SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File number 000-19809
DURA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3645543
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7475 LUSK BLVD., SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE IS (619) 457-2553
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [ X ] Yes [ ] No
The number of shares of the Registrant's Common Stock outstanding as of July
31, 1998 was 46,366,092.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DURA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT SHARE AMOUNTS
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DECEMBER 31, JUNE 30,
ASSETS 1997 1998
------------ -----------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 72,003 $ 119,076
Short-term investments 313,218 291,286
Accounts and other receivables 40,987 34,255
Inventory 15,201 10,846
------------ -----------
Total current assets 441,409 455,463
License agreements and product rights 250,781 249,756
Property 48,525 64,826
Other assets 34,165 33,695
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TOTAL $ 774,880 $ 803,740
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------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 45,741 $ 53,920
Current portion of long-term obligations 2,798 2,896
------------ -----------
Total current liabilities 48,539 56,816
Convertible subordinated notes 287,500 287,500
Other long-term obligations 9,564 9,944
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Total liabilities 345,603 354,260
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.001; shares authorized - 5,000,000;
no shares issued or outstanding
Common stock, par value $.001; shares authorized - 200,000,000;
issued and outstanding - 45,608,414 and 46,363,738, respectively 46 46
Additional paid-in capital 604,991 608,560
Accumulated other comprehensive income 176 93
Warrant subscriptions receivable (12,252) (10,876)
Accumulated deficit (163,684) (148,343)
------------ -----------
Total stockholders' equity 429,277 449,480
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TOTAL $ 774,880 $ 803,740
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See accompanying notes to consolidated financial statements.
2
DURA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ----------------------
1997 1998 1997 1998
------------------------ ----------------------
REVENUES:
Sales $ 35,404 $ 34,912 $ 69,339 $ 70,798
Contract 8,227 17,026 15,184 29,906
--------- --------- --------- ---------
Total revenues 43,631 51,938 84,523 100,704
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES:
Cost of sales 7,976 7,457 15,946 15,550
Clinical, development and regulatory 6,593 11,488 12,353 21,077
Selling, general and administrative 16,760 22,946 32,752 45,461
--------- --------- --------- ---------
Total operating costs and expenses 31,329 41,891 61,051 82,088
--------- --------- --------- ---------
OPERATING INCOME 12,302 10,047 23,472 18,616
--------- --------- --------- ---------
OTHER:
Interest income 2,992 5,937 6,379 11,354
Interest expense (116) (3,069) (289) (6,210)
Other - net (9) (519) 11 (506)
--------- --------- --------- ---------
Total other 2,867 2,349 6,101 4,638
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INCOME BEFORE INCOME TAXES 15,169 12,396 29,573 23,254
PROVISION FOR INCOME TAXES 5,887 4,219 11,504 7,913
--------- --------- --------- ---------
NET INCOME $ 9,282 $ 8,177 $ 18,069 $ 15,341
--------- --------- --------- ---------
--------- --------- --------- ---------
NET INCOME PER SHARE:
Basic $ 0.21 $ 0.18 $ 0.42 $ 0.33
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted $ 0.20 $ 0.17 $ 0.38 $ 0.32
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic 43,672 46,302 43,511 46,139
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted 47,326 48,073 47,285 48,321
--------- --------- --------- ---------
--------- --------- --------- ---------
See accompanying notes to consolidated financial statements.
3
DURA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(UNAUDITED)
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SIX MONTHS ENDED
JUNE 30,
------------------------
1997 1998
------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 30,241 $ 43,633
--------- ---------
INVESTING ACTIVITIES:
Purchases of short-term investments (141,604) (179,606)
Sales and maturities of short-term investments 105,776 201,454
Product acquisitions (69,731) (5,000)
Capital expenditures (13,735) (18,582)
Other (1,155) (363)
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Net cash used for investing activities (120,449) (2,097)
--------- ---------
FINANCING ACTIVITIES:
Issuance of common stock and warrants - net 3,615 5,537
Principal payments on long-term obligations (3,500) -
--------- ---------
Net cash provided by financing activities 115 5,537
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (90,093) 47,073
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 131,101 72,003
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 41,008 $ 119,076
--------- ---------
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 0 $ 5,832
Income taxes $ 4,438 $ 3,479
See accompanying notes to consolidated financial statements.
4
DURA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by Dura Pharmaceuticals, Inc. ("Dura" or the "Company") in
accordance with the instructions to Form 10-Q. The consolidated financial
statements reflect all adjustments, consisting of only normal recurring
accruals, which are, in the opinion of management, necessary for a fair
statement of the results of the interim periods presented. These
consolidated financial statements and notes thereto should be read in
conjunction with the audited financial statements and notes thereto included
in the Company's 1997 Annual Report to Stockholders, which statements and
notes are incorporated by reference in the Company's Annual Report on Form
10-K for the year ended December 31, 1997. The results of operations for the
interim periods are not necessarily indicative of results to be expected for
any other interim period or for the year as a whole.
The consolidated financial statements include the accounts of Dura and its
wholly-owned subsidiaries. All intercompany transactions and balances are
eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the consolidated financial statements and
related notes. Changes in those estimates may affect amounts reported in
future periods.
2. NEW ACCOUNTING STANDARD
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 and its
components which, for Dura, includes net income and unrealized gains and
losses on investments. In accordance with SFAS 130, the accumulated balance
of other comprehensive income is disclosed as a separate component of
stockholders' equity. Prior year financial statements have been reclassified
to conform to the requirements of SFAS 130.
5
For the three months and six months ended June 30, 1997 and 1998, comprehensive
income consisted of (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
------- ------ ------- -------
Net income $ 9,282 $8,177 $18,069 $15,341
Other comprehensive income (loss):
Unrealized gain(loss) on
investments 579 (167) 114 (83)
------- ------ ------- -------
Comprehensive income $ 9,861 $8,010 $18,183 $15,258
------- ------ ------- -------
------- ------ ------- -------
3. CAPITAL STOCK
COMMON STOCK. On May 21, 1998, the Company's stockholders approved an
amendment to the Company's Certificate of Incorporation increasing the number
of authorized shares of Common Stock from 100 million to 200 million.
