SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
October 10, 1997
(Date of Report - earliest event reported)
DURA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 000-19809 95-3645543
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
7475 LUSK BOULEVARD, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE IS (619) 457-2553
Page 1
Item 5. Other Events.
On October 10, 1997, Dura Pharmaceuticals, Inc. (the "Company") announced its
intention to exercise, prior to the completion of a proposed offering of
securities by Spiros Development Corporation II, Inc. and subject to
providing official shareholder notification, its option to acquire all of the
callable common stock of Spiros Development Corporation ("SDC") for an
aggregate purchase price estimated to be $45.7 million payable in cash,
shares of the Company's common stock, or any combination thereof (the "SDC
Purchase"). Through a series of license, development, and management
agreements with the Company, SDC is developing Spiros-TM-, a pulmonary drug
delivery system, for use with certain respiratory drugs.
The following unaudited pro forma condensed consolidated balance sheet as of
September 30, 1997 and the unaudited pro forma condensed consolidated
statements of operations for the year ended December 31, 1996 and for the
nine months ended September 30, 1997 give effect to (i) the SDC Purchase and
(ii) the Product Acquisitions (as defined herein), as if such transactions
occurred as of September 30, 1997 for the condensed consolidated balance
sheet and as of January 1, 1996 for the condensed consolidated statements of
operations.
The pro forma condensed consolidated financial statements are based on the
historical financial statements of the Company and SDC and information
regarding sales of the products prior to their acquisition by the Company,
giving effect to the acquisition of SDC, applying the purchase method of
accounting, and to the assumptions and adjustments as discussed in the
accompanying notes to the pro forma condensed consolidated financial
statements. These pro forma condensed consolidated financial statements have
been prepared by the management of the Company based upon the consolidated
financial statements of the Company and SDC as of September 30, 1997
(unaudited) and for the year ended December 31, 1996 and the nine months
ended September 30, 1997 (unaudited). In the opinion of the management of
the Company, all pro forma adjustments necessary to state fairly such pro
forma financial information have been made. The unaudited pro forma
condensed consolidated financial statements are not necessarily indicative of
what actual results of operations would have been for the periods had the
transactions occurred on the dates indicated. In addition, such financial
statements do not purport to indicate the results of future operations or
financial position of the Company from the acquisition dates forward.
Also included in this report are audited financial statements of SDC as of
December 31, 1995 and 1996 and for the periods then ended and unaudited
financial statements as of September 30, 1997 and for the periods ended
September 30, 1996 and 1997.
2
DURA PHARMACEUTICALS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1997
IN THOUSANDS
- --------------------------------------------------------------------------------
SDC
Spiros Purchase Pro Forma
ASSETS Dura Corp. Adjustments As Adjusted
-------------- ------------- ------------ -------------
Current Assets:
Cash, cash equivalents, and short-term investments $ 454,710 $ 4,851 $ 459,561
Other current asssets 43,707 (2,325) (2a) 41,382
-------------- ------------- ------------ -------------
Total current assets 498,417 4,851 (2,325) 500,943
Property 44,148 44,148
License Agreements and Product Rights 248,743 248,743
Other Non-Current Assets 29,797 29,797
-------------- ------------- ------------ -------------
Total $ 821,105 $ 4,851 $ (2,325) $ 823,631
-------------- ------------- ------------ -------------
-------------- ------------- ------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 38,193 $ 2,333 $ (2,325) (2a) $ 38,201
Current portion of long-term obligations 2,948 2,948
-------------- ------------- ------------ -------------
Total current liabilities 41,141 2,333 (2,325) 41,149
Convertible Subordinated Notes 287,500 287,500
Other Non-Current Liabilities 10,167 10,167
-------------- ------------- ------------ -------------
Total liabilities 338,808 2,333 (2,325) 338,816
-------------- ------------- ------------ -------------
Shareholders' Equity:
Common stock 44 1 - (2b) 45
Additional paid-in-capital 533,003 40,641 5,065 (2b) 578,709
Accumulated deficit (49,597) (38,126) (6,411) (2b,c) (94,134)
Unrealized gain on investments 195 2 (2) (2b) 195
Warrant subscriptions receivable (1,348) 1,348 (2c)
-------------- ------------- ------------ -------------
Total shareholders' equity 482,297 2,518 - 484,815
-------------- ------------- ------------ -------------
Total $ 821,105 $ 4,851 $ (2,325) $ 823,631
-------------- ------------- ------------ -------------
-------------- ------------- ------------ -------------
See accompanying notes to pro forma condensed consolidated financial statements.
