SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
December 19, 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 2. Acquisition or Disposition of Assets
On December 19, 1997, Dura Pharmaceuticals, Inc. (the "Company" or "Dura")
acquired all of the outstanding shares of callable common stock of Spiros
Development Corporation ("Spiros Corp."), a separate, private company.
Spiros Corp. was formed in December 1995 to fund the development of a
proprietary pulmonary drug delivery system, Spiros-TM-, for use with
currently marketed asthma drugs. Dura acquired all of the outstanding shares
of Spiros Corp. by giving notice of exercise the purchase option for the
Spiros Corp. callable common stock on November 6, 1997. The purchase option
was originally acquired in 1995 from Spiros Corp.'s shareholders in exchange
for the issuance to such shareholders of warrants to purchase Dura's common
stock. The purchase price of $45,707,000 for the outstanding securities of
Spiros Corp., consisting of callable common stock and options, was paid by
the issuance of 896,606 shares of Dura common stock valued at $43,755,000 and
a cash payment of $1,952,000 from Dura's existing cash and cash equivalents.
Dura filed a registration statement on Form S-3 with respect to the resale of
the shares of Dura common stock issued in payment of the option exercise,
which was declared effective on December 18, 1997.
The acquistion was consummated based on the terms set forth in (i) Section 9
of the Purchase Agreement dated December 29, 1995 between Dura, Spiros Corp.
and the Spiros Corp. shareholders, (ii) Article IV of the Restated
Certificate of Incorporation of Spiros Corp. and (iii) the Agreement and Plan
of Merger dated December 18, 1997 between Dura, Spiros Corp. and SDC
Acquisition Corp. ("SDC Acquisition"), a Delaware corporation. The acquistion
was effected through the merger of Spiros Corp. with SDC Acquisition, a
wholly-owned subsidiary of Dura, which was effective on December 19, 1997. As
a result of the acquisition, Spiros Corp. is now a wholly-owned subsidiary of
Dura.
The acquisition has been treated as a purchase for accounting purposes and,
accordingly, the Company has allocated the purchase price to the fair value
of the net assets acquired. The net assets acquired consisted of
approximately $1.0 million in cash; accordingly, the excess purchase price
over the fair value of the net assets acquired was $44.7 million. This amount
was allocated to in-process technology and was expensed by Dura as a one-time
non-cash charge in December 1997.
Spiros Corp.'s activities prior to the acquisition consisted of developing
Spiros-TM- for use with three existing asthma drugs licensed from Dura. The
development activities of Spiros Corp. were being performed and managed under a
contract with Dura. Two directors of Spiros Corp. are officers and directors
of Dura.
In December 1997, Dura and Spiros Corp. licensed certain rights to specified
compounds for use with Spiros-TM- to Spiros Development Corporation II, Inc.
("Spiros Corp. II"), a separate, newly-formed corporation (see Item 5 herein).
The foregoing description of the acquisition is qualified in its entirety by
reference to the exhibits attached hereto and incorporated herein by
reference.
Item 5. Other Events
On December 22, 1997, Dura contributed $75.0 million in cash to Spiros Corp.
II, and Dura and Spiros Corp. II completed a Public offering of 6,325,000
Units. Each Unit consisted of one share of callable common stock of Spiros
Corp. II and one warrant to purchase one-fourth of one share of common stock
of Dura. As a result of the offering, warrants to purchase an aggregate of
1,581,250 shares of Dura common stock at $54.84 per share were issued to
Spiros Corp. II shareholders. Dura has the right, through December 31, 2002,
to purchase all of the shares of Spiros Corp. II callable common stock at
predetermined prices, beginning at $24.01 per share, or an aggregate of
$151.9 million,
2
through December 31, 1999 and increasing on a quarterly basis thereafter to a
maximum of $45.95 per share, or an aggregate of $290.6 million, on December 31,
2002. The purchase option exercise price may be paid in cash or shares of
Dura common stock, or any combination of the foregoing, at Dura's sole
discretion. In addition, Dura has the option, through specified dates, to
acquire Spiros Corp. II's exclusive rights for the use of Spiros with (i) the
asthma drug albuterol and (ii) a second asthma drug being developed by
Spiros Corp. II, to be selected by Dura. A one-time purchase option expense
of $75.0 million, representing the cash contributed to Spiros Corp. II, was
recorded by Dura in December 1997. The Company will also record a warrant
subscription receivable and a corresponding increase to paid-in capital for
the estimated fair value of the warrants issued.