SHAREHOLDER RIGHTS PLAN. In May 1998, the Company adopted a Shareholder
Rights Plan in which Preferred Stock purchase rights ("Rights") were
distributed as a dividend at the rate of one Right for each share of Common
Stock held as of the close of business on June 5, 1998. Each Right entitles
stockholders to buy, upon certain events, one one-thousandth of a share of a
new series of junior participating Preferred Stock of the Company at an
exercise price of $175.00. The Rights are designed to guard against partial
tender offers and other abusive tactics that might be used in an attempt to
gain control of the Company or to deprive stockholders of their interest in
the long-term value of the Company. The Rights are exercisable only if a
person or group acquires 15% or more of the Company's Common Stock or
announces a tender offer of which the consummation would result in ownership
by a person or group of 15% or more of the Company's Common Stock. The
Rights are redeemable for one cent per Right at the option of the Board of
Directors prior to this event occurring. The Rights expire on June 5, 2008.
4. COMMITMENTS AND CONTINGENCIES
TERMINATION OF MERGER AGREEMENT WITH SCANDIPHARM, INC. On December 1, 1997,
the Company terminated a merger agreement with Scandipharm, Inc.
("Scandipharm") entered into on October 20, 1997. On January 16, 1998,
Scandipharm filed suit against the Company for breach of contract. On January
19, 1998, the Company filed suit against Scandipharm seeking a declaratory
judgment that Dura's termination of the merger did not breach the merger
agreement and for damages against Scandipharm. The Company believes that it
had the right to terminate the merger agreement, and that Scandipharm's
claims for specific performance under the agreement or for unspecified
damages are without merit, and that outcome of this matter will not have a
material adverse effect on the Company's financial position or results of
operations.
ACQUISITION OF SPIROS DEVELOPMENT CORPORATION. On December 19, 1997, the
Company acquired all of the outstanding callable common stock of Spiros
Development Corporation. The Company
6
is in the process of determining the appropriate values to be assigned to the
assets and liabilities assumed in the acquisition. The Company's estimate of
these values is subject to revision upon completion of its evaluation which
may result in an adjustment to the amount recorded in 1997 for the
acquisition of in-process technology.
5. SUBSEQUENT EVENTS
On July 28, 1998, the Company entered into a series of agreements with a
newly-formed, privately held company, DJ Pharma, Inc. ("DJ"), for the
co-promotion of the Company's Rondec, Keftab, and certain cough, cold and
allergy product lines. As consideration for the co-promotion of these
products, the Company will pay DJ fifty percent of the net sales of such
products in excess of established amounts. DJ also received an option to
acquire these products from the Company at predetermined prices which include
the delivery of a secured promissory note and the right to a percentage of
the net sales of such products over a four year period following the exercise
of its option. The co-promotion and option agreement expires June 30, 1999.
The Company also provided $5 million of financing to DJ in the form of a
convertible secured promissory note, some or all of which will convert to
equity upon the closing of a private offering of equity securities currently
being contemplated by DJ ("DJ Offering"). In addition, the Company has
committed to providing an additional loan of $5 million to DJ in the form of
a non-convertible secured promissory note to be funded upon the closing of a
DJ Offering of at least $15 million.
ACQUISITION OF MYAMBUTOL-Registered Trademark- PRODUCT RIGHTS. On August 3,
1998, the Company acquired from an affiliate of American Home Products
("AHP") exclusive U.S. marketing rights to the single-source tuberculosis
drug Myambutol. The purchase price consisted of a $33.5 million cash
payment made at closing, plus additional payments over the next four years
based upon net sales of Myambutol during that period. Based on historical
sales data for Myambutol provided by AHP, the Company estimates that such
future payments could approximate $50 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This information should be read in conjunction with the consolidated
financial statements and the notes thereto included in Item 1 of this
Quarterly Report and the audited financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 1997 contained in the Company's
1997 Annual Report to Stockholders, which is incorporated by reference in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
See "Risks and Uncertainties" for a discussion of factors known to the
Company that could cause reported financial information not to be necessarily
indicative of future results, including discussion of the effects of
seasonality on
7
the Company. The Company undertakes no obligation to release publicly any
revisions to these forward-looking statements to reflect events and
circumstances arising after the date hereof.
RECENT DEVELOPMENTS
On August 3, 1998, the Company acquired from an affiliate of AHP exclusive
U.S. marketing rights to the single-source tuberculosis drug Myambutol. The
purchase price consisted of a $33.5 million cash payment made at closing,
plus additional payments over the next four years based upon net sales of
Myambutol during that period. Based on historical sales data for Myambutol
provided by AHP, the Company estimates that such future payments could
approximate $50 million.
On July 28, 1998, the Company entered into a series of agreements with a
newly-formed, privately held company, DJ Pharma, Inc. ("DJ"), for the
co-promotion of the Company's Rondec, Keftab, and certain cough, cold and
allergy product lines. As consideration for the co-promotion of these
products, the Company will pay DJ fifty percent of the net sales of such
products in excess of established amounts. DJ also received an option to
acquire these products from the Company at predetermined prices which include
the delivery of a secured promissory note and the right to a percentage of
the net sales of such products over a four year period following the exercise
of its option. The co-promotion and option agreement expires June 30, 1999.
The Company also provided $5 million of financing to DJ in the form of a
convertible secured promissory note, some or all of which will convert to
equity upon the closing of a private offering of equity securities currently
being contemplated by DJ ("DJ Offering"). In addition, the Company has
committed to providing an additional loan of $5 million to DJ in the form of
a non-convertible secured promissory note to be funded upon the closing of a
DJ Offering of at least $15 million.
On May 21, 1998, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation increasing the number of authorized
shares of Common Stock from 100 million to 200 million.
On February 22, 1998, the Company announced that it planned to begin
expanding its field sales force immediately from approximately 270
representatives to approximately 450 representatives by the end of 1998 to
increase the promotional activity of its current products and to prepare for
the launch, subject to receiving regulatory approval, of Albuterol
Spiros-TM-. The Company expects that the rapid expansion of its sales force
will result in an increase in fiscal 1998 in its selling, general and
administrative expenses, both in total and as a percentage of revenues, as
compared to fiscal 1997.
8
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1998
Total revenues for the three months ended June 30, 1998 were $51.9 million,
an increase of $8.3 million, or 19%, over the same period in 1997. Net
income for the three months ended June 30, 1998 was $8.2 million, or $0.17
per diluted share, a decrease of $1.1 million from the same period in 1997.
The principal factors causing these changes are discussed below.
Pharmaceutical sales for the three months ended June 30, 1998 were $34.9
million, a decrease of $500,000, or 1%, over the same period in 1997. This
decrease is due primarily to a decrease in sales of certain of the Company's
older cough, cold and allergy products, partially offset by an increase in
sales of Nasarel-Registered Trademark- and Nasalide-Registered Trademark-,
acquired in May 1997.
