGCL.
Section 2.2 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. The
directors of Merger Sub and the officers of the Company at the Effective Time
shall, from and after the Effective Time, be the directors and officers,
respectively, of the Surviving Corporation until their successors shall have
been duly elected or appointed or qualified or until their earlier death,
resignation or removal in accordance with the certificate of incorporation and
the by-laws of the Surviving Corporation. If, at the Effective Time, a vacancy
shall exist on the board of directors of the Company or in any office of the
Surviving Corporation, such vacancy may thereafter be filled in the manner
provided by law.
Section 2.3 EFFECTIVE TIME. The Parent, Merger Sub and the Company will
cause the Certificate of Merger to be executed and filed on the Closing Date (or
on such other date as the Parent and the Company may agree) with the Secretary
of State of the State of Delaware as provided in the DGCL. The Merger shall
become effective on the date and at the time the Certificate of Merger is duly
filed with the Secretary of State of the State of Delaware or such other time as
is agreed upon by the parties and specified in the Certificate of Merger.
Section 2.4 CLOSING. The closing of the Merger shall take place at
10:00 a.m., on a date to be agreed upon by the parties, and if such date is not
agreed upon by the parties, the Closing shall occur on the third Business Day
after satisfaction or waiver of all of the conditions set forth in Article VII,
but in no event earlier than June 18, 2000, at the offices of Brobeck,
Phleger & Harrison, LLP, 12390 El Camino Real, San Diego, California 92130.
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Section 2.5 SUBSEQUENT ACTIONS. If at any time after the Effective Time,
the Surviving Corporation will consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of either of the Company or Merger Sub acquired or to be
acquired by the Surviving Corporation as a result of, or in connection with, the
Merger or otherwise to carry out this Agreement, the officers and directors of
the Surviving Corporation shall be authorized to execute and deliver, in the
name and on behalf of either the Company or Merger Sub, all such deeds, bills of
sale, instruments of conveyance, assignments and assurances and to take and do,
in the name and on behalf of each of such corporations or otherwise, all such
other actions and things as may be necessary or desirable to vest, perfect or
confirm any and all right, title and interest in, to and under such rights,
properties or assets in the Surviving Corporation or otherwise to carry out this
Agreement.
ARTICLE III
CONVERSION OF SECURITIES
Section 3.1 CONVERSION OF CAPITAL STOCK. As of the Effective Time, by
virtue of the Merger and without any further action on the part of the holders
of any Shares or holders of Merger Sub Common Stock:
(a) Merger Sub Common Stock. Each issued and outstanding share of Merger Sub
Common Stock shall be converted into and become one fully paid and nonassessable
share of common stock, par value $0.001 per share, of the Surviving Corporation.
(b) Cancellation of Treasury Stock and the Parent-Owned Stock.
(i) Each Share owned by the Company as treasury stock or by any Company
Subsidiary and each Share owned by the Parent, Merger Sub or any other
wholly owned Subsidiary of the Parent (other than Shares in trust accounts,
managed accounts, custodial accounts and the like that are beneficially
owned by third parties) shall be cancelled and retired and shall cease to
exist, and no consideration shall be delivered in exchange therefor.
(ii) Each share of Company Special Common Stock owned by the Parent, the
Company, Merger Sub or any other wholly owned Subsidiary of the Parent shall
be cancelled and retired and shall cease to exist and no consideration shall
be delivered in exchange therefor.
(c) Conversion of Shares. Each issued and outstanding Share (other than
Shares to be cancelled in accordance with Section 3.1(b) and other than any
Dissenting Shares) shall be converted into the right to receive Merger
Consideration, payable to the holder thereof, without interest, upon surrender
of the certificate formerly representing such Share (each a "Certificate") in
the manner provided in Section 3.2. From and after the Effective Time, all such
converted Shares shall no longer be outstanding and shall be deemed to be
cancelled and retired and shall cease to exist, and each holder of any such
converted Shares shall cease to have any rights with respect to any Certificate
except the right to receive the Merger Consideration therefor, without interest,
upon the surrender of such Certificate in accordance with Section 3.2 or the
right, if any, to receive payment from the Surviving Corporation of the "fair
value" of such Shares as determined in accordance with Section 262 of the DGCL.
Section 3.2 EXCHANGE OF CERTIFICATES.
(a) The Parent shall designate a bank or trust company to act as agent for
the holders of the Shares in connection with the Merger to receive in trust the
funds and Parent Warrants to which holders of the Shares shall become entitled
pursuant to Section 3.1(c). At the Effective Time, the Parent or Merger Sub
shall deposit, or cause to be deposited, with the Exchange Agent for the benefit
of holders of Shares the aggregate Merger Consideration to which such holders
shall be entitled at the Effective Time pursuant to
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Section 3.1(c). Such funds shall be invested as directed by the Parent or the
Surviving Corporation pending payment thereof by the Exchange Agent to holders
of the Shares. Earnings from such investments shall be the sole and exclusive
property of Merger Sub or the Surviving Corporation, as applicable, and no part
of such earnings shall accrue to the benefit of holders of Shares.
(b) As soon as reasonably practicable after the Effective Time, the Parent
shall cause the Exchange Agent to mail to each holder of record of one or more
Certificates, (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange and shall be in such form
and have such other provisions not inconsistent with this Agreement as the
Parent may reasonably specify) and (ii) instructions for use in effecting the
surrender of Certificates in exchange for payment of Merger Consideration. Upon
surrender of a Certificate for cancellation to the Exchange Agent or to such
other agent or agents as may be appointed by the Parent, together with such
letter of transmittal, duly executed, the holder of such Certificate shall be
entitled to receive in exchange therefor the Merger Consideration for each Share
formerly represented by such Certificate, and the Certificate so surrendered
shall be cancelled. If payment of the Merger Consideration is to be made to a
Person other than the Person in whose name the surrendered Certificate is
registered, it shall be a condition of payment that the Certificate so
surrendered shall be properly indorsed or shall be otherwise in proper form for
transfer and that the Person requesting such payment shall have paid any
transfer and other taxes required by reason of the payment of the Merger
Consideration to a Person other than the registered holder of the Certificate
surrendered or shall have established to the satisfaction of the Surviving
Corporation that such tax either has been paid or is not applicable.
(c) At the Effective Time, the stock transfer books of the Company shall be
closed, and thereafter there shall be no further registration of transfers of
the Shares on the records of the Company.
(d) At any time following six months after the Effective Time, the Surviving
Corporation shall be entitled to require the Exchange Agent to deliver to it any
portion of the aggregate Merger Consideration (including any earnings with
respect thereto) which had been made available to the Exchange Agent and which
has not been disbursed to holders of Certificates, and thereafter such holders
shall be entitled to look only to the Surviving Corporation (subject to
abandoned property, escheat or other similar laws) and only as general creditors
thereof with respect to the Merger Consideration payable upon due surrender of
their Certificates, without any interest thereon. Notwithstanding the foregoing,
neither the Parent, the Surviving Corporation nor the Exchange Agent shall be
liable to any holder of a Certificate for any Merger Consideration delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law.
Section 3.3 DISSENTING SHARES.
(a) Notwithstanding any provision of this Agreement to the contrary,
Dissenting Shares shall not be converted into or represent a right to receive
Merger Consideration, but the holder thereof shall be entitled to only such
rights as are granted by the DGCL.
(b) Notwithstanding the provisions of Section 3.3(a), if any holder of
Shares who demands appraisal of Shares under the DGCL effectively withdraws or
loses (through failure to perfect or otherwise) the right to appraisal, then as
of the Effective Time or the occurrence of such event, whichever later occurs,
such holder's Shares shall automatically be converted into and represent only
the right to receive the Merger Consideration as provided in Section 3.1(c),
without interest, upon surrender of the Certificates representing such Shares
pursuant to Section 3.2.
(c) The Company shall give the Parent (i) prompt notice of any written
demands for appraisal or payment of the fair value of any Shares, withdrawals of
such demands, and any other instruments served on the Company pursuant to the
DGCL received by the Company and (ii) the opportunity to direct all negotiations
and proceedings with respect to demands for appraisal under the DGCL. Except
with the
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prior written consent of the Parent, which consent shall not be unreasonably
withheld, the Company shall not voluntarily make any payment, admissions or
statements against interest with respect to any demands for appraisal, settle or
offer to settle any such demands.
Section 3.4 COMPANY STOCK OPTION PLANS.
(a) Except as provided in Section 3.4(b), each Company Stock Option shall,
at the Effective Time, be converted into the right to receive an amount in cash
equal to the Spread, without interest. The Surviving Corporation shall, promptly
after the Effective Time, mail a check to each registered holder of a Company
Stock Option in an amount equal to the Spread.
(b) Each Company Stock Option beneficially owned by any member of the
Special Committee shall, at the Effective Time, be converted into the right to
receive upon exercise, until the expiration of their term, the Merger
Consideration that would be issuable with respect to the number of shares of
Company Callable Common Stock for which such Company Stock Option may be
exercised, with the other terms of such Company Stock Option remaining
unchanged.
(c) If and to the extent necessary or required by the terms of the plans
governing Company Stock Options or pursuant to the terms of any Company Stock
Option granted thereunder, each of the Parent and the Company shall obtain the
consent of each holder of outstanding Company Stock Options to the foregoing
treatment of such Company Options.
Section 3.5 CERTAIN ADJUSTMENTS. If between the date of this Agreement and
the Effective Time, the outstanding shares of Parent Common Stock shall have
been changed into or exchanged for a different number of shares or different
class, in each case, by reason of any reclassification, recapitalization, stock
split, split-up, combination, exchange of shares or a stock dividend or dividend
payable in any other securities shall be declared with a record dated within
such period or any similar event shall have occurred, the number of shares of
Parent Common Stock purchaseable and the exercise price payable under each
Parent Warrant shall be appropriately adjusted to provide the same economic
effect as contemplated by this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the Company Disclosure Letter, the Company represents
and warrants to the Parent and Merger Sub as follows:
Section 4.1 ORGANIZATION; QUALIFICATION. The Company (a) is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware; (b) has full corporate power and authority to carry on its
business as it is now being conducted and to own the properties and assets it
now owns; and (c) is duly qualified or licensed to do business as a foreign
corporation in good standing in every jurisdiction in which such qualification
is required except for such failures to be so qualified or licensed and in good
standing as could not, individually or in the aggregate, reasonably be expect to
have a Company Material Adverse Effect.
Section 4.2 CAPITALIZATION
(a) The authorized capital stock of the Company consists of 6,500,000 shares
of Company Callable Common Stock and 1,000 shares of Company Special Common
Stock. As of the date of this Agreement, (i) 6,325,000 Shares are issued and
outstanding, (ii) zero Shares are issued and held in the treasury of the
Company, (iii) 1,000 shares of Company Special Common Stock are issued and
outstanding and (iv) 948,750 Shares are reserved for issuance upon exercise of
Company Options under the Company's 1997 Stock Option Plan. All the outstanding
shares of the Company's capital stock are, and all Shares which may be issued
pursuant to the exercise of outstanding Company Options will be, when issued in
accordance with the respective terms thereof, duly authorized, validly issued,
fully paid, nonassessable and
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not issued in violation of any preemptive rights. Except as set forth above and
except for the Transactions, (i) there are no shares of capital stock of the
Company authorized, issued or outstanding; (ii) there are no existing options,
warrants, calls, pre-emptive rights, subscriptions or other rights, agreements,
arrangements, understandings or commitments of any character, relating to the
issued or unissued capital stock of the Company, obligating the Company to
issue, transfer or sell or cause to be issued, transferred or sold any shares of
capital stock of, or other equity interest in, the Company or securities
convertible into or exchangeable for such shares, equity interests, or
obligating the Company to grant, extend or enter into any such option, warrant,
call, subscription or other right, agreement, arrangement or commitment; and
(iii) there are no outstanding contractual obligations of the Company to
repurchase, redeem or otherwise acquire any Shares, or the capital stock of the
Company or to provide funds to make any investment (in the form of a loan,
capital contribution or otherwise) in any other entity or Person.
(b) There are no voting trusts or other agreements or understandings to
which the Company is a party with respect to the voting of the capital stock of
the Company.
(c) Following the Effective Time, no holder of Company Options will have any
right to receive shares of common stock of the Surviving Corporation upon
exercise of Company Options.
Section 4.3 AUTHORIZATION, VALIDITY OF AGREEMENT, COMPANY ACTION. The
Company has full corporate power and authority to execute and deliver this
Agreement, to perform its obligations under this Agreement and to consummate the
Transactions. The execution, delivery and the performance by the Company of its
obligations under this Agreement and the consummation by it of the Transactions,
have been duly authorized by the Company's board of directors and, except for
obtaining the approval specified in Section 4.6 at the Special Meeting, no other
corporate action on the part of the Company or its stockholders is necessary to
authorize the execution and delivery by the Company of this Agreement or the
consummation by it of the Transactions. This Agreement has been duly executed
and delivered by the Company and, assuming due and valid authorization,
execution and delivery thereof by each of the Parent and Merger Sub, this
Agreement is a valid and binding obligation of the Company enforceable against
the Company in accordance with its terms.
Section 4.4 BOARD APPROVALS REGARDING TRANSACTIONS. The Company's board of
directors, at a meeting duly called and held, has (a) unanimously (with two
directors abstaining) determined that the Agreement and the Merger are fair to,
advisable and in the best interests of the Company and the stockholders of the
Company (other than the Parent and Merger Sub) and (b) approved the Transactions
and none of the aforesaid actions by the Company's board of directors has been
amended, rescinded or modified. The action taken by the Company's board of
directors constitutes approval of the Merger and the other Transactions by the
Company's board of directors under the provisions of Section 203 of the DGCL
such that Section 203 of the DGCL does not apply to this Agreement or the
Transactions. No other state takeover, antitakeover, moratorium, fair price,
interested stockholder, business combination or similar statute or rule is
applicable to the Merger or the other Transactions.
Section 4.5 VOTE REQUIRED. The affirmative vote of (a) the Parent as the
sole holder of shares of Company Special Common Stock and (b) the holders of at
least fifty percent of the outstanding Shares are the only vote of the holders
of any class or series of the Company's capital stock necessary to approve the
Merger or adopt this Agreement. No other vote of any class or series of the
Company's capital stock is necessary to approve any of the Transactions.
Section 4.6 CONSENTS AND APPROVALS, NO VIOLATIONS. To the knowledge of the
Special Committee, except for the filings, permits, authorizations, consents and
approvals as may be required under, and other applicable requirements of, the
Exchange Act, the HSR Act, state securities or blue sky laws, and the filing of
the Certificate of Merger, none of the execution, delivery or performance of
this Agreement by the Company, the consummation by the Company of the
Transactions or compliance by the Company with any of the provisions of this
Agreement will (a) conflict with or result in any breach of any provision of the
certificate of incorporation or the by-laws of the Company, (b) require any
filing with, or permit,
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authorization, consent or approval of, any Governmental Entity, (c) result in a
violation or breach of, or constitute (with or without due notice or the passage
of time or both) a default (or give rise to any right of termination, amendment,
cancellation or acceleration or loss of any rights) under, any of the terms,
conditions or provisions of any Company Agreement or (d) violate any order,
writ, injunction, decree, statute, rule or regulation applicable to the Company
or any of its properties or assets, excluding from the foregoing clauses (b),
(c) and (d) such filings, permits, authorizations, consents, approvals,
violations, breaches or defaults which could not, individually or in the
aggregate, reasonably be expected to have a Company Material Adverse Effect.
Except as set forth in Section 4.7 of the Company Disclosure Letter, there are
no third party non-governmental consents, notices or approvals related to the
Company or any of its respective assets or properties required to be obtained
prior to the consummation of any of the Transactions.
Section 4.7 REPORTS AND FINANCIAL STATEMENTS
(a) To the knowledge of the Special Committee, the Company has filed, with
the SEC, the Company SEC Documents. To the knowledge of the Special Committee,
as of their respective dates or, if amended, as of the date of the last such
amendment filed prior to the date of this Agreement, the Company SEC Documents,
including any financial statements or schedules included therein (a) did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading and (b) complied in all material respects with the applicable
requirements of the Exchange Act and the Securities Act, as the case may be, and
the applicable rules and regulations of the SEC thereunder.
(b) To the knowledge of the Special Committee, each of the Company Financial
Statements have been prepared from, and are in accordance with, the books and
records of the Company. The Company Financial Statements complied, as of their
respective dates, in all material respects with applicable accounting
requirements and rules and regulations of the SEC. To the knowledge of the
Special Committee, the Company Financial Statements have been prepared in
accordance with GAAP applied on a consistent basis (except as may be indicated
in the notes thereto and subject, in the case of condensed unaudited interim
financial statements, to normal, recurring and immaterial year-end adjustments
and the absence of certain notes) and fairly present, in all material respects,
(i) the financial position of the Company as of the dates thereof and (ii) the
results of operations, changes in stockholders' equity and cash flows of the
Company for the periods presented therein.
Section 4.8 NO UNDISCLOSED LIABILITIES. To the knowledge of the Special
Committee, except (a) as disclosed in the Financial Statements and (b) for
liabilities and obligations incurred in the ordinary course of business and
consistent with past practice since the Balance Sheet Date, the Company has no
liabilities or obligations of any nature, whether or not accrued, contingent or
otherwise.
Section 4.9 LITIGATION. To the knowledge of the Special Committee, there
is no action, suit, inquiry, proceeding or investigation by or before any
Governmental Entity or threatened against or involving the Company, or which
questions or challenges the validity of this Agreement or any action taken or to
be taken by the Company pursuant to this Agreement or in connection with the
Transactions. To the knowledge of the Special Committee, there is no and the
Company does not know or have any reason to know of any valid basis for any such
action, proceeding or investigation. To the knowledge of the Special Committee,
the Company is not in default under or in violation of, nor to the Company's
knowledge is there any valid basis for any claim of default under or violation
of, any Company Contract or commitment or restriction to which the Company is a
party or by which it or any of its assets is bound. To the knowledge of the
Special Committee, the Company is not subject to any judgment, order or decree
which may have an adverse effect on its business practices or on its ability to
acquire any property or conduct its business in any area.