Dura and Spiros Corp. II have entered into certain technology license,
development, manufacturing and marketing, and services agreements, under which
Spiros Corp. II will contract with Dura for the ongoing development of Spiros
with specified asthma drugs. Future payments to be received by Dura from Spiros
Corp. II for the development of Spiros will be prorated between contract revenue
and the warrant subscription receivable.
The description of the events set forth above is qualified in its entirety by
reference to the exhibits which are attached hereto and incorporated herein
by reference.
Item 7. Financial Statements and Exhibits
Listed below are the financial statements and pro forma financial information
filed as part of this report on Form 8-K.
a. Financial Statements of Spiros Development Corporation (a development
stage enterprise):
Independent Auditors' Report
Balance Sheets as of December 31, 1995 and 1996 and September 30,
1997 (unaudited).
Statements of Operations for the period December 5, 1995 (date of
incorporation) to December 31, 1995, the year ended December 31,
1996, the period December 5, 1995 to December 31, 1996, the nine
months ended September 30, 1996 and 1997 (unaudited), and the
period December 5, 1995 to September 30, 1997 (unaudited).
Statements of Cash Flows for the period December 5, 1995 (date of
incorporation) to December 31, 1995, the year ended December 31,
1996, the period December 5, 1995 to December 31, 1996, the nine
months ended September 30, 1996 and 1997 (unaudited), and the
period December 5, 1995 to September 30, 1997 (unaudited).
Statements of Shareholders' Equity for the period December 5,
1995 (date of incorporation) to December 31, 1995, the year
ended December 31, 1996, and the nine months ended September 30,
1997
Notes to Financial Statements.
3
b. Pro Forma Financial Information:
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
the acquisition of Spiros Corp. as if it 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. These
pro forma condensed consolidated financial statements have been
prepared by management of Dura based on historical financial
statements of Dura and Spiros Corp. and on the assumptions and
adjustments as discussed in the accompanying notes to the pro forma
condensed consolidated financial statements. The acquisition has been
accounted for as a purchase and the pro forma financial information
gives effect to the preliminary allocation of the purchase price to
the acquired assets of Spiros Corp. The final purchase price
allocation will be made at a future date, which may result in
adjustments to the preliminary allocation.
In the opinion of management, 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 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 the Company from the acquisition date forward.
c. Exhibits:
EXHIBIT NO. DESCRIPTION
----------- -----------
1.1 (a) U.S. Purchase Agreement dated December 16, 1997 between Dura
Pharmaceuticals, Inc. ("Dura"), Spiros Development Corporation
II, Inc. ("Spiros Corp. II"), and the underwriters listed on
Schedule A thereto.
1.2 (a) International Purchase Agreement dated December 16, 1997 between
Dura, Spiros Corp. II, and the managers listed on Schedule A
thereto.
2.1 (b) Purchase Agreement dated December 29, 1995 between Dura, Spiros
Development Corporation ("Spiros Corp."), and the entities listed
on the schedule of purchasers attached thereto.
2.2 Agreement and Plan of Merger dated December 18, 1995 between
Dura, Spiros Corp. and SDC Acquisition Corp.
4.1(a) Amended and Restated Certificate of Incorporation of Spiros
Corp. II, filed December 19, 1997 with the Deleware Secretary of
State.