Gross profit (pharmaceutical sales less cost of sales) for the three months
ended June 30, 1998 was $27.5 million compared to $27.4 million for the same
period in 1997. Gross profit as a percentage of sales was 79% for the three
months ended June 30, 1998 compared to 77% for the same period in 1997.
Contract revenue relates primarily to amounts received by the Company for the
development of Spiros-Registered Trademark-, the Company's proprietary dry
powder pulmonary drug delivery system. Pursuant to agreements with several
companies, the Company conducts feasibility testing and development work on
various compounds for use with Spiros. Contract revenues include payment for
feasibility and development work performed by the Company as well as
milestone and technology access payments. Contract revenue for the three
months ended June 30, 1998 was $17 million, an increase of $8.8 million, or
107%, over the same period in 1997. This increase is due to increased
development activity conducted on behalf of Spiros Development Corporation,
Inc. II ("Spiros Corp. II") and other pharmaceutical company partners.
Contract revenues from Spiros-related development and feasibility agreements
totaled $16.9 million for the three months ended June 30, 1998 as compared to
$7.8 million for the same period in 1997, including $12.6 million from Spiros
Corp. II as compared to $6.8 million from Spiros Development Corporation for
the same period in 1997.
Clinical, development and regulatory expenses for the three months ended June
30, 1998 were $11.5 million, an increase of $4.9 million, or 74%, over the
same period in 1997. The increase reflects additional expenses incurred by
the Company under feasibility and development agreements covering the use of
various compounds with Spiros as discussed above.
Selling, general and administrative expenses for the three months ended June
30, 1998 were $22.9 million, an increase of $6.2 million, or 37%, over the
same period in 1997, and increased as a percentage of total revenues to 44%
for the three months ended June 30, 1998 as compared to 38% for the second
quarter of 1997. The dollar and percentage increases are primarily due to
increased costs associated with expanding the Company's sales force (increase
of $6.4 million). On February 22, 1998, the Company announced that it planned
to begin expanding its field sales force immediately from approximately 270
representatives to approximately 450 representatives by the
9
end of 1998 to increase the promotional activity of its current products and
to prepare for the launch, subject to receiving regulatory approval, of
Albuterol Spiros. The Company expects that the rapid expansion of its sales
force will result in an increase in fiscal 1998 in its selling, general and
administrative expenses, both in total and as a percentage of revenues, as
compared to fiscal 1997.
Interest income for the three months ended June 30, 1998 was $5.9 million, an
increase of $2.9 million, or 98%, as compared to the same period in 1997.
The increase is due to higher balances of cash and short-term investments
resulting primarily from the 3 1/2% Convertible Subordinated Notes issued in
the third quarter of 1997 (see "Liquidity and Capital Resources" below), as
well as cash generated from operations.
Interest expense for the three months ended June 30, 1998 was $3.1 million as
compared to $116,000 for the same period in 1997. The increase is primarily
due to interest expense on the 3 1/2% Convertible Subordinated Notes (see
"Liquidity and Capital Resources" below).
The Company records interim provisions for income taxes based on the
estimated effective combined tax rate to be applicable for the fiscal year.
This estimate is reevaluated by management each quarter based on forecasts of
income before income taxes for the year as well as anticipated adjustments
from statutory federal and state tax rates. The Company's effective tax rate
for the three months ended June 30, 1998 was 34%, compared to 39% for the
same period in 1997. This reduction is due primarily to an increase in 1998
in income earned at foreign subsidiaries which is taxed at lower rates.
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
Total revenues for the six months ended June 30, 1998 were $100.7 million, an
increase of $16.2 million, or 19%, over the same period in 1997. Net income
for the six months ended June 30, 1998 was $15.3 million, or $0.32 per
diluted share, a decrease of $2.7 million from the same period in 1997. The
principal factors causing these changes are discussed below.
Pharmaceutical sales for the six months ended June 30, 1998 were $70.8
million, an increase of $1.5 million, or 2%, over the same period in 1997.
This increase is due primarily to sales of Nasarel and Nasalide, acquired in
May 1997, offset by a decrease in sales of certain of the Company's older
cough, cold and allergy products.
Gross profit (pharmaceutical sales less cost of sales) for the six months
ended June 30, 1998 was $55.2 million, an increase of $1.9 million, or 3%, as
compared to the same period in 1997. This increase is due to the increase in
pharmaceutical sales discussed above. Gross profit as a percentage of sales
was 78% for the six months ended June 30, 1998 compared to 77% for the same
period in 1997.
Contract revenue relates primarily to amounts received by the Company for the
development of Spiros, the Company's proprietary dry powder pulmonary drug
delivery system. Pursuant to agreements with several companies, the Company
conducts feasibility testing and development
10
work on various compounds for use with Spiros. Contract revenues include
payment for feasibility and development work performed by the Company as well
as milestone and technology access payments. Contract revenue for the six
months ended June 30, 1998 was $29.9 million, an increase of $14.7 million,
or 97%, over the same period in 1997. This increase is due to increased
development activity conducted on behalf of Spiros Corp. II and other
pharmaceutical company partners. Contract revenue from Spiros-related
development and feasibility agreements for the six months ended June 30, 1998
totaled $29.4 million as compared to $14.6 million for the same period in
1997, including $23 million from Spiros Corp. II as compared to $12.2 million
from Spiros Development Corporation for the same period in 1997.
Clinical, development and regulatory expenses for the six months ended June
30, 1998 were $21 million, an increase of $8.7 million, or 71%, over the same
period in 1997. The increase reflects additional expenses incurred by the
Company under feasibility and development agreements covering the use of
various compounds with Spiros as discussed above.
Selling, general and administrative expenses for the six months ended June
30, 1998 were $45.5 million, an increase of $12.7 million, or 39%, over the
same period in 1997, and increased as a percentage of total revenues to 45%
for the six months ended June 30, 1998 as compared to 39% for the six months
ended June 30, 1997. The dollar and percentage increases are primarily due
to increased costs incurred to support the Company's sales and contract
revenue growth, including costs associated with expanding the Company's sales
force (increase of $11.3 million) and increased operating costs related to
general corporate activities (increase of $1.4 million). On February 22,
1998, the Company announced that it planned to begin expanding its field sales
force immediately from approximately 270 representatives to approximately 450
representatives by the end of 1998 to increase the promotional activity of
its current products and to prepare for the launch, subject to receiving
regulatory approval, of Albuterol Spiros. The Company expects that the rapid
expansion of its sales force will result in an increase in fiscal 1998 in its
selling, general and administrative expenses, both in total and as a
percentage of revenues, as compared to fiscal 1997.
