-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PD0dDRUyal02lS9AuzZybHNQLaaBP5y9CIGrucAhKWom6ZztwyAtBPmH2cz3Y/TO HVEjKPeio/7+bVQ/JyEGxw== 0000912057-00-015048.txt : 20000331 0000912057-00-015048.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-015048 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DURA PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000882098 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 953645543 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-19809 FILM NUMBER: 587759 BUSINESS ADDRESS: STREET 1: 7475 LUSK BLVD CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 8584572553 MAIL ADDRESS: STREET 1: 7475 LUSK BLVD CITY: SAN DIEGO STATE: CA ZIP: 92121 FORMER COMPANY: FORMER CONFORMED NAME: DURA PHARMACEUTICALS INC/CA DATE OF NAME CHANGE: 19930328 10-K405 1 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --------- EXCHANGE ACT OF 1934 For fiscal year ended December 31, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - --------- SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ________ to ________. COMMISSION FILE NUMBER: 000-19809 DURA PHARMACEUTICALS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-3645543 (State or other jurisdiction (I.R.S. Employer or incorporation or organization) Identification No.) 7475 LUSK BLVD., SAN DIEGO, CALIFORNIA 92121 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code (858) 457-2553 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.001 PER SHARE, PREFERRED STOCK PURCHASE RIGHTS, PAR VALUE $.001 PER SHARE, WARRANTS TO PURCHASE ONE-FOURTH OF ONE SHARE OF COMMON STOCK, PAR VALUE $.001 PER SHARE 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. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. The aggregate market value of the voting common stock held by non-affiliates of the registrant as of March 15, 2000 was $602.8 million. For the purposes of this calculation, shares owned by officers, directors (and their affiliates) and 10% or greater shareholders known to the registrant have been excluded. This exclusion is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the Registrant. The number of shares of the Registrant's common stock outstanding as of March 15, 2000 was 44,333,113. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders (the "Proxy Statement") are incorporated in Part III. Certain exhibits filed with the Registrant's prior registration statements and Forms 10-K and 10-Q are incorporated in Part IV. INDEX [OPEN FOR FINAL PAGES] Part I: Item 1. Business....................................................................1 Item 2. Properties.................................................................19 Item 3. Legal Proceedings..........................................................20 Item 4. Submission of Matters to a Vote of Security Holders........................20 Part II: Item 5. Market for Registrant's Common Equity and Related Shareholder Matters........................................................20 Item 6. Selected Financial Data....................................................21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................22 Item 7A. Quantitative and Qualitative Disclosures about Market Risk ................26 Item 8. Financial Statements and Supplementary Data................................26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................26 Part III: Item 10. Directors and Executive Officers of the Registrant.........................26 Item 11. Executive Compensation.....................................................27 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................................27 Item 13. Certain Relationships and Related Transactions.............................27 Part IV: Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............27 Signatures.................................................................32
PART I ITEM 1. BUSINESS The discussion of our business contained in this Annual Report on Form 10-K may contain projections, estimates and other forward-looking statements that involve many risks and uncertainties. For a discussion of factors which may affect the outcome projected in these statements, see "Risks and Uncertainties" on pages 16 through 19 of this Annual Report on Form 10-K. While this outlook represents our current judgment on the future direction of our business, these risks and uncertainties could cause our actual results to differ materially from any projected future performance described below. We undertake no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date of this Annual Report on Form 10-K. OVERVIEW We are a specialty pharmaceutical company that develops, markets and sells prescription products that treat respiratory conditions and infectious diseases. We have built an effective sales and marketing organization that includes approximately 475 territories and focuses on the high prescribing physician groups in our target markets. We currently market a portfolio of 12 patent protected and/or branded prescription products. Our proprietary Spiros-Registered Trademark- pulmonary drug delivery system, which we are developing to improve the delivery of inhaled medications, represents a significant opportunity for us and is an essential component of our future growth. Leveraging both our sales and marketing organization by opportunistically acquiring products and late-stage product development candidates and our Spiros platform technology by developing products for delivery through Spiros are essential to our future growth. We target the respiratory and infectious diseases markets because they are large and growing. The U.S. market for products that treat respiratory conditions totaled approximately $9.1 billion in 1999, an increase of 21% over 1998. The market for infectious disease products in the U.S. was also substantial, totaling approximately $11.1 billion in 1999, an increase of 14% over 1998. These markets are also attractive to us because identifiable groups of physicians write a large majority of the total prescriptions in these markets. This concentration of high volume prescribers enables us to effectively promote our products with a smaller and more focused sales and marketing organization than would be required for other markets. Our sales and marketing organization is composed of approximately 600 people and includes a field sales force and a hospital sales force. The field sales force includes approximately 325 territories and our hospital sales force includes approximately 150 territories, all of which are located in the U.S. The field sales representatives principally call on primary care physicians, allergists, ear, nose and throat specialists, pulmonologists and a selected subset of pediatricians. These physicians collectively write a majority of the total prescriptions for the products our field sales force promotes. These physicians also treat a large number of asthma patients, the target of our first two Spiros products currently under development. The hospital sales representatives call on pulmonologists, infectious disease specialists, surgeons, internal medicine physicians, hematologists and oncologists. These physicians write a significant portion of the total prescriptions for injectable antibiotics, while pulmonologists will also be important to the launch of our Spiros respiratory products. Leveraging our sales and marketing organization by acquiring rights to market prescription pharmaceutical products and late-stage product development candidates is a foundation of our growth strategy. We have historically focused on products that we judged to have significant commercial potential but were underpromoted or had not been launched at the time of our acquisition. We have also focused on increasing the number of patented and/or branded products in our portfolio. Sales of these products represented 74% of our total pharmaceutical sales in 1999, a substantial increase from 1995 when these products represented only 13% of our total pharmaceutical sales. Our product portfolio includes the following products and product development candidates: 1
---------------------------------------------------------------------------------------------------------------- PRODUCT/PRODUCT CANDIDATE INDICATION STATUS TARGET PHYSICIAN GROUPS ---------------------------------------------------------------------------------------------------------------- RESPIRATORY CONDITIONS ALLERGY ---------------------------------------------------------------------------------------------------------------- Nasarel-Registered Trademark-/ Nasalide-Registered Trademark- Allergic rhinitis Approved Allergy, Primary Care ---------------------------------------------------------------------------------------------------------------- Alocril-TM- Itch associated Approved Allergy, Primary Care with allergic conjunctivitis ---------------------------------------------------------------------------------------------------------------- Entex-Registered Trademark- Symptoms of nasal Approved Allergy, Primary Care congestion ---------------------------------------------------------------------------------------------------------------- ASTHMA ---------------------------------------------------------------------------------------------------------------- Beclomethasone Spiros-TM- Asthma Phase III Allergy, Pulmonology, Primary Care ---------------------------------------------------------------------------------------------------------------- Budesonide Spiros-TM- Asthma Phase II Allergy, Pulmonology, Primary Care --------------------------------------------------------------------------------------------------------------- INFECTIOUS DISEASES --------------------------------------------------------------------------------------------------------------- Ceclor-Registered Trademark- CD Bacterial Approved Primary Care, ENT infections --------------------------------------------------------------------------------------------------------------- Maxipime-Registered Trademark- Bacterial Approved Infectious Disease, infections Pulmonology, Hematology, Oncology --------------------------------------------------------------------------------------------------------------- Azactam-Registered Trademark- Bacterial Approved Surgery, Infectious Disease, infections Internal Medicine --------------------------------------------------------------------------------------------------------------- Tuberculosis products Tuberculosis Approved Infectious Disease --------------------------------------------------------------------------------------------------------------- Furadantin-Registered Trademark- Urinary tract Approved Primary Care infections --------------------------------------------------------------------------------------------------------------- DIABETES --------------------------------------------------------------------------------------------------------------- Inhaled insulin Diabetes Not disclosed Marketing rights held by Eli Lilly* ---------------------------------------------------------------------------------------------------------------
The following words used in the table above have the following meanings: - "Approved" indicates the product is approved for marketing and sale in the U.S. - "Phase III" indicates the product candidate is being evaluated for safety and efficacy in large-scale clinical trials. - "Phase II" indicates the product candidate is being evaluated for preliminary indications of safety and therapeutic response in clinical trials or for establishing dosing for new dosage forms. Our exclusive rights to market and sell Alocril are limited to the primary care and respiratory market segments for a multi-year period. Allergan, Inc., or Allergan, has retained all other rights to Alocril. We are developing insulin for delivery through our Spiros drug delivery system in collaboration with Eli Lilly and Company, or Lilly. Under our collaboration agreement, we receive research and development and progress payments during development as well as revenues from the supply of and royalties from the sale of commercial products. Lilly holds all rights to market and sell the commercial product. Our sales and marketing organization has established a track record of effectively marketing and selling our products. For example, Ceclor CD was first in its class and Nasarel was second in its class in percentage growth of total prescriptions during 1999. Total prescriptions of Ceclor CD were 31% higher in 1999 than in 1998, and total prescriptions of Nasarel during 1999 were 57% higher than during 1998. Maxipime (cefepime hydrochloride) for Injection was the fastest growing injectable antibiotic in the U.S. during 1999, with sales 158% higher than in 1998. We plan to continue to leverage our sales and marketing organization by opportunistically acquiring products and late-stage product development candidates that are prescribed by our target physician groups. For example, in February 2000 we entered into a multi-year, multi-product agreement with Allergan Sales, Inc. to market and promote selected Allergan products in the U.S. primary care and respiratory markets. Under this agreement, we co-launched Alocril, 2 Allergan's patented product for the treatment of eye itch associated with allergic conjunctivitis, in March 2000. The agreement also includes a commitment to launch a second product to the same market segments at an unspecified date and a joint structure to evaluate additional opportunities for us to promote specific product candidates Allergan is developing. We believe our hospital sales force also provides new growth opportunities for us. Many product classes are prescribed by identifiable physician groups that practice primarily in the hospital. Our sales and marketing presence in the hospital enables us to further expand our business by selectively acquiring products and product development candidates in these product classes. Another cornerstone of our growth strategy is to develop our proprietary Spiros pulmonary drug delivery system. Spiros is designed to aerosolize pharmaceuticals in dry powder formulations for delivery to and through the lungs. We believe that Spiros, if approved by the FDA, may provide advantages over other currently available pulmonary drug delivery systems for respiratory products and could also provide a significant benefit to patients being treated with biopharmaceuticals, which today are delivered primarily by injection. We plan to continue to leverage our Spiros platform technology by: - Developing Spiros for the local delivery of pharmaceuticals to the lungs to treat respiratory conditions, for our own account and in collaboration with third parties, and - Developing Spiros, generally in collaboration with third parties, for the systemic delivery of biopharmaceuticals, including proteins and peptides, through the lungs to treat non-respiratory conditions as an alternative to current invasive delivery techniques. We are currently developing beclomethasone and budesonide, two inhaled steroids frequently prescribed to treat asthma, for use in Spiros on behalf of Spiros Development Corporation II, Inc., or Spiros Corp. II. Beclomethasone Spiros is in Phase III clinical trials, and we plan to initiate Phase III clinical trials for Budesonide Spiros in 2000. We are collaborating with Lilly to develop inhaled insulin in our Spiros delivery system. The size of the inhaled insulin opportunity is significant and strategically important to our collaboration. We are also conducting feasibility studies for our own account and with several companies to assess the effectiveness of Spiros in delivering other drugs. In March 2000 we entered into a merger agreement to acquire Spiros Corp. II. Under the agreement, for each share of callable common stock Spiros Corp. II shareholders will receive $13.25 in cash and one five-year warrant to purchase a fractional share of our common stock at $17.94 per share, which represents a 25% premium over the average closing price of our common stock for the 10 trading days prior to the date of the merger agreement. The exact fraction of a share of our common stock purchasable under the warrant will be determined based on the average closing price of our common stock for the 10 trading days prior to the vote of the Spiros Corp. II shareholders on the merger and will result in a calculated Black-Scholes value for each warrant of between $3.22 and $1.81. The total consideration for the merger as of the date of the merger agreement was calculated to be $100.8 million, or $15.75 per share of callable common stock. Closing of the transaction is subject to Hart-Scott-Rodino clearance, effectiveness of the registration statement for our warrants, and Spiros Corp. II stockholder approval. We have received voting agreements in favor of the merger from holders of approximately 22% of Spiros Corp. II's outstanding callable common stock. A special committee of independent members of the Spiros Corp. II board, formed in December 1999 to evaluate strategic alternatives for Spiros Corp. II, Inc, has approved the merger agreement and is recommending that the Spiros Corp. II shareholders approve the merger. 