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Section 4.10 INFORMATION SUPPLIED. None of the information supplied or to
be supplied by the Special Committee for inclusion or incorporation by reference
in (a) the Registration Statement at the time the Registration Statement is
filed with the SEC, at any time it is amended or at the time it becomes
effective under the Securities Act, contains or will contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading,
(b) the Schedule 13E-3 at the time the Schedule 13E-3 is filed with the SEC, at
any time it is amended or at the date and time of commencement of the Special
Meeting, contains or will contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading and (c) the Proxy Statement/Prospectus will, on the date it
is first mailed to the Company's stockholders or at the time of the Special
Meeting contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Schedule 13E-3 and Proxy Statement/ Prospectus will in all
material respects comply as to form with the requirements of the Securities Act,
the Exchange Act and the rules and regulations promulgated by the SEC
thereunder. Notwithstanding the foregoing, no representation or warranty is made
by the Company with respect to statements or omissions made or incorporated by
reference in the Registration Statement, the Schedule 13E-3 or the Proxy
Statement/Prospectus based on information supplied by the Parent or the Company
(excluding information provided by the Special Committee) for inclusion or
incorporation by reference therein.
Section 4.11 OPINION OF FINANCIAL ADVISOR. The Company has received the
opinion of SG Cowen Securities Corporation (the "Financial Advisor"), dated the
date of this Agreement, to the effect that, as of such date, the Merger
Consideration is fair from a financial point of view to holders of Shares (other
than the Parent and Merger Sub) and the copy of such opinion included in the
Company Disclosure Letter is manually signed, accurate and complete. The Company
has been authorized by the Financial Advisor to permit the inclusion of such
opinion in its entirety in the Proxy Statement/Prospectus, so long as such
inclusion is in form and substance reasonably satisfactory to the Financial
Advisor and its counsel.
Section 4.12 INSIDER INTERESTS. To the knowledge of the Special Committee,
no officer or director of the Company has any material interest in any property,
real or personal, tangible or intangible, including inventions, patents,
trademarks or trade names, used in or pertaining to the business of the Company.
Section 4.13 BROKERS OR FINDERS. To the knowledge of the Special
Committee, no agent, broker, investment banker, financial advisor or other firm
or Person is or will be entitled to any brokers' or finder's fee or any other
commission or similar fee in connection with any of the Transactions except for
the Financial Advisor. True and correct copies of all agreements between the
Company and the Financial Advisor including any fee arrangements, a copy of
which has been made available to the Parent.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PARENT AND MERGER SUB
The Parent and Merger Sub represent and warrant to the Company that:
Section 5.1 ORGANIZATION; QUALIFICATION. Each of the Parent and Merger Sub
(a) is a corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware; (b) has full corporate power and authority to
carry on its business as now being conducted and to own the properties and
assets it now owns; and (c) is duly qualified or licensed to do business as a
foreign corporation in good standing in every jurisdiction in which such
qualification is required, except for such failures to be so qualified or
licensed or in good standing as would not, individually or in the aggregate,
reasonably be expected to have a Parent Material Adverse Effect.
Section 5.2 CAPITALIZATION.
(a) The authorized capital stock of the Parent consists of 200,000,000
shares of Parent Common Stock and 5,000,000 shares of Preferred Stock, par value
$.01 per share. As of March 14, 2000, (i) 44,333,113 shares of Parent Common
Stock are issued and outstanding, (ii) 2,402,500 shares of Parent Common Stock
are issued and held in the treasury of the Parent, (iii) no shares of Parent
Preferred Stock are issued and outstanding, (iv) 2,400,000 shares of Parent
Preferred Stock have been designated as Series A Junior Participating Preferred
Stock and are reserved for issuance under the Parent's Rights Agreement, dated
as of May 21, 1998, by and between the Parent and ChaseMellon Shareholder
Services, LLC., (v) 10,855,224 shares of Parent Common Stock are reserved for
issuance upon exercise of existing options and warrants to purchase shares of
Parent Common Stock and (vi) 5,677,891 shares of Parent Common Stock are
reserved for issuance upon conversion of the Parent Convertible Notes. All the
outstanding shares of the Parent's capital stock are, and all shares which may
be issued pursuant to the exercise of outstanding options and warrants issued by
the Parent and the Parent Convertible Notes will be, when issued in accordance
with the respective terms thereof, duly authorized, validly issued, fully paid,
nonassessable and not issued in violation of any preemptive rights. Other than
the Parent Convertible Notes, there is no Voting Debt of the Company issued and
outstanding. Except as set forth above and except for the Transactions, as of
the date of this Agreement, (i) there are no shares of capital stock of the
Parent authorized, issued or outstanding; (ii) there are no existing options,
warrants, calls, pre-emptive rights, subscriptions or other rights, agreements,
arrangements, understandings or commitments of any character, relating to the
issued or unissued capital stock of the Parent, obligating the Parent to issue,
transfer or sell or cause to be issued, transferred or sold any shares of
capital stock or Voting Debt of, or other equity interest in, the Parent or
securities convertible into or exchangeable for such shares, equity interests or
Voting Debt, or obligating the Parent to grant, extend or enter into any such
option, warrant, call, subscription or other right, agreement, arrangement or
commitment; and (iii) there are no outstanding contractual obligations of the
Parent to repurchase, redeem or otherwise acquire any capital stock of the
Parent or Affiliate of the Parent.
(b) There are no voting trusts or other agreements or understandings to
which the Parent is a party with respect to the voting of the capital stock of
the Parent.
Section 5.3 SUBSIDIARIES. The Parent SEC Documents include a list of all
Subsidiaries of the Parent which as of the date of this Agreement are
Significant Subsidiaries (as defined in Rule 1-02 of Regulation S-X promulgated
by the SEC). All of the outstanding shares of capital stock of, or other equity
interests in, such Significant Subsidiaries of the Parent have been validly
issued are fully paid and nonassessable and, except as set forth in the Parent
SEC Documents, are owned, directly or indirectly, by the Parent free and clear
of all liens, pledges, claims, encumbrances, security interests of any kind or
nature whatsoever and free of any other restrictions (including any restriction
on the right to vote, sell or otherwise dispose of such capital stock or other
ownership interest), other than restrictions on transfer arising under
applicable securities laws.
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Section 5.4 AUTHORIZATION, VALIDITY OF AGREEMENT, NECESSARY ACTION. Each
of the Parent and Merger Sub, as applicable, has full corporate power and
authority to execute and deliver this Agreement, the Parent Warrant Agreement
and the Parent Warrants, to perform its obligations under this Agreement, the
Parent Warrant Agreement and the Parent Warrants and to consummate the
Transactions. The execution, delivery by the Parent and Merger Sub, as
applicable, and performance of its obligations under this Agreement, the Parent
Warrant Agreement and the Parent Warrants and the consummation of the
Transactions have been duly authorized by the boards of directors of each of the
Parent and Merger Sub and by the Parent as the sole stockholder of Merger Sub,
and no other corporate action on the part of the Parent or Merger Sub is
necessary to authorize the execution and delivery by the Parent and Merger Sub
of this Agreement, the Parent Warrant Agreement and the Parent Warrants or the
consummation of the Transactions. This Agreement has been duly executed and
delivered by the Parent and Merger Sub, as applicable, and, assuming due and
valid authorization, execution and delivery by each of the other parties
thereto, is a valid and binding obligation of each of the Parent and Merger Sub,
enforceable against each of them in accordance with its terms.
Section 5.5 WARRANT SHARES. The Parent has taken all necessary corporate
action to reserve for issuance the number of shares of Parent Common Stock
issuable under the Parent Warrants. The shares of Parent Common Stock to be
issued under the Parent Warrants have been duly authorized and when issued in
accordance with the terms of the Parent Warrant Agreement will be validly
issued, fully paid, nonassessable and not issued in violation of any preemptive
rights.
Section 5.6 CONSENTS AND APPROVALS, NO VIOLATIONS. Except for the filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Securities Act, the Exchange Act, the HSR
Act, state securities or blue sky laws and the DGCL, none of the execution,
delivery of this Agreement, the Parent Warrant Agreement or the Parent Warrants
or performance of obligations hereunder or thereunder by the Parent or Merger
Sub, the consummation by the Parent or Merger Sub of the Transactions or
compliance by the Parent or Merger Sub with any of the provisions of this
Agreement, the Parent Warrant Agreement or the Parent Warrants will
(a) conflict with or result in any breach of any provision of the respective
certificate of incorporation or by-laws of the Parent or Merger Sub;
(b) require any filing with, or permit, authorization, consent or approval of,
any Governmental Entity; (c) result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or give rise to
any right of termination, cancellation or acceleration) under, any of the terms,
conditions or provisions of any Parent Agreement; or (d) violate any order,
writ, injunction, decree, statute, rule or regulation applicable to the Parent,
any of its Subsidiaries or any of their properties or assets, excluding from the
foregoing clauses (b), (c) and (d) such violations, breaches or defaults which
would not, individually or in the aggregate, be reasonably expected to have a
Parent Material Adverse Effect.
Section 5.7 REPORTS AND FINANCIAL STATEMENTS
(a) The Parent has filed with the SEC the Parent SEC Documents. As of their
respective dates or, if amended, as of the date of the last such amendment filed
prior to the date of this Agreement, the Parent SEC Documents, including any
financial statements or schedules included therein (a) did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements made therein, in
the light of the circumstances under which they were made, not misleading and
(b) complied in all material respects with the applicable requirements of the
Exchange Act and the Securities Act, as the case may be, and the applicable
rules and regulations of the SEC thereunder.
(b) Each of the Parent Financial Statements have been prepared from, and are
in accordance with, the books and records of the Parent. The Parent Financial
Statements complied, as of their respective dates, in all material respects with
applicable accounting requirements and rules and regulations of the SEC. The
Parent Financial Statements have been prepared in accordance with GAAP applied
on a consistent basis
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(except as may be indicated in the notes thereto and subject, in the case of
unaudited, condensed consolidated interim financial statements, to normal,
recurring and immaterial year-end adjustments and the absence of certain notes)
and fairly present, in all material respects, (i) the consolidated financial
position of the Parent as of the dates thereof and (ii) the consolidated results
of operations, consolidated changes in stockholders' equity and consolidated
cash flows of the Parent and its consolidated Subsidiaries for the periods
presented therein.
(c) Except as disclosed in the Parent SEC Documents, the Parent and its
Subsidiaries have not incurred any liabilities that are of a nature that would
be required to be disclosed on a balance sheet of the Parent and its
Subsidiaries prepared in conformity with GAAP, other than (i) liabilities
incurred in the ordinary course of business, (ii) liabilities incurred in
connection with the Transactions, (iii) liabilities for Taxes or
(iv) liabilities that, individually or in the aggregate, would not reasonably be
expected to have a Parent Material Adverse Effect.
Section 5.8 INFORMATION SUPPLIED. None of the information supplied or to
be supplied by the Parent, Merger Sub or the Company (excluding information
provided by the Special Committee) for inclusion or incorporation by reference
in (a) the Registration Statement at the time the Registration Statement is
filed with the SEC, at any time it is amended or at the time it becomes
effective under the Securities Act, contains or will contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading,
(b) the Schedule 13E-3 at the time the Schedule 13E-3 is filed with the SEC, at
any time it is amended or at the date and time of commencement of the Special
Meeting, contains or will contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading and (c) the Proxy Statement/Prospectus, the Schedule 13E-3
and the Registration Statement, on the date it is first mailed to the Company's
stockholders or at the time of the Special Meeting, contains or will contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Proxy
Statement/Prospectus, the Schedule 13E-3 and the Registration Statement will in
all material respects comply as to form with the requirements of the Securities
Act, the Exchange Act and the rules and regulations promulgated by the SEC
thereunder. Notwithstanding the foregoing, no representation or warranty is made
by the Parent or Merger Sub with respect to statements or omissions made or
incorporated by reference in the Registration Statement or the Proxy
Statement/Prospectus based on information supplied by the Special Committee for
inclusion or incorporation by reference therein.
Section 5.9 SUFFICIENT FUNDS. Either the Parent or Merger Sub has
available sufficient funds to pay the cash portion of the Merger Consideration
and to pay all fees and expenses of the Parent and Merger Sub related to the
Transactions.
Section 5.10 SHARE OWNERSHIP. None of the Parent or Merger Sub
beneficially owns any Shares.
Section 5.11 MERGER SUB'S OPERATIONS. Merger Sub was formed solely for the
purpose of engaging in the Transactions and has not engaged in any business
activities or conducted any operations other than in connection with the
Transactions.
Section 5.12 BROKERS OR FINDERS. Neither the Parent nor any of its
Subsidiaries or their respective Affiliates has entered into any agreement or
arrangement entitling any agent, broker, investment banker, financial advisor or
other firm or Person to any brokers' or finders' fee or any other commission or
similar fee in connection with any of the Transactions, except Merrill Lynch,
Pierce, Fenner & Smith Incorporated, whose fees and expenses will be paid by the
Parent in accordance with the Parent's agreement with such firm.
Section 5.13 LITIGATION. As of the date of this Agreement, there are no
Actions pending or, to the knowledge of the Parent, threatened, against or
affecting the Parent or any of its Subsidiaries or any
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property or asset of the Parent or any of its Subsidiaries which, individually
or in the aggregate, if adversely determined, would reasonably be expected to
have a Company Material Adverse Effect. As of the date of this Agreement, there
are no judgments, decrees, injunctions, rules or orders of any Governmental
Authority or arbitrator outstanding against the Parent or any of its
Subsidiaries which, individually or in the aggregate, would reasonably be
expected to have a Parent Material Adverse Effect.
ARTICLE VI
COVENANTS
Section 6.1 INTERIM OPERATIONS OF THE COMPANY. The Company covenants and
agrees that prior to the Effective Time, except (i) as expressly contemplated by
this Agreement, (ii) as set forth in Section 6.1 of the Company Disclosure
Letter or (iii) as agreed in writing by the Parent after the date hereof or
(iv) for any actions taken by the Company without the approval of the Special
Committee or the Company's Board of Directors:
(a) the Company shall not take any actions that would cause it not to
conduct its business in the usual, regular and ordinary course and substantially
in the same manner as heretofore conducted, and the Company shall preserve its
business organization intact and keep available the services of its current
officers and employees and maintain its existing business relationships;
(b) the Company shall not: (i) amend its certificate of incorporation or
by-laws or similar organizational documents, (ii) issue, sell, transfer, pledge,
dispose of or encumber any shares of any class or series of its capital stock,
or securities convertible into or exchangeable for, or options, warrants, calls,
commitments or rights of any kind to acquire, any shares of any class or series
of its capital stock other than Shares reserved for issuance on the date of this
Agreement pursuant to the exercise of Company Options outstanding on the date of
this Agreement, (iii) declare, set aside or pay any dividend or other
distribution payable in cash, stock or property with respect to any shares of
any class or series of its capital stock, (iv) split, combine or reclassify any
shares of any class or series of its stock or (v) redeem, purchase or otherwise
acquire directly or indirectly any shares of any class or series of its capital
stock, or any instrument or security which consists of or includes a right to
acquire such shares;
(c) the Company shall not: (i) incur or modify any indebtedness or other
liability, other than in the ordinary and usual course of business and
consistent with past practice or (ii) modify, amend or terminate any of its
material contracts or waive, release or assign any material rights or claims,
except in the ordinary course of business and consistent with past practice;
(d) the Company shall not: (i) incur or assume any debt or obligations under
capital leases; (ii) modify the terms of any liability; (iii) assume, guarantee,
endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other Person, except as
described in Section 6.1(d) of the Company Disclosure Letter as being in the
ordinary course of business and consistent with past practice; (iv) make any
loans, advances or capital contributions to, or investments in, any other
Person; or (v) enter into any material commitment or transaction (including any
capital expenditure or purchase, sale or lease of assets or real estate);
(e) the Company shall not transfer, lease, license, sell, mortgage, pledge,
dispose of, or encumber any assets other than in the ordinary and usual course
of business and consistent with past practice; or
(f) the Company shall not make or offer to make any change in the
compensation payable or to become payable to any of its officers, directors,
employees, agents or consultants (other than normal recurring increases in wages
to employees who are not officers or directors or Affiliates in the ordinary
course of business and consistent with past practice) or to Persons providing
management services, or enter into or amend any employment, severance,
consulting, termination or other agreement or employee benefit plan or make any
loans to any of its officers, directors, employees, Affiliates, agents or
consultants
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or make any change in its existing borrowing or lending arrangements for or on
behalf of any of such Persons pursuant to an employee benefit plan or otherwise;
(g) the Company shall not permit any insurance policy naming it as a
beneficiary or a loss payable payee to be cancelled or terminated without notice
to and the prior written consent of the Parent;
(h) the Company shall not enter into any contract or transaction relating to
the purchase of assets other than in the ordinary course of business and
consistent with prior practices;
(i) the Company shall not pay, purchase, discharge or satisfy any of its
claims, liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or satisfaction in
the ordinary course of business and consistent with past practice, of claims,
liabilities or obligations reflected or reserved against in, or contemplated by,
the Company Financial Statements;
(j) the Company shall not adopt a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or other
reorganization of the Company (other than the Merger);
(k) the Company shall not: (i) change any of the accounting methods used by
it unless required by GAAP or (ii) make any material election relating to Taxes,
change any material election relating to Taxes already made, adopt any material
accounting method relating to Taxes, change any material accounting method
relating to Taxes unless required by GAAP or change in the Code or the
regulations under the Code, enter into any closing agreement relating to Taxes,
settle any claim or assessment relating to Taxes or consent to any claim or
assessment relating to Taxes or any waiver of the statute of limitations for any
such claim or assessment;
(l) the Company shall not take, or agree to commit to take, any action that
could or would be reasonably likely to result in any of the conditions set forth
in Article VII not being satisfied, or would make any representation or warranty
of the Company contained in this Agreement inaccurate in any respect at, or as
of any time prior to, the Effective Time, or that could be reasonably be
expected to materially impair the ability of the Company, the Parent, Merger Sub
or the holders of Shares to consummate the Merger in accordance with the terms
hereof or materially delay such consummation; and
(m) the Company shall not enter into any agreement, contract, commitment,
understanding or arrangement to do any of the foregoing, or to authorize,
recommend, propose or announce an intention to do any of the foregoing.