Interest income for the six months ended June 30, 1998 was $11.4 million, an
increase of $5 million, or 78%, as compared to the same period in 1997. The
increase is due to higher balances of cash and short-term investments
resulting primarily from the 3 1/2% Convertible Subordinated Notes issued in
the third quarter of 1997 (see "Liquidity and Capital Resources" below), as
well as cash generated from operations.
Interest expense for the six months ended June 30, 1998 was $6.2 million
compared to $289,000 for the same period in 1997. The increase is primarily
due to interest expense on the 3 1/2% Convertible Subordinated Notes (see
"Liquidity and Capital Resources" below).
The Company records interim provisions for income taxes based on the
estimated effective combined tax rate to be applicable for the fiscal year.
This estimate is reevaluated by management each quarter based on forecasts of
income before income taxes for the year as well as anticipated adjustments
from statutory federal and state tax rates. The Company's effective tax rate
for the six months ended June 30, 1998 was 34%, compared to 39% for the same
period in
11
1997. This reduction is due primarily to an increase in 1998 in income
earned at foreign subsidiaries which is taxed at lower rates.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments increased by $25.2 million
to $410.4 million at June 30, 1998 from $385.2 million at December 31, 1997.
The increase is due primarily to cash generated from operations, partially
offset by capital expenditures. Working capital increased by $5.7 million to
$398.6 million at June 30, 1998 from $392.9 million at December 31, 1997. As
discussed in Note 5 to the consolidated financial statements, on August 3,
1998 the Company acquired from an affiliate of American Home Products
Corporation exclusive U.S. marketing rights to the single-source tuberculosis
drug Myambutol for $33.5 million, which was paid at closing, plus additional
payments over the next four years based upon future net sales.
In the third quarter of 1997, the Company issued $287.5 million principal
amount of 3 1/2% Convertible Subordinated Notes ("Notes") due July 15, 2002
with interest payable semiannually. Proceeds from the offering of the Notes
are expected to be used for general corporate purposes, including (i) to
acquire, in-license, co-promote, develop and commercialize pharmaceuticals
targeted at the Company's physician base or in areas related or otherwise
complementary to its existing business; (ii) to fund Spiros development
programs; and (iii) for working capital and facilities expansion. The Notes
are convertible, at the option of the holder, into shares of Dura's Common
Stock at any time prior to maturity or redemption at a conversion price of
$50.635 per share. At June 30, 1998, in addition to the Notes, the Company
had outstanding an aggregate of $12.8 million in current and other long-term
obligations, of which $2.8 million is to be paid during the next 12 months.
Also as of June 30, 1998, additional future contingent obligations totaling
$87.5 million relating to product acquisitions are due through 2004,
including $5 million due in 1998. Dura is also required to make additional
payments related to the August 1998 Myambutol acquisition over the next four
years based upon future net sales of Myambutol.
The Company has entered into a loan agreement which provides for the
borrowing of up to $50 million, subject to maintaining certain financial
ratios, on an unsecured basis through May 1, 1999. As of June 30, 1998, no
borrowings were outstanding under this agreement.
The Company anticipates that its existing capital resources, together with
cash expected to be generated from operations and available bank borrowings,
will be sufficient to finance its operations and working capital through at
least the next 12 months. Significant additional resources, however, may be
required in connection with product or company acquisitions or in-licensing
opportunities. There can be no assurance that such additional resources will
be available to the Company when needed or on terms acceptable to the
Company. At present, the Company is actively pursuing the acquisition of
rights to products and/or companies which may require the use of substantial
capital resources; however there are no present agreements or commitments
with respect to such acquisitions.
The Company recognizes the need to ensure its operations will not be
adversely impacted by the inability of the Company's systems to process data
having dates on or after January 1, 2000
12
("Year 2000"). Processing errors due to software failure arising from
calculations using the Year 2000 date are a recognized risk. The Company is
currently addressing the risk, with respect to the availability and integrity
of its financial systems and the reliability of its operating systems, and is
in the process of communicating with suppliers, customers, financial
institutions and others with whom it conducts business to assess whether they
are or will be Year 2000 compliant. While the Company believes its planning
efforts are adequate to address the Year 2000 concerns, there can be no
assurance that the systems of other companies on which the Company's systems
and operations rely will be converted on a timely basis and will not have a
material effect on the Company. In addition, the potential impact of the
Year 2000 on others with whom the Company does business and any resulting
effects on the Company cannot be reasonably estimated at this time. The cost
of the Company's Year 2000 is not expected to be material to the Company's
results of operations or financial position.
RISKS AND UNCERTAINTIES
FORWARD-LOOKING STATEMENTS. The Company cautions readers that the statements
in this Quarterly Report that are not descriptions of historical facts may be
forward-looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due
to a number of factors, including those identified below.
REDUCTION IN GROSS MARGINS. There is no proprietary protection for most of
the products sold by Dura and substitutes for such products are sold by other
pharmaceutical companies. Dura expects average selling prices for many of
its products to decline over time due to competitive and reimbursement
pressures. While Dura will seek to mitigate the effect of this decline in
average selling prices, there can be no assurance that Dura will be
successful in these efforts.
THIRD-PARTY REIMBURSEMENT; PRICING PRESSURES. The Company's commercial
success will depend in part on the availability of adequate reimbursement
from third-party healthcare payors, such as government and private health
insurers and managed care organizations. Third-party payors are increasingly
challenging the pricing of medical products and services. There can be no
assurance that reimbursement will be available to enable the Company to
achieve market acceptance of its products or to maintain price levels
sufficient to realize an appropriate return on the Company's investment in
product acquisition, in-licensing and development. The market for the
Company's products may be limited by actions of third-party payors. For
example, many managed healthcare organizations are now controlling the
pharmaceuticals that are on their formulary lists. The resulting competition
among pharmaceutical companies to place their products on these formulary
lists has created a trend of downward pricing pressure in the industry. In
addition, many managed care organizations are pursuing various ways to reduce
pharmaceutical costs and are considering formulary contracts primarily with
those pharmaceutical companies that can offer a full line of products for a
given therapy sector or disease state. There can be no assurance that the
Company's products will be included on the formulary lists of managed care
organizations or that downward pricing pressure in the industry generally
will not negatively impact the Company's operations.