3 STRATEGY Our objective is to be a leader in developing, marketing and selling pharmaceutical products that treat respiratory conditions and infectious diseases. Our strategy to achieve this objective includes the following elements: - LEVERAGING OUR FOCUSED SALES AND MARKETING ORGANIZATION. We have built an effective sales and marketing organization that targets the high prescribing physician groups that treat respiratory conditions and infectious diseases. We believe the concentration of high volume prescribers in our target markets enables us to effectively promote our products with a smaller and more focused sales and marketing organization than would be required for other markets. We intend to acquire or in-license products and late-stage product development candidates and to develop products in Spiros that will leverage the capacity of our sales and marketing organization as well as the relationships we have established with our target physician groups. - ACQUIRING OR IN-LICENSING APPROVED PHARMACEUTICALS. We have historically grown our business by acquiring or in-licensing rights to market and sell prescription pharmaceuticals and we intend to continue to grow in this manner. We are particularly focused on products that treat respiratory conditions or infectious diseases and that are underpromoted by large pharmaceutical companies. We believe the significant consolidation that is occurring in the pharmaceutical industry continues to raise the threshold for products that large pharmaceutical companies can promote effectively and should create attractive opportunities for us to acquire additional products. We are actively pursuing the acquisition of rights to market and sell additional products which, if successful, may require the use of substantial capital resources. - ACQUIRING OR IN-LICENSING LATE-STAGE PRODUCT DEVELOPMENT CANDIDATES. We also selectively seek to acquire or in-license late-stage product development candidates. We are focused on product development candidates that are ready for or have already entered Phase III clinical trials and should therefore present less development risk than product candidates at an earlier stage of development. We focus on product development candidates that would be prescribed by our target physician groups or by other identifiable physician groups that practice primarily in the hospital. We believe that our established sales and marketing organization and our strong cash position make us an attractive commercialization partner for many biotechnology companies with late-stage product development candidates. We are actively pursuing the acquisition of rights to product development candidates which, if successful, may require the use of substantial capital resources. - DEVELOPING SPIROS. Our Spiros platform technology is an essential component of our future growth. We plan to continue to leverage our Spiros platform technology by developing Spiros for the local delivery of pharmaceuticals to the lungs to treat respiratory conditions, for our own account and in collaboration with third parties, and by developing Spiros for the systemic delivery of biopharmaceuticals, including proteins and peptides, through the lungs to treat non-respiratory conditions as an alternative to current invasive delivery techniques, generally in collaboration with third parties. We believe our Spiros technology platform, including recently developed motorless Spiros systems, offers significant long-term value for our shareholders, and we intend to continue to develop it aggressively. PRODUCT PORTFOLIO We are focused on developing, marketing and selling pharmaceutical products that treat respiratory conditions and infectious diseases. RESPIRATORY CONDITIONS The market for products that treat respiratory conditions is significant and growing. The U.S. market for these products was approximately $9.1 billion in 1999, an increase of 21% over 1998. Major segments in this market include allergy, asthma, chronic obstructive pulmonary disease and cough, cold. ALLERGY. While the causes of allergies, which can be seasonal or perennial, vary, nasal congestion, sneezing and eye itch are common symptoms of many allergies. The U.S. market for therapeutic drugs to treat allergies was 4 approximately $4.2 billion in 1999. Antihistamines and antihistamine/decongestant combinations are the most widely used forms of therapy and represent the largest portion of the allergy market in the U.S. Additional products for allergies include intranasal steroids, which are increasingly being prescribed for allergic rhinitis, and products that treat eye allergies. The U.S. market for intranasal steroids was approximately $1.2 billion in 1999, an increase of 19% over 1998. The U.S. market for products that treat eye allergies was approximately $210 million in 1999, an increase of 27% over 1998. We promote three products that treat the causes and/or symptoms of allergies: Nasarel, Nasalide and Alocril. Nasarel and Nasalide are intranasal steroids, and Alocril is approved for the treatment of eye itch associated with allergic conjunctivitis. Nasarel and Nasalide are used to treat the underlying cause and symptoms of seasonal and perennial allergic rhinitis, including runny nose, nasal congestion and sneezing. The active ingredient in Nasarel and Nasalide is flunisolide hemihydrate, a synthetic steroid that reduces inflammation in allergic reactions. Allergists and primary care physicians write the majority of prescriptions for Nasarel and Nasalide. We acquired exclusive U.S. rights to market and promote Nasarel and Nasalide in 1997. Alocril is a mast cell stabilizer developed by Allergan and is approved for the treatment of eye itch associated with allergic conjunctivitis. In the primary care and respiratory markets, allergists and primary care physicians write the majority of prescriptions for Alocril. We acquired exclusive U.S. rights to market and promote Alocril to primary care and respiratory physicians in February 2000. We launched Alocril with Allergan in March 2000. ASTHMA. Asthma is a complex physiological disorder characterized by airway hyperactivity to a variety of stimuli such as dust, pollen, stress or physical exercise, resulting in airway obstruction that is partially or temporarily reversible. The U.S. asthma population has grown steadily in recent years. The market for therapeutic drugs to treat asthma was approximately $7.7 billion in the major countries of the world in 1999. The U.S. market represented approximately $3.5 billion of this total. These drugs include beta-agonists, like albuterol, which are typically used to provide rapid symptomatic relief of reversible bronchospasm, steroids, like beclomethasone and budesonide, which are increasingly used as maintenance therapy to treat the inflammatory component of asthma, and anticholinergic bronchodilators, like ipratropium, which are commonly prescribed for patients that do not respond well to beta-agonists. Physicians are increasingly prescribing oral inhaled steroids as maintenance therapy to treat the inflammatory component of asthma in an effort to prevent acute attacks. The market for oral inhaled steroids in the major countries of the world was approximately $2.7 billion in 1998 and grew at a rate of 13% per year from 1994 through 1998. We are developing, on behalf of Spiros Corp. II, beclomethasone and budesonide for use in our proprietary Spiros pulmonary drug delivery system. Beclomethasone is a steroid used to treat the inflammatory component of asthma and selected symptoms of chronic obstructive pulmonary disease. Sales of beclomethasone in 1998 in the major countries of the world were approximately $700 million. Budesonide is a new generation steroid used to treat the inflammatory component of asthma. Sales of budesonide in 1998 in the major countries of the world were approximately $720 million. Beclomethasone Spiros is currently in Phase III clinical trials, and we plan to initiate Phase III clinical trials for Budesonide Spiros in 2000. The status of our development programs for these two products and our relationship with Spiros Corp. II are described in greater detail below under "SPIROS--DEVELOPMENT PROGRAMS" and "--RELATIONSHIP WITH SPIROS CORP. II." INFECTIOUS DISEASES The market for products that treat infectious diseases is also large and growing. The U.S. market for these products was approximately $11.1 billion in 1999, an increase of 14% over 1998. Major segments in this market include respiratory infections, hospital-acquired bacterial infections and fungal infections. RESPIRATORY INFECTIONS. Respiratory infections caused by a variety of bacteria can affect either the nasal cavity, the sinuses and throat or the lungs. The resulting diagnoses include sinusitis, tonsillitis and bronchitis. These 5 infections are treated with antibiotics, which kill the bacteria causing the symptoms. There are a variety of classes of antibiotics that treat specific ranges, or spectrums, of bacteria. Classes used to treat respiratory infection include cephalosporins, broad spectrum macrolides and quinolones. The U.S. market for these classes is very large, totaling $6.6 billion in 1999 for the oral forms alone. The cephalosporin class accounted for approximately $824 million of this total. Ceclor CD is an oral cephalosporin antibiotic used primarily for the treatment of bronchitis. It is prescribed predominantly by primary care physicians and ear, nose and throat specialists. It is approved for the treatment of bacterial bronchitis, uncomplicated skin and skin structure infections, pharyngitis and tonsillitis. We acquired exclusive U.S. rights to market and promote Ceclor CD in 1996. HOSPITAL-ACQUIRED BACTERIAL INFECTIONS. Bacterial infections pose a threat to seriously ill patients in the hospital and long-term care settings. These infections are associated with increased hospital stays, more intensive therapy and high mortality. Increasing bacterial resistance among both Gram positive and Gram negative organisms further complicates treatment. Therapy is most often initiated with broad-spectrum injectable antibiotics, including third and fourth generation cephalosporins, extended spectrum penicillins, carbapenems, quinolones and aminoglycosides, either alone or in combination. The U.S. market for all injectable antibiotics was approximately $2.4 billion during 1999, and the U.S. market for broad-spectrum injectable antibiotics totaled approximately $1.7 billion in 1999. Maxipime and Azactam (aztreonam) for Injection are both injectable antibiotics. Maxipime is a fourth-generation cephalosporin antibiotic used to treat patients with life-threatening infections. Pulmonologists, infectious disease specialists, internal medicine physicians, hematologists and oncologists prescribe Maxipime for patients with severe hospital-based respiratory and non-respiratory conditions such as pneumonia, urinary tract infection and febrile neutropenia. An important attribute of Maxipime is its broad spectrum of activity, including activity against many pathogens resistant to other antibiotics. Azactam is a monobactam and is principally used by surgeons, infectious disease specialists and internal medicine physicians to treat pneumonia, post-surgical infections and septicemia and has an excellent safety profile. We acquired exclusive U.S. rights to both products in late 1998 and have significantly increased sales of Maxipime since that time. TUBERCULOSIS. Tuberculosis is a highly infectious, airborne disease caused by the bacterium MYCOBACTERIUM TUBERCULOSIS. The clinical symptoms of tuberculosis vary, but generally include weight loss, fatigue, and weakness. Pulmonary tuberculosis is the most common form of the active disease, leading to progressive destruction of the infected lung. Standard treatment of the disease, as outlined by the American Lung Association, includes a dosing regimen of four antibiotic drugs administered over a six-month period. Some patients are infected with resistant strains of MYCOBACTERIUM TUBERCULOSIS and do not respond to first-line treatment with the traditional oral antibiotic drug therapies. These patients must be treated more intensively with stronger antibiotics, including injectable products. We market three products for the treatment of tuberculosis: Myambutol-Registered Trademark-, Capastat-Registered Trademark- and Seromycin-Registered Trademark-. Myambutol is an oral tablet and is one of the four antibiotics typically used as first-line therapy for all patients diagnosed with tuberculosis during the initial treatment period. Capastat and Seromycin are antibiotics approved for the treatment of multiple drug resistant tuberculosis. We believe the tuberculosis market is an attractive segment of the infectious disease market because treatment protocols are firmly established and the products require minimal promotional effort. SALES AND MARKETING ORGANIZATION Our sales and marketing organization is composed of approximately 600 people, and includes a field sales force, a hospital sales force and a managed markets sales and marketing group. 6 FIELD SALES FORCE Our field sales force includes approximately 325 territories, all of which are located in the U.S. The field sales representatives principally call on primary care physicians, allergists, ear, nose and throat specialists, pulmonologists and a selected subset of pediatricians. These physicians collectively write a majority of the total prescriptions for the respiratory infection and allergy products that our field sales force promotes. These physicians also treat a large number of asthma patients, the target of our first two Spiros products currently under development. HOSPITAL SALES FORCE Our hospital sales force includes approximately 150 territories, all of which are located in the U.S. The hospital sales representatives call principally on hospital-based pulmonologists, infectious disease specialists, surgeons, internal medicine physicians, hematologists and oncologists. These physicians write a significant portion of the total prescriptions for injectable antibiotics, while pulmonologists will also be important to the launch of our Spiros respiratory products. MANAGED MARKETS SALES AND MARKETING GROUP We have also established a dedicated managed markets sales and marketing group that focuses on sales to large regional and national managed care organizations and retail pharmacy chains. These organizations include health maintenance organizations, group purchasing organizations, long-term care providers, wholesale distributors and retail chains and mail order pharmacies. A primary goal of the managed markets sales and marketing group is to place our products on approved formulary lists of health maintenance organizations, group purchasing organizations and long-term care providers. SPIROS Spiros is our proprietary pulmonary drug delivery system that we are developing to aerosolize pharmaceuticals in dry powder formulations for delivery to the lungs. Our program for Spiros includes developing Spiros both for the local delivery of pharmaceuticals to the lungs for the treatment of respiratory conditions and for the systemic delivery of biopharmaceuticals, including proteins and peptides, through the lungs as an alternative to current invasive delivery techniques. SPIROS MARKET OPPORTUNITY There are currently many approved products for the delivery of medication to the lungs, primarily for the treatment of respiratory conditions. Biopharmaceuticals, in contrast, are primarily delivered orally or by injection. We believe Spiros has the opportunity to significantly improve the delivery of medication for both local delivery to the lungs and systemic delivery through the lungs. INHALATION DEVICES Most currently-approved inhalation devices are one of the following three types: - METERED DOSE INHALERS. Metered dose inhalers, also known as MDIs, are currently the most widely used inhalation delivery system due to their relative convenience and portability. MDIs consist of a suspension or solution of drug filled into a canister, sealed with a metering valve and pressurized using a propellant, most commonly a chloroflorcarbon or CFC. Unfortunately, it is estimated that only 10% to 20% of the dose from an MDI actually reaches the lung, with the remainder of the drug being deposited in the mouth and throat or the stomach where it has no therapeutic effect and may cause unwanted side effects. The limited amount of drug that reaches the lung is caused primarily by the inability of most patients to coordinate their inhalation with the initiation of the delivery system and the resulting high velocity of the propellant-driven aerosol. To increase the amount of drug that actually reaches the lung, patients are sometimes prescribed spacers to use with their MDIs, thereby increasing the complexity and reducing the portability of the device. 