4.2(c) By-laws of Spiros Corp. II.
4.3 Purchase Option (included in Exhibit 4.1)
4.4 Warrant Agreement dated December 22, 1997 between Dura and
ChaseMellon Shareholder Services L.L.C., as warrant agent,
including form of Warrant.
4.5 Form of Warrant (included in Exhibit 4.4).
4.6 Specimen Unit Certificate.
4.7 Specimen Certificate of Spiros Corp. II Callable Common Stock.
4.8 Stock Certificate of SDC II Special Shares.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
99.1 Technology License Agreement dated December 22, 1997 between
Dura, Dura Delivery Systems, Inc., Spiros Corp. and Spiros
Corp. II.
99.2 Development Agreement dated December 22, 1997 between Dura and
Spiros Corp. II.
99.3 Albuterol and Product Option Agreement dated December 22, 1997,
between Dura and Spiros Corp. II.
99.4 Manufacturing and Marketing Agreement dated December 22, 1997,
between Dura and Spiros Corp. II.
99.5 Services Agreement dated December 22, 1997, between Dura and
Spiros Corp. II.
99.6 Press Release dated October 10, 1997.
99.7 Press Release dated December 17, 1997.
(a) Incorporated by reference to Schedule 13D filed by Dura on January 2,
1998.
(b) Incorporated by reference to the Company's Current Report on Form 8-K
dated December 29, 1995, as filed on January 9, 1996.
(c) Incorporated by reference to the Company's Registration Statement on
Forms S-1/S-3, filed October 10, 1997, as amended.
4
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, on December 19, 1997 Dura Pharmaceuticals, Inc. acquired
all of the callable common stock of the Company.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
March 21, 1997 (December 19, 1997 as to Note 7)
5
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.
6
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.
7
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.
8
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.
9
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.
10
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.
11
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:
12
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. EXERCISE OF SPIROS PURCHASE OPTION BY DURA PHARMACEUTICALS, INC.
(UNAUDITED)
On December 19, 1997, Dura acquired all of the Company's callable common
stock. The purchase price of $45.7 million was paid through the issuance of
896,606 shares of Dura common stock valued at $43.8 million and $1.9 million
in cash.
13
DURA PHARMACEUTICALS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1997
IN THOUSANDS
- --------------------------------------------------------------------------------
Spiros Purchase Pro Forma
ASSETS Dura Corp. Adjustments Consolidated
-------------- ------------- ------------ -------------
Current Assets:
Cash, cash equivalents, and short-term investments $ 454,710 $ 4,851 $ (1,952) (2b) $ 457,609
Other current asssets 43,707 (2,325) (2a) 41,382
-------------- ------------- ------------ -------------
Total current assets 498,417 4,851 (4,277) 498,991
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 $ (4,277) $ 821,679
-------------- ------------- ------------ -------------
-------------- ------------- ------------ -------------
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 3,113 (2b) 576,757
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 (1,952) 482,863
-------------- ------------- ------------ -------------
Total $ 821,105 $ 4,851 $ (4,277) $ 821,679
-------------- ------------- ------------ -------------
-------------- ------------- ------------ -------------
See accompanying notes to pro forma condensed consolidated financial statements.