3
DURA PHARMACEUTICALS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1996
IN THOUSANDS, EXCEPT PER SHARE DATA
- --------------------------------------------------------------------------------
SDC Product
Purchase Purchase Pro Forma
Dura SDC Adjustments Adjustments As Adjusted
--------- --------- ----------- ------------ -----------
REVENUES:
Sales $ 79,563 $ 51,047 (4a) $ 130,610
Contract 24,556 $ 200 $ (19,138) (3a) 5,618
--------- --------- ---------- --------- ----------
Total revenues 104,119 200 (19,138) 51,047 136,228
--------- --------- ---------- --------- ----------
OPERATING COSTS AND EXPENSES:
Cost of sales 21,301 5,112 (4a) 26,413
Clinical, development and regulatory 18,540 16,174 (16,174) (3b) 18,540
Selling, general and administrative 42,631 4,666 (4,666) (3b) 17,535 (4a,b) 60,166
--------- --------- ---------- --------- ----------
Total operating costs and expenses 82,472 20,840 (20,840) 22,647 105,119
--------- --------- ---------- --------- ----------
OPERATING INCOME (LOSS) 21,647 (20,640) 1,702 28,400 31,109
--------- --------- ---------- --------- ----------
OTHER:
Interest income 6,897 1,788 (5,088) (4c) 3,597
Interest expense (677) (677)
--------- --------- ---------- --------- ----------
Total other 6,220 1,788 (5,088) 2,920
--------- --------- ---------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 27,867 (18,852) 1,702 23,312 34,029
PROVISION FOR INCOME TAXES 3,539 2 (6,860) (3c) 9,325 (4d) 6,006
--------- --------- ---------- --------- ----------
NET INCOME (LOSS) $ 24,328 $ (18,854) $ 8,562 $ 13,987 $ 28,023
--------- --------- ---------- --------- ----------
--------- --------- ---------- --------- ----------
NET INCOME PER SHARE $ 0.60 $ 0.68
--------- ----------
--------- ----------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES 40,479 41,495
--------- ----------
--------- ----------
See accompanying notes to pro forma condensed consolidated financial
statements.
4
DURA PHARMACEUTICALS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
IN THOUSANDS, EXCEPT PER SHARE DATA
- --------------------------------------------------------------------------------
SDC Product
Spiros Purchase Purchase Pro Forma
Dura Corp. Adjustments Adjustments As Adjusted
------------ ------------ ------------- ----------- ------------
REVENUES:
Sales $ 105,437 $ 4,860 (4a) $ 110,297
Contract 22,430 $ (18,331) (3a) 4,099
------------ ------------ ------------ ----------- ------------
Total revenues 127,867 - (18,331) 4,860 114,396
------------ ------------ ------------ ----------- ------------
OPERATING COSTS AND EXPENSES:
Cost of sales 23,373 243 (4a) 23,616
Clinical, development and regulatory 18,160 $ 14,863 (14,863) (3b) 18,160
Selling, general and administrative 49,485 4,869 (4,869) (3b) 1,915 (4a,b) 51,400
------------ ------------ ------------ ----------- ------------
Total operating costs and expenses 91,018 19,732 (19,732) 2,158 93,176
------------ ------------ ------------ ----------- ------------
OPERATING INCOME (LOSS) 36,849 (19,732) 1,401 2,702 21,220
------------ ------------ ------------ ----------- ------------
OTHER:
Interest income 11,434 688 (962) (4c) 11,160
Interest expense (2,531) (2,531)
------------ ------------ ------------ ----------- ------------
Total other 8,903 688 - (962) 8,629
------------ ------------ ------------ ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES 45,752 (19,044) 1,401 1,740 29,849
PROVISION FOR INCOME TAXES 16,357 (7,057) (3c) 696 (4d) 9,996
------------ ------------ ------------ ----------- ------------
NET INCOME (LOSS) $ 29,395 $ (19,044) $ 8,458 $ 1,044 $ 19,853
------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ----------- ------------
NET INCOME PER SHARE $ 0.62 $ 0.41
------------ ------------
------------ ------------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES 47,392 48,408
------------ ------------
------------ ------------
See accompanying notes to pro forma condensed consolidated financial
statements.