Section 6.2 ACCESS. The Company shall (and shall cause each Company
Subsidiary to) afford to the officers, employees, accountants, counsel,
financing sources and other representatives of the Parent, full access during
the period prior to the Closing Date, to all its properties, books, contracts,
commitments and records and, during such period, the Company shall furnish
promptly to the Parent (a) a copy of each report, schedule, registration
statement and other document filed or received by it during such period pursuant
to the requirements of federal securities laws and (b) all other information
concerning its business, properties and personnel as the Parent may reasonably
request. After the Appointment Date, the Company shall provide the Parent and
such Persons as the Parent shall designate with all such information, at anytime
as the Parent shall reasonably request.
Section 6.3 REASONABLE EFFORTS.
(a) Prior to the Closing, upon the terms and subject to the conditions of
this Agreement, the Parent, Merger Sub and the Company agree to use commercially
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper or advisable (subject to any
applicable laws) to consummate the Merger and make effective the Merger and the
other Transactions as promptly as practicable but in no event earlier than
June 18, 2000, including, (i) the preparation and filing of all forms,
registrations and notices required to be filed to consummate the Merger and the
other Transactions and the taking of such actions as are necessary to obtain any
requisite approvals, consents,
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orders, exemptions or waivers by any third party or Governmental Entity, and
(ii) the satisfaction of the other parties' conditions to Closing. In addition,
no party hereto shall take any action after the date of this Agreement to
materially delay the obtaining of, or result in not obtaining, any permission,
approval or consent from any Governmental Entity necessary to be obtained prior
to Closing. Notwithstanding the foregoing, or any other covenant herein
contained, in connection with the receipt of any necessary approvals under the
HSR Act, the Company shall not be entitled to divest or hold separate or
otherwise take or commit to take any action that limits the Parent's or Merger
Sub's freedom of action with respect of, or their ability to retain, the Company
or any material portions thereof or any of the businesses, product lines,
properties or assets of the Company, without the Parent's prior written consent
(which may be withheld in the Parent's sole and absolute discretion).
(b) Prior to the Closing, each party shall promptly consult with the other
parties hereto with respect to, provide any necessary information with respect
to, and provide the other parties (or their respective counsel) with copies of,
all filings made by such party with any Governmental Entity or any other
information supplied by such party to a Governmental Entity in connection with
this Agreement, the Merger and the other Transactions. Each party hereto shall
promptly inform the other of any communication from any Governmental Entity
regarding any of the Transactions. If any party hereto or Affiliate thereof
receives a request for additional information or documentary material from any
such Governmental Entity with respect to any of the Transactions, then such
party shall endeavor in good faith to make, or cause to be made, as soon as
reasonably practicable and after consultation with the other parties, an
appropriate response in compliance with such request. To the extent that
transfers, amendments or modifications of permits (including environmental
permits) are required as a result of the execution of this Agreement or
consummation of any of the Transactions, the Company shall use best efforts to
effect such transfers, amendments or modifications.
(c) The Company and the Parent shall file as soon as practicable
notifications under the HSR Act and respond as promptly as practicable to any
inquiries received from the Federal Trade Commission and the Antitrust Division
of the Department of Justice for additional information or documentation and
respond as promptly as practicable to all inquiries and requests received from
any state Attorney General or other Governmental Entity in connection with
antitrust matters. Concurrently with the filing of notifications under the HSR
Act or as soon thereafter as practicable, the Company and the Parent shall each
request early termination of the HSR Act waiting period.
(d) Notwithstanding the foregoing, nothing in this Agreement shall be deemed
to require the Parent or Merger Sub to commence any litigation against any
entity in order to facilitate the consummation of any of the Transactions or to
defend against any litigation brought by any Governmental Entity seeking to
prevent the consummation of any of the Transactions.
Section 6.4 NO SOLICITATION OF COMPETING TRANSACTION.
(a) Neither the Company nor any Affiliate of the Company shall (and the
Company shall cause the officers, directors, employees, representatives and
agents of the Company and each Affiliate of the Company, including investment
bankers, attorneys and accountants, not to), directly or indirectly, encourage,
solicit, participate in or initiate or resume (including by way of furnishing or
disclosing non-public information) or take any action designed to facilitate any
discussions, inquiries, negotiations or the making of any proposals with respect
to or concerning any Acquisition Proposal. Nothing contained in this
Section 6.4 or any other provision of this Agreement shall prohibit the Company
or the Company's board of directors from (i) taking and disclosing to the
Company's stockholders a position with respect to a tender or exchange offer by
a third party not solicited, encouraged, discussed, continued or failed to be
ceased or terminated in contravention of this Agreement pursuant to Rules 14d-9
and 14e-2 under the Exchange Act, or (ii) making such disclosure to the
Company's stockholders as, in the good faith judgment of the board of directors
of the Company, pursuant to advice from outside counsel, is reasonably expected
to be required under applicable law, PROVIDED that the Company may not, except
as permitted by
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Section 6.4(b), withdraw or modify, or propose to withdraw or modify, its
position with respect to the Merger or approve or recommend, or propose to
approve or recommend any Acquisition Proposal, or enter into any agreement with
respect to any Acquisition Proposal. Upon execution of this Agreement, the
Company will immediately cease any existing activities, discussions or
negotiations with any parties conducted heretofore with respect to any of the
foregoing. Notwithstanding the foregoing, prior to the Closing, the Company may
furnish information concerning its business, properties or assets to any
corporation, partnership, Person or other entity or group pursuant to
appropriate confidentiality agreements (which shall permit the disclosure
contemplated by this Section 6.4(a)), and may negotiate and participate in
discussions and negotiations with such entity or group concerning an Acquisition
Proposal if:
(x) such entity or group has, on an unsolicited basis, submitted a bona
fide written proposal to the board of directors of the Company relating to
any such transaction which the board determines in good faith, consistent
with advice of an independent investment banker, (i) is reasonably capable
of being and likely to be funded on the disclosed terms and (ii) is
reasonably likely to be consummated in accordance with its terms; and
(y) in the opinion of the Special Committee such action is reasonably
expected to be required in order to discharge the board of directors of the
Company's fiduciary duties to the Company's stockholders under applicable
law, determined only after the Special Committee concludes in good faith
that the Acquisition Proposal could reasonably be expected to constitute a
proposal that is superior, from a financial point of view, to the Merger.
The Company will promptly notify the Parent of the existence of any proposal,
discussion, negotiation or inquiry received by the Company or any of its
representatives, and the Company will promptly communicate to the Parent the
terms of any proposal, discussion, negotiation or inquiry which it or any of its
representatives may receive (and will promptly provide to the Parent copies of
any written materials received by the Company or its representatives in
connection with such proposal, discussion, negotiation or inquiry) and the
identity of the party making such proposal or inquiry or engaging in such
discussion or negotiation. The Company will promptly provide to the Parent any
non-public information concerning the Company provided to any other party which
was not previously provided to the Parent.
(b) Except as set forth below in this Section 6.4(b), neither the Company's
board of directors nor any committee thereof shall (i) withdraw or modify, or
propose to withdraw or modify, or take any action in furtherance of the
withdrawal or modification, in a manner adverse to the Parent or Merger Sub, the
approval or recommendation by such board of directors or any such committee of
this Agreement or the Merger, (ii) approve or recommend or propose to approve or
recommend or take any action in furtherance of approval of recommendation of,
any Acquisition Proposal or (iii) enter into any agreement with respect to any
Acquisition Proposal. Notwithstanding the foregoing, prior to the date of the
Special Meeting, the Company's board of directors may withdraw or modify its
approval or recommendation of this Agreement or the Merger, approve or recommend
a Superior Proposal, or enter into an agreement with respect to a Superior
Proposal, in each case at any time after the third Business Day following the
Parent's receipt of written notice from the Company advising the Parent that the
board of directors of the Company has received a Superior Proposal which it
intends to accept, specifying the terms and conditions of such Superior
Proposal, identifying the Person making such Superior Proposal, but only if the
Company shall, upon the request of Parent, have caused its financial and legal
advisors to negotiate in good faith with the Parent to make such adjustments in
the terms and conditions of this Agreement as would enable the Company to
proceed with the transactions contemplated herein on such adjusted terms.
Nothing in this Agreement shall permit the Company to enter into any agreement,
arrangement or understanding with any third party providing for the payment of
fees or reimbursement of expenses in the event the Parent makes a proposal in
response to such Superior Proposal.
Section 6.5 PUBLICITY. The initial press release with respect to the
execution of this Agreement shall be a joint press release reasonably acceptable
to the Parent and the Company. Thereafter, until the
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Appointment Date, or the date this Agreement is terminated pursuant to
Article VIII (whichever occurs first), neither the Company, the Parent nor any
of their respective Affiliates shall issue or cause the publication of any press
release or other announcement with respect to the Merger, this Agreement or the
other Transactions without prior consultation with the other party, except as
may be required by law or by any listing agreement with a national securities
exchange or trading market.
Section 6.6 NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt
written notice to the Parent, of (i) the occurrence or non-occurrence of any
event the occurrence or non-occurrence of which caused or would reasonably be
expected to cause any representation or warranty contained in this Agreement to
be untrue or inaccurate in any material respect at or prior to the Effective
Time and (ii) any material failure of the Company, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder, PROVIDED, HOWEVER, that the delivery of any notice pursuant to this
Section 6.6 shall not limit or otherwise affect the remedies available hereunder
to the Parent.
Section 6.7 DIRECTORS' AND OFFICERS' INSURANCE AND INDEMNIFICATION.
(a) The Parent shall, and shall cause the Surviving Corporation (or any
successor to the Surviving Corporation) to indemnify, defend and hold harmless
each Indemnified Party against all losses, claims, damages, liabilities, costs,
fees and expenses, including fees and disbursements of counsel and judgments,
fines, losses, claims, liabilities and amounts paid in settlement (PROVIDED that
any such settlement is effected with the written consent of the Parent or the
Surviving Corporation) arising out of actions or omissions occurring at or prior
to the Effective Time to the full extent permitted under applicable Delaware
law, the terms of the Company's certificate of incorporation or the by-laws, as
in effect at the date hereof, PROVIDED that, in the event any claim, demand or
claims are asserted or made, all rights to indemnification in respect of any
such demand, claim or claims shall continue until disposition of any and all
such claims.
(b) The Parent shall, and shall cause the Surviving Corporation to maintain
in effect the Company's existing officers' and directors' liability insurance
for a period of not less than six years after the Effective Date covering those
persons who are currently covered by the Company's officers' and directors'
insurance, PROVIDED, that the Parent may substitute therefor policies of at
least the same coverage and amounts containing terms no less advantageous to
such former directors or officers.
(c) The certificate of incorporation and the bylaws of the Surviving
Corporation shall contain provisions with respect to indemnification identical
to those contained in the certificate of incorporation and bylaws of the
Company, each as in effect on the date of this Agreement. The Parent and the
Surviving Corporation shall not take any action to amend, repeal, supplement or
modify such provisions in a manner adverse to any Indemnified Party.
(d) In the event Parent or the Surviving Corporation or any of their
respective successors or assigns (i) consolidates with or merges into any other
Person and shall not be the continuing or surviving corporation or entity of
such consolidation or merger, or (ii) transfers or conveys all or substantially
all of its properties and assets to any Person, then, and in each such case, to
the extent necessary to effectuate the purposes of this Section 6.7, proper
provision shall be made so that the successors and assigns of Parent or
Surviving Corporation assume the obligations set forth in this Section 6.7, and
none of the actions described in clause (i) or (ii) shall be taken until such
provision is made.
(e) The provisions of this Section 6.7 are intended to be for the benefit
of, and shall be enforceable by, each of the Indemnified Parties, their heirs
and their representatives.
Section 6.8 STATE TAKEOVER LAWS. Notwithstanding any other provision in
this Agreement, in no event shall the approval of the Transactions under
Section 203 of the DGCL be withdrawn, revoked or modified by the board of
directors of the Company. If any state takeover statute other than Section 203
of the DGCL becomes or is deemed to become applicable to the Agreement, the
Merger or the other Transactions, the Company shall take all action necessary to
render such statute inapplicable to all of the foregoing.
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Section 6.9 MERGER SUB COMPLIANCE. The Parent shall cause Merger Sub to,
and unconditionally guarantees that the Merger Sub will, comply with all of its
obligations under or related to this Agreement.
Section 6.10 PREPARATION OF PROXY STATEMENT; THE SPECIAL MEETING
(a) As promptly as reasonably practicable following the date hereof, the
Company and the Parent shall cooperate in preparing and the Parent shall cause
to be filed with the SEC a mutually acceptable form of the Registration
Statement and the Schedule 13E-3. The Proxy Statement/Prospectus will be
included as a prospectus in and will constitute a part of the Registration
Statement. Each of the Company and the Parent shall use commercially reasonable
efforts to have the Proxy Statement/Prospectus and the Schedule 13E-3 cleared by
the SEC and the Registration Statement declared effective by the SEC and to keep
the Registration Statement effective as long as is necessary to consummate the
Merger and the Transactions. The Company and the Parent shall, as promptly as
practicable after receipt thereof, provide the other party copies of any written
comments and advise the other party of any oral comments, with respect to the
Proxy Statement/Prospectus, the Schedule 13E-3 or the Registration Statement
received from the SEC. The parties shall cooperate and provide the other with a
reasonable opportunity to review and comment on any amendment or supplement to
the Proxy Statement/Prospectus, the Schedule 13E-3 and the Registration
Statement prior to filing with the SEC, and will provide each other with a copy
of all such filings made with the SEC. Notwithstanding any other provision
herein to the contrary, no amendment or supplement (including by incorporation
by reference) to the Proxy Statement/Prospectus, the Schedule 13E-3 or the
Registration Statement shall be made without the approval of both parties, which
approval shall not be unreasonably withheld or delayed; PROVIDED that with
respect to documents filed by a party which are incorporated by reference in the
Registration Statement, the Schedule 13E-3 or Proxy Statement/Prospectus, the
right of approval shall apply only with respect to information relating to the
other party or its business, financial condition or results of operations. The
Parent shall also take any action (other than qualifying to do business in any
jurisdiction or delivering a general consent to service of process) in which it
is not now so qualified required to be taken under any applicable state
securities laws in connection with the Merger and the Company shall furnish all
information concerning it and the holders of its capital stock as may be
reasonably requested in connection with any such action. Each party will advise
the other party, promptly after it receives notice thereof, of the time when the
Registration Statement has become effective, the issuance of any stop order, the
suspension of the qualification of the Parent Warrants issuable in connection
with the Merger for offering or sale in any jurisdiction, or any request by the
SEC for amendment of or supplement to the Proxy Statement/Prospectus, the
Schedule 13E-3 or the Registration Statement.
(b) The Company shall duly take all lawful action to call, give notice of,
and convene the Special Meeting for the purpose of adopting this Agreement and
shall take all lawful action to solicit the adoption of this Agreement, and the
board of directors of the Company shall recommend adoption of this Agreement by
the stockholders of the Company to the effect as set forth in Section 4.5., and
shall not (x) withdraw, modify or qualify (or propose to withdraw, modify or
qualify) in any manner adverse to the Parent such recommendation or (y) take any
action or make any statement in connection with the Special Meeting inconsistent
with such recommendation; PROVIDED, HOWEVER, that the board of directors of the
Company may make a change in such recommendation pursuant to Section 6.4 hereof.
Notwithstanding any change in Company's recommendation of adoption of this
Agreement, this Agreement shall be submitted to the stockholders of the Company
at the Special Meeting for the purpose of adopting this Agreement and nothing
contained herein shall be deemed to relieve the Company of such obligation.
ARTICLE VII
CONDITIONS
Section 7.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. The respective obligation of each party to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of each
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of the following conditions, any and all of which may be waived in whole or in
part by the Company, the Parent or Merger Sub, as the case may be, to the extent
permitted by applicable law:
(a) STOCKHOLDER APPROVAL. This Agreement shall have been adopted by the
requisite vote of the holders of the Shares and the Special Common Stock in
order to consummate the Merger.
(b) STATUTES; COURT ORDERS. No statute, rule or regulation shall have been
enacted or promulgated by any governmental authority which prohibits the
consummation of the Merger, and there shall be no order or injunction of a court
of competent jurisdiction in effect precluding consummation of the Merger.
(c) HSR APPROVAL. The applicable waiting period under the HSR Act shall have
expired or been terminated.
(d) REGISTRATION STATEMENT. The Registration Statement shall have been
declared effective by the SEC under the Securities Act and no stop order
suspending the effectiveness of the Registration Statement shall have been
issued by the SEC and no proceedings for that purpose shall have been initiated
or threatened by the SEC.
Section 7.2 COMPANY'S OBLIGATIONS TO EFFECT THE MERGER. The obligations of
the Company to consummate the Merger shall be subject to the satisfaction on or
prior to the Closing Date of each of the following conditions, any and all of
which may be waived in whole or in part by the Company, to the extent permitted
by applicable law.