14
DURA PHARMACEUTICALS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1996
IN THOUSANDS, EXCEPT PER SHARE DATA
- --------------------------------------------------------------------------------
Spiros Purchase Pro Forma
Dura Corp. Adjustments Consolidated
--------- --------- ----------- ------------
REVENUES:
Sales $ 79,563 $ 79,563
Contract 24,556 $ 200 $ (19,138) (3a) 5,618
--------- --------- ---------- ----------
Total revenues 104,119 200 (19,138) 85,181
--------- --------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Cost of sales 21,301 21,301
Clinical, development and regulatory 18,540 16,174 (16,174) (3b) 18,540
Selling, general and administrative 42,631 4,666 (4,666) (3b) 42,631
--------- --------- ---------- ----------
Total operating costs and expenses 82,472 20,840 (20,840) 82,472
--------- --------- ---------- ----------
OPERATING INCOME (LOSS) 21,647 (20,640) 1,702 2,709
--------- --------- ---------- ----------
OTHER:
Interest income 6,897 1,788 8,685
Interest expense (677) (677)
--------- --------- ---------- ----------
Total other 6,220 1,788 8,008
--------- --------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 27,867 (18,852) 1,702 10,717
PROVISION FOR INCOME TAXES 3,539 2 (2,625) (3c) 916
--------- --------- ---------- ----------
NET INCOME (LOSS) $ 24,328 $ (18,854) $ 4,327 $ 9,801
--------- --------- ---------- ----------
--------- --------- ---------- ----------
NET INCOME PER SHARE $ 0.60 $ 0.24
--------- ----------
--------- ----------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES 40,479 41,376
--------- ----------
--------- ----------
See accompanying notes to pro forma condensed consolidated financial
statements.
15
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
- --------------------------------------------------------------------------------
Spiros Purchase Pro Forma
Dura Corp. Adjustments As Adjusted
------------ ------------ ------------- ------------
REVENUES:
Sales $ 105,437 $ 105,437
Contract 22,430 $ (18,331) (3a) 4,099
------------ ------------ ------------ ------------
Total revenues 127,867 - (18,331) 109,536
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of sales 23,373 23,373
Clinical, development and regulatory 18,160 $ 14,863 (14,863) (3b) 18,160
Selling, general and administrative 49,485 4,869 (4,869) (3b) 49,485
------------ ------------ ------------ ------------
Total operating costs and expenses 91,018 19,732 (19,732) 91,018
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 36,849 (19,732) 1,401 18,518
------------ ------------ ------------ ------------
OTHER:
Interest income 11,434 688 12,122
Interest expense (2,531) (2,531)
------------ ------------ ------------ ------------
Total other 8,903 688 - 9,591
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 45,752 (19,044) 1,401 28,109
PROVISION FOR INCOME TAXES 16,357 (7,057) (3c) 9,300
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 29,395 $ (19,044) $ 8,458 $ 18,809
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET INCOME PER SHARE $ 0.62 $ 0.39
------------ ------------
------------ ------------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES 47,392 48,289
------------ ------------
------------ ------------
See accompanying notes to pro forma condensed consolidated financial
statements.
16
Dura Pharmaceuticals, Inc.
Notes to Pro Forma Condensed Consolidated Financial Statements (Unaudited)
1. On December 19, 1997, Dura Pharmaceuticals, Inc. (the "Company" or
"Dura") acquired all of the outstanding shares of callable common stock of
Spiros Development Corporation ("Spiros Corp") for an aggregate purchase
price of $45,707,000. The purchase price was paid through the issuance of
896,606 shares of Dura common stock and a cash payment of $1,952,000. The
acquisition has been accounted for as a purchase business combination.