7 - JET NEBULIZERS. Jet nebulizers aerosolize a liquid solution of medicine, either ultrasonically or with compressed air, creating a fine mist that patients inhale slowly over several minutes. Jet nebulizers are much larger than other inhalation delivery systems and, because of their size, are primarily used to deliver aerosol to hospitalized patients, patients with acute asthma and patients unable to coordinate the use of other inhalation delivery devices. Jet nebulizers are generally considered to be less convenient and less portable because of their size and the complexity of use. - DRY POWDER INHALERS. Dry powder inhalers represent a significant advancement in the development of inhalation delivery systems. Dry powder inhalers are relatively convenient and portable, and are CFC-free. They are breath actuated, so they eliminate the need for the press-and-breathe coordination associated with MDIs. Although dry powder inhalers overcome the need to coordinate inhalation with the initiation of the device, currently marketed dry powder inhalers require high inspiratory flow rates, making the ultimate dose delivered to the patient dependent on the patient's inspiratory effort. This high inspiratory flow rate is difficult to achieve for children, the elderly and patients with breathing difficulties. We believe the development of respiratory drugs for delivery through Spiros is a significant opportunity for us. We anticipate that dry powder inhalers like Spiros will gradually replace MDIs as the leading pulmonary delivery systems, due primarily to the phasing out of CFC propellants and coordination problems associated with many MDIs. Some companies are studying alternative propellants, such as hydrofluorocarbons, for use in MDIs. We believe, however, that any product using an alternative propellant will still suffer from many of the limitations of currently marketed MDIs, including the need for patients to coordinate breathing with actuation of the drug delivery system. In Europe, where several pharmaceutical companies have marketed dry powder inhalers for a number of years, sales of dry powder inhalers had increased to 27% of the total sales of inhaled asthma products in 1999. DELIVERY OF BIOPHARMACEUTICALS Genetically engineered drugs or biopharmaceuticals are relatively new treatments in the field of medicine. The first genetically engineered drug approved by the FDA was human insulin, which was approved in 1982. Since then, the FDA has approved over 55 biopharmaceuticals and many more are currently being developed. Analysts estimate that the U.S. market for these drugs in 1999 exceeded $13 billion. Most of these drugs are currently delivered by injection. Injections are invasive and not widely accepted by patients due to inconvenience, discomfort and the possibility of infection. To date, alternative methods of delivery such as oral, nasal and transdermal have not been commercially attractive due to the relatively low amount of drug that reaches the blood. Initial work suggests that inhalation may be an attractive alternative to injection for select biopharmaceuticals. We believe our Spiros drug delivery system also represents a significant opportunity for improving the delivery of biopharmaceuticals. The lung has long been used for the delivery of respiratory products where a local lung effect is desired and for the systemic administration of drugs (both conventional small molecules and biopharmaceuticals). Depending upon the formulation, the aerosol can be directed to the larger more central airways or to the smaller airways in the deep lung. The lung provides a large surface area for absorption and is in close proximity to the blood supply. Pulmonary delivery bypasses gastrointestinal degradation and hepatic metabolism, which typically destroy biopharmaceuticals delivered orally. Delivery of medications through the lung is also patient friendly and non-invasive and could expand the market for biopharmaceuticals by increasing patient acceptance and providing new therapeutic indications. POTENTIAL ADVANTAGES OF SPIROS We believe Spiros, if approved by the FDA, may provide advantages over other currently available pulmonary drug delivery systems and could provide a significant benefit to patients being treated with biopharmaceuticals: - INSPIRATORY FLOW RATE INDEPENDENCE AND LOW FLOW RATE CAPABILITY. Spiros is designed to deliver a relatively consistent drug dose to the lungs over a wide range of inspiratory flow rates, which can vary depending on a patient's health, age, effort or physical abilities. Tests of Spiros on human subjects have shown a relatively 8 consistent amount of drug deposition throughout the clinically relevant inspiratory range. Existing dry powder inhalers can vary significantly in their level of drug deposition depending on the patient's inspiratory flow rate. Many of them also require high inspiratory flow rates for the patient to obtain the labeled dose of the drug. Therefore, they may deliver significantly less drug at the lower flow rates typically associated with compromised pulmonary function. For many proteins and peptides, accurate dosing is critical, and a pulmonary delivery system such as Spiros, which is designed to provide relatively consistent dosing over a variety of inspiratory flow ranges, may better meet the requirements for optimal pulmonary delivery of biopharmaceuticals. - MINIMUM NEED FOR PATIENT COORDINATION. Spiros is breath actuated and does not require the user to coordinate inhalation and actuation of the drug delivery system. MDIs generally require users to coordinate their breathing with initiation of the MDI. Studies indicate that a significant percentage of patients, particularly young children and the elderly, do not use MDIs correctly. Spiros is designed to solve these coordination problems by delivering the drug to patient's lungs as they inhale. - PATIENT CONVENIENCE. Spiros is designed to be convenient for patients, with features such as breath actuation and portability due to its light weight and small size, quick delivery time, simple operation, dose delivery feedback and multi-dose capability. Spiros also allows the patient to see the actual number of doses remaining in a cassette or blister pack and an LED light alerts the patient of the need to replace Spiros prior to the end of its useful life. Many biopharmaceuticals that currently must be administered by injection could be delivered by Spiros, thereby significantly improving patient convenience and potentially improving compliance. - FREE OF CHLOROFLUOROCARBON PROPELLANTS. Spiros does not use CFCs while most MDIs, currently the most popular form of aerosol drug delivery, use CFCs. CFC propellants have ozone destructive characteristics. Virtually all of the world's industrial nations, under the auspices of the United Nations Environmental Program, have pledged to cease use of CFCs by the year 2000. Continued use of CFCs in medical products has been permitted under annual exemptions. As a result of the planned phase out of CFCs, we believe that DPIs will become a leading method for pulmonary drug delivery. THE SPIROS PULMONARY DRUG DELIVERY SYSTEM Spiros uses electromechanical energy to aerosolize pharmaceuticals in dry powder formulations for delivery to the lungs while providing advantages over traditional pulmonary delivery systems. The Spiros system is appropriate for use both with respiratory medications for topical delivery to the lung and with biopharmaceuticals, which are delivered to the deep lung for systemic administration. CORE TECHNOLOGY The core technology contained in the Spiros system is an aerosol generator that uses electromechanical energy to disperse dry powder to form an aerosol for inhalation. The main components of the aerosol generator include the impeller, the motor, the breath-actuated switch, and the dosing chamber. When the switch is activated, the electric circuit is completed and the impeller rotates. The action of the impeller on the dry powder formulation supplies the energy to disperse the drug and provide a cloud of aerosolized drug for inhalation. The cloud of aerosolized drug is suspended in the dosing chamber and is delivered to the lungs only as the patient inhales. This technology controls both the powder dispersion to form the aerosol and allows for patient-actuated inhalation, making the drug delivery independent of the inspiratory force generated by the patient. Virtually the same dose is delivered at low and high inspiratory efforts, making the system relatively flow rate independent. Products are currently under development in two separate Spiros systems, a cassette system and a blisterdisk system, both using the same core technology with different powder storage systems. Because of the physical and chemical requirements of the specific drugs deliverable by Spiros, as well as the varying needs of the patients and marketplace, we believe that our cassette and blisterdisk systems will provide flexibility for delivery of many different types of drugs. 9 CASSETTE SYSTEM. The cassette system was the first Spiros system developed. The powder storage device in this system is a 30-dose plastic cassette packed in a foil pouch. To use the cassette system, a patient first removes the cassette from the pouch and opens the lid of the Spiros generator to load the cassette. When the lid is closed, the cassette rotates to deliver a dose of drug into the dosing chamber. An impeller is located within the dosing chamber. When the patient inhales through the mouthpiece, the impeller is automatically activated at a relatively low flow rate. The action of the impeller on the powder in the chamber generates the aerosol, which the patient inhales. When the cassette is empty, the patient opens the lid, removes the empty cassette and loads a new cassette. BLISTERDISK SYSTEM. Although many drugs and powder formulations are sufficiently stable using the cassette system, some drugs, including many biopharmaceuticals, are sensitive to relative humidity. We have developed a blisterdisk system for drugs that require a barrier against moisture or light. This system uses powder-filled sealed foil blisters, which prevent moisture contact with the powder. The powder storage device in this system is a 16-dose blisterdisk and is sufficiently flexible to accommodate a wide variety of drugs. To use the blisterdisk system, a patient opens the mouthpiece cover, pushes a button to open the blister and inhales through the mouthpiece to actuate the impeller and aerosolize the dose. As the patient closes the mouthpiece cover, the next blister is advanced to the dosing position. When the blisterdisk is empty, the patient opens the lid, removes the empty blisterdisk and loads a new blisterdisk. SPIROS DEVELOPMENT PROGRAM Our development program for Spiros consists of two principal components. The first component entails developing for ourselves or third parties drugs that are currently used to treat respiratory conditions for delivery in Spiros. The second component entails developing Spiros for the systemic delivery of biopharmaceuticals, including proteins and peptides, through the lungs as an alternative to current invasive delivery techniques, generally in collaboration with third parties. RESPIRATORY PRODUCTS We are currently developing beclomethasone and budesonide, two drugs frequently prescribed to treat asthma, for use in Spiros on behalf of Spiros Corp. II. BECLOMETHASONE. In the first quarter of 1997, we completed dose ranging studies for one dosage strength of beclomethasone in the Spiros cassette system under an investigational new drug application. In the fourth quarter of 1997, we commenced a late-stage 12-week trial in humans to demonstrate safety and efficacy. Enrollment of patients was completed by the second quarter of 1998. The study demonstrated that Beclomethasone Spiros provided improved potency and comparable safety and efficacy to the approved MDI product to which it was compared. After receiving feedback from the FDA, we reformulated Beclomethasone Spiros and finalized the commercial Spiros inhaler design. In the fourth quarter of 1999, we initiated the first in a new series of pivotal clinical studies for Beclomethasone Spiros. An important objective of these studies is to demonstrate the reliability of the Spiros system, to confirm the results of the earlier trials and to demonstrate that comparable efficacy and potentially improved safety may be achieved with Beclomethasone Spiros using lower dosages than currently approved MDI formulations. If the clinical trials are successful , we currently plan to file a new drug application for Beclomethasone Spiros in late 2000 or early 2001 and, if the product is approved by the FDA, to launch the product in late 2001 or 2002. BUDESONIDE. We completed a dose-targeting study for Budesonide Spiros in the first quarter of 2000 and plan to begin a pivotal clinical program in the second half of 2000. If the clinical trials are successful, we currently plan to file a new drug application for Budesonide Spiros in late 2002 and, if the product is approved by the FDA, to launch the product in 2003. INHALED INSULIN Approximately 15.7 million Americans, or 5.9% of the U.S. population, have diabetes. It is estimated that 10.3 million Americans have been diagnosed and the remaining 5.4 million people are not aware that they have the disease. Diabetes is a disorder of metabolism--it occurs when a person's pancreas either produces little or no insulin, or the body cells do not respond to the insulin that is produced. As a result, glucose collects in the blood 10 and is not delivered to the body's cells to use for growth and energy. Instead, glucose overflows into the urine and passes out of the body, thereby eliminating the body's main source of fuel. Over time, high levels of blood glucose can lead to debilitating complications, such as retinopathy, neuropathy, cardiovascular disease, and end-stage renal disease. There are two types of diabetes: Type 1, or insulin-dependent diabetes mellitus, and Type 2, or non-insulin dependent diabetes mellitus. Type 1 patients, all of whom require insulin therapy, account for between 5% and 10% of the U.S. diabetes population. Their diabetes is usually managed most effectively with an insulin regimen that combines a long-acting insulin with a rapid-onset insulin, administered multiple times throughout the day to cover glucose peaks that occur after meals. Type 2 patients comprise the remaining 90% to 95% of diagnosed diabetes patients in the U.S. Although some Type 2 diabetes may be managed with a careful regimen of diet and exercise, most Type 2 patients progress through various stages of therapy from oral diabetes medications to insulin therapy. This insulin therapy may mimic the regimen that Type 1 patients utilize--long acting insulin to provide a basal level of insulin, with multiple injections of rapid-onset insulin. Although insulin may be the final option for controlling diabetes, most Type 2 patients try to avoid initiation of insulin therapy, predominantly due to the fear and inconvenience of injections. We are collaborating with Lilly to develop an inhaled form of insulin with our Spiros drug delivery system. Under this collaboration, we supply the inhaler and formulate and manufacture the insulin, which is supplied by Lilly, using our proprietary protein and peptide pulmonary delivery technology. We also receive research