5
Dura Pharmaceuticals, Inc.
Notes to Pro Forma Condensed Consolidated Financial Statements (Unaudited)
1. Dura Pharmaceuticals, Inc. (the "Company") intends to exercise, prior to
the completion of a proposed offering of securities by Spiros Development
Corporation II, Inc. and subject to providing official shareholder
notification, its option to acquire all of the outstanding common stock
of Spiros Development Corporation ("SDC") for an aggregate purchase price
estimated to be $45.7 million, payable in cash, shares of the Company's
common stock, or any combination thereof. The Company has initially
assigned the estimated aggregate excess of cost over the fair value of
net assets to be acquired to in-process technology and does not expect
that other material tangible or intangible assets will be identified.
The Company expects to record a charge to earnings for the amount of the
in-process technology in the period in which the purchase of SDC occurs.
This charge has not been reflected in the pro forma condensed
consolidated statements of operations as it is non-recurring, but is
reflected in the pro forma condensed consolidated balance sheet.
2. The pro forma condensed consolidated balance sheet includes the adjustments
necessary as if the purchase of SDC had occurred on September 30, 1997. The
adjustments are summarized as follows:
(a) To eliminate intercompany accounts payable and receivable.
Accounts payable and accrued liabilities $ 2,325
Other current assets $ 2,325
(b) To record the issuance of 1,015,711 shares of the Company's common
stock for the acquisition of SDC as if the purchase price was paid solely
in shares of the Company's common stock, the elimination of SDC's equity
accounts, and the charge to earnings resulting from the allocation of
acquisition cost to in-process technology.
Accumulated deficit $ 43,189
Additional paid-in capital 40,641
Common stock 1
Unrealized gain on investments 2
6
Additional paid-in-capital $ 45,706
Common stock 1
Accumulated deficit 38,126
(c) To eliminate warrant subscriptions receivable.
Accumulated deficit $ 1,348
Warrant subscriptions receivable $ 1,348
3. The pro forma condensed consolidated statements of operations include the
adjustments necessary to reflect the purchase of SDC as if it had occurred
on January 1, 1996. The pro forma adjustments are summarized as follows:
For the year ended December 31, 1996:
(a) To eliminate contract revenue recognition by the Company related to
activities conducted on behalf of SDC. $ 19,138
(b) To eliminate research and development and general and administrative
expenses recognized by SDC related to activities conducted by the Company.
Clinical, development and regulatory $ 16,174
General and administrative 4,666
(c) To record the reduction in the provision for income taxes related to
the decrease in income before income taxes resulting from the combination
of the Company and SDC (see further discussion below). $ 6,860
For the nine months ended September 30, 1997:
(a) To eliminate contract revenue recognition by the Company related to
activities conducted on behalf of SDC. $ 18,331
(b) To eliminate research and development and general and administrative
expenses recognized by SDC related to activities conducted by the Company.
Clinical, development and regulatory $ 14,863
General and administrative 4,869
(c) To record the reduction in the provision for income taxes related to
the decrease in income before income taxes resulting from the combination
of the Company and SDC. (see further discussion below). $ 7,057
No income tax benefit was recognized by SDC in its historical financial
statements for the increase in its deferred tax assets due to the
uncertainty regarding its ability to realize those assets. Accordingly,
the pro forma adjustments for the provision for income taxes for the year
ended December 31, 1996 and the nine months ended September 30, 1997 were
determined by combining the results of operations of SDC with those of the
Company and the pro forma product purchase adjustments for the respective
periods and calculating the provision for income taxes as if the Company
had acquired SDC and the products on January 1, 1996.
7
The weighted average number of shares used to calculate pro forma net
income per share for the year ended December 31, 1996 and the nine months
ended September 30, 1997 is based on the historical weighted average shares
outstanding for the Company for the respective periods adjusted to reflect
as of January 1, 1996 the assumed issuance of 1,015,711 shares of the
Company's common stock as discussed in Note 1.