Dura has initially assigned the estimated aggregate excess of cost over
the fair value of net assets acquired to in-process technology. The
charge to earnings for in-process technology 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 Spiros Corp. had occurred on September 30,
1997. The adjustments are summarized as follows (dollars in thousands):
(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 896,606 shares of the Company's common
stock valued at $43,755 and a cash payment of $1,952 for the acquisition of
Spiros Corp., the elimination of Spiros Corp.'s equity accounts, and a
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
17
Cash $ 1,952
Additional paid-in capital 43,754
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 Spiros Corp. as if it had
occurred on January 1, 1996. The pro forma adjustments are summarized as
follows (dollars in thousands):
For the year ended December 31, 1996:
(a) To eliminate contract revenue recognized by the Company related to
activities conducted on behalf of Spiros Corp. Because a pro rata portion
of the amounts paid by Spiros Corp. to the Company is allocated to warrant
subscriptions receivable, the contract revenue recognized by the Company
does not equal the total research and development and general and
administrative expenses recorded by Spiros Corp. $ 19,138
(b) To eliminate research and development and general and administrative
expenses recognized by Spiros Corp. 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 Spiros Corp. (see further discussion
below). $ 2,625
For the nine months ended September 30, 1997:
(a) To eliminate contract revenue recognized by the Company related to
activities conducted on behalf of Spiros Corp. Because a pro rata portion
of the amounts paid by Spiros Corp. to the Company is allocated to warrant
subscriptions receivable, the contract revenue recognized by the Company
does not equal the total research and development and general and
administrative expenses recorded by Spiros Corp. $ 18,331
(b) To eliminate research and development and general and administrative
expenses recognized by Spiros Corp. 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 Spiros Corp. (see further discussion
below). $ 7,057
No income tax benefit was recognized by Spiros Corp. 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 Spiros Corp. with
those of the Company for the respective periods and calculating the
provision for income taxes as if the Company had acquired Spiros Corp. on
January 1, 1996.
18
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 896,606 shares of the
Company's common stock as discussed in Note 1.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 8-K to be signed on its behalf
by the undersigned hereunto duly authorized.
DURA PHARMACEUTICALS, INC.
Date: January 5, 1998 /s/ Mitchell R. Woodbury
--------------------------------------
Sr. Vice President and General Counsel
20
DURA PHARMACEUTICALS, INC.
FORM 8-K
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
1.1 (a) U.S. Purchase Agreement dated December 16, 1997 between Dura
Pharmaceuticals, Inc. ("Dura"), Spiros Development Corporation
II, Inc. ("Spiros Corp. II"), and the underwriters listed on
Schedule A thereto.
1.2 (a) International Purchase Agreement dated December 16, 1997 between
Dura, Spiros Corp. II, and the managers listed on Schedule A
thereto.
2.1 (b) Purchase Agreement dated December 29, 1995 between Dura, Spiros
Development Corporation ("Spiros Corp."), and the entities listed
on the schedule of purchasers attached thereto.
2.2 Agreement and Plan of Merger dated December 18, 1995 between
Dura, Spiros Corp. and SDC Acquisition Corp.
4.1(a) Amended and Restated Certificate of Incorporation of Spiros
Corp. II, filed December 19, 1997 with the Deleware Secretary of
State.
4.2(c) By-laws of Spiros Corp. II.
4.3 Purchase Option (included in Exhibit 4.1)
4.4 Warrant Agreement dated December 22, 1997 between Dura and
ChaseMellon Shareholder Services L.L.C., as warrant agent,
including form of Warrant.
4.5 Form of Warrant (included in Exhibit 4.4).
4.6 Specimen Unit Certificate.
4.7 Specimen Certificate of Spiros Corp. II Callable Common Stock.
4.8 Stock Certificate of SDC II Special Shares.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
99.1 Technology License Agreement dated December 22, 1997 between
Dura, Dura Delivery Systems, Inc., Spiros Corp. and Spiros
Corp. II
99.2 Development Agreement dated December 22, 1997 between Dura and
Spiros Corp. II.
99.3 Albuterol and Product Option Agreement dated December 22, 1997,
between Dura and Spiros Corp. II.
99.4 Manufacturing and Marketing Agreement dated December 22, 1997,
between Dura and Spiros Corp. II.
99.5 Services Agreement dated December 22, 1997, between Dura and
Spiros Corp. II.
99.6 Press Release dated October 10, 1997.
99.7 Press Release dated December 17, 1997.
(a) Incorporated by reference to Schedule 13D filed by Dura on January 2,
1998.
(b) Incorporated by reference to the Company's Current Report on Form 8-K
dated December 29, 1995, as filed on January 9, 1996.
(c) Incorporated by reference to the Company's Registration Statement on
Forms S-1/S-3, filed October 10, 1997, as amended.