and development and progress payments during development and revenues and royalties from supply of commercial product. Lilly conducts the clinical trial program and holds worldwide marketing rights to the inhaled insulin product. We believe the Spiros inhaled insulin program represents a significant opportunity to improve insulin therapy for diabetes patients. Spiros for inhaled insulin incorporates many of the same features displayed in the Beclomethasone Spiros and Budesonide Spiros systems: portability, simple operation, breath actuation, multi-dose capability. And, perhaps more importantly, Spiros for inhaled insulin eliminates the inconvenience and fear associated with insulin injections. This collaboration also represents an important opportunity for us and a substantial recognition of the potential of the Spiros technology platform and its application to systemic delivery of biopharmaceuticals. NEXT GENERATION INHALERS Our scientists have recently invented new technologies for forming and delivering aerosols from powder formulations. The technologies are based on earlier developments with Spiros and could provide excellent aerosol delivery using a motorless inhaler system. The technologies could utilize either our existing powder storage systems or new unit dose systems. Broad patent coverage is being sought for these new technologies which we plan to develop by ourselves and with potential partners. RELATIONSHIP WITH SPIROS CORP. II In late 1997, Spiros Corp. II completed a $101 million public offering. Under agreements with us, the net proceeds of $94 million from the offering and a $75 million contribution from us were targeted to develop Spiros and Spiros applications for use with the drugs albuterol, beclomethasone, budesonide, ipratropium, an albuterol-ipratropium combination and additional designated compounds. The offering consisted of 6,325,000 units sold at $16.00 per unit. Each unit consisted of one share of Spiros Corp. II callable common stock and a warrant to purchase one-fourth of one share of our common stock. These warrants are exercisable from January 1, 2000 through December 31, 2002 at an exercise price of $54.84 per share. In consideration for the warrants and the $75 million contribution, we have the right through December 31, 2002 to purchase all, but not less than all, of the then outstanding callable common stock of Spiros Corp. II at predetermined prices. We also have an option, through specified dates, to acquire Spiros Corp. II's exclusive rights for the use of Spiros with albuterol and for the use of Spiros with a second product other than albuterol. The purchase price for the stock purchase option may be paid, at our 11 option, in cash, shares of our common stock, or any combination of the two. The purchase price for the product options may only be paid in cash. In March 2000 we entered into a merger agreement to acquire Spiros Corp. II. Under the agreement, for each share of callable common stock Spiros Corp. II shareholders will receive $13.25 in cash and one five-year warrant to purchase a fractional share of our common stock at $17.94 per share. The total consideration for the merger as of the date of the merger agreement was calculated to be $100.8 million, or $15.75 per share of callable common stock. Closing of the transaction is subject to standard conditions. We have received voting agreements in favor of the merger from holders of approximately 22% of Spiros Corp. II's outstanding callable common stock. A special committee of independent members of the Spiros Corp. II board has approved the merger agreement and is recommending that the Spiros Corp. II shareholders approve the merger. In connection with our agreement to acquire Spiros Corp. II, we announced that upon successful completion of the acquisition we would discontinue development activities on albuterol in the existing Spiros cassette system. Albuterol was the first product developed in the Spiros system. We filed a new drug application for Albuterol Spiros in 1997, and in November 1998 we received a complete response letter from the FDA. The response letter indicated that the new drug application would not be approved unless specified deficiencies were addressed. The FDA requested that we resolve several chemistry, manufacturing, and control issues, as well as specified electromechanical reliability issues. After several meetings with the FDA, we identified the requirements that would address the issues raised by the FDA and support a resubmission of the Albuterol Spiros new drug application. We were addressing the chemistry, manufacturing and control issues for Albuterol Spiros at the time we made our decision to discontinue development activities. Our decision was based largely on market considerations, including an evaluation of the potential market for and the potential return on the investment required to complete development of the product. In connection with the Spiros Corp. II initial public offering, we also entered into the following additional agreements with Spiros Corp. II: TECHNOLOGY LICENSE AGREEMENT. Under this agreement, we granted to Spiros Corp. II, subject to existing agreements, an exclusive, worldwide, perpetual, royalty-bearing license to use Spiros in connection with the designated compounds. ALBUTEROL AND PRODUCT OPTION AGREEMENT. Under this agreement, we have the option to acquire the rights to use Spiros with albuterol and a second product other than albuterol. DEVELOPMENT AGREEMENT. Under this agreement, Spiros Corp. II engaged us to develop the Spiros products and provide general management services. MANUFACTURING AND MARKETING AGREEMENT. Under this agreement, Spiros Corp. II granted to us an exclusive worldwide license to manufacture and market the Spiros products in exchange for a royalty of 7% on net product sales, as defined in the agreement. HEALTHSCRIPT HealthScript is a mail service pharmacy specializing in dispensing respiratory pharmaceuticals that we acquired in 1995. Mail order services are particularly well suited for respiratory patients who are long-term, chronic users of certain pharmaceuticals and to whom the convenience of mail order is appealing. HealthScript currently dispenses approximately 100 respiratory medications manufactured by third parties. HealthScript is focused on working with doctors, home healthcare providers and patients to coordinate respiratory medication services and patients management programs. HealthScript markets its services through specialty field sales representatives and telemarketing. The patient base is maintained by telephone contact to monitor compliance with their doctors' prescriptions. HealthScript is also developing Internet capabilities that will provide a convenient, value oriented shopping experience offering consumers a wide range of information and products designed to promote healthy lifestyles. HealthScript will feature a comprehensive range of personal healthcare products at competitive prices, a full- 12 service, licensed pharmacy, along with an extensive range of health-related information and other tools designed to help our customers make informed purchasing decisions. COMPETITION Many companies, including large pharmaceutical firms with financial and marketing resources and development capabilities substantially greater than ours, are engaged in developing, marketing and selling products that compete with those we offer or plan to offer. We believe that competition among both prescription pharmaceuticals aimed at the markets for respiratory conditions and infectious diseases and pulmonary drug delivery systems will be based on, among other things, product efficacy, safety, reliability, availability and price. As the respiratory and infectious disease markets continue to evolve, there will be numerous products and devices that will continue to offer competitive advantages to already existing products and devices in the market place. There are at least 25 other companies in the U.S. that are developing, marketing and selling pharmaceuticals to treat respiratory conditions and infectious diseases. Additionally, there are at least 10 companies currently developing, marketing or selling single and/or multiple dose dry powder pulmonary drug delivery systems, many of which are major pharmaceutical companies. There are currently at least two other companies developing inhaled insulin delivery systems, Aradigm Corporation and Inhale Therapeutic Systems, Inc. In 1998, Aradigm announced a collaboration with Novo Nordisk for inhaled insulin. In 1999, Inhale announced that it is in Phase III clinical trials in its collaboration with Pfizer for inhaled insulin. PATENTS AND PROPRIETARY RIGHTS We presently hold 12 U.S. patents and 13 U.S. patent applications relating to the Spiros technology. The issued patents include a patent with claims covering the use in Spiros of an impeller to create an aerosol cloud of a drug intended for inhalation, which expires in 2011. We have also filed selected continuations in part and foreign patent applications relating to Spiros. All of the above patents and patent applications, relating to the Spiros technology, together with their respective continuations in part and foreign patent applications, have been licensed to Spiros Corp. II for specified uses under our technology license agreement. Our scientists have recently invented new technologies for forming and delivering aerosols from powder formulations. The technologies are based on earlier developments with Spiros and could provide excellent aerosol delivery using a motorless inhaler system. The technologies could utilize either our existing powder storage systems or new unit dose systems. Broad patent coverage is being sought for these new technologies which we plan to develop by ourselves and with potential partners. We consider the protection of discoveries in connection with our development activities important to our business. We intend to seek patent protection in the U.S. and selected foreign countries where deemed appropriate. We also rely on trade secrets, unpatented proprietary know-how and continuing technological innovation to develop our competitive position. We enter into confidentiality agreements with some of our employees under which these employees agree to assign to us any inventions relating to our business made by them while in our employ. In connection with one of the patents described above, in 1993 we entered into an agreement with the principal inventor of the Spiros technology which, among other things, provides compensation to the inventor over the life of the patent which is linked to annual sales of products related to such patent. Such compensation amounts to approximately $1 million of the first $50 million of annual sales of such products, and $1 million of the next $100 million of annual sales, with a maximum aggregate annual compensation of $6 million. The Alocril, Ceclor CD, Nasarel, Nasalide, Maxipime and Azactam products or processes to make such products are covered by patents that expire between 2004 and 2008. For a discussion of risks related to our intellectual property, please see "Risks and Uncertainties" below. 13 GOVERNMENT REGULATION The manufacturing and marketing of our products are subject to regulation by various Federal and state government authorities. In the U.S., pharmaceuticals and drug delivery systems, including Spiros, are also subject to rigorous FDA regulation and may be subject to regulation by other jurisdictions, including the State of California. The Federal Food, Drug, and Cosmetic Act and the Public Health Service Act govern the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of our products. Product development and approval within this regulatory framework takes a number of years and involves the expenditure of substantial resources. To obtain FDA approval for each of the Spiros products, we must conduct each of the following and possibly other steps: - laboratory and possibly animal tests, - the submission to the FDA of an investigational new drug application, which must become effective before human testing may commence, - adequate and well-controlled human testing to establish safety and efficacy, - the submission of a new drug application to the FDA for marketing approval, and - FDA approval of the new drug application prior to any commercial sale or shipment. The new drug application must include, in addition to a compilation of preclinical and clinical data, complete information about product performance and manufacturing facilities and processes. Prior to completion of the regulatory review process, the FDA may conduct an inspection of the facility, manufacturing procedures, operating systems and personnel qualifications. In addition to obtaining FDA approval for each product, each domestic drug and/or device manufacturing facility must be registered with and approved by the FDA. Domestic manufacturing facilities are subject to biennial inspections by the FDA and inspections by other jurisdictions and must comply with current good manufacturing practice for both drugs and devices. To supply products for use in the U.S., foreign manufacturing establishments must comply with current good manufacturing practice and other requirements and are subject to periodic inspection by the FDA or by regulatory authorities in such countries under reciprocal agreements with the FDA. Preclinical testing includes laboratory evaluation of product chemistry and animal studies, if appropriate, to assess the safety and efficacy of the product and its formulation. The results of the preclinical tests are submitted to the FDA as part of an IND application, and unless the FDA objects, the IND application will become effective 30 days following its receipt by the FDA, thus allowing the product to be tested in humans. Clinical trials involve the administration of the pharmaceutical product to healthy volunteers or to patients identified as having the condition for which the pharmaceutical agent is being tested. The pharmaceutical product is administered under the supervision of a qualified principal investigator. Clinical trials are conducted in accordance with Good Clinical Practice and protocols previously submitted to the FDA as part of the investigational new drug application that detail the objectives of the study, the parameters used to monitor safety and the efficacy criteria evaluated. Each clinical study is conducted under the auspices of an independent Institutional Review Board at the institution at which the study is conducted. The review board considers, among other things, the design of the study, ethical factors, the safety of the human subjects and the possible liability risk for the institution. Clinical trials for new products are typically conducted in three sequential phases that may overlap. In Phase I, the initial introduction of the pharmaceutical into healthy human volunteers, the emphasis is on testing for safety and adverse effects, dosage tolerance, metabolism, distribution, excretion and clinical pharmacology. Phase II involves studies in a limited patient population to determine the initial efficacy of the pharmaceutical for specific targeted indications, to determine dosage tolerance and optimal dosage and to identify possible adverse side effect and safety risks. Once a compound is found to be effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to more fully evaluate clinical outcomes. The FDA reviews both the clinical plans and the results of the trials and may require the study to be discontinued at any time if there are significant safety issues. 