4. On May 7, 1997, the Company acquired the U.S. rights to the intranasal
steroid products Nasarel and Nasalide for $70 million plus additional
future contingent payments. On September 5, 1996, the Company acquired the
U.S. marketing rights to the patented antibiotics Keftab and Ceclor CD for
$100 million plus additional future contingent payments. On July 3, 1996,
the Company acquired certain Entex products for $45 million. The following
pro forma adjustments reflect the impact of these acquisitions as if they
had occurred on January 1, 1996. These acquisitions are referred to
collectively herein as the "Product Acquisitions." These pro forma
adjustments do not reflect any revenues or expenses for Ceclor CD as this
product was launched after it was acquired by the Company.
For the year ended December 31, 1996:
(a) To record product sales, cost of sales, and estimated selling, general
and administrative expenses.
Sales $ 51,047
Cost of sales 5,112
Selling, general and administrative expenses 12,842
(b) To record amortization of product rights. $ 4,693
(c) To record reduction in interest income from the use of cash for the
acquisition of products. $ 5,088
(d) To record a provision for income taxes (based on statutory tax rates
in effect during 1996). $ 9,325
For the nine months ended September 30, 1997:
(a) To record product sales, cost of sales, and estimated selling, general
and administrative expenses.
Sales $ 4,860
Cost of sales 243
Selling, general and administrative expenses 1,215
(b) To record amortization of product rights. $ 700
(c) To record reduction in interest income from the use of cash for the
acquisition of products. $ 962
(d) To record a provision for income taxes (based on statutory tax rates
in effect during 1997). $ 696
8
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Spiros Development Corporation:
We have audited the accompanying balance sheets of Spiros Development
Corporation (a development stage enterprise) (the "Company") as of December
31, 1995 and 1996, the related statements of operations, shareholders' equity
and cash flows for the period December 5, 1995 (date of incorporation) to
December 31, 1995, the year ended December 31, 1996 and for the period from
December 5, 1995 (date of incorporation) to December 31, 1996. 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, 1995 and
1996, and the results of its operations and its cash flows for the period
December 5, 1995 (date of incorporation) to December 31, 1995, the year
ended December 31, 1996, and for the period from December 5, 1995 (date of
incorporation) to December 31, 1996 in conformity with generally accepted
accounting principles.
The Company is in the development stage as of December 31, 1996. As discussed
in Note 1 to the financial statements, the Company has yet to complete
product development, obtain required regulatory approvals, or verify the
market acceptance and demand for its products. As discussed in Note 7 to the
financial statements, Dura Pharmaceuticals, Inc. announced on October 10,
1997 its intention, subject to certain conditions, to exercise its option to
acquire all of the callable common stock of the Company.
DELOITTE & TOUCHE LLP
- -------------------------
San Diego, California
March 21, 1997 (October 10, 1997 as to Note 7)
9
SPIROS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
DECEMBER 31,
-----------------------------
1995 1996 SEPTEMBER 30, 1997
------------- -------------- ------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 26,966,535 $ 10,628,486 $ 718,250
Short-term investments.......................................... 8,040,807 13,188,559 4,132,341
------------- -------------- --------------
Total assets................................................ $ 35,007,342 $ 23,817,045 $ 4,850,591
------------- -------------- --------------
------------- -------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Account payable to Dura Pharmaceuticals, Inc.................... $ 413,078 $ 2,234,293 $ 2,325,013
Accrued liabilities............................................. 400,000 8,153 8,153
------------- -------------- --------------
Total liabilities........................................... 813,078 2,242,446 2,333,166
------------- -------------- --------------
SHAREHOLDERS' EQUITY:
Callable common stock, $.001 par value, authorized--
1,073,334 shares; issued and outstanding--933,334 shares...... 933 933 933
Additonal paid-in capital....................................... 40,423,656 40,641,121 40,641,121
Callable common stock subscription receivable................... (6,000,000)
Unrealized gain (loss) on short-term investments................ (1,866) 14,507 1,461
Deficit accumulated during the development stage................ (228,459) (19,081,962) (38,126,090)
------------- -------------- --------------
Total shareholders' equity.................................. 34,194,264 21,574,599 2,517,425
------------- -------------- --------------
Total liabilities and shareholders' equity ................. $ 35,007,342 $ 23,817,045 $ 4,850,591
------------- -------------- --------------
------------- -------------- --------------
See accompanying notes to financial statements.