13
DEPENDENCE ON ACQUISITION OF RIGHTS TO PHARMACEUTICALS. Dura's strategy for
growth is dependent, in part, upon acquiring, in-licensing and co-promoting
pharmaceuticals to targeted physicians. Other companies, including those
with substantially greater resources, are competing with Dura for the rights
to such products. There can be no assurance that Dura will be able to
acquire, in-license or co-promote additional pharmaceuticals on acceptable
terms, if at all. The failure to acquire, in-license, co-promote, develop or
market commercially successful pharmaceuticals would have a material adverse
effect on the Company's business, financial condition and results of
operations. Furthermore, there can be no assurance that Dura, once it has
obtained rights to a pharmaceutical and committed to payment terms, will be
able to generate sales sufficient to create a profit or otherwise avoid a
loss on such product.
DEVELOPMENT RISKS ASSOCIATED WITH SPIROS. Spiros will require significant
additional development efforts. There can be no assurance that development
of Spiros will be completed successfully, that Spiros will not encounter
problems in clinical trials that will cause the delay or suspension of such
trials, that current or future testing will show any Spiros product to be
safe or efficacious or that any Spiros product will receive regulatory
approval in a timely manner, if at all. In addition, regulatory approvals
will have to be obtained for each drug to be delivered through the use of
Spiros prior to commercialization. Moreover, even if Spiros does receive
regulatory approval, there can be no assurance that Spiros will be
commercially successful, have all of the patent and other protections
necessary to prevent competitors from producing similar products and not
infringe on patent or other proprietary rights of third parties. The failure
of any Spiros product to receive timely regulatory approval and achieve
commercial success would have a material adverse effect on the Company's
business, financial condition or results of operations.
CUSTOMER CONCENTRATION; CONSOLIDATION OF DISTRIBUTION NETWORK. The
distribution network for pharmaceutical products is largely controlled by a
few large wholesale distributors, and, in recent years, the number of
independent and small chain drug stores has decreased. Further consolidation
among, or any financial difficulties of, distributors or retailers could
result in the combination or elimination of warehouses thereby stimulating
product returns to Dura. Further consolidation or financial difficulties
could also cause customers to reduce their inventory levels or otherwise
reduce purchases of Dura's products which could result in a material adverse
effect on Dura's business, financial condition or results of operations.
Dura's principal customers are wholesale drug distributors and major drug
store chains. For the six months ended June 30, 1998, one wholesale customer
(McKesson Corporation) accounted for 13% of sales. For the same period in
1997, four wholesale customers (Bergen Brunswig Corporation, Cardinal Health,
Inc., McKesson Corporation, and AmeriSource Health Corporation) individually
accounted for 18%, 17%, 15%, and 14% of sales, respectively.
SEASONALITY AND FLUCTUATING QUARTERLY RESULTS. Historically, as a result of
the winter cold and flu season, industry-wide demand for respiratory products
has been stronger in the first and fourth quarters than in the second and
third quarters of the year. In addition, variations in the timing and
severity of the winter cold and flu season have influenced Dura's results of
operations in the past. While the growth and productivity of Dura's sales
force and the introduction by Dura of new products have historically
mitigated the impact of seasonality on Dura's results of
14
operations, recent product acquisitions by Dura, especially Keftab and
Ceclor-Registered Trademark- CD, which are used to treat respiratory
infections, increase the impact of seasonality on Dura's results of
operations. No assurances can be given that Dura's results of operations
will not be materially adversely affected by the seasonality of product
sales.
COMPETITION. Many companies, including large pharmaceutical firms with
financial and marketing resources and development capabilities substantially
greater than those of Dura, are engaged in developing, marketing and selling
products that compete with those offered or planned to be offered by Dura.
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. 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. Dura believes that competition
among both prescription pharmaceuticals and pulmonary drug delivery systems
aimed at the respiratory infection, allergy, cough and cold, and asthma and
chronic obstructive pulmonary disease markets will be based on, among other
things, product efficacy, safety, reliability, availability and price.
There are at least 25 other companies in the U.S. that are currently engaged
in developing, marketing and selling respiratory pharmaceuticals.
Additionally, there are at least 10 companies currently involved in the
development, marketing or sales of dry powder pulmonary drug delivery
systems. There are two types of dry powder inhalers ("DPIs") currently in
commercial use worldwide, individual dose and multiple dose. Individual dose
DPIs currently marketed in the U.S. include the Rotohaler-TM- (developed and
marketed by Glaxo Wellcome ("Glaxo")) and the Spinhaler-Registered Trademark-
(developed and marketed by Fisons Limited). The Turbuhaler-Registered
Trademark- (developed and marketed by Astra Pharmaceuticals, Inc. ("Astra")),
a multiple dose DPI, is the leading DPI in worldwide sales. In June 1997,
the FDA approved the first Turbuhaler product, the Pulmicort Turbuhaler, for
marketing in the U.S., which Astra launched in early 1998. Recently the FDA
also approved two multiple dose DPIs developed by Glaxo, the
Flovent-Registered Trademark- Rotadisk-Registered Trademark- and the
Serevent-Registered Trademark- Diskus-Registered Trademark-, both launched by
Glaxo in early 1998.
DEPENDENCE ON THIRD PARTIES. Dura's strategy for development and
commercialization of certain of its products, including Spiros, is dependent
upon entering into various arrangements with corporate partners, licensors
and others and upon the subsequent success of these partners, licensors and
others in performing their obligations. There can be no assurance that Dura
will be able to negotiate acceptable arrangements in the future or that such
arrangements or its existing arrangements will be successful. In addition,
partners, licensors and others may pursue alternative technologies or develop
alternative compounds or drug delivery systems either on their own or in
collaboration with others, including Dura's competitors. Dura has limited
experience manufacturing products for commercial purposes and currently does
not have the capability to manufacture its pharmaceutical products and
therefore is dependent on contract manufacturers for the production of such
products for development and commercial purposes. The manufacture of Dura's
products is subject to cGMP regulations prescribed by the FDA. Dura relies
on a single manufacturer for each of its products. There can be no assurance
that
15
Dura will be able to continue to obtain adequate supplies of such products in
a timely fashion at acceptable quality and prices. Also, there can be no
assurance that Dura will be able to enter into agreements for the manufacture
of future products, including Spiros products, with manufacturers whose
facilities and procedures comply with cGMP and other regulatory requirements.
In the event that Dura is unable to obtain or retain third-party
manufacturing, it may not be able to commercialize its products as planned.
Dura's current dependence upon others for the manufacture of its products may
adversely affect future profit margins on the sale of those products and
Dura's ability to develop and deliver products on a timely and competitive
basis.