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of the Parent and Merger Sub set forth in this Agreement shall be
true and correct in all material respects as of the Closing Date as though made
on and as of the Closing Date (except to the extent that such representations
and warranties speak as of another date, in which case such representations and
warranties shall be true and correct in all material respects as of such other
date), and the Company shall have received a certificate of a senior executive
officer and a senior financial officer of the Parent to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF THE PARENT. The Parent and Merger Sub
shall each have performed or complied with all agreements and covenants required
to be performed by it under this Agreement at or prior to the Closing Date in
all material respects and the Company shall have received a certificate of a
senior executive officer and a senior financial officer of the Parent to such
effect.
(c) LISTING OF WARRANTS AND WARRANT SHARES. The Warrants and the Warrant
Shares shall have been approved for listing on the Nasdaq National Market,
subject to official notice of issuance.
(d) NO ACQUISITION PROPOSALS. There shall not have been publicly announced
any Acquisition Proposal with respect to the Parent.
Section 7.3 CONDITIONS TO THE PARENT'S AND MERGER SUB'S OBLIGATIONS TO
EFFECT THE MERGER. The obligations of the Parent and Merger Sub to consummate
the Merger shall be subject to the satisfaction on or prior to the Closing Date
of each of the following conditions, any and all of which may be waived in whole
or in part by the Parent and Merger Sub, to the extent permitted by applicable
law.
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of the Company set forth in this Agreement shall be true and correct
in all material respects as of the Closing Date as though made on and as of the
Closing Date (except to the extent that such representations and warranties
speak as of another date, in which case such representations and warranties
shall be true and correct all material respects as of such other date), and the
Parent shall have received a certificate of a senior executive officer and a
senior financial officer of the Company to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have
performed or complied with all agreements and covenants required to be performed
by it under this Agreement at or prior to the Closing Date in all material
respects, and the Parent shall have received a certificate of a senior executive
officer and a senior financial officer of the Company to such effect.
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ARTICLE VIII
TERMINATION
Section 8.1 TERMINATION. The Transactions may be terminated or abandoned
at any time prior to the Effective Time, whether before or after stockholder
approval thereof:
(a) By the mutual written consent of the Parent and the Company.
(b) By either of the Company or the Parent:
(i) if the Effective Time shall not have occurred on or before
5:00 p.m. Pacific Daylight Savings Time on September 30, 2000; PROVIDED,
HOWEVER, that the right to terminate this Agreement under this
Section 8.1(b)(i) shall not be available to any party whose failure to
fulfill any obligation under this Agreement has been the cause of, or
resulted in, the failure of Effective Time to occur on or prior to such
date; or
(ii) if any Governmental Entity shall have issued an order, decree or
ruling or taken any other action (which order, decree, ruling or other
action the parties hereto shall use their reasonable efforts to lift), which
permanently restrains, enjoins or otherwise prohibits the acceptance for
payment of, or payment for, Shares pursuant to the Merger and such order,
decree, ruling or other action shall have become final and non-appealable.
(c) By the Company:
(i) in connection with entering into a definitive agreement as permitted
by Section 6.4(b);
(ii) if the Parent or Merger Sub shall have breached in any material
respect any of their respective representations, warranties, covenants or
other agreements contained in this Agreement, which breach cannot be or has
not been cured within thirty days after the giving of written notice by the
Company to the Parent or Merger Sub, as applicable.
(d) By the Parent (on behalf of itself and Merger Sub):
(i) if the Company's board of directors shall have withdrawn, modified
or changed in a manner adverse to the Parent or Merger Sub its approval or
recommendation of this Agreement or the Merger or shall have recommended an
Acquisition Proposal or shall have executed an agreement in principle or
definitive agreement relating to an Acquisition Proposal or similar business
combination with a Person or entity (other than the Parent, Merger Sub or
their Affiliates); or
(ii) if the Company shall have breached in any material respect any of
its representations, warranties, covenants or other agreements contained in
this Agreement which breach cannot be or has not been cured within thirty
days after the giving of written notice by the Parent to the Company.
Section 8.2 EFFECT OF TERMINATION. In the event of the termination or
abandonment of the Transactions by any party hereto pursuant to the terms of
this Agreement, written notice thereof shall forthwith be given to the other
party or parties specifying the provision hereof pursuant to which such
termination or abandonment of the Transactions is made, and there shall be no
liability on the part of the Parent or the Company except (a) for fraud or for
willful material breach of this Agreement prior to such termination or
abandonment of the Transactions and (b) as set forth in Section 9.1.
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ARTICLE IX
MISCELLANEOUS
Section 9.1 FEES AND EXPENSES. Except as specifically provided to the
contrary in this Agreement, all costs and expenses incurred in connection with
this Agreement and the consummation of the Transactions shall be paid by the
party incurring such expenses.
Section 9.2 AMENDMENT AND MODIFICATION. Subject to applicable law, this
Agreement may be amended, modified and supplemented in any and all respects,
whether before or after any vote of the stockholders of the Company contemplated
hereby, by written agreement of the parties hereto, by action taken by their
respective boards of directors at any time prior to the Closing Date with
respect to any of the terms contained herein; PROVIDED, HOWEVER, that after the
approval of this Agreement by the stockholders of the Company, no such
amendment, modification or supplement shall reduce the amount or change the form
of the Merger Consideration.
Section 9.3 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties in this Agreement or in any schedule, instrument
or other document delivered pursuant to this Agreement shall survive the
Effective Time. The foregoing sentence shall not limit any covenant or agreement
of the parties which by its terms contemplates performance after the Effective
Time.
Section 9.4 NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered Personally, telecopied
(which is confirmed) or sent by an internationally recognized overnight courier
service, such as Federal Express, to the parties at the following addresses (or
at such other address for a party as shall be specified by like notice):
(a) if to the Parent or Merger Sub, to:
Dura Pharmaceuticals, Inc.
7475 Lusk Boulevard
San Diego, California 92121
Attention: Office of the General Counsel
Telephone No.: (858) 457-2553
Telecopy No.: (858) 657-0981
with a copy (which shall not constitute notice) to:
Brobeck, Phleger & Harrison LLP
550 South Hope Street
Los Angeles, California 90071
Attention: Richard S. Chernicoff
Telephone No.: (213) 489-4060
Telecopy No.: (213) 239-1324
and
if to the Company, to:
Spiros Development Corporation II, Inc.
7475 Lusk Boulevard
San Diego, California 92121
Attention: William H. Rastetter, Chairman of the Special Committee
Telephone No.: (858) 431-8637
Telecopy No.: (858) 431-8770
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and
Erle T. Mast, Vice President, Chief Financial Officer
Telephone No.: (858) 784-6402
Telecopy No.: (858) 657-0981
with a copy (which shall not constitute notice) to:
Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue
Los Angeles, California 90071
Attention: Joseph J. Giunta
Telephone No.: (213) 687-5000
Telecopy No.: (213) 687-5600
Section 9.5 COUNTERPARTS. This Agreement may be executed in one or more
counterparts (whether delivered by facsimile or otherwise), each of which shall
be considered one and the same agreement and shall become effective when two or
more counterparts have been signed by each of the parties and delivered to the
other parties.
Section 9.6 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. This Agreement
(including the documents and the instruments referred to herein and therein):
(a) constitute the entire agreement and supersede all prior agreements,
negotiations, arrangements and understandings, both written and oral, among the
parties with respect to the subject matter hereof and thereof, and (b) except as
provided in Section 6.7 are not intended to confer upon any Person, other than
the parties hereto, any rights or remedies hereunder.
Section 9.7 SEVERABILITY. Any term or provision of this Agreement that is
held by a court of competent jurisdiction or other authority to be invalid, void
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the invalid, void or unenforceable term or
provision in any other situation or in any other jurisdiction. If the final
judgment of a court of competent jurisdiction or other authority declares that
any term or provision hereof is invalid, void or unenforceable, the parties
agree that the court making such determination shall have the power to and
shall, subject to the discretion of such court, reduce the scope, duration, area
or applicability of the term or provision, to delete specific words or phrases,
or to replace any invalid, void or unenforceable term or provision with a term
or provision that is valid and enforceable and that comes closest to expressing
the intention of the invalid or unenforceable term or provision.
Section 9.8 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without giving
effect to the principles of conflicts of law thereof.
Section 9.9 ENFORCEMENT. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware or in Delaware state court, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties (a) consents to submit itself to the personal
jurisdiction of any Federal court located in the State of Delaware or any
Delaware state court in the event any dispute arises out of this Agreement or
any of the Transactions, (b) agrees that it will not attempt to deny or defeat
such Personal jurisdiction by motion or other request for leave from any such
court, (c) agrees that it will not bring any action relating to this Agreement
or any of the Transactions in any court other than a Federal court sitting in
the State of
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Delaware or a Delaware state court and (d) irrevocably waives any right it may
have in any such proceeding to a trial by jury.
Section 9.10 EXTENSION, WAIVER. At any time prior to the Effective Time,
the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties of the other parties contained in this
Agreement or in any document delivered pursuant to this Agreement or
(c) subject to the proviso of Section 8.2, waive compliance by the other parties
with any of the agreements or conditions contained in this Agreement. Any
agreement on the part of a party to any such extension or waiver shall be valid
only if set forth in an instrument in writing signed on behalf of such party.
The failure of any party to this Agreement to assert any of its rights under
this Agreement or otherwise shall not constitute a waiver of those rights.
Section 9.11 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
(whether by operation of law or otherwise) without the prior written content of
the other parties, except that Merger Sub may assign, in its sole discretion,
any or all of its rights, interests and obligations hereunder to the Parent or
to any direct or indirect wholly owned Subsidiary of the Parent and such
assignment shall not relieve Merger Sub of any obligation under this Agreement.
Subject to the preceding sentence, this Agreement will be binding upon, inure to
the benefit of and be enforceable by the parties and their respective successors
and assigns.
IN WITNESS WHEREOF, the Parent, Merger Sub and the Company have caused this
Agreement to be signed by their respective officers thereunto duly authorized as
of the date first written above.
DURA PHARMACEUTICALS, INC.
By: /s/ MICHAEL T. BORER
------------------------------------------------
Name: Michael T. Borer
Title: Senior Vice President and Chief Financial
Officer
STARFISH ACQUISITION CORP., INC.
By: /s/ MICHAEL T. BORER
------------------------------------------------
Name: Michael T. Borer
Title: Chief Financial Officer and Treasurer
SPIROS DEVELOPMENT CORPORATION II, INC.
By: /s/ DAVID S. KABAKOFF
------------------------------------------------
Name: David S. Kabakoff
Title: CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER
A-28
EXHIBIT A
TO ANNEX A
WARRANT AGREEMENT
BY AND BETWEEN
DURA PHARMACEUTICALS, INC.
AND
CHASE MELLON SHAREHOLDER SERVICES, L.L.C.
DATED AS OF
, 2000
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WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of _______, 2000, by and between Dura
Pharmaceuticals, Inc., a Delaware corporation ("Dura"), and ChaseMellon
Shareholder Services, L.L.C., a New Jersey limited liability company, as warrant
agent (the "Warrant Agent"), in favor of each person who acquires from time to
time warrants (the "Warrants") to purchase shares of Dura's Common Stock, $.001
par value per share (the "Warrant Shares").
Section 1. APPOINTMENT OF WARRANT AGENT. Dura hereby appoints the Warrant
Agent to act as agent for Dura in accordance with the instructions set forth
herein, and the Warrant Agent hereby accepts such appointment, upon the terms
and conditions hereinafter set forth.
Section 2. CERTAIN DEFINITIONS. As used herein, the following terms shall
have the following meanings:
"CLOSING PRICE" means the closing price per share of Common Stock on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading or, if not listed or traded on any such exchange, on the
Nasdaq National Market or if not listed or traded on any such exchange or the
Nasdaq National Market, the average of the last bid and asked prices per share
on the Nasdaq over-the-counter system or, if such quotations are not available,
the fair market value as reasonably determined by the board of directors of Dura
or any committee of such board.
"COMMISSION" means the Securities and Exchange Commission or any successor
governmental organization or entity responsible for administration of the
Securities Act.
"COMMON STOCK" means (i) the class of stock designated as the Common Stock,
$.001 par value per share, of Dura, on the date hereof or (ii) any other class
of stock resulting from successive changes or reclassifications of such shares
consisting solely of changes in par value, or from par value to no par value, or
from no par value to par value. Unless the context requires otherwise, all
references to Common Stock and Warrant Shares in this Agreement and in the
Warrant Certificates shall, in the event of an adjustment pursuant to
Section 12 hereof, be deemed to refer also to any other securities or property
then issuable upon exercise of the Warrants as a result of such adjustment.
"ELIGIBLE INSTITUTION" shall have the meaning set forth in Section 8(b)
hereof.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXERCISE PRICE" shall have the meaning set forth in Section 5(b) hereof.
"EXERCISE PERIOD" means the period during which the Warrants may be
exercised as set forth in Section 5(a) hereof.
"EXPIRATION DATE" shall have the meaning set forth in Section 5(a) hereof.
"HOLDERS" shall have the meaning set forth in Section 4(b) hereof.
"NASD" means the National Association of Securities Dealers, Inc.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"WARRANT CERTIFICATE" shall have the meaning set forth in Section 3(a)
hereof.
"WARRANT REGISTER" means the books and records kept by the Warrant Agent for
the registration, and the registration of transfer, of the Warrant Certificates
in which shall be registered the names and addresses of Holders of Warrants
evidenced by Warrant Certificates in registered form and the certificate numbers
and denominations of such Warrant Certificates.
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Section 3. FORM OF WARRANT CERTIFICATE.
(a) The certificates evidencing the Warrants (the "Warrant
Certificates"), and the forms of election to purchase Warrant Shares and of
assignment to be printed on the reverse thereof, shall be substantially in
the form set forth in Exhibit A hereto and may have such letters, numbers or
other marks of identification or designation and such legends, summaries or
endorsements printed, lithographed or engraved thereon as Dura reasonably
deems appropriate, which do not affect the duties or responsibilities of the
Warrant Agent, and as are not inconsistent with the provisions of this
Agreement, or as may be required to comply with any law, any rule or
regulation related thereto, or with any rule or regulation of the NASD, the
Nasdaq National Market or any securities exchange on which the Warrants may
from time to time be listed.
(b) Each Warrant shall entitle the Holder thereof to purchase ________
of a Warrant Share upon the exercise thereof at the applicable Exercise
Price, subject to adjustment as provided in Section 12 hereof, during the
Exercise Period; PROVIDED, HOWEVER, that the Warrants are exercisable only
for whole shares; cash will be paid in lieu of fractional shares in
accordance with Section 5(e) hereof. Each Warrant Certificate shall be
executed on behalf of Dura by the manual or facsimile signature of the
present or any future President or any officer of Dura, under its corporate
seal, affixed or in facsimile, attested by the manual or facsimile signature
of the present or any future Secretary or Assistant Secretary of Dura.
Warrants shall be dated as of the date of their initial issue.
Section 4. REGISTRATION AND COUNTERSIGNATURE.
(a) The Warrant Agent shall maintain the Warrant Register. The Warrant
Certificates shall be countersigned by the Warrant Agent and shall not be
valid for any purpose unless so countersigned. The Warrant Certificates
shall be so countersigned, however, by the Warrant Agent and shall be
delivered by the Warrant Agent, notwithstanding whether the persons whose
manual or facsimile signatures appear thereon as proper officers of Dura
shall have ceased to be such officers at the time of such countersignature
or delivery.
(b) Prior to due presentment for registration or transfer of the
Warrant Certificates, Dura and the Warrant Agent shall deem and treat the
registered holder (a "Holder") thereof as the absolute owner of the Warrant
Certificates (notwithstanding any notation of ownership or other writing
made thereon by anyone other than Dura or the Warrant Agent), for the
purpose of any exercise thereof and for all other purposes, and neither Dura
nor the Warrant Agent shall be affected by any notice to the contrary.
Section 5. DURATION AND EXERCISE OF WARRANTS.
(a) Warrants may be exercised at any time or from time to time on or
after the date hereof and will expire at 5:00 p.m., New York City time, on
________, 2005, (the "Expiration Date"). Upon the Expiration Date, all
rights evidenced by the Warrants shall cease and the Warrants shall become
void.
(b) Subject to the provisions of this Agreement, the Holder of each
Warrant shall have the right to purchase from Dura (and Dura shall issue and
sell to such Holder) the number of fully paid and nonassessable Warrant
Shares set forth on such Holder's Warrant Certificate (or such number of
Warrant Shares as may result from adjustments made from time to time as
provided in this Agreement) at the price of $________ per Warrant Share in
lawful money of the United States of America (such exercise price per
Warrant Share, as adjusted from time to time as provided herein, being
referred to herein as the "Exercise Price"), upon (i) surrender of the
Warrant Certificates to Dura at the office of the Warrant Agent designated
by the Warrant Agent for such purpose with the exercise form on the reverse
thereof duly and properly completed and signed by the Holder or Holders
thereof or by a duly appointed legal representative thereof or by a duly
authorized attorney, such signature to be guaranteed by an Eligible
Institution (as defined in Section 8(b) hereof) if such guarantee is
required by the terms of the Warrant Certificate, and (ii) payment, in
lawful money of the
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United States of America, of the Exercise Price for the Warrant Share or
Warrant Shares in respect of which such Warrant is then exercised. The
Exercise Price payable upon exercise of any Warrant may be paid only by
certified or, at the option of the Holder, official bank check payable to
the order of Dura. Upon surrender of the Warrant Certificate, and payment of
the Exercise Price, Dura shall issue and cause to be delivered with all
reasonable dispatch to or upon the written order of the Holder of such
Warrant and in such name or names as such Holder may designate, a
certificate or certificates for the number of Warrant Shares so purchased
upon the exercise of such Warrants, together with cash or check, at Dura's
option, in respect of any fraction of a Warrant Share issuable upon such
surrender pursuant to Section 5(e) hereof. The Warrant Agent shall deliver
on a weekly basis all funds received upon exercise of the Warrants to Dura,
7475 Lusk Boulevard, San Diego, California 92121, Attention: Senior Vice
President and Chief Financial Officer.