10
SPIROS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
DECEMBER 5, DECEMBER 5, DECEMBER 5,
1995 1995 1995
(DATE OF (DATE OF (DATE OF
INCORPORATION) INCORPORATION) NINE MONTHS ENDED INCORPORATION)
TO YEAR ENDED TO SEPTEMBER 30, TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------------------- SEPTEMBER 30,
1995 1996 1996 1996 1997 1997
------------- ----------- ------------- ----------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
REVENUES:
Contract....................... $ 200,000 $ 200,000 $ 200,000
Interest....................... $ 9,188 1,788,419 1,797,607 $ 1,444,098 $ 687,954 2,485,561
--------- ----------- ------------ ------------ ------------ ------------
Total revenues............. 9,188 1,988,419 1,997,607 1,444,098 687,954 2,685,561
--------- ----------- ------------ ------------ ------------ ------------
EXPENSES:
Research and
development.................. 237,647 16,173,971 16,411,618 11,535,823 14,862,718 31,274,336
General and
administrative............... 4,666,292 4,666,292 2,510,807 4,869,364 9,535,656
Income taxes................... 1,659 1,659 1,659
--------- ------------ ------------ ------------ ------------ ------------
Total expenses............. 237,647 20,841,922 21,079,569 14,046,630 19,732,082 40,811,651
--------- ------------ ------------ ------------ ------------ ------------
NET LOSS......................... $(228,459) $(18,853,503) $(19,081,962) $(12,602,532) $(19,044,128) $(38,126,090)
--------- ------------ ------------ ------------ ------------ ------------
--------- ------------ ------------ ------------ ------------ ------------
See accompanying notes to financial statements.
11
SPIROS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
DECEMBER 5, 1995
DECEMBER 5, 1995 DECEMBER 5, 1995 NINE MONTHS ENDED (DATE OF
(DATE OF (DATE OF SEPTEMBER 30, INCORPORATION)
INCORPORATION) TO YEAR ENDED INCORPORATION) TO ------------------------ TO
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1996 1996 1997 SEPTEMBER 30, 1997
----------------- ----------------- ----------------- ----------- ----------- ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES:
Net loss......................... $ (228,459) $ (18,853,503) $(19,081,962) $(12,602,532) $(19,044,128) $(38,126,090)
Adjustments to reconcile net
loss to net cash provided by
(used for) operating
activities:
Compensation expense--stock
options...................... 242,075 242,075 242,075 242,075
Changes in assets and
liabilities:
Account payable.............. 237,647 1,996,646 2,234,293 1,478,831 90,719 2,325,012
Accrued liabilities.......... 8,153 8,153 10,118 8,153
------------- -------------- ------------ ---------- ------------ ----------
Net cash provided by
(used for) operating
activities............... 9,188 (16,606,629) (16,597,441) (10,871,508) (18,953,409) (35,550,850)
------------- -------------- ------------ ---------- ------------ ----------
INVESTING ACTIVITIES:
Purchases of short-term
investments.................... (8,042,673) (31,068,586) (39,111,259) (25,068,590) (3,177,612) (42,288,871)
Sales and maturities of
short-term investments......... 25,937,207 25,937,207 16,820,942 12,220,785 38,157,992
-------------- -------------- ----------- ---------- ----------- ----------
Net cash provided by (used for)
investing activities..... (8,042,673) (5,131,379) (13,174,052) (8,247,648) 9,043,173 (4,130,879)
-------------- -------------- ----------- ---------- ----------- ----------
FINANCING ACTIVITIES:
Net proceeds from issuance of
callable common stock.......... 21,424,589 5,975,390 27,399,979 5,975,390 27,399,979
Increase (decrease) in accrued
issuance costs................. 575,431 (575,431) (575,431)
Contributions from Dura
Pharmaceuticals, Inc........... 13,000,000 13,000,000 13,000,000
-------------- -------------- ----------- ---------- ----------- ----------
Net cash provided by
financing activities..... 35,000,020 5,399,959 40,399,979 5,399,959 -- 40,399,979
-------------- -------------- ----------- ---------- ----------- ----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS........ 26,966,535 (16,338,049) 10,628,486 (13,719,197) (9,910,236) 718,250
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD.............. -- 26,966,535 -- 26,966,535 10,628,486 --
-------------- -------------- ----------- ---------- ----------- ----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD........................... $26,966,535 $ 10,628,486 $10,628,486 $13,247,338 $ 718,250 $ 718,250
-------------- -------------- ----------- ---------- ----------- ----------
-------------- -------------- ----------- ---------- ----------- ----------
See accompanying notes to financial statements.