LIMITED MANUFACTURING EXPERIENCE. Dura's principal manufacturing facility is
intended to be used to formulate, mill, blend and manufacture drugs to be
used with Spiros, pending regulatory approval. Equipment purchases and
validation are currently scheduled through 1998. Dura's manufacturing
facility must be registered with and licensed by various regulatory
authorities and must comply with current cGMP requirements prescribed by the
FDA and the State of California. Dura will need to significantly scale up
its current manufacturing operations and comply with cGMPs and other
regulations prescribed by various regulatory agencies in the U.S. and other
countries to achieve the prescribed quality and required levels of production
of such products to obtain marketing approval. Any failure or significant
delay in the validation of or obtaining a satisfactory regulatory inspection
of the new facility, failure to successfully scale up or failure to maintain
necessary regulatory approvals for such facilities could have a material
adverse effect on the ability of Dura to manufacture products in connection
with Spiros. Dura intends to utilize third parties to produce components of
and assemble the Spiros aerosol generator. Such third parties have only
produced limited quantities of components and assembled limited numbers of
generators and will be required to significantly scale up their activities
and to produce components on a timely and consistent basis and which meet
applicable specifications. There can be no assurance that such third parties
will be successful in attaining acceptable service levels or meeting cGMP
requirements. Any failure or delay in the scale up or supply associated with
aerosol generator manufacturing would have a material adverse effect on the
ability of Dura to commercialize Spiros products.
MANAGING GROWTH OF BUSINESS. Dura has experienced significant growth as
total revenues increased 102% in 1996, 74% in 1997, and 19% for the first
half of 1998 as compared to prior periods, primarily as a result of the
acquisition and in-licensing of additional respiratory pharmaceutical
products. Due to Dura's emphasis on acquiring and in-licensing respiratory
pharmaceutical products, Dura anticipates that the integration of the
recently acquired products, as well as any future acquisitions, will require
significant management attention and expansion of its sales force. On
February 22, 1998, the Company announced that it planned to begin expanding
its field sales force immediately from approximately 270 representatives to
approximately 450 representatives by the end of 1998 to increase the
promotional activity of its current products and to prepare for the launch,
subject to receiving regulatory approval, of Albuterol Spiros. Dura's ability
to achieve and maintain profitability is based on management's ability to
manage its changing business effectively.
16
UNCERTAINTY OF PROFITABILITY; NEED FOR ADDITIONAL FUNDS. Dura has
experienced significant operating losses in the past, and at June 30, 1998,
Dura's accumulated deficit was $148.3 million. The acquisition and
in-licensing of products, the expansion and maintenance of Dura's sales force
in response to acquisition, in-licensing, and enhanced promotion of products
and planned introduction of Spiros products, the upgrade and expansion of its
facilities, continued pricing pressure on its pharmaceutical products, or the
exercise of the Stock Purchase Option or Product Options (defined below) will
require the commitment of substantial capital resources and may also result
in significant impairment of profits, or losses. Depending upon, among other
things, the acquisition and in-licensing opportunities available, Dura may
need to raise additional funds for these purposes. Adequate funds for these
purposes may not be available when needed or on terms acceptable to Dura.
Insufficient funds may require Dura to delay, scale back or suspend some or
all of its product acquisition, in-licensing and promotional programs, the
upgrade and expansion of its facilities, or the potential exercise of the
Stock Purchase Option and/or the Product Options. Dura anticipates that its
existing capital resources, together with cash expected to be generated from
operations and available bank borrowings, should be sufficient to finance its
current operations and working capital requirements through at least the next
12 months.
EFFECT OF EXERCISE OF THE STOCK PURCHASE OPTION AND THE PRODUCT OPTIONS;
DILUTION. Dura has a purchase option with respect to the outstanding shares
of callable common stock of Spiros Corp. II which expires on December 31,
2002 ("Stock Purchase Option"). If Dura exercises the Stock Purchase Option,
it will be required to make a substantial cash payment or to issue shares of
Dura Common Stock, or both. A payment in cash would reduce Dura's capital
resources. A payment in shares of Dura Common Stock would result in a
decrease in the percentage ownership of Dura's stockholders at that time. If
Dura determines to exercise the Stock Purchase Option, it will likely be
required Dura to record a significant charge to earnings and may have an
adverse impact on future operating results. If Dura does not exercise the
Stock Purchase Option prior to its expiration, Dura's rights in and to Spiros
with respect to certain compounds will terminate.
As part of Dura's contractual relationship with Spiros Corp. II, Dura
received options to purchase certain rights to the use of Spiros with
albuterol and with an additional product other than albuterol ("Product
Options"). If Dura exercises either of the Product Options, it will be
required to make a significant cash payment which could have an adverse
effect on its capital resources. Dura may not have sufficient capital
resources to exercise the Product Options, which may result in Dura's loss of
valuable rights.
GOVERNMENT REGULATION; NO ASSURANCE OF FDA APPROVAL. Development, testing,
manufacturing and marketing of pharmaceutical products including drug
delivery systems are subject to extensive regulation by numerous governmental
authorities in the U.S. and other countries. The process of obtaining FDA
approval of pharmaceutical products and drug delivery systems is costly and
time consuming. Any new pharmaceutical product must undergo rigorous
preclinical and clinical testing and an extensive regulatory approval process
mandated by the FDA. Such regulatory review includes the determination of
manufacturing capability and product performance. Marketing of drug delivery
systems also requires FDA approval, which can be
17
costly and time consuming to obtain. A separate regulatory approval will
need to be obtained for each Spiros drug delivery system. There can be no
assurance that the pharmaceutical products currently in development by Dura
or those products acquired or in-licensed will be approved by the FDA. In
addition, there can be no assurance that all necessary approvals will be
granted for future products or that FDA review or actions will not involve
delays caused by the FDA's request for additional information or testing that
could adversely affect the time to market and sale of the products. For both
currently marketed products and future products of Dura, failure to comply
with applicable regulatory requirements can, among other things, result in
the suspension of regulatory approval, as well as possible civil and criminal
sanctions.