14 The results of the preclinical and clinical trials for pharmaceutical drug products such as those currently marketed or being developed by us are submitted to the FDA in the form of a new drug application for marketing approval. FDA approval can take several months to several years, or approval may be denied. The approval process can be affected by a number of factors, including the severity of side effects, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials. Additional animal studies or clinical trials may be requested during the FDA review process and may delay marketing approval. After FDA approval for the initial indication, further clinical trials are necessary to gain approval for the use of the product for any additional indications. The FDA may also require post-marketing testing and surveillance to monitor for adverse effects, which can involve significant additional expense. Although the FDA has considerable discretion to decide what requirements must be met prior to approval, we believe, based upon the FDA's historical practice with respect to drug inhalers, that the FDA is likely to regulate each combination of Spiros with a compound as a discrete pharmaceutical or drug product requiring separate approval as a new drug. Although the safety and efficacy of the compounds being developed on behalf of Spiros Corp. II in Spiros have already been established in currently marketed formulations and delivery mechanisms, the approved requirements for new pulmonary delivery systems such as Spiros are quite rigorous. For both currently marketed and future products, failure to comply with applicable regulatory requirements after obtaining regulatory approval can, among other things, result in the suspension of regulatory approval, as well as possible civil and criminal sanctions. In addition, changes in regulations could have a material adverse effect on us. HealthScript is subject to regulation by state regulatory authorities, principally state boards of pharmacy. In addition, HealthScript 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. For a description of the risks related to government regulation, please see "Risks and Uncertainties" below. MANUFACTURING Our manufacturing facility is located near our headquarters in San Diego, California. The facility initially will be used to formulate, mill, blend and manufacture drugs to be used with Spiros, pending regulatory approval. Our manufacturing facility must be registered with and licensed by various regulatory authorities and must comply with current good manufacturing practice requirements prescribed by the FDA and other governmental authorities. We will need to significantly scale up our current manufacturing operations from clinical supply scale to commercial scale and comply with 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 and to obtain marketing approval. Any failure or significant delay in the validation of or obtaining a satisfactory regulatory inspection of the new facility or failure to successfully scale up could have a material adverse effect on our ability to manufacture products in connection with Spiros. We do not have the capability to manufacture the pharmaceutical products we currently sell. As a result, we are dependent on third-party contract manufacturers for the supply of all of our products. These products are supplied under short-term and long-term supply agreements. If these manufacturers were unable to supply product, it could be difficult for us to secure alternative sources of supply in a timely manner. This would impair our ability to ship product to our customers and could have an adverse effect on our business and results of operations. HUMAN RESOURCES We had 1,022 employees as of December 31, 1999, consisting of 565 people in sales and marketing, 119 in corporate services, 245 in clinical, regulatory and research and development and 93 at Health Script. None of our employees are represented by a labor union, and we believe we maintain positive relations with both field and corporate personnel. 15 RISKS AND UNCERTAINTIES WE FACE RISKS ASSOCIATED WITH OUR OPERATIONS. BEFORE WE CAN MARKET ANY SPIROS PRODUCT, WE WILL HAVE TO OBTAIN REQUIRED GOVERNMENTAL APPROVALS, WHICH IS NOT ASSURED. The development, testing, manufacturing and marketing of pharmaceutical products are subject to extensive regulation by governmental authorities, including the FDA. The FDA must approve each Spiros product before that product can be manufactured or marketed for commercial sale. The review and approval process mandated by the FDA is very rigorous, requiring extensive preclinical and clinical testing as well as determining manufacturing capability and product performance. The FDA may never approve any of the Spiros products currently in development by us or in collaboration with third parties. Failure to obtain any such approval would have an adverse effect on our business and results of operations. ALTERNATIVE SUPPLIERS TO OUR THIRD-PARTY MANUFACTURERS MAY NOT BE AVAILABLE ON A TIMELY BASIS WHICH WOULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS. We do not have the capability to manufacture the pharmaceutical products we currently sell. As a result, we are dependent on third-party contract manufacturers for the supply of all of our products. These products are supplied under short-term and long-term supply agreements. If these manufacturers were unable to supply product, it could be difficult for us to secure alternative sources of supply in a timely manner. This would impair our ability to ship product to our customers and could have an adverse effect on our business and results of operations. WE INTEND TO CONTINUE TO PURSUE OUR STRATEGY OF ACQUIRING COMPLEMENTARY PRODUCTS AND LATE-STAGE PRODUCT DEVELOPMENT CANDIDATES, WHICH COULD RESULT IN SIGNIFICANT CHARGES TO EARNINGS AND REQUIRE THE USE OF CAPITAL RESOURCES. As part of our business strategy, we intend to continue to pursue the acquisition of complementary products and late-stage product development candidates. Such acquisitions could result in significant charges to earnings in the related period as well as require the use of a large amount of our available capital resources. Depending on the acquisition opportunities available and our use of existing funds to satisfy existing capital and operating needs, we may need to raise additional funds to finance such transactions. If adequate funds are not available when needed on terms acceptable to us, our ability to complete acquisitions could be limited. We may not have sufficient funds to develop any late-stage product development candidates that we may acquire, any development we conduct may not be successful and any funds we spend on product development may reduce our earnings below the levels expected by securities analysts. Further, reimbursement may not be available to enable us to achieve market acceptance of any products we may acquire or develop or to maintain price levels sufficient to realize an appropriate return on our investment in these products. WE WILL NEED TO SIGNIFICANTLY EXPAND OUR MANUFACTURING CAPABILITY AND COMPLY WITH GOVERNMENT REGULATIONS BEFORE WE CAN MANUFACTURE ANY SPIROS PRODUCTS. We will need to significantly expand our current manufacturing operations and comply with regulations prescribed by various regulatory agencies to achieve the quality and required levels of production of our Spiros products to obtain marketing approval. In addition, our manufacturing facility must be registered with and licensed by various regulatory authorities and must comply with current good manufacturing practice requirements prescribed by the FDA and other governmental authorities. We intend to utilize third parties to produce components of and assemble the Spiros inhaler. Such third parties have only produced limited quantities of components and assembled limited numbers of inhalers. These third parties will be required to significantly scale up their activities and to produce components which meet applicable specifications on a timely and consistent basis. Such third parties may not be successful in attaining acceptable service levels or meeting regulatory requirements which would have an adverse effect on our ability to commercialize the Spiros products. 16 IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL AS NECESSARY, IT COULD IMPAIR OUR SALES AND MARKETING ORGANIZATION AND DELAY OUR PRODUCT DEVELOPMENT PROGRAMS. Our success depends on the principal members of our scientific and management staff. If we lose the services of one or more of these people, we may be unable to achieve our development objectives. None of our employees, other than Mr. Garner, Mr. Whitehead and Dr. Kabakoff, is currently employed under an employment contract. Mr. Garner, Mr. Whitehead and Dr. Kabakoff are employed under separate letter agreements, which are automatically extended for successive one-year periods. We may not be able to recruit and retain management and qualified scientific personnel to perform research and development work in the future due to intense competition for such personnel among pharmaceutical and other technology-based businesses, universities and research institutions, particularly in the San Diego area. WE MAY NOT BE ABLE TO EFFECTIVELY MARKET MAXIPIME AND AZACTAM. Effective January 1, 1999, we acquired the rights to Maxipime and Azactam, our first acquisition of products used in hospitals. Under a co-promotion agreement with Bristol-Myers Squibb Company, their hospital sales force promoted the products during 1999, while we built our hospital sales force. Beginning in 2000, we assumed full responsibility for promoting these products. We may not be able to effectively promote these products solely through our own hospital sales force. WE MAY HAVE TO REFINANCE OUR $287.5 MILLION OF OUTSTANDING NOTES ON TERMS THAT MAY NOT BE ATTRACTIVE TO US. We issued $287.5 million principal amount of 3 1/2% convertible subordinated notes due 2002. We may desire to refinance the notes at a time when we are not able to do so or on terms that are not attractive to us. Any inability to refinance the notes on attractive terms could have a material adverse effect on us and the market value of our common stock. SEASONALITY AND THE TIMING AND SEVERITY OF THE WINTER COLD AND FLU SEASON CAN HAVE AN ADVERSE EFFECT ON OUR OPERATING 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 our results of operations in the past and may influence them again in the future. WE COMPETE WITH MANY COMPANIES FOR THE ACQUISITION OF RIGHTS TO NEW PRODUCTS AND TECHNOLOGIES. Our strategy for growth is dependent, in part, on our ability to continue to acquire rights to new products and technologies. The failure to successfully acquire, develop or market new products or technologies would have an adverse effect on our business, including our ability to achieve our targeted growth rates. Other companies, including those with substantially greater resources, are competing with us for the rights to such products. We may not be able to acquire additional products or technologies on acceptable terms, or at all. GROSS MARGINS ON PHARMACEUTICAL PRODUCTS MAY DECREASE AS A RESULT OF COMPETITIVE PRESSURES. We do not have proprietary protection for several of the products we sell, and other pharmaceutical companies sell substitutes for such products. In addition, the average selling prices for many of our products may decline over time due to competitive and reimbursement pressures. We may not be successful in any efforts we take to mitigate the effect of a decline in average selling prices. Our commercial success will depend in part on the price that third-party healthcare payors, such as government and private health insurers and managed care organizations, are willing to pay for our products. Third-party payors continually challenge the pricing of medical products and services. Many managed care organizations limit the number of pharmaceutical products they approve for reimbursement. The 17 competition between pharmaceutical companies to get their products approved for reimbursement may also result in downward pricing pressure in the industry. Any of these factors causing a decline in our average selling prices would also reduce the gross margins we achieve and negatively impact our business. OUR ABILITY TO OBTAIN PATENTS AND PROTECT OUR PROPRIETARY RIGHTS IS UNCERTAIN AND COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS. Our ability to obtain patents on current or future products or technologies, defend our patents, maintain trade secrets and operate without infringing upon the proprietary rights of others both in the U.S. and abroad is uncertain. Patents may never issue from the applications we have filed. Even if issued or licensed to us, patents may not be enforceable, provide substantial protection from competition or be of commercial benefit to us. Even if all these are true, we may not possess the financial resources necessary to enforce or defend any patent rights we obtain. Our commercial success will also depend upon avoiding the infringement of patents issued to competitors and upon maintaining the technology licenses upon which certain of our products are based. Litigation, which is costly, may be necessary to enforce our patent and license rights or to determine the scope and validity of proprietary rights of third parties. If any of our products or technologies are found to infringe upon patents or other rights owned by third parties, we could be required to obtain a license to continue to manufacture or market such products or technologies. Licenses to such patent rights may not be available to us on commercially reasonable terms, or at all. If we do not obtain such licenses, we could encounter delays in marketing affected products or technologies or we could find that the development, manufacture or sale of products requiring such licenses is not possible. WE ARE INVOLVED IN A LAWSUIT AND CANNOT PREDICT ITS OUTCOME. We are involved in shareholder litigation as described in Note 13 of the consolidated financial statements. The outcome of this lawsuit and any other suits in which we may become involved cannot be predicted. An adverse outcome in any of these actions could have an adverse effect on our business or results of operations. OUR PRODUCTS MAY CAUSE PRODUCT LIABILITY CLAIMS OR MAY NEED TO BE RECALLED, EITHER OF WHICH WOULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS. We face an inherent business risk of exposure to product liability claims in the event that the use of our products or technologies is alleged to have resulted in adverse effects. The level or breadth of any insurance coverage we currently maintain may not be sufficient to fully cover potential claims. Adequate insurance coverage may not be available in the future at acceptable costs, if at all. WE FACE RISKS ASSOCIATED WITH THE PENDING ACQUISITION OF SPIROS CORP. II. THE FAILURE TO COMPLETE THE ACQUISITION MAY RESULT IN A DECREASE IN THE MARKET VALUE OF OUR COMMON STOCK. The acquisition is subject to a number of contingencies, including approval by the shareholders of Spiros Corp. II and other customary closing conditions. As a result, the acquisition may not be completed. If the acquisition is not completed for any reason, the trading price of our common stock may fall. THE MERGER WILL SIGNIFICANTLY REDUCE OUR CONTRACT REVENUES AND WILL LIKELY RESULT IN A MATERIAL CHARGE TO OUR EARNINGS IN THE PERIOD IN WHICH THE EVENT OCCURS. We record contract revenue for payments from Spiros Corp. II for development costs we incur on Spiros Corp. II's behalf and for technology access fees. Contract revenues from Spiros Corp. II totaled $55.5 million for the year ended December 31, 1999. The merger will likely result in a significant reduction of contract revenue to us. In addition, we expect that a material charge for acquired in-process technology will likely be recorded in the period in which the acquisition is effected. 