12
SPIROS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF SHAREHOLDERS' EQUITY
CALLABLE DEFICIT
CALLABLE COMMON UNREALIZED ACCUMULATED
COMMON STOCK ADDITIONAL STOCK GAIN (LOSS) DURING THE
---------------------- PAID-IN SUBSCRIPTION ON DEVELOPMENT
SHARES AMOUNT CAPITAL RECEIVABLE INVESTMENTS STAGE TOTAL
--------- ----------- ---------- ------------ ----------- ------------ -----------
BALANCE, DECEMBER 5, 1995
(Date of Incorporation)............
Issuance of callable common stock,
net................................ 933,334 $ 933 $27,423,656 $(6,000,000) $21,424,589
Contribution from Dura
Pharmaceuticals, Inc............... 13,000,000 13,000,000
Unrealized loss on
available-for-sale short-term
investments........................ $ (1,866) (1,866)
Net loss............................. $ (228,459) (228,459)
--------- ----- ---------- ------------ ----------- ------------ -----------
BALANCE, DECEMBER 31, 1995........... 933,334 933 40,423,656 (6,000,000) (1,866) (228,459) 34,194,264
Collection of callable common stock
subscription receivable............ 6,000,000 6,000,000
Additional issuance costs incurred
during 1996........................ (24,610) (24,610)
Unrealized gain on available-for-sale
short-term investments............. 16,373 16,373
Compensation expense--stock
options............................ 242,075 242,075
Net loss............................. (18,853,503) (18,853,503)
--------- ----- ---------- ------------ ----------- ------------ -----------
BALANCE, DECEMBER 31, 1996........... 933,334 933 40,641,121 -- 14,507 (19,081,962) 21,574,599
UNAUDITED:
Unrealized loss on available-for-sale
short-term investments............. (13,046) (13,046)
Net loss............................. (19,044,128) (19,044,128)
--------- ----- ---------- ------------ ----------- ------------ -----------
BALANCE, SEPTEMBER 30, 1997.......... 933,334 $ 933 $40,641,121 $ -- $ 1,461 ($38,126,090) $ 2,517,425
--------- ----- ---------- ------------ ----------- ------------ -----------
--------- ----- ---------- ------------ ----------- ------------ -----------
See accompanying notes to financial statements.
13
SPIROS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY--Spiros Development Corporation (the "Company") was incorporated
on December 5, 1995 for the purpose of funding the development of Spiros, a
proprietary drug delivery system licensed to the Company from Dura
Pharmaceuticals, Inc. ("Dura"). Through a series of license, development, and
management agreements with Dura, the Company is developing Spiros and the use of
Spiros with three leading asthma drugs: albuterol, beclomethasone, and
ipratropium (the "Compounds") (see Notes 3 and 4). Two members of the Company's
board of directors are officers of Dura.
BASIS OF ACCOUNTING--The Company is currently engaged in the development of
Spiros products and has yet to complete product development, obtain required
regulatory approvals, or verify the market acceptance and demand for its
products. Accordingly, its activities have been accounted for as those of a
"development stage enterprise" as set forth in Statement of Financial Accounting
Standards ("SFAS") No. 7, "Accounting and Reporting by Development Stage
Enterprises." Among the disclosures required by SFAS 7 are that the Company's
financial statements be identified as those of a "development stage enterprise"
and that the Statements of Operations, Shareholders' Equity, and Cash Flows
disclose activities since the date of the Company's inception.
At December 31, 1996, the Company had working capital of $21.6 million. The
Company estimates that these funds will be sufficient to fund product
development through 1997. However, completion of the Company's planned
development of Spiros with the Compounds will require additional funding.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS--The Company considers cash
equivalents to include only highly liquid securities with an original maturity
of three months or less. Short-term investments consist of government
securities, corporate bonds, and commercial paper which management has
classified as available-for-sale in the accompanying financial statements (Note
2). Such investments are carried at fair value, with unrealized gains and losses
reported as a separate component of shareholders' equity.
CONCENTRATION OF CREDIT RISK--The Company invests its excess cash in U.S.
Government securities and debt instruments of financial institutions and
corporations with strong credit ratings. The Company has established guidelines
relative to diversification of its cash investments and their maturities, which
are designed to maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
The Company has not experienced any significant losses on its cash equivalents
or short-term investments.
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.