(c) Each person in whose name any certificate for Warrant Shares is
issued upon the exercise of Warrants shall for all purposes be deemed to
have become the holder of record of the Warrant Shares represented thereby,
and such certificate shall be dated the date upon which the Warrant
Certificate evidencing such Warrants was duly surrendered and payment of the
Exercise Price (and any applicable taxes pursuant to Section 9 hereof) was
made; PROVIDED, HOWEVER, that if the date of such surrender and payment is a
date upon which the Common Stock transfer books of Dura are closed, such
person shall be deemed to have become the record holder of such Warrant
Shares on, and such certificate shall be dated, the next succeeding business
day on which the Common Stock transfer books of Dura are open.
(d) In the event that, during the Exercise Period, fewer than all of
the Warrants represented by a Warrant Certificate are exercised, a new
Warrant Certificate, duly executed by Dura, will be issued for the remaining
number of Warrants exercisable pursuant to the Warrant Certificate so
surrendered, and the Warrant Agent shall countersign and deliver such new
Warrant Certificate to the Holder of such unexercised Warrants pursuant to
the provisions of this Section 5 and of Section 4 hereof.
(e) No fractional shares of Common Stock or scrip shall be issued to
any Holder in connection with the exercise of a Warrant. Instead of any
fractional shares of Common Stock that would otherwise be issuable to such
Holder, Dura shall pay to such Holder a cash adjustment in respect of such
fractional interest in an amount equal to that fractional interest of the
then current Closing Price on the date of exercise per share of Common
Stock.
(f) The number of Warrant Shares to be received upon the exercise of a
Warrant and the price to be paid for a Warrant Share are subject to
adjustment from time to time as hereinafter set forth.
(g) Warrants not exercised on or prior to the Expiration Date shall
become void and all rights in respect thereof shall cease as of such time.
Section 6. RESERVATION OF WARRANT SHARES; STOCK CERTIFICATES. Dura shall
at all times reserve, for issuance and delivery upon exercise of the Warrants,
such number of Warrant Shares or other shares of capital stock of Dura as may be
issuable from time to time upon exercise of the Warrants. All such shares shall
be duly authorized and, when issued upon such exercise and receipt by Dura of
payment in full of the Exercise Price, shall be validly issued, fully paid and
nonassessable, free and clear of all liens, security interests, charges and
other encumbrances or restrictions on sale and free and clear of all preemptive
rights. The Warrant Agent is hereby irrevocably authorized to requisition, from
time to time from the transfer agent for the Common Stock, stock certificates
issuable upon exercise of outstanding Warrants. Dura will supply such transfer
agent with duly executed stock certificates for such purpose. All Warrant
Certificates surrendered upon exercise shall be cancelled by the Warrant Agent
and shall thereafter be delivered to Dura or otherwise disposed of in a manner
satisfactory to Dura. Unless all Warrants shall have been exercised prior to
5:00 p.m., New York City time, on the Expiration Date, the Warrant Agent shall
certify to Dura, as of the close of business on the Expiration Date, the total
aggregate number of Warrants then outstanding, and thereafter no shares of
Common Stock shall be subject to reservation in respect of
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such Warrants. Dura shall keep a copy of this Agreement on file with its
transfer agent and with every transfer agent for any shares of Common Stock.
Section 7. TRANSFER AND REGISTRATION OF THE WARRANTS AND WARRANT SHARES.
(a) The Warrants and the Warrant Shares, and any interest in either,
may be sold, assigned, pledged, encumbered or in any other manner
transferred or disposed of, in whole or in part, only in accordance with
Section 8 hereof and in compliance with applicable United States federal and
state securities laws and the terms and conditions hereof.
(b) The Warrants and the Warrant Shares have been registered under the
Securities Act pursuant to a registration statement on Form S-4 (File
No. 333-_______) declared effective under the Securities Act (the
"Registration Statement"). Dura covenants and agrees:
(i) it will prepare and file with the Commission such amendments and
supplements to the Registration Statement and the prospectus used in
connection therewith as may be necessary to keep the Registration
Statement effective through the termination of the Exercise Period or
until such earlier time as no Warrants remain outstanding;
(ii) as expeditiously as possible, to register or qualify the
Warrants and the Warrant Shares under the securities or "Blue Sky" laws
of each jurisdiction in which such registration or qualification is
necessary; and
(iii) to pay all expenses incurred by Dura in complying with this
Section 7(b), including, without limitation (A) all registration and
filing fees, (B) all printing expenses, (C) all fees and disbursements of
counsel and independent public accountants for Dura, (D) all NASD and
"Blue Sky" fees and expenses (including fees and expenses of counsel in
connection with any "Blue Sky" surveys) and (E) the entire expense of any
special audits incident to or required in connection with any such
registration.
Section 8. EXCHANGE, TRANSFER OR ASSIGNMENT OF WARRANTS.
(a) Warrants may be exchanged, at the option of the Holder thereof,
upon presentation and surrender to the Warrant Agent of the Warrant
Certificate evidencing such Warrants, for other Warrant Certificates of
different denominations, entitling the Holder or Holders thereof to purchase
in the aggregate the same number of Warrant Shares as did such surrendered
Warrant Certificate. Subject to the preceding sentence, a Warrant
Certificate may be divided or combined with other Warrant Certificates that
carry the same rights upon presentation thereof at the office of the Warrant
Agent, together with written notice signed by the Holder or Holders thereof
specifying the names and denominations in which new Warrant Certificates are
to be issued.
(b) Warrants may be assigned or transferred, at the option of the
Holder thereof, upon surrender of the Warrant Certificates evidencing such
Warrants to the Warrant Agent, accompanied (if so required by Dura) by a
written instrument or instruments of transfer in form satisfactory to Dura
and the Warrant Agent, duly executed by such Holder or by a duly authorized
representative or attorney, such signature to be guaranteed by a commercial
bank or trust company having an office in the United States, by a broker or
a dealer that is a member of the NASD or by a member of a national
securities exchange (any such entity, an "Eligible Institution"). Upon any
such registration of transfer, a new Warrant Certificate shall be issued to
the transferee and the surrendered Warrant Certificate shall be cancelled by
the Warrant Agent. Warrant Certificates so cancelled shall be delivered by
the Warrant Agent to Dura from time to time or otherwise disposed of by the
Warrant Agent in a manner satisfactory to Dura.
(c) Any transfer, exchange or assignment of Warrants (including any new
Warrants issued pursuant to Section 10 hereof) shall be without charge
(other than the cost of any transfer tax) to the
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Holder and any new Warrant or Warrants issued pursuant to this Section 8
shall be dated the date hereof.
Section 9. PAYMENT OF TAXES. Dura shall pay all documentary stamp taxes
attributable to the original issuance of the Warrants and of Warrant Shares;
PROVIDED, HOWEVER, that Dura shall not be required to (a) pay any tax which may
be payable in respect of any transfer involving the transfer and delivery of
Warrant Certificates or the issuance or delivery of certificates for Warrant
Shares in a name other than that of the Holder of the Warrant Certificate
surrendered upon the exercise of a Warrant or (b) issue or deliver any
certificate for Warrant Shares upon the exercise of any Warrants until any such
tax required to be paid under clause (a) shall have been paid, all such tax
being payable by the Holder of such Warrant at the time of surrender.
Section 10. MUTILATED OR MISSING WARRANT CERTIFICATES. In the event that
any Warrant Certificate shall be mutilated, lost, stolen or destroyed, Dura may
in its sole discretion issue, and the Warrant Agent shall countersign and
deliver, upon the request of the Holder of the Warrants evidenced by such
Warrant Certificate, in exchange for and upon cancellation of any such mutilated
Warrant Certificate, or in substitution for any such lost, stolen or destroyed
Warrant Certificate, a new Warrant Certificate of like tenor and evidencing the
same number of Warrant Shares as were evidenced by such mutilated, lost, stolen
or destroyed Warrant Certificate, but only upon receipt of evidence satisfactory
to the Warrant Agent of such loss, theft or destruction of such Warrant
Certificate and an indemnity, if requested, reasonably satisfactory to it. An
applicant for such substitute Warrant Certificate shall also comply with such
other reasonable regulations and pay such other reasonable charges as Dura or
the Warrant Agent may prescribe. Any such new Warrant Certificate shall
constitute an original contractual obligation of Dura, whether or not the
allegedly mutilated, lost, stolen or destroyed Warrant Certificate shall be
enforceable by any person at any time thereafter.
Section 11. NO STOCK RIGHTS: LIMITATION OF LIABILITY. No Holder of any
Warrant shall, by virtue thereof, be entitled to the rights of a stockholder of
Dura, unless and until exercise of such Warrant has occurred. No provisions of
any Warrant or of this Agreement, in the absence of affirmative action by the
Holder of any such Warrant to exercise such Warrant, and no mere enumeration
herein of the rights or privileges of such Holder, shall give rise to any
liability of such Holder for the Exercise Price or as a stockholder of Dura,
whether such liability is asserted by Dura or by its creditors.
Section 12. ANTIDILUTION PROVISIONS.
(a) The Exercise Price and the number of Warrant Shares that may be
purchased upon the exercise of a Warrant shall be subject to change or
adjustment from time to time as follows:
(i) STOCK DIVIDENDS AND STOCK SPLITS. If at any time during the
Exercise Period (A) Dura shall fix a record date for the issuance of any
dividend payable in shares of Common Stock or (B) the number of shares of
Common Stock shall have been increased by a subdivision or split-up of
shares of Common Stock, then, on the record date fixed for the
determination of holders of Common Stock entitled to receive such
dividend or immediately after the effective date of such subdivision or
split-up, as the case may be, the number of shares to be delivered upon
exercise of any Warrant will be appropriately increased so that each
Holder thereafter will be entitled to receive the number of shares of
Common Stock that such Holder would have owned immediately following such
action had such Warrant been exercised immediately prior thereto, and the
Exercise Price will be appropriately adjusted. The time of occurrence of
an event giving rise to an adjustment made pursuant to this
Section 12(a)(i) shall, in the case of a stock dividend, be deemed to be
the record date thereof and shall, in the case of a subdivision or
split-up, be deemed to be the effective date thereof.
(ii) COMBINATION OF STOCK. If the number of shares of Common Stock
outstanding at any time during the Exercise Period is decreased by a
combination of the outstanding shares of
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Common Stock, then, immediately after the effective date of such
combination, the number of shares of Common Stock to be delivered upon
exercise of any Warrant shall be appropriately decreased so that the
Holder of such Warrant thereafter will be entitled to receive the number
of shares of Common Stock that such Holder would have owned immediately
following such action had such Warrant been exercised immediately prior
thereto, and the Exercise Price shall be appropriately adjusted.
(iii) REORGANIZATION. If, at any time during the Exercise Period,
any capital reorganization of Dura, or any reclassification of the Common
Stock, or any consolidation of Dura with, or merger of Dura with or into,
any other person or any sale, lease or other transfer of all or
substantially all of the assets of Dura to any other person (including
any individual, partnership, limited liability company, joint venture,
corporation, trust or group thereof) shall be effected in such a way that
upon consummation of such transaction the holders of the Common Stock
shall be entitled to receive stock, securities or assets with respect to
or in exchange for Common Stock, then, upon exercise of any Warrant in
accordance with the terms of this Agreement and the Warrant Certificate,
the Holder of such Warrant shall have the right to receive the kind and
amount of stock, securities or assets receivable upon such
reorganization, reclassification, consolidation, merger or sale, lease or
other transfer by a holder of the number of shares of Common Stock that
such Holder would have been entitled to receive upon exercise of such
Warrant pursuant to Section 3 hereof had such Warrant been exercised
immediately prior to such reorganization, reclassification,
consolidation, merger or sale, lease or other transfer, subject to
additional adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 12(a)(iii).
(iv) SPECIAL DIVIDENDS. If, at any time during the Exercise Period
(other than in a dissolution or liquidation), Dura shall distribute to
holders of Common Stock evidences of indebtedness of Dura, securities or
other assets (other than cash dividends payable out of retained earnings)
by way of a dividend on outstanding shares of Common Stock, then the
Exercise Price shall be adjusted so that immediately after the date fixed
by Dura as the record date in respect of such distribution, such Exercise
Price shall equal the price determined by multiplying the Exercise Price
in effect immediately prior to the close of business on the record date
for the determination of the stockholders entitled to receive such
distribution by a fraction, (A) the numerator of which shall be the
Closing Price on such record date less the then fair market value as
determined reasonably and in good faith by the board of directors of Dura
of the portion of the securities or other assets distributed applicable
to one share of Common Stock and (B) the denominator of which shall be
such Closing Price. Such adjustment shall become effective on such record
date. In such case, no adjustment shall be made to the number of Warrant
Shares to be received upon the exercise of a Warrant.
(v) RIGHTS OFFERING. If, at any time during the Exercise Period,
Dura shall issue or sell or fix a record date for the issuance of rights,
options, warrants or convertible or exchangeable securities to all
holders of Common Stock entitling the holders thereof to subscribe for or
purchase Common Stock (or securities convertible into or exchangeable for
Common Stock), in any such case, at a price per share (or having a
conversion price per share) that, together with the value (if for
consideration other than cash, as reasonably determined in good faith by
the board of directors of Dura) of any consideration paid for any such
rights, options, warrants or convertible or exchangeable securities, is
greater than the Exercise Price and less than the Closing Price on the
date of such issuance or sale or on such record date, as the case may be,
then, immediately after the date of such issuance or sale or on such
record date, the number of shares to be delivered upon exercise of the
Warrants shall be appropriately increased so that the Holder, thereafter
during the Exercise Period, shall be entitled to receive the number of
shares of Common Stock determined by multiplying the number of shares
such Holder would have been
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entitled to receive immediately before the date of such issuance or sale
or such record date by a fraction, (A) the numerator of which shall be
the number of shares of Common Stock outstanding on such date plus the
number of additional shares of Common Stock offered for subscription or
purchase (or into which the convertible or exchangeable securities so
offered are initially convertible or exchangeable) and (B) the
denominator of which shall be the number of shares of Common Stock
outstanding on such date plus the number of shares of Common Stock that
the aggregate offering price of the total number of shares so offered for
subscription or purchase (or the aggregate initial conversion price of
the convertible securities so offered) would purchase at such Closing
Price, and the Exercise Price shall be appropriately adjusted. The time
of occurrence of an event giving rise to an adjustment pursuant to this
Section 12(a)(v) shall, in the case of a dividend, be the record date and
shall, in the case of an issuance or sale, be the date of such issuance
or sale.
(vi) NO ADJUSTMENTS TO EXERCISE PRICE. No adjustment of the
Exercise Price in accordance with the provisions of paragraph (i), (ii),
(iii), (iv) or (v) above shall be made in an amount of less than $0.01;
PROVIDED, HOWEVER, that the amount by which any adjustment is not made by
reason of the provisions of this Section shall be carried forward and
taken into account at the time of any subsequent adjustment in the
Exercise Price.
(vii) READJUSTMENTS, ETC.. If an adjustment is made under
paragraph (i), (ii), (iii), (iv) or (v) above, and the event to which the
adjustment relates does not occur, then any adjustments in the Exercise
Price or Warrant Shares that were made in accordance with such paragraphs
shall be adjusted back to the Exercise Price and the number of Warrant
Shares that were in effect immediately prior to the record date for such
event.
(b) NO IMPAIRMENT; CERTAIN EVENTS.
(i) Dura shall not, by amendment of its certificate of incorporation
or through any reorganization, reclassification, consolidation, merger,
sale, lease or transfer of assets, issuance or sale of securities or any
other action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed under this Section 12 by Dura,
but will at all times in good faith assist in the carrying out of all the
provisions of this Section 12 and in the taking of all such action as may
be necessary or appropriate in order to protect the rights of the Holders
against impairment.
(ii) If any event occurs as to which the provisions of
paragraph (a) of this Section 12 are not strictly applicable but with
respect to which, in the reasonable, good faith opinion of Dura, an
adjustment of the Exercise Price, and the number of Warrant Shares
issuable upon the exercise of a Warrant, would fairly protect the
exercise rights of the Holders in accordance with the basic intent and
principles of such provisions or as to which an adjustment pursuant to
such provisions, if strictly applied, would not fairly protect the
purchase rights of the Holders in accordance with the basic intent and
principles of such provisions, then Dura shall make any computation
required under this Section 12(b)(ii) with respect to any such adjustment
on a basis consistent with the basic intent and principles established by
the provisions of this Section 12, necessary to preserve, without
dilution, the exercise rights of the Holders. Dura shall appoint a firm
of independent certified public accountants (which may be the regular
auditors of Dura) of recognized national standing, which firm shall
review the computation of Dura prepared pursuant to this
Section 12(b)(ii) and prepare a report signed by such firm, which shall
be provided to Dura and which shall acknowledge that the adjustment
calculation prepared by Dura is arithmetically correct. Such report shall
be conclusive evidence of the correctness of the computation made under
this Section 12(b)(ii). Upon receipt of such report, Dura shall forthwith
cause to be made, or shall act to prevent, the adjustments described in
such calculation.
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Section 13. OFFICER'S CERTIFICATE. Whenever the number of Warrant Shares
that may be purchased upon exercise of the Warrant is adjusted as required by
the provisions of this Agreement, Dura shall file forthwith with the Warrant
Agent and with its Secretary or Assistant Secretary at its principal office an
officer's certificate indicating the adjusted number of Warrant Shares that may
be purchased upon exercise of a Warrant and the adjusted Exercise Price,
determined as herein provided, and setting forth in reasonable detail the facts
requiring such adjustment and the manner of computing such adjustment. Each such
officer's certificate shall be made available at all reasonable times for
inspection by the Holders. Dura shall, forthwith after each such adjustment,
cause a copy of such officer's certificate to be mailed to the Holders. The
Warrant Agent may rely on such certificate without further inquiry and shall not
be deemed to have knowledge of any adjustment unless and until it shall have
received such certificate.