The FDA is continuing an evaluation of the effectiveness of all drug products
containing ingredients marketed prior to 1962 (the year of enactment of the
"Drug Amendments of 1962" to the Federal Food, Drug and Cosmetic Act) as part
of its DESI program and will determine which drugs are considered "new drugs"
requiring approval through an NDA for marketing. A Policy Guide (CPG
440.100) issued by the FDA indicates that the FDA will implement procedures
to determine whether the new drug provisions are applicable to existing
products. This Policy Guide requires that products covered by paragraph B
not be similar or related to any drug included in the DESI program or have a
different formulation or conditions for use than products marketed before
November 13, 1984. If a final determination is made that a particular drug
required an approved NDA, such approval will be required for marketing to
continue. If such a determination is made, the FDA might impose various
requirements; for example, it might require that the current product be the
subject of an approved NDA, that the product be reformulated and an NDA
approval be obtained, that the product must be sold on an over-the-counter
basis rather than as a prescription drug or that the products must be removed
from the market. Dura believes that twenty-one of its prescription
pharmaceutical products may be covered by paragraph B of the Policy Guide or
may be DESI-related. Also, Dura is not aware of evidence to substantiate
that three of its products have the same formulation or conditions for use as
products marketed before November 13, 1984. There can be no assurance as to
which regulatory course the FDA will follow, if any, with respect to many of
Dura's pharmaceutical products or whether Dura will be able to obtain any
approvals that the FDA may deem necessary. If any negative actions are taken
by the FDA, such actions could have a material adverse effect on business of
Dura. Dura's Health Script Pharmacy Services, Inc. ("Health Script")
subsidiary is subject to regulation by state regulatory authorities,
principally state boards of pharmacy. In addition, Health Script is subject
to regulation by other state and federal agencies with respect to
reimbursement for prescription drug benefits provided to individuals covered
primarily by publicly funded programs.
PATENTS AND PROPRIETARY RIGHTS. Dura's success will depend in part on its
ability to obtain patents on current or future products or formulations,
defend its patents, maintain trade secrets and operate without infringing
upon the proprietary rights of others both in the U.S. and abroad. However,
only six of the pharmaceuticals currently marketed by Dura are covered by
patents. Dura also has licenses or license rights to certain other U.S. and
foreign patent and patent applications. There can be no assurance that
patents, U.S. or foreign, will be obtained, or that, if issued or licensed to
Dura, they will be enforceable or will provide substantial protection from
competition or be of commercial benefit to Dura or that Dura will possess the
financial resources
18
necessary to enforce or defend any of its patent rights. Federal court
decisions establishing legal standards for determining the validity and scope
of patents in the field are in transition. There can be no assurance that
the historical legal standards surrounding questions of validity and scope
will continue to be applied or that current defenses as to issued patents in
the field will offer protection in the future. The commercial success of
Dura will also depend upon avoiding the infringement of patents issued to
competitors and upon maintaining the technology licenses upon which certain
of Dura's current products are, or any future products under development
might be, based. Litigation, which could result in substantial cost to Dura,
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
Dura's products 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. There can be no assurance that licenses
to such patent rights would be made available to Dura on commercially
reasonable terms, if at all. If Dura does not obtain such licenses, it could
encounter delays in marketing affected products while it attempts to design
around such patents or it could find that the development, manufacture or
sale of products requiring such licenses is not possible. Dura currently has
certain licenses from third parties and in the future may require additional
licenses from other parties to develop, manufacture and market commercially
viable products effectively. There can be no assurance that such licenses
will be obtainable on commercially reasonable terms, if at all, or that the
patents underlying such licenses will be valid and enforceable.
PRODUCT LIABILITY AND RECALL. Dura faces an inherent business risk of
exposure to product liability claims in the event that the use of its
technologies or products is alleged to have resulted in adverse effects.
Such risks will exist even with respect to those products that receive
regulatory approval for commercial sale. While Dura has taken, and will
continue to take, what it believes are appropriate precautions, there can be
no assurance that it will avoid significant product liability exposure. Dura
currently has product liability insurance; however, there can be no assurance
that the level or breadth of any insurance coverage will be sufficient to
fully cover potential claims. There can be no assurance that adequate
insurance coverage will be available in the future at acceptable costs, if at
all, or that a product liability claim or recall would not materially and
adversely affect the business or financial condition of Dura.
ATTRACTION AND RETENTION OF KEY PERSONNEL. The Company is highly dependent
on the principal members of its management staff, the loss of whose services
might impede the achievement of corporate objectives. Although the Company
believes that it is adequately staffed in key positions and that it will be
successful in retaining skilled and experienced management, operational and
scientific personnel, there can be no assurance that the Company will be able
to attract and retain such personnel on acceptable terms. The loss of the
services of key scientific, technical and management personnel could have a
material adverse effect on the Company, especially in light of the Company's
recent significant growth.
TERMINATION OF MERGER AGREEMENT WITH SCANDIPHARM, INC. On December 1, 1997,
the Company terminated a merger agreement with Scandipharm entered into on
October 20, 1997. On January 16, 1998, Scandipharm filed suit against the
Company for breach of contract. On January 19, 1998, the Company filed suit
against Scandipharm seeking a declaratory judgment that Dura's
19
termination of the merger did not breach the merger agreement, and for
damages against Scandipharm. The Company believes that it had the right to
terminate the merger agreement and that Scandipharm's claims for specific
performance under the agreement or for unspecified damages are without merit,
and that outcome of this matter will not have a material adverse effect on
the Company's financial position or results of operations.
CHANGE IN CONTROL. Certain provisions of Dura's charter documents and terms
relating to the acceleration of the exercisability of certain warrants and
options in the event of a change in control may have the effect of delaying,
deferring or preventing a change in control of Dura, thereby possibly
depriving stockholders of receiving a premium for their shares of the Dura
Common Stock. In addition, upon a Change in Control (as defined), Dura will
be required to offer to purchase for cash all of the outstanding Notes at a
purchase price of 100% of the principal amount thereof, plus accrued but
unpaid interest through the Change in Control Purchase Date (as defined).
The Change in Control purchase features of the Notes may in certain
circumstances have an anti-takeover effect. If a Change in Control were to
occur, there can be no assurance that Dura would have sufficient funds to pay
the Change in Control Purchase Price (as defined) for all Notes tendered by
the holders thereof and to repay other indebtedness that may become due as a
result of any Change in Control.
In May 1998, the Company adopted a Shareholder Rights Plan in which Preferred
Stock purchase rights ("Rights") were distributed as a dividend at the rate
of one Right for each share of Common Stock held as of the close of business
on June 5, 1998. Each Right entitles stockholders to buy, upon certain
events, one one-thousandth of a share of a new series of junior participating
Preferred Stock of the Company at an exercise price of $175.00. The Rights
are designed to guard against partial tender offers and other abusive tactics
that might be used in an attempt to gain control of the Company or to deprive
stockholders of their interest in the long-term value of the Company. The
Rights are exercisable only if a person or group acquires 15% or more of the
Company's Common Stock or announces a tender offer of which the consummation
would result in ownership by a person or group of 15% or more of the
Company's Common Stock. The Rights are redeemable for one cent per Right at
the option of the Board of Directors prior to this event occurring. The
Rights expire on June 5, 2008.