ACCOUNTING FOR STOCK-BASED COMPENSATION--In 1996, the Company elected to
adopt only the disclosure provisions of the Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation." Therefore, the
adoption of this standard did not have an effect on the Company's financial
position or results of operations (see Note 5).
INTERIM FINANCIAL INFORMATION--The financial statements as of September
30, 1997, for the nine months ended September 30, 1996 and 1997, and for the
period from December 5, 1995 (date of incorporation) to September 30, 1997
are unaudited. These financial statements reflect all adjustments, consisting
only of normal recurring adjustments which, in the opinion of management, are
necessary to fairly present the Company's financial position as of September
30, 1997, the results of its operations for the nine months ended September
30, 1996 and 1997, and the results of operations from December 5, 1995 (date
of incorporation) to September 30, 1997. The results of operations for the
nine months ended September 30, 1997 are not necessarily indicative of the
results to be expected for the year ending December 31, 1997.
14
SPIROS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHORT-TERM INVESTMENTS
The following is a summary of short-term investments:
UNREALIZED ESTIMATED
GAINS FAIR
COST (LOSSES) VALUE
------------- ----------- -------------
DECEMBER 31, 1995:
Corporate obligations.............................. $ 8,042,673 $ (1,866) $ 8,040,807
DECEMBER 31, 1996:
Corporate obligations.............................. $ 13,174,052 $ 14,507 $ 13,188,559
At December 31, 1996, all short-term investments mature within one year.
3. SHAREHOLDERS' EQUITY
On December 29, 1995, the Company completed a private placement of
933,334 units. Each unit sold for $30 and consisted of 1 share of the
Company's callable common stock and a Series S warrant to purchase 2.4 shares
of Dura's common stock. Net proceeds to the Company totaled $27.4 million.
The Company also received a $13 million contribution from Dura. In exchange
for this contribution and the Series S warrants, Dura has the right ("Spiros
Purchase Option") through December 31, 1999, to purchase all of the
outstanding shares of the Company's callable common stock at predetermined
prices. The purchase price is $46.88 per share through December 31, 1997 and
increases on a quarterly basis thereafter to a maximum of $76.17 per share on
December 31, 1999. Based on shares outstanding and shares reserved for
options outstanding at December 31, 1996, the aggregate purchase price would
be $49.8 million through December 31, 1997 to a maximum of $80.8 million on
December 31, 1999. The purchase price may be paid, at Dura's discretion, in
cash, shares of Dura common stock, or a combination thereof. Dura has no
legal obligation to exercise the Spiros Purchase Option.
In addition, Dura has the option through specific dates to acquire the
Company's exclusive rights for the use of albuterol with the cassette version
of Spiros ("Albuterol Purchase Option") for a minimum purchase price of $15
million. If Dura exercises the Albuterol Purchase Option and does not
exercise its Spiros Purchase Option, Dura will pay a royalty to the Company
on net sales of such product. (See Note 7.)
4. LICENSE, ROYALTY AND DEVELOPMENT AGREEMENTS
DURA PHARMACEUTICALS, INC.--In connection with the December 29, 1995 private
placement, the Company also entered into certain other agreements with Dura
which are summarized as follows:
TECHNOLOGY LICENSE AGREEMENT--Under this agreement, Dura granted to the
Company, subject to existing agreements with Mitsubishi Chemical
Corporation, a royalty-bearing, perpetual, exclusive license to use Spiros
in connection with the Compounds, certain off-patent proteins and compounds,
and certain non-exclusive rights to other compounds. This agreement expires
upon exercise by Dura of the Spiros Purchase Option and prior to such
expiration, Dura may exercise the Albuterol Purchase Option under terms set
forth in the agreement.
INTERIM MANUFACTURING AND MARKETING AGREEMENT--Under this agreement, the
Company granted to Dura an exclusive license to manufacture and market
Spiros Corp. products in the U.S. in exchange for a royalty of 10.0% on net
product sales, as defined. Such agreement expires upon exercise or
termination of the Spiros Purchase Option.