Section 14. NOTICE OF CERTAIN EVENTS. In the event that, at any time
during the Exercise Period:
(a) Dura shall pay any dividend on Common Stock that is payable in
stock, or make any distribution (other than regular cash dividends) to the
holders of Common Stock;
(b) Dura authorizes the issuance to all holders of Common Stock of
rights or warrants to subscribe for or purchase shares of Common Stock or
any other subscription rights or warrants;
(c) Dura authorizes the distribution to all holders of Common Stock of
any of Dura's assets, including evidences of its indebtedness or assets
(other than cash dividends payable out of retained earnings);
(d) there shall be any capital reorganization or reclassification of
the capital stock of Dura or consolidation or merger of Dura with another
person (other than a consolidation or merger of Dura with a subsidiary of
Dura in which Dura is the surviving or continuing corporation and there is
no change with respect to the Common Stock), or sale, conveyance or transfer
of all or substantially all of Dura's property and assets (other than a
sale, conveyance or transfer of such assets to an Affiliate (within the
meaning of the Securities Act));
(e) there shall be a voluntary or involuntary dissolution, liquidation,
bankruptcy, assignment for the benefit of creditors or winding up of Dura;
or
(f) Dura shall propose to take any other action, or any other event
occurs, that would require an adjustment pursuant to Section 12 hereof of
the Exercise Price or the number of Warrant Shares that may be purchased
upon the exercise of a Warrant; then Dura will cause to be mailed to the
Holder and the Warrant Agent by first-class mail addressed to the Warrant
Agent at the address set forth in Section 24(b) and such Holder at the
address appearing in the Warrant Register, at least twenty days (or ten days
in any case specified in clauses (a), (b) or (c) above) before the
applicable record or effective date hereinafter specified, a notice stating
(A) the date as of which the holders of Common Stock of record entitled to
receive any such dividends, rights, warrants or distributions are to be
determined or (B) the date on which any such consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding-up is expected to
become effective, and the date as of which it is expected that holders of
Common Stock of record will be entitled to exchange their shares of Common
Stock for securities or other property, if any, deliverable upon such
reorganization, reclassification, consolidation, merger, conveyance,
transfer, dissolution, liquidation or winding-up.
Section 15. LISTING ON SECURITIES EXCHANGES. Dura will list on each
national securities exchange or, if not so listed, will list for quotation on
the Nasdaq National Market, or such other over-the-counter quotation system on
which any Common Stock may at any time be listed, all shares of the Common Stock
from time to time issuable upon the exercise of the Warrants, and will maintain
such listing so long as any other shares of Common Stock are so listed; and Dura
shall so list on each national securities exchange or the Nasdaq National
Market, or such other over-the-counter quotation system, and shall maintain such
listing of, any other shares of capital stock of Dura issuable upon the exercise
of the Warrants if and so long as any shares of capital stock of the same class
are listed on such national securities exchange or are
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traded on the Nasdaq National Market or such over-the-counter quotation system.
Any such listing or quotation will be at Dura's expense.
Section 16. AVAILABILITY OF INFORMATION. Dura will comply with all
applicable periodic public information reporting requirements of the Commission
to which it may from time to time be subject.
Section 17. WARRANT AGENT.
(a) MERGER, CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT.
(i) Any entity into which the Warrant Agent may be merged or with
which it may be consolidated, or any entity resulting from any merger or
consolidation to which the Warrant Agent shall be a party, or any entity
succeeding to the business of the Warrant Agent, shall be the successor
to the Warrant Agent hereunder without the execution or filing of any
paper or any further act on the part of any of the parties hereto;
PROVIDED, HOWEVER, that such successor must be otherwise eligible for
appointment as a Warrant Agent hereunder. In the event that at the time
such successor to the Warrant Agent shall succeed to the agency created
by this Agreement any of the Warrant Certificates shall have been
countersigned but not delivered, any such successor to the Warrant Agent
may adopt the countersignature of such predecessor Warrant Agent and
deliver such Warrant Certificates so countersigned; and in the event that
at the time of such succession any of the Warrant Certificates shall not
have been countersigned, any such successor to the Warrant Agent may
countersign such Warrant Certificates either in the name of such
predecessor Warrant Agent or in the name of such successor Warrant Agent;
and in any event, all such Warrant Certificates shall have the full force
and effect provided in such Warrant Certificates and in this Agreement.
(ii) In the case that at any time the name of the Warrant Agent
shall be changed and at such time one or more of the Warrant Certificates
shall have been countersigned but not delivered, the Warrant Agent may
adopt the countersignature under its prior name and deliver Warrant
Certificates so countersigned; in the event that at that time one or more
of the Warrant Certificates shall not have been countersigned, the
Warrant Agent may countersign such Warrant Certificates either in its
prior name or in its changed name; and in all such cases such Warrant
Certificates shall have the full force and effect provided in such
Warrant Certificates and in this Agreement.
(b) DUTIES OF WARRANT AGENT. The Warrant Agent undertakes only the
duties and obligations expressly imposed by this Agreement upon the
following terms and conditions, by which the Holders, by their acceptance of
Warrants, and Dura, shall be bound:
(i) The Warrant Agent shall not be responsible or liable for any
failure of Dura to comply with any of the covenants to be complied with
by Dura that are contained in this Agreement or in the Warrant
Certificates.
(ii) The Warrant Agent may consult at any time with counsel
satisfactory thereto (who may be legal counsel to Dura), and the advice
or opinion of such counsel shall be full and complete authorization and
protection to the Warrant Agent (including, but not limited to, any
liability or responsibility to Dura or to any Holder) in respect of any
action taken, suffered or omitted by the Warrant Agent hereunder in good
faith and in accordance with the opinion or the advice of such counsel,
provided that the Warrant Agent shall have exercised reasonable care in
the selection and continued employment of such counsel.
(iii) The Warrant Agent shall incur no liability or responsibility
to Dura or to any Holder for any action taken in reliance on any notice,
resolution, waiver, consent, order, certificate or other paper, document
or instrument believed by the Warrant Agent to be genuine and to have
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been signed, sent or presented by the party or parties thereto or
otherwise upon the advise of counsel as set forth in Section 17.
(iv) Dura shall (A) pay to the Warrant Agent reasonable compensation
for all services rendered by the Warrant Agent in the execution,
preparation, delivery and amendment of this Agreement (including, but not
limited to, legal fees), (B) reimburse the Warrant Agent for all
expenses, taxes (other than taxes based on such Warrant Agent's net
income), governmental charges, and other charges of any kind and nature,
incurred by the Warrant Agent in the performance of this Agreement,
(C) advance to the Warrant Agent, upon request, funds to pay cash in lieu
of fractional shares of Common Stock issuable upon exercise of Warrants
and (D) indemnify the Warrant Agent and save it harmless against any and
all losses, expenses, damages, settlements, fines, penalties, claims,
demands or liabilities, including judgments, costs and counsel fees,
arising out of or in connection with its agency under this Agreement and
the cost and expenses of defending against any claim of liability arising
therefrom, directly or indirectly, except as a result of its gross
negligence or bad faith, as finally determined by a court of competent
jurisdiction. Notwithstanding anything contained herein, in no case shall
the Warrant Agent be liable for special, punitive, indirect, incidental
or consequential loss or damage of any kind whatsoever (including, but
not limited to, lost profits), even if the Warrant Agent has been advised
of the likelihood of such loss or damage. The indemnity provided herein
shall survive the termination of this Warrant Agreement or the
resignation or discharge of the Warrant Agent, and the termination and
the expiration of the Warrants. The costs and expenses incurred in
enforcing this right of indemnification shall be paid by Dour. Any
liability of the Warrant Agent under this Warrant Agreement will be
limited to the amount of fees paid by Dour to the Warrant Agent.
(v) The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or to take any other action likely to
involve the incurrence by the Warrant Agent of expenses unless Dura or
one or more Holders shall have furnished the Warrant Agent with
reasonable security and indemnity for any costs and expenses which may be
incurred. All rights of action under this Agreement or under any of the
Warrants may be enforced by the Warrant Agent without the possession of
any of the Warrants or the production thereof at any trial or other
proceeding relative thereto, and any such action, suit or proceeding
instituted by the Warrant Agent shall be brought in its name as Warrant
Agent, and any recovery of judgment shall be for the ratable benefit of
the Holders, as their respective rights or interests may appear.
(vi) The Warrant Agent and any stockholder, director, officer or
employee of the Warrant Agent may buy, sell or deal in any of the
Warrants or other securities of Dura, or become peculiarly interested in
any transaction in which Dura may be interested or contract with or lend
money or otherwise act as fully and freely as though it were not the
Warrant Agent under this Agreement. Nothing herein shall preclude the
Warrant Agent from acting in any other capacity for Dura or for any other
legal entity.
(vii) The Warrant Agent shall act hereunder solely as agent, and its
duties shall be determined solely by the provisions hereof. The Warrant
Agent shall not be liable or responsible for any actions which it may
take or refrain from taking, in connection with this Agreement, except as
result from its own gross negligence or bad faith and fairly determined
by a court of competent jurisdiction.
(viii) The Warrant Agent shall make copies of this Agreement
available for inspection at its offices designated for such purpose
during normal business hours and shall provide copies to Holders upon
their written request.
(c) CHANGE OF WARRANT AGENT. The Warrant Agent may resign and be
discharged from its duties under this Agreement by providing both
(i) written notice to Dura and (ii) written notice, sent at the Company's
expense by first-class mail, postage prepaid, to each Holder at such
Holder's address
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appearing in the Warrant Register, which notice shall specify a date when
such resignation shall take effect and shall be sent at least two weeks
prior to the date so specified. If the Warrant Agent shall resign or
otherwise become incapable of acting, Dura shall appoint a successor
thereto. If Dura shall fail to make such appointment within a period of
thirty days after receiving written notification of such resignation or
incapacity by the Warrant Agent or by any Holder (which Holder shall, with
such notice, submit Warrant Certificates held thereby for inspection by
Dura), then any Holder may apply to any court of competent jurisdiction for
the appointment of a successor to the Warrant Agent. Pending appointment of
a successor to the Warrant Agent, either by Dura or by a court, the duties
of the Warrant Agent shall be carried out by Dura. After such appointment,
the successor Warrant Agent shall be vested with such powers, rights, duties
and responsibilities as such Warrant Agent would have been vested had such
Warrant Agent been named originally as Warrant Agent hereunder, without
further act or deed. The former Warrant Agent shall deliver and transfer to
the successor Warrant Agent any property at the time held by such former
Warrant Agent hereunder and shall execute and deliver any further assurance,
conveyance, act or deed necessary therefor. Failure to provide any notice
called for in this Section 17, however, or any defect therein, shall not
affect the legality or validity of the resignation or removal of the Warrant
Agent or the appointment of a successor Warrant Agent.
Section 18. IDENTITY OF TRANSFER AGENT. Forthwith upon the appointment
after the date hereof of any transfer agent for the Common Stock, or of any
subsequent transfer agent for shares of the Common Stock, Dura will file with
the Warrant Agent a statement setting forth the name and address of such
transfer agent.
Section 19. SUCCESSORS. All the covenants and provisions of this Agreement
by or for the benefit of Dura, the Warrant Agent or any of the Holders shall
bind and inure to the benefit of their respective successors, assigns, heirs and
personal representatives.
Section 20. TERMINATION. This Agreement shall terminate at 5:00 p.m., New
York City time, on the Expiration Date or upon such earlier date on which all
Warrants have been exercised or redeemed, except that the Warrant Agent shall
account to Dura for all cash held by it at 5:00 p.m., New York City time, on
such Expiration Date or such other date.
Section 21. HEADINGS. The headings of sections of this Agreement have been
inserted for convenience of reference only, are not to be considered a part
hereof, and shall in no way modify or restrict any of the terms or provisions
hereof.
Section 22. AMENDMENTS. This Agreement may be amended only by both
(i) the written consent of Dura and (ii) the affirmative vote or the written
consent of Holders holding not less than two-thirds in interest of the then
outstanding Warrants; PROVIDED, HOWEVER, that, except as expressly provided
herein, this Agreement may not be amended to change (a) the Exercise Price,
(b) the Exercise Period, (c) the number or type of securities to be issued upon
the exercise of the Warrants or (d) the provisions of this Section 22, without
the consent of each Holder and, provided further, that this Agreement may not be
amended to change or increase the Warrant Agent duties, liabilities or
obligations, without the written consent of the Warrant Agent.
Section 23. COUNTERPARTS. This Agreement may be executed in any number of
counterparts each of which when so executed shall be deemed to be an original,
but all of which taken together shall constitute one and the same agreement.
Section 24. NOTICES.
(a) Any notice required by the provisions of this Agreement to be
provided to Dura by the Warrant Agent or by any Holder shall be deemed given
if deposited in the United States mail, first
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class postage prepaid, addressed (until another address is filed in writing
by Dura with the Warrant Agent) as follows:
Dura Pharmaceuticals Inc.
7475 Lusk Boulevard
San Diego, CA 92121
Attention: Corporate Secretary
(b) Any notice required by the provisions of this Agreement to be
provided to the Warrant Agent by Dura or by any Holder shall be deemed given
if deposited in the United States mail, first class postage prepaid,
addressed (until another address is filed in writing by the Warrant Agent
with Dura or notice of the address of a successor Warrant Agent is provided
pursuant to this Agreement) as follows:
ChaseMellon Shareholder Services, L.L.C.
400 South Hope Street, Fourth Floor
Los Angeles, California 90071
Attn: Sharon Knepper
(c) Any notice required by the provisions of this Agreement to be
provided to any Holder by Dura or by the Warrant Agent shall be deemed given
if deposited in the United States mail, first class postage prepaid,
addressed to such Holder at its address set forth in the Warrant Register.
Any notice given in conformity with this Section 24 shall be deemed
effective three days after mailing.
Section 25. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give to any person or corporation, other than Dura, the Warrant
Agent and the Holders, any legal or equitable right, remedy or claim under this
Agreement; but this Agreement shall be for the sole and exclusive benefit of
Dura, the Warrant Agent and the Holders.
Section 26. GOVERNING LAW. This Agreement and each Warrant Certificate
shall be deemed to be a contract made under and governed by and construed in
accordance with the laws of the State of New York, including Section 5-1402 of
the New York General Obligations Law.
IN WITNESS WHEREOF, the parties hereto have duly caused this Agreement to be
signed by its duly authorized officers.
DURA PHARMACEUTICALS, INC.
By:
----------------------------------------------
Name:
----------------------------------------------
Title:
----------------------------------------------
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
as Warrant Agent
By:
----------------------------------------------
Name:
----------------------------------------------
Title:
----------------------------------------------
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EXHIBIT A
FORM OF WARRANT CERTIFICATE
VOID AFTER 5:00 P.M., Warrant No.
NEW YORK CITY TIME, Warrants
ON , 2005
CUSIP
A-42
DURA PHARMACEUTICALS, INC.
WARRANTS TO PURCHASE SHARES OF COMMON STOCK
THIS CERTIFIES THAT, FOR VALUE RECEIVED, ________, or registered assigns, is
the registered holder of the number of Warrants (the "Warrants") set forth
above. Each Warrant entitles the holder thereof to purchase from Dura
Pharmaceuticals, Inc., a Delaware corporation ("Dura"), subject to the terms and
conditions hereinafter set forth and in the Warrant Agreement hereinafter
referred to, ________ of one fully paid and nonassessable share of Common Stock,
par value $.001 per share, of Dura (the "Common Stock"). The Warrants may be
exercised at any time or from time to time on or after the date hereof and will
expire at 5:00 p.m., New York City time, on _________, 2005 (the "Expiration
Date"). Upon the Expiration Date, all rights evidenced by the Warrants shall
cease and the Warrants shall become void. Subject to the provisions of the
Warrant Agreement, the holder of each Warrant shall have the right to purchase
from Dura until the Expiration Date (and Dura shall issue and sell to such
holder of a Warrant) ________ of one fully paid and nonassessable share of
Common Stock (a "Warrant Share") at an exercise price (the "Exercise Price") of
$________ per share upon surrender of this Warrant Certificate to Dura at the
office of the Warrant Agent (as defined in the Warrant Agreement) designated by
the Warrant Agent for such purpose with the form of election to purchase
appearing on this Warrant Certificate duly completed and signed, together with
payment of the Exercise Price by certified or official bank check payable to the
order of Dura.
The Exercise Price and the number of Warrant Shares that may be purchased
upon the exercise of the Warrants and the number of Warrants outstanding are
subject to change or adjustment upon the occurrence of certain events set forth
in the Warrant Agreement.
REFERENCE IS MADE TO THE PROVISIONS OF THIS WARRANT CERTIFICATE SET FORTH ON THE
REVERSE SIDE HEREOF, AND SUCH FURTHER PROVISIONS SHALL FOR ALL PURPOSES HAVE THE
SAME EFFECT AS THOUGH FULLY SET FORTH ON THE FRONT OF THIS CERTIFICATE.
This Warrant Certificate shall not be valid unless countersigned by the
Warrant Agent.
This Warrant Certificate shall be deemed to be a contract made under,
governed by and construed in accordance with the laws of the State of New York,
including Section 5-1402 of the New York General Obligations Law.
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IN WITNESS WHEREOF, Dura has caused this Warrant Certificate to be executed
by its duly authorized officers.
Dated: , DURA PHARMACEUTICALS, INC.
--------------------------------------
By:
--------------------------------------
Title:
ATTEST:
--------------------------------------
By:
--------------------------------------
Title:
Countersigned:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
as Warrant Agent
--------------------------------------
Authorized Signature
By:
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[REVERSE SIDE]
DURA PHARMACEUTICALS, INC.