VOLATILITY OF DURA STOCK PRICE. The market prices for securities of emerging
companies, including Dura, have historically been highly volatile. Future
announcements concerning Dura or its competitors may have a significant
impact on the market price of the Dura Common Stock. Such announcements
might include financial results, the results of testing, regulatory
developments, technological innovations, new commercial products, changes to
government regulations, government decisions on commercialization of
products, developments concerning proprietary rights, litigation or public
concern as to safety of Dura's products.
ABSENCE OF DIVIDENDS. The Company has never paid any cash dividends on its
Common Stock. In accordance with a bank loan agreement, Dura is prohibited
from paying cash dividends without prior bank approval. Dura currently
anticipates that it will retain all available funds for use in its business
and does not expect to pay any cash dividends in the foreseeable future.
20
YEAR 2000 COMPLIANCE CONSIDERATIONS. The Company recognizes the need to
ensure its operations will not be adversely impacted by the inability of the
Company's systems to process data having dates on or after January 1, 2000.
Processing errors due to software failure arising from calculations using the
Year 2000 date are a recognized risk. The Company is currently addressing
the risk, with respect to the availability and integrity of its financial
systems and the reliability of its operating systems, and is in the process
of communicating with suppliers, customers, financial institutions and others
with whom it conducts business to assess whether they are or will be Year
2000 compliant. While the Company believes its planning efforts are adequate
to address the Year 2000 concerns, there can be no assurance that the systems
of other companies on which the Company's systems and operations rely will be
converted on a timely basis and will not have a material effect on the
Company. In addition, the potential impact of the Year 2000 on others with
whom the Company does business and any resulting effects on the Company
cannot be reasonably estimated at this time. The cost of the Company's Year
2000 initiatives is not expected to be material to the Company's results of
operations or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
CHANGES IN SECURITIES
In May 1998, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation increasing the number of authorized
shares of Common Stock from 100 million to 200 million.
In May 1998, the Company adopted a Shareholder Rights Plan in which Preferred
Stock purchase rights ("Rights") were distributed as a dividend at the rate
of one Right for each share of Common Stock held as of the close of business
on June 5, 1998. Each Right entitles stockholders to buy, upon certain
events, one one-thousandth of a share of a new series of junior participating
Preferred Stock of the Company at an exercise price of $175.00. The Rights
are designed to guard against partial tender offers and other abusive and
coercive tactics that might be used in an attempt to gain control of the
Company or to deprive stockholders of their interest in the long-term value
of the Company. The Rights will be exercisable only if a person or group
acquires 15% or more of the Company's Common Stock or announces a tender
offer of which the consummation would result in ownership by a person or
group of 15% or more of the Company's Common Stock. The Rights are
redeemable for one cent per Right at the option of the Board of Directors
prior to this event occurring. The Rights expire on June 5, 2008.
21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 21, 1998, the Company's Annual Meeting of Stockholders was held in La
Jolla, California for the following purposes:
(a) The following five directors were elected to serve two-year terms to expire
at the 2000 Annual Meeting of Stockholders:
FOR AGAINST WITHHELD
James C. Blair 41,865,373 0 213,373
Joseph C. Cook, Jr. 41,867,412 0 211,334
Cam L. Garner 41,865,172 0 213,574
David F. Hale 41,865,355 0 213,391
David S. Kabakoff 41,865,010 0 213,736
The following directors were elected at the May 28, 1997 Annual Meeting of
Stockholders and are currently serving terms that will expire in 1999 (with
the exception of Mr. Spath, who resigned as a director effective June 30,
1998).
Herbert J. Conrad
Gordon V. Ramseier
Charles G. Smith
Walter F. Spath
(b) The Stockholders approved the amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock
from 100,000,000 to 200,000,000. The total number of votes cast for,
against and abstained was 40,187,285, 1,806,390 and 85,071, respectively.
(c) The Stockholders approved an amendment to the Company's 1992 Stock Option
Plan to increase the authorized number shares of Common Stock available for
issuance under such Plan by 1,000,000 shares to a total of 8,607,360. The
total number of votes cast for, against and abstained was 25,688,103,
16,248,353 and 139,500, respectively.
22
(d) The Stockholders ratified the appointment of Deloitte & Touche LLP as the
Company's independent public accountants for the year ending December 31,
1998. The total number of votes cast for, against and abstained was
41,883,978, 115,190, and 79,478, respectively.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
- ------------ ------------
(1) 3.1 Certificate of Incorporation.
(2) 3.2 Certificate of Amendment of Certificate of Incorporation, effective
May 21, 1998.
(3) 4.1 Rights Agreement, dated as of May 21, 1998, between the Company 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.
4.2 Specimen Stock Certificate for Dura Common Stock.
10.1 Amendment No. 4 to Business Loan Agreement dated June 25, 1998
between the Company and Bank of America National Trust and Savings
Association.
10.2 1992 Stock Option Plan, as amended.
11 Statements re Computations of Net Income Per Share
27 Financial Data Schedule
(1) Incorporated by reference to the Company's Form 10-Q for the quarter ended
June 30, 1997.
(2) Incorporated by reference to the Company's Registration Statement on Form
8-A filed on May 22, 1998.
(3) Incorporated by reference to the Company's Form 8-K, dated May 21, 1998.
(b) Reports on Form 8-K
On May 22, 1998, the Company filed a Current Report on Form 8-K dated May
21, 1998, reporting the adoption of a Shareholder Rights Plan.
23
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
DURA PHARMACEUTICALS, INC.
DATE AUGUST 12, 1998 /s/ ERLE T. MAST
- ------------------------ ------------------------------
ERLE T. MAST
VICE PRESIDENT, FINANCE
(Principal Financial and Accounting Officer)
24
EXHIBIT INDEX
TO
FORM 10-Q
DURA PHARMACEUTICALS, INC.
Exhibit No. Description
- ---------- -----------
(1) 3.1 Certificate of Incorporation.
(2) 3.2 Certificate of Amendment of Certificate of Incorporation, effective
May 21, 1998.
(3) 4.1 Rights Agreement, dated as of May 21, 1998, between the Company 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.
4.2 Specimen Stock Certificate for Dura Common Stock.
10.1 Amendment No. 4 to Business Loan Agreement dated June 25, 1998
between the Company and Bank of America National Trust and Savings
Association.
10.2 1992 Stock Option Plan, as amended.
11 Statements re Computations of Net Income Per Share
27 Financial Data Schedule
(1) Incorporated by reference to the Company's Form 10-Q for the quarter ended
June 30, 1997.
(2) Incorporated by reference to the Company's Registration Statement on Form
8-A filed on May 22, 1998.
(3) Incorporated by reference to the Company's Form 8-K, dated May 21, 1998.