15
SPIROS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LICENSE, ROYALTY AND DEVELOPMENT AGREEMENTS (CONTINUED)
DEVELOPMENT AND MANAGEMENT AGREEMENT--Under this agreement, the Company
has engaged Dura to develop the Company's products and provide general
management services to the Company. The Company reimburses Dura for (1) all
direct development costs plus a fee equal to 25% of all such costs and (2)
indirect development costs plus a fee equal to 15% of such costs. The
Agreement requires the Company to make payments to Dura for costs made on
behalf of the Company within 15 days after the month end in which the costs
were incurred. Fees paid to Dura for development of products and general
management services were $237,647, $20,598,188 and $20,835,835 for the
period December 5, 1995 (date of incorporation) to December 31, 1995,
the year ended December 31, 1996, and the period from December 5, 1995
(date of incorporation) through December 31, 1996, respectively.
MITSUBISHI CHEMICAL CORPORATION ("MCC")--The Company has entered into a
license and supply agreement with MCC whereby MCC was granted a license to
use and sell Spiros with certain compounds in defined territories located in
Asia. Under the agreement, the Company is developing formulations of the
compounds for use with Spiros, as well as a process to manufacture such
products. The Company is entitled to development payments upon achieving
specified milestones. Contract revenue under the agreement is recognized as
performance requirements are met. Contract revenue of $200,000 was recorded
during the year ended December 31, 1996.
5. STOCK OPTION PLAN
Under the 1996 Stock Option Plan (the "Plan"), the Company may grant options
to purchase up to 140,000 shares of the Company's callable common stock to
employees, directors, and consultants who provide services to the Company at
prices not less than 85% of the fair value of a share of callable common stock.
These options generally expire ten years from the date of the grant. Unexercised
options generally terminate upon the execution of a corporate transaction, as
defined in the plan agreement. Shares issued upon the exercise of options are
subject to certain restrictions regarding their disposition.
No options were granted during the period ended December 31, 1995. During
the year ended December 31, 1996, options to purchase 128,000 shares were
granted at a weighted average exercise price of $31.52, all of which remained
outstanding at December 31, 1996. Each of the options was fully exercisable
upon the date of the grant. The options granted have exercise prices ranging
from $30.00 to $33.87 and had a weighted average remaining contractual life
of 9.25 years at December 31, 1996. In accordance with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), the Company applies Accounting Principles Board Opinion No. 25
and related interpretations in accounting for stock options granted to
employees and, accordingly, no compensation cost has been recognized for
stock options granted to employees. In accordance with SFAS 123, options
granted to non-employees are accounted for based on their estimated fair
value at grant date. During the year ended December 31, 1996, 73,000 options
were granted to non-employees for which the Company recorded compensation
expense of $242,075. If the Company had elected to recognize compensation
cost for options granted to employees based on the fair value of the options
granted at the grant date, net loss for the year ended December 31, 1996
would have been increased by $193,935. The estimated weighted average fair
value at grant date for options granted during 1996 was $3.41. The fair value
of options at the date of grant was estimated using the Black-Scholes
option-pricing model with the following assumptions:
16
SPIROS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Expected dividend yield............................................ None
Risk-free interest rate............................................ 5.8%
Expected life of options........................................... 2 years
6. INCOME TAXES
Deferred taxes represent the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax assets at December 31, 1996 are as follows:
Net operating loss carryforwards................................ $6,281,973
Research costs capitalized for tax purposes..................... 977,897
Research credit carryforwards................................... 603,720
----------
Total deferred tax assets....................................... 7,863,590
Valuation allowance for deferred tax assets..................... (7,863,590)
----------
Net deferred tax assets..................................... $ 0
----------
The Company has provided a valuation allowance against deferred tax assets
due to uncertainties as to their ultimate realization. At December 31, 1996, the
Company had federal net operating loss carryforwards totaling approximately
$18.2 million which begin to expire in 2010.
7. EXPERCISE OF SPIROS PURCHASE OPTION BY DURA PHARMACEUTICALS, INC.
(UNAUDITED)
On October 10, 1997, Dura Pharmaceuticals, Inc. announced its intention
to exercise, prior to the completion of a proposed offering of securities by
Spiros Development Corporation II, Inc., an unrelated entity, and subject to
providing official notification to the Company's shareholders, its option to
acquire all of the Company's callable common stock.
17
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
C. Exhibits
23.1 Consent dated October 20, 1997 of Deloitte & Touche LLP.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 8-K/A to be signed on its behalf
by the undersigned hereunto duly authorized.
DURA PHARMACEUTICALS, INC.
Date: October 21, 1997 /s/ Mitchell R. Woodbury
--------------------------------------
Sr. Vice President General Counsel
19