This Warrant Certificate is subject to all of the terms and conditions of
the Warrant Agreement, dated as of _____________, 2000 (the "Warrant
Agreement"), by and between Dura and the Warrant Agent, to all of which terms
and conditions the registered holder of the Warrant consents by acceptance
hereof. The Warrant Agreement is incorporated herein by reference and made a
part hereof and reference is made to the Warrant Agreement for a full
description of the rights, limitations of rights, obligations, duties and
immunities of the Warrant Agent, Dura and the registered holders of Warrant
Certificates. Copies of the Warrant Agreement are available for inspection at
the principal office of the Warrant Agent or may be obtained upon written
request addressed to the Warrant Agent at its office designated for such
purpose.
Dura shall not be required upon the exercise of the Warrants evidenced by
this Warrant Certificate to issue fractional shares, but shall make adjustment
therefore in cash on the basis of the current market value of any fractional
interest as provided in the Warrant Agreement.
Dura has agreed to cause a registration statement under the Securities Act
of 1933, as amended, covering the Warrants and Warrant Shares to be effective
through the termination of the Exercise Period (as defined in the Warrant
Agreement) or until such earlier time as no Warrants remain outstanding, and to
register or qualify the Warrants and the Warrant Shares to be delivered upon
exercise of the Warrants under the laws of each jurisdiction in which such
registration or qualification is necessary.
The Warrant Certificate may be exchanged, at the option of the holder upon
presentation and surrender hereof to the Warrant Agent, for other Warrant
Certificates of different denominations, entitling the holder hereof to purchase
in the aggregate the same number of Warrant Shares. The Warrants may be assigned
or transferred upon surrender of this Warrant Certificate to the Warrant Agent,
accompanied (if so required by Dura) by the form of assignment appearing on this
Warrant Certificate duly completed and signed, whereupon the Warrant Agent shall
execute and deliver to the transferee a new Warrant Certificate entitling the
transferee to purchase the same number of Warrant Shares. If the Warrants
evidenced by this Warrant Certificate shall be exercised in part, the holder
hereof shall be entitled to receive upon surrender hereof another Warrant
Certificate or Certificates evidencing the number of Warrants not so exercised.
The holder of this Warrant Certificate shall not, by virtue hereof, be
entitled to any of the rights of a stockholder in Dura, either at law or in
equity, and the rights of the holder are limited to those expressed in the
Warrant Agreement.
If this Warrant Certificate shall be surrendered for exercise within any
period during which the transfer books for the Common Stock are closed for any
purpose, Dura shall not be required to make delivery of certificates for shares
purchasable upon such transfer until the date of the reopening of said transfer
books.
Each holder of this Warrant Certificate, by accepting the same, consents and
agrees with Dura, the Warrant Agent and with every other holder of a Warrant
Certificate that:
(a) this Warrant Certificate is transferable on the registry books of the
Warrant Agent only upon the terms and conditions set forth in the Warrant
Agreement; and
(b) Dura and the Warrant Agent shall deem and treat the person in whose
name this Warrant Certificate is registered as the absolute owner hereof
(notwithstanding any notation of ownership or other writing hereon made by
anyone other than Dura or the Warrant Agent) for all purposes whatever and
neither Dura nor the Warrant Agent shall be affected by any notice to the
contrary.
This Warrant Certificate shall not be valid or enforceable for any purpose
until it shall have been countersigned by the Warrant Agent.
A-45
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
ABBREVIATION DEFINED TERM
- ------------ ------------------------------------------------------------
TEN COM Tenants in common
Joint tenants with right of survivorship and not as tenants
JT TEN in common
CUST Custodian
U/B/M/A Uniform Gifts to Minors Act
Additional abbreviations may also be used though not in the above list.
A-46
ELECTION TO PURCHASE
(TO BE EXECUTED UPON EXERCISE OF WARRANT)
DATED __________, _______
The undersigned hereby irrevocably exercises this Warrant to purchase
________ shares of Common Stock and herewith makes payment of $________ in
payment of the Exercise Price thereof on the terms and conditions specified in
this Warrant Certificate, surrenders this Warrant Certificate and all right,
title, and interest therein to Dura and directs that the Warrant Shares
deliverable upon the exercise of such Warrants be registered in the name and at
the address specified below and delivered thereto.
Name: __________________________________________________________________________
(Please Print)
Address:________________________________________________________________________
City, State and Zip Code:_______________________________________________________
If such number of Warrant Shares is less than the aggregate number of
Warrant Shares purchasable hereunder, the undersigned requests that a new
Warrant Certificate representing the balance of such Warrant Shares to be
registered in the name and at the address specified below and delivered thereto.
Name:___________________________________________________________________________
(Please Print)
Address:________________________________________________________________________
City, State and Zip Code:_______________________________________________________
Taxpayer's Identification or Social Security Number:____________________________
Signature(s)
--------------------------------------
--------------------------------------
NOTE: The above signature(s) must correspond with the name as written upon
the face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatsoever. If the certificate representing the
Warrant Shares or any Warrant Certificate representing Warrants not exercised is
to be registered in a name other than that in which this Warrant Certificate is
registered, the signature of the holder hereof must be guaranteed.
Signature(s) Guaranteed:
- -----------------------------------------
A-47
ASSIGNMENT
FOR VALUE RECEIVED, _____________ hereby sells, assigns and transfers to:
Name: __________________________________________________________________________
(Please Print)
Address: _______________________________________________________________________
City, State and Zip Code: ______________________________________________________
Taxpayer's Identification or Social Security Number: ______________ the
right to purchase up to ____________ Warrant Shares represented by this Warrant
and does hereby irrevocably constitute and appoint ____________ to transfer said
Warrant with full power of substitution in the premises.
Dated: ,
Signature(s) of registered Holder
NOTE: The above signature(s) must correspond with the name as written upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatsoever.
Signature(s) Guaranteed:
A-48
EXHIBIT B
TO ANNEX A
TERMS OF THE PARENT WARRANTS
Expiration Date Sixty months from the Closing Date.
Exercise Price per Share of $17.94 which equals $14.35 (the "Measurement Price")
Parent Common Stock multiplied by 1.25.
Fraction of a share of Parent To be determined based on the Black-Scholes Option Pricing
Common Stock issued upon Model such that each Share shall receive $2.50 in calculated
exercise of each Parent value, subject to the effects of the Collar Range referred
Warrant to in the following paragraph. The Black-Scholes valuation
shall use an underlying asset value equal to the Measurement
Price; a volatility factor of 65%; a sixty-month term from
date of calculation and a risk-free rate equal to 6.43%.
Collar A collar around the Measurement Price of plus or minus
twenty percent (the "Collar Range"). If the average closing
price of the Parent Common Stock for the ten consecutive
trading days ending on the day prior to the day during which
the Special Meeting occurs is within the Collar Range
(including the end points), then the Black-Scholes valuation
described in the preceding paragraph shall not be adjusted
and the fraction of a share of Parent Common Stock issued
upon exercise of each Parent Warrant shall be the same as
determined above at the time of the public announcement. If
the Closing Price is above or below the Collar Range, then
the calculated value described in the preceding paragraph
shall be at the high end of the Collar Range or at the low
end of the Collar Range, respectively, and the fraction of a
share of Parent Common Stock shall be correspondingly
adjusted.
A-49
ANNEX B
March 20, 2000
Special Committee of the Board of Directors
Spiros Development Corporation II, Inc.
7475 Lusk Boulevard
San Diego, California 92121
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the callable common stock of Spiros Development
Corporation II, Inc., a Delaware corporation ("Spiros" or the "Company"), of the
Consideration (as defined below) to be received by such holders pursuant to the
terms of that certain Agreement and Plan of Merger, to be dated as of March 20,
2000 (the "Agreement"), by and among the Company, Dura Pharmaceuticals Inc., a
Delaware corporation ("Acquirer"), and Starfish Acquisition Corp., a wholly
owned subsidiary of Acquirer ("Merger Sub").
As more specifically set forth in the Agreement, and subject to the terms,
conditions and adjustments set forth in the Agreement, Acquirer has agreed to
acquire Spiros through the merger of Merger Sub with and into Spiros (the
"Merger"), with Spiros continuing as the surviving company as a wholly owned
subsidiary of Acquirer. At the Effective Time (as defined in the Agreement),
each outstanding share of Spiros callable common stock (other than dissenting
shares) will be converted into the right to receive $13.25 in cash and a warrant
(the "Parent Warrant") to purchase shares of Acquirer common stock, the number
and purchase price per share of which shall be determined in accordance with the
formula set forth in the Agreement (collectively, the "Consideration"), and each
outstanding share of Spiros special common stock will be cancelled for no
consideration.
SG Cowen Securities Corporation ("SG Cowen"), as part of its investment banking
business, is continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. In the
ordinary course of our business, we and our affiliates may actively trade the
securities of the Company and Acquirer for our own account and for the accounts
of our customers and, accordingly, may at any time hold a long or short position
in such securities.
We are acting as financial advisor to the Special Committee of the Board of
Directors of the Company in connection with the Merger and will receive a fee
from the Company for our services pursuant to the terms of our engagement letter
with the Company, dated as of February 15, 2000 (the "Engagement Letter"), a
portion of which is payable for providing this opinion and a significant portion
of which is contingent upon the consummation of the Merger. SG Cowen and its
affiliates in the ordinary course of business may have from time to time
provided, and in the future may provide, commercial and investment banking
services to the Company and Acquirer and may have received fees for the
rendering of such services. SG Cowen and its affiliates currently do not provide
commercial and investment banking services to the Acquirer.
In connection with our opinion, we have reviewed and considered such financial
and other matters as we have deemed relevant, including, among other things:
- a draft of the Agreement that we received on March 19, 2000;
- certain publicly available information for the Company, including its
annual reports filed on Form 10-K for the years ended December 31, 1997
and December 31, 1998, its quarterly reports filed on Form 10-Q for the
quarters ended March 31, June 30, and September 30, 1999, and its
B-1
registration statement originally filed on Form S-1 dated October 10,
1997, as amended, and certain other relevant financial and operating data
furnished to SG Cowen by the Company;
- certain publicly available information for Acquirer, including its annual
reports filed on Form 10-K for the years ended December 31, 1997 and
December 31, 1998, its quarterly reports filed on Form 10-Q for the
quarters ended March 31, June 30, and September 30, 1999;
- certain internal financial analyses, financial forecasts, reports and
other information concerning the Company (the "Company Forecasts"),
prepared by the management of the Company;
- discussions we have had with certain members of the management of the
Company concerning the historical and current business operations,
financial conditions and prospects of the Company and such other matters
we deemed relevant;
- discussions we have had with certain members of the management of Acquirer
concerning the historical and current business operations, financial
conditions and prospects of Acquirer and such other matters we deemed
relevant;
- the reported price and trading histories of the shares of Acquirer and the
callable common stock and units of the Company;
- First Call consensus earnings per share estimates (the "First Call
Estimates") and projections (the "Analyst Projections") of financial
institutions for the Acquirer;
- certain financial forecasts and other information concerning Acquirer (the
"Acquirer Forecasts"), provided by the management of Acquirer;
- certain operating results and trading multiples of Acquirer as compared to
operating results and trading multiples of certain publicly traded
companies we deemed relevant;
- certain financial terms of the Merger as compared to the financial terms
of certain selected business combinations we deemed relevant;
- based on the Company Forecasts, the cash flows generated by the Company on
a stand-alone basis to determine the present value of the discounted cash
flows; and
- such other information, financial studies, analyses and investigations and
such other factors that we deemed relevant for the purposes of this
opinion.
In conducting our review and arriving at our opinion, we have, with your
consent, assumed and relied, without independent investigation, upon the
accuracy and completeness of all financial and other information provided to us
by the Company and Acquirer, respectively, or which is publicly available. We
have not undertaken any responsibility for the accuracy, completeness or
reasonableness of, or independently to verify, such information. In addition, we
have not conducted, nor have we assumed any obligation to conduct, any physical
inspection of the properties or facilities of the Company or the Acquirer. We
have further relied upon the assurance of management of the Company that they
are unaware of any facts that would make the information provided to us
incomplete or misleading in any respect. We have assumed that the Company
Forecasts and the Acquirer Forecasts were reasonably prepared by the management
of the Company and Acquirer, respectively, on bases reflecting the best
currently available estimates and good faith judgments of such respective
managements as to the future performance of the Company and Acquirer,
respectively, and that the Company Forecasts, Acquirer Forecasts, First Call
Estimates, and Analyst Projections provide a reasonable basis for our opinion.
We have not made or obtained any independent evaluations, valuations or
appraisals of the assets or liabilities of the Company or Acquirer, nor have we
been furnished with such materials. With respect to all legal matters relating
to the Company and Acquirer, we have relied on the advice of legal counsel to
the Company. Our opinion is necessarily based upon economic and market
conditions and other circumstances as they exist and can be evaluated by us on
the date hereof. It should be understood that although
B-2
subsequent developments may affect our opinion, we do not have any obligation to
update, revise or reaffirm our opinion and we expressly disclaim any
responsibility to do so. Additionally, we have not been authorized or requested
to, and did not, solicit alternative offers for the Company or its assets.
For purposes of rendering our opinion we have assumed, in all respects material
to our analysis, that the representations and warranties of each party contained
in the Agreement are true and correct, that each party will perform all of the
covenants and agreements required to be performed by it under the Agreement and
that all conditions to the consummation of the Merger will be satisfied without
waiver thereof. We have assumed that the final form of the Agreement will be
substantially similar to the last draft reviewed by us. We have also assumed
that all governmental, regulatory and other consents and approvals contemplated
by the Agreement will be obtained and that in the course of obtaining any of
those consents no restrictions will be imposed or waivers made that would have
an adverse effect on the contemplated benefits of the Merger.
It is understood that this letter is intended for the benefit and use of the
Special Committee of the Board of Directors of the Company in its consideration
of the Merger and may not be used for any other purpose or reproduced,
disseminated, quoted or referred to at any time, in any manner or for any
purpose without our prior written consent, PROVIDED, HOWEVER, that this letter
may be reproduced in its entirety in any proxy statement or registration
statement relating to the Merger filed by Spiros or Acquirer under the
Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as
amended (the "Securities Act"), and distributed to stockholders of Spiros in
accordance therewith, provided that it will be reproduced in such proxy
statement or registration statement in full, and any description of or reference
to SG Cowen or summary of this letter in such proxy statement or registration
statement will be in a form acceptable to SG Cowen and its counsel, and provided
further that, in consenting to such inclusion, we do not admit or acknowledge
that we come within the category of persons whose consent is required under
Section 7 of the Securities Act or the rules and regulations promulgated
thereunder.
This letter does not constitute a recommendation to any stockholder as to how
such stockholder should vote with respect to the Merger or to take any other
action in connection with the Merger or otherwise. We are not expressing any
opinion as to what the price or trading range of the Parent Warrant following
the consummation of the Merger or of the underlying common stock of Acquirer
will be when the Parent Warrant is issued to the Company's stockholders pursuant
to the Merger. We have also assumed that neither Acquirer nor any of its
affiliates owns any callable common stock of the Company. We have not been
requested to express an opinion with respect to, and our opinion does not in any
manner address, the special common stock of the Company. We also have not been
requested to opine as to, and our opinion does not in any manner address, the
Company's underlying business decision to effect the Merger. Furthermore, we
express no view as to the price or trading range for shares of the common stock
of Acquirer following the consummation of the Merger.
Based upon and subject to the foregoing, including the various assumptions and
limitations set forth herein, it is our opinion that, as of the date hereof, the
Consideration to be received in the Merger by the holders of callable common
stock of Spiros is fair, from a financial point of view, to such stockholders.
Very truly yours,
SG COWEN SECURITIES CORPORATION
B-3
ANNEX C
March 20, 2000
Board of Directors
Dura Pharmaceuticals, Inc.
7475 Lusk Boulevard
San Diego, CA 92121
Members of the Board of Directors:
Spiros Development Corporation II, Inc. (the "Company"), Dura
Pharmaceuticals, Inc. (the "Acquiror") and Starfish Acquisition Corp., a newly
formed, wholly owned subsidiary of the Acquiror (the "Acquisition Sub"), propose
to enter into an Agreement and Plan of Merger (the "Agreement") pursuant to
which the Acquisition Sub will be merged with and into the Company in a
transaction (the "Merger") in which each outstanding share of Callable Common
Stock, par value $0.001 per share, of the Company (the "Company Shares"), will
be converted into the right to receive $13.25 per share, net to the seller in
cash (the "Cash Consideration"), plus one warrant to purchase a number of shares
of Common Stock, par value $0.001 per share, of the Acquiror, on the form and
terms set forth in Exhibit A and Exhibit B, respectively, to the Agreement (the
"Acquiror Warrant," together with the Cash Consideration, the "Merger
Consideration").
You have asked us whether, in our opinion, the Merger Consideration to be
paid by the Acquiror pursuant to the Merger is fair from a financial point of
view to the Acquiror.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial information
relating to the Company and the Acquiror that we deemed to be relevant;
(2) Reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flows, assets, liabilities and prospects of
the Company and the Acquiror, as well as the amount and timing of any
cost savings and related expenses and synergies expected to result from
the Merger (the "Expected Synergies") furnished to us by the Company and
the Acquiror;
(3) Conducted discussions with members of senior management and
representatives of the Company and the Acquiror concerning the matters
described in clauses 1 and 2 above, as well as their respective
businesses and prospects before and after giving effect to the Merger
and the Expected Synergies;
(4) Reviewed the market prices and valuation multiples for the Company
Shares and compared them with those of certain publicly traded companies
that we deemed to be relevant;
(5) Reviewed the results of operations of the Company and compared them with
those of certain publicly traded companies that we deemed to be
relevant;
(6) Compared the proposed financial terms of the Merger with the financial
terms of certain other transactions which we deemed to be relevant;
(7) Participated in discussions and negotiations among representatives of
the Company and the Acquiror and their financial and legal advisors;
(8) Reviewed the potential pro forma impact of the Merger on the Acquiror;
(9) Reviewed a draft dated March 20, 2000 of the Agreement and the Warrant
Agreement; and
(10) Reviewed such other financial studies and analyses and took into account
such other matters as we deemed necessary.
C-1
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the Company or been furnished with any such evaluation or
appraisal. In addition, we have not assumed any obligation to conduct any
physical inspection of the properties or facilities of the Company. With respect
to the financial forecast information and the Expected Synergies furnished to or
discussed with us by the Company or the Acquiror, we have assumed that they have
been reasonably prepared and reflect the best currently available estimates and
judgment of the Company's or the Acquiror's management as to the expected future
financial performance of the Company or the Acquiror, as the case may be, and
the Expected Synergies. We have also assumed that the final form of the
Agreement will be substantially similar to the last draft reviewed by us.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to
us as of, the date hereof. We have assumed that in the course of obtaining the
necessary regulatory or other consents or approvals (contractual or otherwise)
for the Merger, no restrictions, including any divestiture requirements or
amendments or modifications, will be imposed that will have a material adverse
effect on the contemplated benefits of the Merger.
We are acting as financial advisor to the Acquiror in connection with the
Merger and will receive a fee from the Acquiror for our services, a significant
portion of which is contingent upon the consummation of the Merger. In addition,
the Acquiror has agreed to indemnify us for certain liabilities arising out of
our engagement. We are currently engaged by the Acquiror with respect to the
evaluation of certain strategic alternatives under consideration by the Acquiror
and have, in the past, provided financial advisory and financing services to the
Acquiror and the Company and may continue to do so and have received, and may
receive, fees for the rendering of such services. In addition, in the ordinary
course of our business, we may actively trade the Company Shares and other
securities of the Company, as well as securities of the Acquiror for our own
account and for the accounts of customers and, accordingly, may at any time hold
a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Acquiror. Our opinion does not address the merits of the underlying decision by
the Acquiror to engage in the Merger and does not constitute a recommendation to
any stockholder of the Acquiror as to how such stockholder should vote on the
proposed Merger or any matter related thereto.
We are not expressing any opinion herein as to the prices at which the
Acquiror Shares will trade following the announcement or consummation of the
Merger.
On the basis of and subject to the foregoing, we are of the opinion that, as
of the date hereof, the Merger Consideration to be paid by the Acquiror pursuant
to the Merger is fair from a financial point of view to the Acquiror.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
C-2
ANNEX D
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
(a) Any stockholder of a corporation of this State who holds shares of stock on
the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of the stockholder's shares of stock
under the circumstances described in subsections (b) and (c) of this
section. As used in this section, the word "stockholder" means a holder of
record of stock in a stock corporation and also a member of record of a
nonstock corporation; the words "stock" and "share" mean and include what is
ordinarily meant by those words and also membership or membership interest
of a member of a nonstock corporation; and the words "depository receipt"
mean a receipt or other instrument issued by a depository representing an
interest in one or more shares, or fractions thereof, solely of stock of a
corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series of
stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 other than a merger effected pursuant to
Section 251(g) of this title, Section 252, Section 254, Section 257,
Section 258, Section 263 Or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange
or designated as a national market system security on an interdealer
quotation system by the National Association of Securities
Dealers, Inc. or (ii) held of record by more than 2,000 holders; and
further provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a merger if the
merger did not require for its approval the vote of the stockholders of
the surviving corporation as provided in subsection (f) of Section 251
of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under
this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national
securities exchange or designated as a national market system
security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more
than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph;
or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
D-1
(3) In the event all of the stock of a subsidiary Delaware corporation party
to a merger effected under Section 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware
corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the
assets of the corporation. If the certificate of incorporation contains such
a provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting
of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of
this section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking
of the vote on the merger or consolidation, a written demand for
appraisal of such stockholder's shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such stockholder's shares. A proxy or vote against the
merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the effective
date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that
the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228 or
Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal
rights of the approval of the merger or consolidation and that appraisal
rights are available for any or all shares of such class or series of
stock of such constituent corporation, and shall include in such notice
a copy of this section; provided that, if the notice is given on or
after the effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation
that are entitled to appraisal rights. Such notice may, and, if given on
or after the effective date of the merger or consolidation, shall, also
notify such stockholders of the effective date of the merger or
consolidation. Any stockholder entitled to appraisal rights may, within
twenty days after the date of mailing of such notice, demand in writing
from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such holder's
shares. If such notice did not notify stockholders of the effective date
of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the
merger or consolidation notifying each of the holders of any class or
series of stock of such constituent corporation that are entitled to
appraisal rights of the effective date of the merger or consolidation or
(ii) the surviving or resulting corporation shall send such a second
notice to all such holders on or within 10 days after such effective
date; provided, however, that if such second notice is sent more than
20 days following the sending of the first notice, such second
D-2
notice need only be sent to each stockholder who is entitled to
appraisal rights and who has demanded appraisal of such holder's shares
in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given shall, in
the absence of fraud, be prima facie evidence of the facts stated
therein. For purposes of determining the stockholders entitled to
receive either notice, each constituent corporation may fix, in advance,
a record date that shall be not more than 10 days prior to the date the
notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be
such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of
business on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation, the
surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the
effective date of the merger or consolidation, any stockholder shall have
the right to withdraw such stockholder's demand for appraisal and to accept
the terms offered upon the merger or consolidation. Within 120 days after
the effective date of the merger or consolidation, any stockholder who has
complied with the requirements of subsections (a) and (d) hereof, upon
written request, shall be entitled to receive from the corporation surviving
the merger or resulting from the consolidation a statement setting forth the
aggregate number of shares not voted in favor of the merger or consolidation
and with respect to which demands for appraisal have been received and the
aggregate number of holders of such shares. Such written statement shall be
mailed to the stockholder within 10 days after such stockholder's written
request for such a statement is received by the surviving or resulting
corporation or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register
in Chancery in which the petition was filed a duly verified list containing
the names and addresses of all stockholders who have demanded payment for
their shares and with whom agreements as to the value of their shares have
not been reached by the surviving or resulting corporation. If the petition
shall be filed by the surviving or resulting corporation, the petition shall
be accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper
of general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail
and by publication shall be approved by the Court, and the costs thereof
shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the stockholders
who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court shall
appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into
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account all relevant factors. In determining the fair rate of interest, the
Court may consider all relevant factors, including the rate of interest
which the surviving or resulting corporation would have had to pay to borrow
money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to
participate in the appraisal proceeding, the Court may, in its discretion,
permit discovery or other pretrial proceedings and may proceed to trial upon
the appraisal prior to the final determination of the stockholder entitled
to an appraisal. Any stockholder whose name appears on the list filed by the
surviving or resulting corporation pursuant to subsection (f) of this
section and who has submitted such stockholder's certificates of stock to
the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder is not
entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares, together
with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders
of shares represented by certificates upon the surrender to the corporation
of the certificates representing such stock. The Court's decree may be
enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of
any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or
to receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed
within the time provided in subsection (e) of this section, or if such
stockholder shall deliver to the surviving or resulting corporation a
written withdrawal of such stockholder's demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in subsection
(e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of
Chancery shall be dismissed as to any stockholder without the approval of
the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to which the shares of
such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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PROXY
SPIROS DEVELOPMENT CORPORATION II, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints John R. Cook and Erle T. Mast, jointly
and severally, as proxies, with power to act without the other and with
power of substitution, and hereby authorizes them to represent and vote all
of the shares of callable common stock of Spiros Development Corporation II,
Inc. standing in the name of the undersigned, as designated on the other
side, with all powers which the undersigned would possess if present at the
special meeting of stockholders to be held August 31, 2000, or any
postponements or adjournments thereof.
(CONTINUED, AND TO BE MARKED, DATED AND SIGNED, ON THE OTHER SIDE)
_______________________________________________________________________________
- FOLD AND DETACH HERE -
[LOGO]
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED Please mark
BY THE PROXIES IN THE MANNER DESIGNATED BELOW. IF your votes as /X/
THIS PROXY IS RETURNED SIGNED BUT WITHOUT A CLEAR indicated in
VOTING DESIGNATION, THE PROXIES WILL VOTE FOR this example
PROPOSALS 1, 2 AND 3.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2 AND 3.
Proposal 1: The adoption of the Agreement and Plan of Merger, dated as of
March 20, 2000, by and among Dura Pharmaceuticals, Inc.,
Starfish Acquisition Corp., Inc. and Spiros Development
Corporation II, Inc.
FOR AGAINST ABSTAIN
/ / / / / /
Proposal 2: Discretionary authority to vote on other matters to come before
the special meeting.
FOR ABSTAIN
/ / / /
Proposal 3: Discretionary authority to postpone or adjourn the special
meeting.
FOR WITHHOLD
/ / / /
Signature______________________ Signature_______________________ Date___________
NOTE: Please sign as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, trustee or guardian, please give full title as
such.
_______________________________________________________________________________
- FOLD AND DETACH HERE -
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) Section 145 of the Delaware General Corporation Law permits
indemnification of Dura's officers and directors under specified conditions and
subject to specified limitations. Section 145 of the Delaware General
Corporation Law also provides that a corporation, like Dura, has the power to
purchase and maintain insurance on behalf of its officers and directors against
any liability asserted against such person and incurred by him or her in such
capacity, or arising out of his or her status as such, whether or not the
corporation would have the power to indemnify him or her against such liability
under the provisions of Section 145 of the Delaware General Corporation Law.
(b) Dura's bylaws (Article VII, Section (1)) provides that Dura shall
indemnify its directors and executive officers to the fullest extent not
prohibited by Delaware General Corporation Law. The rights to indemnity
thereunder continue as to a person who has ceased to be a director, officer,
employee or agent and inure to the benefit of the heirs, executors and
administrators of the person. In addition, expenses incurred by a director or
executive officer in defending any civil, criminal, administrative or
investigative action, suit or proceeding by reason of the fact that he or she is
or was a director or officer of Dura (or was serving at Dura's request as a
director or officer of another corporation) shall be paid by Dura in advance of
the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he or she is not entitled to be
indemnified by Dura as authorized by the relevant section of the Delaware
General Corporation Law.
(c) As permitted by Section 102(b)(7) of the Delaware General Corporation
Law, Article V, Section (A) of Dura's certificate of incorporation provides that
a director of Dura shall not be personally liable for monetary damages for
breach of his or her fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to Dura or its stockholders,
(ii) for acts or omissions not in good faith or acts or omissions that involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law or (iv) for any transaction from which the
director derived any improper personal benefit.
(d) Dura entered into indemnification agreements with each of its directors
and officers.
(e) There is directors and officers liability insurance now in effect which
insures Dura's directors and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------
2.1 Agreement and Plan of Merger dated as March 20, 2000, by and
among Dura Pharmaceuticals, Inc., Starfish Acquisition
Corp., Inc. and Spiros Development Corporation II, Inc.
(included in Part I as Annex A).
3.1 Dura's Certificate of Incorporation. (1)
3.2 Dura's Certificate of Amendment of Certificate of
Incorporation effective May 21, 1998. (2)
3.3 Dura's Certificate of Designation of Series A Junior
Participating Preferred Stock effective May 22, 1998
(included in Exhibit 4.8). (2)
3.4 Dura's Bylaws. (1)
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EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------
4.1 Dura's Common Stock Certificate. (3)
4.2 Indenture, including form of Note, dated July 30, 1997,
between Dura and Chase Manhattan Bank and Trust Company,
successor to Chase Trust Company of California, as trustee,
with respect to the 3 1/2% Convertible Subordinated Notes
due 2002. (4)
4.3 Form of Dura's 3 1/2% Convertible Subordinated Note
(included in Exhibit 4.2). (4)
4.4 Warrant Agreement, dated December 22, 1997, between Dura and
ChaseMellon Shareholder Services, L.L.C., as warrant agent.
(5)
4.5 Specimen SDC II Warrant. (6)
4.6 Form of Dura's Series W Warrant. (7)
4.7 Form of Dura's Series S Warrant. (8)
4.8 Rights Agreement, dated as of May 21, 1998, between Dura and
ChaseMellon Shareholder Services, L.L.C., which includes the
form of Certificate of Designation for the Series A Junior
Participating Preferred Stock as Exhibit A, the form of
Rights Certificate as Exhibit B and the Summary of Rights to
Purchase Series A Junior Preferred Stock as Exhibit C. (2)
4.9 First Amendment to the Rights Agreement, dated December 10,
1998, between Dura and ChaseMellon Shareholder
Services, L.L.C. (9)
4.10* Form of Warrant Agreement, to be dated as of the date of
completion of the acquisition, by and between Dura and
ChaseMellon Shareholder Services, L.L.C.
4.11* Form of Dura Warrant (included in Exhibit 4.10).
5.1* Opinion of Brobeck, Phleger & Harrison LLP as to the
legality of the securities being registered.
23.1 Consent of SG Cowen Securities Corporation, financial
advisor to the Special Committee of the Board of Directors
of Spiros Development Corporation II, Inc. (11)
23.2 Consent of Merrill Lynch, Pierce Fenner & Smith
Incorporated, financial advisor to the Board of Directors of
Dura. (11)
23.3* Consent of Deloitte & Touche LLP, former independent
auditors of Spiros Development Corporation II, Inc.
23.4* Consent of Ernst & Young LLP, current independent auditors
of Spiros Development Corporation II, Inc.
23.5* Consent of Deloitte & Touche LLP, independent auditors of
Dura.
23.6* Consent of Brobeck Phleger & Harrison LLP (included in
Exhibit 5.1).
24.1 Power of Attorney (included on signature pages).
27.1 Financial Data Schedule. (10)
- ------------------------
(1) Incorporated by reference to Dura's Form 10-Q for the quarter ended June
30, 1997.
(2) Incorporated by reference to Dura's Registration Statement on Form 8-A
filed May 22, 1998.
(3) Incorporated by reference to Dura's Registration Statement on Form 8-A
filed December 12, 1997.
(4) Incorporated by reference to Dura's Form 10-Q for the quarter ended
September 30, 1997.
(5) Incorporated by reference to Dura's Form 8-K dated December 19, 1997.
(6) Incorporated by reference to Dura's Form 10-K for the year ended December
31, 1999.
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(7) Incorporated by reference to Dura's Registration Statement on Form S-3
filed November 17, 1993.
(8) Incorporated by reference to Dura's Form 8-K dated December 29, 1995, as
amended.
(9) Incorporated by reference to Dura's Form 8-A/A filed December 10, 1998.
(10) Incorporated by reference to Dura's Form 10-K for the year ended December
31, 1999.
(11) Incorporated by reference to Dura's Form S-4 filed April 25, 2000, as
amended.
* Filed herewith.
(B) FINANCIAL STATEMENT SCHEDULES
All such schedules have been omitted because the information required to be
set forth therein is not applicable or is shown in the financial statements or
notes thereto.
(C) REPORTS, OPINIONS OR APPRAISALS.
The opinion of SG Cowen Securities Corporation is included as Annex B to
Part I of this registration statement. The opinion of Merrill Lynch, Pierce,
Fenner & Smith Incorporated is included as Annex C to Part I of this
registration statement.
ITEM 17. UNDERTAKINGS
(a) Dura hereby undertakes to respond to requests for information that is
incorporated by reference into the proxy statement/prospectus pursuant to Item
4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(b) Dura hereby undertakes to supply by means of a post effective amendment
all information concerning a transaction, and the company being acquired
involved therein, that was not the subject of and included in the registration
statement when it became effective.
(c) Dura hereby undertakes:
(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represents a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of the securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in a form of prospectus filed
with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
II-3
(2) that, for purpose of determining any liability under the Securities
Act, each such post effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) to remove from registration by means of a post-effective amendment
any of the securities which remain unsold at the termination of the
offering.
(d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Dura pursuant to the foregoing provisions, or otherwise, Dura has been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by Dura of expenses incurred or paid by a director, officer or
controlling person of Dura in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Dura will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Dura
Pharmaceuticals, Inc. has duly caused this Amendment No. 2 to the registration
statement on Form S-4 to be signed on its behalf by the undersigned, thereunto
duly authorized.
DURA PHARMACEUTICALS, INC.
By: /s/ CAM L. GARNER
-----------------------------------------
Cam L. Garner
Date: July 14, 2000 CHAIRMAN AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement on Form S-4 has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ CAM L. GARNER Chairman and Chief Executive
------------------------------------------- Officer (Principal Executive July 14, 2000
Cam L. Garner Officer)
Senior Vice President and Chief
/s/ MICHAEL T. BORER Financial Officer (Principal
------------------------------------------- Financial and Accounting July 14, 2000
Michael T. Borer Officer)
/s/ JAMES C. BLAIR, PH.D.*
------------------------------------------- Director July 14, 2000
James C. Blair, Ph.D.
/s/ HERBERT J. CONRAD*
------------------------------------------- Director July 14, 2000
Herbert J. Conrad
/s/ JOSEPH C. COOK, JR.*
------------------------------------------- Director July 14, 2000
Joseph C. Cook, Jr.
/s/ DAVID F. HALE*
------------------------------------------- Director July 14, 2000
David F. Hale
II-5
SIGNATURE TITLE DATE
--------- ----- ----
/s/ F. RICHARD NICHOL, PH.D.*
------------------------------------------- Director July 14, 2000
F. Richard Nichol, Ph.D.
/s/ GORDON V. RAMSEIER*
------------------------------------------- Director July 14, 2000
Gordon V. Ramseier
/s/ CHARLES G. SMITH, PH.D.*
------------------------------------------- Director July 14, 2000
Charles G. Smith, Ph.D.
*By: /s/ CAM L. GARNER
--------------------------------------
Cam L. Garner
ATTORNEY-IN-FACT AND AGENT
II-6