18 WE FACE RISKS ASSOCIATED WITH OUR MARKET. THE PHARMACEUTICAL INDUSTRY IS EXTREMELY COMPETITIVE. Many companies, including large pharmaceutical firms with financial and marketing resources and development capabilities substantially greater than ours, are engaged in developing, marketing and selling products that compete with those that we offer or plan to offer. Our failure to effectively respond to the competitive pressures of our industry would have an adverse effect on our business and results of operations. The selling prices of such products typically decline as competition increases. Further, other products now in use or under development by others may be more effective than our current or future products. The industry is characterized by rapid technological change, and competitors may develop their products more rapidly than we do. Competitors may also be able to complete the regulatory process sooner, and therefore, may begin to market their products in advance of our products. SOME OF OUR CHARTER AND OTHER CONTRACTUAL PROVISIONS MAY PREVENT A CHANGE OF CONTROL WHICH COULD BE BENEFICIAL TO OUR SHAREHOLDERS. Certain provisions of our charter documents, outstanding securities (including certain warrants, options and our notes), certain contracts (including the executive severance agreements), and our shareholder rights plan may have the effect of delaying, deferring or preventing a change in control. This could deprive you of an opportunity to receive a premium for your shares of common stock. OUR STOCK PRICE IS VOLATILE. The market prices for securities of emerging companies, including ours, have historically been highly volatile. Future announcements concerning us or our competitors may have a significant impact on the market price of our common stock. Such announcements might include: - - financial results, - - the results of clinical testing of our or our competitors' products, - - regulatory developments, - - technological innovations, - - new commercial products, - - changes to government regulations, - - regulatory decisions on commercialization of products, - - developments concerning proprietary rights, - - litigation or public concern as to safety of our products, or - - our failure to achieve securities analysts' expectations concerning our earnings per share or revenues. ITEM 2. PROPERTIES We own and occupy our campus in San Diego, California consisting of a 77,000 square foot headquarters facility and a 155,000 square foot research and development facility which we completed in January 1999. We own two other buildings that are situated on another parcel of land near our headquarters. One building, consisting of approximately 34,000 square feet, is partially occupied and is being used for manufacturing purposes. The second building, consisting of approximately 49,000 square feet, contains our manufacturing facility that will be used to formulate, mill, blend and fill drugs to be used with Spiros and is also used for warehouse space. We also lease approximately 28,560 square feet of space in Denver, Colorado and 4,375 square feet of space in Rainsville, Alabama, which comprise the operations of Health Script's mail service pharmacy. The lease terms expire in January 2003 and January 2001, respectively. 19 ITEM 2. PROPERTIES We own and occupy our campus in San Diego, California consisting of a 77,000 square foot headquarters facility and a 155,000 square foot research and development facility which we completed in January 1999. We own two other buildings that are situated on another parcel of land near our headquarters. One building, consisting of approximately 34,000 square feet, is partially occupied and is being used for manufacturing purposes. The second building, consisting of approximately 49,000 square feet, contains our manufacturing facility that will be used to formulate, mill, blend and fill drugs to be used with Spiros and is also used for warehouse space. We also lease approximately 28,560 square feet of space in Denver, Colorado and 4,375 square feet of space in Rainsville, Alabama, which comprise the operations of Health Script's mail service pharmacy. The lease terms expire in January 2003 and January 2001, respectively. We consider our facilities adequate for our current needs and believe that additional space can be obtained in the future, if necessary. ITEM 3. LEGAL PROCEEDINGS SETTLEMENT OF THE TERMINATION OF MERGER AGREEMENT WITH SCANDIPHARM, INC.- On December 1, 1997, we terminated a merger agreement with Scandipharm, Inc. entered into on October 20, 1997. On January 16, 1998, Scandipharm filed suit against us for breach of contract. On January 20, 1998, we filed suit against Scandipharm seeking a declaratory judgment that our termination of the merger agreement did not breach the agreement and damages against Scandipharm. On October 4, 1999, we settled all litigation with Scandipharm. Under the terms of the settlement, we paid $3.5 million to Scandipharm, and the parties dismissed all lawsuits filed against one another. The $3.5 million charge was included with other expense in the accompanying consolidated statements of operations for the year ended December 31, 1999. SHAREHOLDER CLASS ACTION LITIGATION - Commencing on January 27, 1999, several class action suits were filed against us and a number of current or former officers and directors of the Company in the United States District Court for the Southern District of California. The lawsuits, which have been consolidated into one action, allege violations of the federal securities laws, and purport to seek damages on behalf of a class of shareholders who purchased our common stock during a defined period. We believe that the claims in the lawsuit are without merit and intend to defend against them vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Our common stock is traded on the Nasdaq National Market under the symbol "DURA." The following table sets forth the high and low sale prices of our common stock as reported on Nasdaq, without retail mark-up, mark-down or commissions, during each quarter in 1998 and 1999: 20
High Low ---- --- 1998 First quarter $48.625 $20.75 Second quarter $29.00 $21.375 Third quarter $26.875 $ 9.938 Fourth quarter $15.625 $ 8.000 1999 First quarter $17.688 $12.625 Second quarter $15.00 $10.063 Third quarter $15.063 $ 9.75 Fourth quarter $14.813 $11.875
On March 15, 2000 the closing price of our common stock was $13.625. At March 15, 2000 there were approximately 620 holders of record of our common stock. No cash dividends were declared or paid in 1998 or 1999. We currently intend to retain all available funds for use in our business, and do not anticipate paying any cash dividends in the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, financial condition and future prospects and other factors the board of directors may deem relevant. ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31, ---------------------------------------------------------- 1999 1998 1997 1996 1995 ---------------------------------------------------------- STATEMENT OF OPERATIONS DATA (1) Total revenues $ 301,426 $ 199,152 $ 181,323 $104,119 $ 51,502 Net income (loss) (2) $ 30,004 $ 2,733 $ (84,692) $ 24,328 $(35,778) Net income (loss) per share (2): Basic $ 0.68 $ 0.06 $ (1.93) $ 0.68 $ (1.53) Diluted $ 0.66 $ 0.06 $ (1.93) $ 0.60 $ (1.53) BALANCE SHEET DATA (1) Cash, cash equivalents and short-term investments $ 274,413 $ 269,412 $ 385,221 $ 240,345 $ 67,820 Working capital $ 255,925 $ 248,237 $ 392,870 $ 219,864 $ 59,105 Total assets $ 883,474 $ 825,459 $ 774,880 $ 504,670 $143,997 Long-term obligations $ 354,154 $ 352,839 $ 297,064 $ 6,670 $ 15,427 Shareholders' equity $ 441,739 $ 410,372 $ 429,277 $ 443,577 $109,097
(1) Selected Consolidated Financial Data reflect various product rights and company acquisitions, including Maxipime and Azactam (1999), Myambutol (1998), Nasarel and Nasalide (1997), the Entex 21 product line, Ceclor CD and Keftab-Registered Trademark- (1996), and HealthScript (1995). See note 4 of the notes to consolidated financial statements. (2) In 1999, Dura incurred a $3.5 million charge for the settlement of the Scandipharm litigation (see note 13 of the notes to the consolidated financial statements). In 1998, 1997 and 1995, Dura incurred charges for acquired in-process technology, purchase options and other nonrecurring items totaling $29.3 million, $137.6 million and $43.8 million, respectively, as described in note 12 of the notes to consolidated financial statements. In addition, the nonrecurring consolidation of DJ Pharma, Inc.'s operations in 1998 reduced net income by $4.9 million. If these charges were excluded, Dura would have reported net income of $32.4 million, or $0.73 per share (basic) and $0.71 per share (diluted) for 1999, net income of $25.5 million, or $0.55 per share (basic) and $0.53 per share (diluted) for 1998, net income of $47.4 million, or $1.08 per share (basic) and $0.99 per share (diluted) for 1997, and $8.0 million, or $0.34 per share (basic) and $0.28 per share (diluted) for 1995. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following comments should be read in conjunction with the consolidated financial statements and notes contained elsewhere in this annual report. See "Risks and Uncertainties" for trends and uncertainties known to us that could cause reported financial information not to be necessarily indicative of future results. OVERVIEW We are engaged in developing and marketing prescription pharmaceutical products for the treatment of respiratory conditions and infectious diseases. We execute our business strategy by (1) acquiring currently marketed or late-stage development products, and companies developing or marketing such pharmaceuticals, to support our presence in high-prescribing physicians' offices and the hospital market, and (2) developing Spiros-Registered Trademark-, a pulmonary drug delivery system for both topical anD systemic delivery of medications. We currently sell 10 prescription product lines and also own a separate mail service pharmacy, Health Script Pharmacy Services, Inc., which dispenses respiratory pharmaceuticals. Our operations are divided into two business segments: (1) Pharmaceutical Products and (2) Research and Development. The Pharmaceutical Products segment markets prescription pharmaceutical products for the treatment of respiratory conditions and infectious diseases. The Research and Development segment manages the development of Spiros. Each of the Company's segments operates solely within the United States. The following table summarizes total revenues and operating income (loss) by segment for 1999, 1998, and 1997 (in thousands):
PHARMACEUTICAL RESEARCH AND PRODUCTS DEVELOPMENT CONSOLIDATED Total revenues 1999 $ 232,589 $ 68,837 $ 301,426 1998 $ 138,025 $ 61,127 $ 199,152 1997 $ 151,850 $ 29,473 $ 181,323 Operating income (loss) 1999 $ 37,458 $ 11,599 $ 49,057 1998 $ (20,600) $ 13,191 $ (7,409) 1997 $ 43,965 $(121,982) $ (78,017)
During 1998, we made significant acquisitions of product rights and licenses that impact the comparability of the Company's operations for the years ended December 31, 1999, 1998 and 1997. On December 31, 1998, we acquired exclusive U.S. distribution rights for the patented hospital antibiotic products Maxipime (cefepime 22 hydrochloride) for Injection and Azactam (aztreonam) for Injection from Bristol-Myers Squibb Company. The Company began selling these products effective January 1, 1999. In August 1998, we acquired from an affiliate of American Home Products exclusive U.S. marketing rights to the single-source tuberculosis drug Myambutol (ethambutol hydrochloride). RESULTS OF OPERATIONS The following table summarizes our results of operations for 1999, 1998, and 1997 (in thousands, except per share amounts):
1999 1998 1997 ---- ---- ---- Total revenues $ 301,426 $ 199,152 $ 181,323 Operating income (loss) 49,057 (7,409) (78,017) Net income (loss) 30,004 2,733 (84,692) Earnings (loss) per share (diluted) 0.66 0.06 (1.93)
NET INCOME Net income for 1999 was $30 million, or $0.66 per diluted share, which included a $3.5 million pre-tax charge in other expense for settling all litigation with Scandipharm, Inc. Net income for 1998 was $2.7 million, or $0.06 per diluted share, which included a pre-tax charge totaling $29.3 million for the write-down of product rights whose values we deemed impaired, as well as the $4.9 million after-tax impact of consolidating the operations of DJ Pharma. Net loss for 1997 was $84.7 million, or $1.93 per diluted share, which included pre-tax charges totaling $137.6 million for acquired in-process technology, purchase options and other nonrecurring items. If these charges were excluded, we would have reported net income of $32.4 million, or $0.71 per diluted share, for 1999, net income of $25.5 million, or $0.53 per diluted share, for 1998, and net income of $47.4 million, or $0.99 per diluted share, for 1997. See notes 6, 11 and 12 of the notes to the consolidated financial statements for further discussion of these charges. Other factors that affected net income are discussed below. SALES AND GROSS PROFIT Sales for 1999 increased $95.6 million, or 70%, over 1998. This increase is due primarily to sales of Maxipime and Azactam, which we acquired in December 1998 and began selling effective January 1999, as well as increases in the sales of our promoted products Ceclor CD and Nasarel. Gross profit, or sales less cost of sales, for 1999 increased $79 million, or 74%, over 1998 as a result of thie increase in sales in 1999. Gross profit as a percentage of sales increased to 80% in 1999 compared to 79% in 1998 and 1997. Sales in 1998 decreased $14.3 million, or 9%, from 1997 due primarily to a decline in sales of some of our cough, cold and allergy products, partially offset by an increase in sales of Myambutol, acquired in August 1998. Gross profit for 1998 decreased $11.5 million, or 10%, from 1997 as a result of the decrease in sales in 1998. CONTRACT REVENUE Contract revenue relates primarily to amounts received by us for development work we perform on our Spiros pulmonary drug delivery system, as well as milestone and technology access payments, under agreements with Spiros Corp. II and Lilly. Contract revenues for 1999 were $69.7 million, of which $55.5 million was from Spiros Corp. II, as compared to $63 million, of which $47.8 million was from Spiros Corp. II, for 1998. Contract revenues for 1998 increased $32.1 million, or 104%, over 1997 due to increased development activity conducted under the agreements discussed above. Contract revenues totaled $25.9 million from Spiros Development Corporation and Spiros Corp. II in 1997. Contract revenues may fluctuate from period to period based on the level of research funding received as well as the achievement of milestones and receipt of technology access payments from our partners. See "Liquidity and Capital Resources" below and note 6 of the notes to the 23 consolidated financial statements for discussion of the Company's March 2000 definitive merger agreement with Spiros Corp. II. The merger with Spiros Corp. II, if completed, will likely result in a significant reduction of our contract revenue even though we will continue to incur the related development costs. CLINICAL, DEVELOPMENT AND REGULATORY EXPENSES Clinical, development and regulatory expenses increased $9.1 million, or 21%, from 1998 to 1999 and increased $18.6 million, or 74% from 1997 to 1998 due to increased development activity conducted under the agreements covering the use of various compounds with Spiros as discussed above. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for 1999 increased $42 million, or 46%, over 1998 but decreased as a percentage of total revenues from 46% in 1998 to 44% in 1999. The dollar increase is primarily due to costs incurred to expand our field sales force (increase of $41.9 million), higher marketing costs relating to our recently acquired products (increase of $3.4 million) and costs related to general corporate activities (increase of $2.9 million). The increases were offset by the $6 million impact of the consolidation of DJ Pharma into our 1998 financial statements as described in note 11 of the notes to the consolidated financial statements. Selling, general and administrative expenses for 1998 increased $38.6 million, or 73%, over 1997 and increased as a percentage of total revenues to 46% for 1998 from 29% for 1997. The dollar and percentage increases are primarily due to costs incurred to expand our field sales force (increase of $27.6 million), costs related to general corporate activities (increase of $4.2 million) and the consolidation of DJ Pharma into our 1998 financial statements (increase of $6 million). For both 1999 and 1998, the expansion of our sales force was in response to the acquisition of distribution rights to new products as well as to increase the promotion of certain existing products in our portfolio. PRODUCT RIGHTS AMORTIZATION Product rights amortization for 1999 increased $7.4 million, or 58%, over 1998, and increased as a percentage of total revenues from 6% in 1998 to 7% in 1999. The dollar and percentage increases are due to the purchase of Myambutol in August 1998, as well as the purchases of Maxipime and Azactam on December 31, 1998. Product rights amortization for 1998 increased $1.2 million, or 10%, over 1997, and remained consistent as a percentage of total revenues at 6% in 1997 and 1998. The dollar increase is due to the purchase of Myambutol in August 1998 and the purchases of Nasarel and Nasalide in May 1997. INTEREST INCOME Interest income for 1999 decreased $4.4 million, or 20%, from 1998 due to lower balances of cash, cash equivalents and short-term investments during 1999 resulting from the acquisition of product rights and the repurchase of shares of our common stock in the second half of 1998. Interest income for 1998 increased $3.8 million, or 21%, over 1997. The increase is due to higher balances of cash, cash equivalents and short-term investments during 1998 resulting primarily from the investment of the net proceeds of our notes offering completed in the third quarter of 1997. INTEREST EXPENSE Interest expense for 1999 increased $6.1 million, or 51%, over 1998 due to interest on obligations incurred in connection with the acquisition of product rights completed in the second half of 1998. Interest expense for 1998 increased $6.2 million, or 107%, over 1997 due to interest expense on our notes offering which we completed in the third quarter of 1997. PROVISION FOR INCOME TAXES Our effective tax rate was 32% for 1999, as compared to a tax benefit of $907,000 on pre-tax income of $1.8 million for 1998. The 1999 effective tax rate is mainly attributable to the realization of research and development credits and the utilization of net operating loss carryforwards. The primary reason for recognizing a 24 tax benefit in 1998 in spite of achieving pre-tax earnings was the availability of federal research and development and other tax credits. A significant portion of the nonrecurring charges incurred in 1997 was not deductible for tax purposes. As such, an $18.8 million tax provision was recorded despite incurring a pre-tax loss. Excluding the impact of nonrecurring charges, our effective tax rate for 1997 was 34%. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and short-term investments increased by $5 million from $269.4 million at December 31, 1998 to $274.4 million at December 31, 1999. Working capital increased by $7.7 million from $248.2 million at December 31, 1998 to $255.9 million at December 31, 1999. We have outstanding $287.5 million principal amount of notes due July 15, 2002 with interest payable semiannually at a coupon rate of 3.5%. The notes are convertible, at the option of the holder, into shares of common stock at any time prior to maturity or redemption at a conversion price of $50.635 per share. In addition to the notes, as of December 31, 1999, we had outstanding an aggregate of $68.5 million in current and other long-term obligations related to our product acquisitions, of which $1.9 million is to be paid during the next 12 months. As of December 31, 1999, additional payments totaling approximately $140 million, estimated based on historical sales levels of the related products, are contingent upon the levels of future sales of certain products, and approximately $70 million are contingent upon the continued absence of competing formulations of certain products as defined in the respective agreements. Such contingent amounts are payable through 2004, including approximately $48 million contingently due within the next 12 months. We have entered into various agreements with Spiros Corp. II for the development of Spiros with certain compounds including beclomethasone and budesonide. In 1997, we licensed the use of these and other compounds with Spiros to Spiros Corp. II on an exclusive basis. We have the right to purchase all, but not less than all, of the then outstanding shares of Spiros Corp. II callable common stock at predetermined prices. In addition, we have the right to acquire from Spiros Corp. II the exclusive rights for the use of Spiros with albuterol and for the use of Spiros with a second product other than albuterol. Both the stock purchase option and the product purchase option expire the earlier of December 31, 2002 or upon the use of substantially all of Spiros Corp. II's funds. Spiros Corp. II has engaged us to develop the Spiros products under license from us. We record contract revenue for payments from Spiros Corp. II for development costs we incur on its behalf and for technology access fees. Contract revenues from Spiros Corp. II totaled $55.5 million for the year ended December 31, 1999. Based on the current development plan of Spiros Corp. II, we expect that it will expend all of its existing cash during the second half of 2000. Further, we do not believe that Spiros Corp. II's existing funds will be sufficient to complete the development of any Spiros product. In March 2000 we entered into a merger agreement to acquire Spiros Corp. II. Under the agreement, for each share of callable common stock Spiros Corp. II shareholders will receive $13.25 in cash and one five-year warrant to purchase a fractional share of our common stock at $17.94 per share, which represents a 25% premium over the average closing price of our common stock for the ten trading days prior to the date of the merger agreement. The exact fraction of a share of our common stock purchasable under the warrant will be determined based on the average closing price of our common stock for the ten trading days prior to the vote of the Spiros Corp. II shareholders on the merger and will result in a calculated Black-Scholes value for each warrant of between $3.22 and $1.81. The total consideration for the merger as of the date of the merger agreement was calculated to be $100.8 million, or $15.75 per share of callable common stock. Closing of the transaction is subject to Hart-Scott-Rodino clearance, effectiveness of the registration statement for our warrants, and Spiros Corp. II shareholder approval. We have received voting agreements in favor of the merger from holders of approximately 22% of Spiros Corp. II's outstanding callable common stock. A special committee of independent members of the Spiros Corp. II's board, formed in December 1999 to evaluate strategic alternatives for Spiros Corp. II, has approved the merger agreement and is recommending that the Spiros Corp. II shareholders approve the merger. 25 The discontinuation of contract revenue from Spiros Corp. II due to the acquisition of its stock by us would significantly reduce our earnings as well as cash generated from operating activities. In addition, we expect that a charge for acquired in-process technology will be recovered in the period in which the merger is effected. We anticipate that our existing capital resources and cash generated from operations will be sufficient to finance our operations through at least the next 12 months. Product or company acquisitions or in-licensing opportunities, however, may require significant additional capital resources. Such additional capital resources may not be available when needed or on terms acceptable to us. We are actively pursuing the acquisition of rights to products and/or companies that may require the use of substantial capital resources; however, there are no present agreements or commitments for any such acquisitions. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We invest our excess cash and short-term investments in U.S. government and corporate debt securities with high quality credit ratings and maturities of less than two years. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment income we earn on our investments and, therefore, impact our cash flows and results of operations. At December 31, 1999, we had outstanding subordinated notes totaling $287.5 million, which mature in July 2002. The notes have a fixed interest rate of 3 1/2 percent. Accordingly, while changEs in interest rates may affect the fair market value of the notes, they do not impact our cash flows or results of operations. As of December 31, 1999, the notes had a fair market value of $234.3 million. We are not exposed to risks for changes in foreign currency exchange rates, commodity prices, or any other market rates. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the Index to consolidated financial statements below for a list of the financial statements included in this Form 10-K. 26 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Identification of Directors. The information under the caption "Election of Directors," appearing in the Proxy Statement to be filed for our 2000 Annual Meeting of Shareholders, is incorporated herein by reference. (b) Identification of Executive Officers. The information under the caption "Executive Officers," appearing in the Proxy Statement to be filed for our 2000 Annual Meeting of Shareholders, is incorporated herein by reference. (c) Compliance with Section 16(a) of the Exchange Act. The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance," appearing in the Proxy Statement to be filed for our 2000 Annual Meeting of Shareholders, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the heading "Executive Compensation and Other Information" appearing in the Proxy Statement to be filed for our 2000 Annual Meeting of Shareholders, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the headings "Principal Stockholders" and "Security Ownership of Management," appearing in the Proxy Statement to be filed for our 2000 Annual Meeting of Shareholders, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the headings "Election of Directors," "Executive Compensation and Other Information" and "Certain Relationships and Related Transactions," appearing in the Proxy Statement to be filed for our 2000 Annual Meeting of Shareholders, is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 27 See attached Index to Consolidated Financial Statements. (a) 2. INDEX TO FINANCIAL STATEMENT SCHEDULES Financial statement schedules are omitted because they are not required, are not applicable, or the information is included in the consolidated financial statements or notes included in this Form 10-K. (a) 3. EXHIBITS
Exhibit No. Description ---------- ----------- 11) 3.1 Certificate of Incorporation. 17) 3.2 Certificate of Amendment of Certificate of Incorporation, effective May 21, 1998. 17) 3.3 Certificate of Designation of Series A Junior Participating Preferred Stock. 11) 3.4 Bylaws. 18) 4.1 Specimen Common Stock Certificate. 12) 4.2 Indenture, including form of Note, dated July 30, 1997, between the Company and Chase Manhattan Bank and Trust Company, successor to Chase Trust Company of California, as trustee, with respect to the 3 1/2% Convertible Subordinated Notes due 2002. 12) 4.3 Form of 3 1/2% Convertible Subordinated Note (included in Exhibit 4.2). 13) 4.4 Warrant Agreement dated December 22, 1997 between the Company and ChaseMellon Shareholder Services, L.L.C., as warrant agent, including form of SDCII Warrant. 3) 4.5 Form of Series W Warrant. 6) 4.6 Form of Series S Warrant. 16) 4.7 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. 22) 4.8 First Amendment to the Rights Agreement dated December 10, 1998 between the Company and ChaseMellon Shareholder Services, L.L.C. 4.9 Specimen SDCII Warrant. 1) 10.1 License Agreement dated June 1, 1990 between the Company and Mark B. Mecikalski, M.D. (with certain confidential portions omitted). 12) + 10.2 Form of Indemnification Agreement between the Company and each of its directors. 12) + 10.3 Form of Indemnification Agreement between the Company and each of its officers.
28 18) + 10.4 1992 Stock Option Plan, as amended and restated. 14) + 10.5 Form of Notice of Grant of Stock Option. 14) + 10.6 Form of Stock Option Agreement. 2) + 10.7 Employment letter agreement dated May 7, 1990 between the Company and Cam L. Garner. 4) 10.8 Assignment Agreement dated March 12, 1993 between the Company and Mark B. Mecikalski, M.D. (with certain confidential portions omitted). 5) 10.9 Technology Access License and Royalty Agreement dated September 5, 1994 between Elan Corporation, plc and the Company (with certain confidential portions omitted). 6) 10.10 Investors' Rights Agreement dated December 29, 1995 between the Company and the investors listed on Schedule A thereto. 7) 10.11 Agreement for Purchase and Sale of Assets dated June 17, 1996 between the Company and Procter & Gamble Pharmaceuticals, Inc. (with certain confidential portions omitted) re: Entex-Registered Trademark-. 8) 10.12 Licensing Agreement dated August 21, 1996 between the Company and Eli Lilly and Company (with certain confidential portions omitted) re: Ceclor-Registered Trademark-CD and Keftab-Registered Trademark-. 9) 10.13 Manufacturing Agreement dated August 21, 1996 between the Company and Eli Lilly and Company (with certain confidential portions omitted) re: Ceclor-Registered Trademark- CD and Keftab-Registered Trademark-. 11) 10.14 Business Loan Agreement dated April 14, 1997 between the Company and Bank of America National Trust and Savings Association. 10) 10.15 Syntex Asset Purchase Agreement dated March 27, 1997 between the Company and Syntex (USA), Inc. re: Nasarel-Registered Trademark-and Nasalide-Registered Trademark-. 10) 10.16 SPIL Asset Purchase Agreement dated March 27, 1997 between the Company and Syntex Pharmaceuticals International Limited re: Nasarel-Registered Trademark-and Nasalide-Registered Trademark-. 12) 10.17 Amendment No. 1 to Business Loan Agreement dated May 8, 1997 between the Company and Bank of America National Trust and Savings Association. 12) 10.18 Amendment No. 2 to Business Loan Agreement dated July 30, 1997 between the Company and Bank of America National Trust and Savings Association. 15) 10.19 Amendment No. 3 to Business Loan Agreement dated October 28, 1997 between the Company and Bank of America National Trust and Savings Association. 15) + 10.20 Deferred Compensation Plan. 13) 10.21 Technology License Agreement dated December 22, 1997 between the Company, Dura Delivery Systems, Inc., Spiros Development Corporation and Spiros Development Corporation II, Inc. 13) 10.22 Development Agreement dated December 22, 1997 between the Company and Spiros Development Corporation II, Inc.
29 13) 10.23 Albuterol and Product Option Agreement dated December 22, 1997 between the Company and Spiros Development Corporation II, Inc. 13) 10.24 Manufacturing and Marketing Agreement dated December 22, 1997 between the Company and Spiros Development Corporation II, Inc. 13) 10.25 Services Agreement dated December 22, 1997 between the Company and Spiros Development Corporation II, Inc. 15) + 10.26 Employment letter agreement dated May 1, 1996 between the Company and David S. Kabakoff. 18) 10.27 Amendment No. 4 to Business Loan Agreement dated June 25, 1998 between the Company and Bank of America National Trust and Savings Association. 19) 10.28 Amendment No. 5 to Business Loan Agreement dated October 12, 1998 between the Company and Bank of America National Trust and Savings Association. 19) 10.29 Amendment No. 6 to Business Loan Agreement dated November 13, 1998 between the Company and Bank of America National Trust and Savings Association. 19) + 10.30 Employment letter agreement dated July 1, 1998 between the Company and Robert S. Whitehead. 19) + 10.31 Notice of Grant of Stock Option dated July 10, 1998 between the Company and Robert S. Whitehead. 20) 10.32 Distribution Agreement for Maxipime-Registered Trademark- and Azactam-Registered Trademark- dated December 21, 1998 between the Company and Bristol-Myers Squibb Company (with certain confidential portions omitted). 20) 10.33 Supply Agreement for Maxipime-Registered Trademark-and Azactam-Registered Trademark-dated December 21, 1998 between the Company and Bristol-Myers Squibb Company (with certain confidential portions omitted). 21) 10.34 Amendment No. 7 to Business Loan Agreement dated December 31, 1998 between the Company and Bank of America National Trust and Savings Association. 10.35 Amendment No. 8 to Business Loan Agreement dated April 30, 1999 between the Company and Bank of America National Trust and Savings Association. 10.36 Amendment No. 9 to Business Loan Agreement dated June 30, 1999 between the Company and Bank of America National Trust and Savings Association. 10.37 Amended and Restated Purchase & License Agreement dated January 25, 1999 between the Company, DJ Pharma, Inc., and Dura (Bermuda) Trading Company Ltd. re: Keftab-Registered Trademark-, Rondec-Registered Trademark-, & CCA products * (with certain confidential portions omitted). 10.38 Amendment No. 1 to Amended and Restated Purchase & License Agreement dated December 30, 1999 between the Company, DJ Pharma, Inc., and Dura (Bermuda) Trading Company Ltd. * (with certain confidential portions omitted). + 10.39 Board of Directors Deferred Compensation Plan
30 10.40 Form of Executive Change of Control Severance Agreement dated January 1, 2000 between the Company and each of its officers. 11 Statements Re Computations of Net Income (Loss) Per Share. 21 Subsidiaries of the Registrant 23 Independent Auditors' Consent. 24 Power of Attorney (See signature page). 27 Financial Data Schedule for the year ended December 31, 1999.
1) Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 33-44525), filed December 13, 1991, as amended. 2) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1992, as amended. 3) Incorporated by reference to the Company's Registration Statement on Form S-3 (No. 33-71798), filed December 13, 1993. 4) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1993, as amended. 5) Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 1994, as amended. 6) Incorporated by reference to the Company's Form 8-K, dated December 29, 1995, as amended. 7) Incorporated by reference to the Company's Form 8-K, dated July 3, 1996. 8) Incorporated by reference to the Company's Form 8-K, dated September 5, 1996, as amended. 9) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1996. 10) Incorporated by reference to the Company's Form 8-K, dated May 7, 1997. 11) Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 1997. 12) Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 1997. 13) Incorporated by reference to the Company's Form 8-K, dated December 19, 1997. 14) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-34551), filed August 28, 1997. 15) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1997. 16) Incorporated by reference to the Company's Form 8-K, dated May 21, 1998. 17) Incorporated by reference to the Company's Registration Statement on Form 8-A, filed May 22, 1998. 18) Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 1998. 19) Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 1998. 20) Incorporated by reference to the Company's Form 8-K, dated January 1, 1999. 21) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1998. 22) Incorporated by reference to the Company's Form 8-A/A, dated December 10, 1998. + Management contract or compensation plan or arrangement. * Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed with the Secretary of the Commission without the Mark pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. 31 (b) REPORTS ON FORM 8-K None. SUPPLEMENTAL INFORMATION No Annual Report to Shareholders or Proxy materials have been sent to shareholders as of the date of this report. The Annual Report to Shareholders and Proxy material will be furnished to the Company's shareholders subsequent to the filing of this report and the Company will furnish such material to the Securities and Exchange Commission at that time. 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. Date: MARCH 28, 2000 DURA PHARMACEUTICALS, INC. By: /s/ Cam L. Garner ------------------------------------ Cam L. Garner, Chairman and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Cam L. Garner and Michael T. Borer, or either of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS ANNUAL REPORT ON FORM 10-K HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Signature Title Date - --------- ----- ---- /s/ Cam L. Garner Chairman and MARCH 28, 2000 - ---------------------------------------- Chief Executive Officer (Cam L. Garner) (Principal Executive Officer) /s/ Michael T. Borer Senior Vice President and MARCH 28, 2000 - ---------------------------------------- Chief Financial Officer (Michael T. Borer) (Principal Financial and Accounting Officer) /s/ James C. Blair, PH.D. Director MARCH 28, 2000 - ---------------------------------------- (James C. Blair, Ph.D.) /s/ Herbert J. Conrad Director MARCH 28, 2000 - ---------------------------------------- (Herbert J. Conrad) /s/ Joseph C. Cook, Jr. Director MARCH 28, 2000 - ---------------------------------------- (Joseph C. Cook, Jr.) /s/ David F. Hale Director MARCH 28, 2000 - ---------------------------------------- (David F. Hale) /s/ F. Richard Nichol, Ph.D. Director MARCH 28, 2000 - ---------------------------------------- (F. Richard Nichol, Ph.D.) /s/ Gordon V. Ramseier Director MARCH 28, 2000 - ---------------------------------------- (Gordon V. Ramseier) /s/ Charles G. Smith, Ph.D. Director MARCH 28, 2000 - ---------------------------------------- (Charles G. Smith, Ph.D.)
33 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets...............................................F-1 Consolidated Statements of Operations.....................................F-2 Consolidated Statements of Cash Flows.....................................F-3 Consolidated Statements of Shareholders' Equity...........................F-4 Notes to Consolidated Financial Statements................................F-5 Independent Auditors' Report ............................................F-20
- -------------------------------------------------------------------------------- DURA PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) - --------------------------------------------------------------------------------
DECEMBER 31, ------------------------------- 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 63,631 $ 31,113 Short-term investments 210,782 238,299 Accounts and other receivables 44,632 24,627 Inventory 12,938 9,006 Other current assets 11,523 7,440 - ----------------------------------------------------------------------------------------------------------------------- Total current assets 343,506 310,485 License agreements and product rights 389,631 377,250 Property 93,333 85,374 Other assets 57,004 52,350 - ----------------------------------------------------------------------------------------------------------------------- Total $ 883,474 $ 825,459 =============================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 11,411 $ 8,893 Accrued liabilities 74,305 46,557 Current portion of long-term obligations 1,865 6,798 - ----------------------------------------------------------------------------------------------------------------------- Total current liabilities 87,581 62,248 Convertible subordinated notes 287,500 287,500 Other long-term obligations 66,654 65,339 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities 441,735 415,087 - ----------------------------------------------------------------------------------------------------------------------- Commitments and contingencies (Notes 4, 6, 8 and 13) Shareholders' 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 - 44,239,660 (1999) and 44,083,652 (1998) 44 44 Additional paid-in capital 579,929 580,210 Accumulated other comprehensive income (loss) (1,230) 454 Warrant subscriptions receivable (6,057) (9,385) Accumulated deficit (130,947) (160,951) - ----------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 441,739 410,372 - ----------------------------------------------------------------------------------------------------------------------- Total $ 883,474 $ 825,459 ===============================
See accompanying notes to consolidated financial statements. F-1 - -------------------------------------------------------------------------------- DURA PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ Revenues: Sales $ 231,776 $ 136,193 $ 150,476 Contract 69,650 62,959 30,847 - ------------------------------------------------------------------------------------------------------------------------ Total revenues 301,426 199,152 181,323 - ------------------------------------------------------------------------------------------------------------------------ Operating costs and expenses: Cost of sales 45,839 29,263 32,081 Clinical, development and regulatory 52,977 43,876 25,288 Selling, general and administrative 133,311 91,283 52,728 Product rights amortization 20,242 12,807 11,604 Charges for acquired in-process technology, purchase options and other nonrecurring items (Note 12) 29,332 137,639 - ------------------------------------------------------------------------------------------------------------------------ Total operating costs and expenses 252,369 206,561 259,340 - ------------------------------------------------------------------------------------------------------------------------ Operating income (loss) 49,057 (7,409) (78,017) - ------------------------------------------------------------------------------------------------------------------------ Other: Interest income 17,363 21,780 17,960 Interest expense (18,175) (12,059) (5,816) Other - net (3,797) (486) (14) - ------------------------------------------------------------------------------------------------------------------------ Total other (4,609) 9,235 12,130 - ------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes 44,448 1,826 (65,887) Provision (benefit) for income taxes 14,444 (907) 18,805 - ------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 30,004 $ 2,733 $ (84,692) =============================================== Net income (loss) per share: Basic $ 0.68 $ 0.06 $ (1.93) Diluted $ 0.66 $ 0.06 $ (1.93) Weighted average number of common shares: Basic 44,132 46,028 43,828 Diluted 45,672 47,809 43,828
See accompanying notes to consolidated financial statements. F-2 - -------------------------------------------------------------------------------- DURA PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- Operating activities: Net income (loss) $ 30,004 $ 2,733 $ (84,692) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 32,058 20,454 15,209 Noncash portion of charges for acquired in-process technology, purchase options and other 29,332 49,146 Changes in assets and liabilities: Accounts and other receivables (20,005) 16,360 (16,040) Inventory (3,758) 6,195 (7,739) Other assets 7,254 (21,776) (5,215) Accounts payable and accrued liabilities 27,952 9,956 35,574 - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) operating activities 73,505 63,254 (13,757) - ----------------------------------------------------------------------------------------------------------------------------- Investing activities: Sales and maturities of short-term investments 300,110 385,570 177,367 Purchases of short-term investments (274,277) (310,374) (381,127) Capital expenditures (17,420) (42,201) (24,079) Company and product acquisitions (40,557) (107,827) (76,973) Other (5,531) (6,250) (1,514) - ----------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (37,675) (81,082) (306,326) - ----------------------------------------------------------------------------------------------------------------------------- Financing activities: Issuance of common stock and warrants 4,519 7,164 9,310 Issuance of convertible subordinated notes - net 278,175 Repurchase of common stock (831) (27,226) Principal payments on long-term obligations (7,000) (3,000) (26,500) - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities (3,312) (23,062) 260,985 - ----------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 32,518 (40,890) (59,098) Cash and cash equivalents at beginning of year 31,113 72,003 131,101 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 63,631 $ 31,113 $ 72,003 =================================================== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest (net of amounts capitalized) $ 10,140 $ 9,706 Income taxes $ 4,506 $ 7,418 $ 6,578
See accompanying notes to consolidated financial statements. F-3 - -------------------------------------------------------------------------------- DURA PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - --------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL ACCUMULATED ------------------------ PAID-IN COMPREHENSIVE OTHER COMP. SHARES AMOUNT CAPITAL INCOME INCOME - --------------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1997 43,184 $ 525,350 $ (38) Exercise of stock options and warrants 1,527 6,028 $ 1,444 Issuance of par value $.001 common stock in connection with reincorporation (531,333) 531,333 Issuance of common stock in connection with the purchase of Spiros Corp. callable common stock 897 1 43,728 Collections on warrant subscriptions receivable Issuance of common stock warrants 15,130 Income tax benefit from stock options exercised 13,356 Comprehensive loss: Net loss $ (84,692) Other comprehensive income: Unrealized gain on available-for-sale short-term investments 214 214 --------- Comprehensive loss $ (84,478) - ----------------------------------------------------------------------------------------------------- ========= --------------- Balance, December 31, 1997 45,608 46 604,991 176 Collections on warrant subscriptions receivable Exercise of stock options and warrants 803 4,306 Repurchase of common stock (2,327) (2) (27,226) Income tax effect from stock options exercised and collections on warrant subscriptions receivable (1,861) Comprehensive income: Net income $ 2,733 Other comprehensive income: Unrealized gain on available-for-sale short-term investments 278 278 Comprehensive income $ 3,011 - ----------------------------------------------------------------------------------------------------- ========= --------------- Balance, December 31, 1998 44,084 44 580,210 454 Collections on warrant subscriptions receivable Exercise of stock options and warrants 231 1,191 Repurchase of common stock (75) (831) Income tax effect from stock options exercised and collections on warrant subscriptions receivable (641) Comprehensive income: Net income $ 30,004 Other comprehensive loss: Unrealized loss on available-for-sale short-term investments (1,684) (1,684) --------- Comprehensive income $ 28,320 - ----------------------------------------------------------------------------------------------------- ========= --------------- Balance, December 31, 1999 44,240 $ 44 $ 579,929 $ (1,230) ===================================== ===============
WARRANT SUBSCRIPTIONS ACCUMULATED RECEIVABLE DEFICIT TOTAL ------------------------------------ Balance, January 1, 1997 $ (2,743) $ (78,992) $ 443,577 Exercise of stock options and warrants 7,472 Issuance of par value $.001 common stock in connection with reincorporation Issuance of common stock in connection with the purchase of Spiros Corp. callable common stock 43,729 Collections on warrant subscriptions receivable 3,141 3,141 Issuance of common stock warrants (12,650) 2,480 Income tax benefit from stock options exercised 13,356 Comprehensive loss: Net loss (84,692) (84,692) Other comprehensive income: Unrealized gain on available-for-sale short-term investments 214 Comprehensive loss - ------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 (12,252) (163,684) 429,277 Collections on warrant subscriptions receivable 2,867 2,867 Exercise of stock options and warrants 4,306 Repurchase of common stock (27,228) Income tax effect from stock options exercised and collections on warrant subscriptions receivable (1,861) Comprehensive income: Net income 2,733 2,733 Other comprehensive income: Unrealized gain on available-for-sale short-term investments 278 Comprehensive income - ------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 (9,385) (160,951) 410,372 Collections on warrant subscriptions receivable 3,328 3,328 Exercise of stock options and warrants 1,191 Repurchase of common stock (831) Income tax effect from stock options exercised and collections on warrant subscriptions receivable (641) Comprehensive income: Net income 30,004 30,004 Other comprehensive loss: Unrealized loss on available-for-sale short-term investments (1,684) Comprehensive income - ------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 $ (6,057) $ (130,947) $ 441,739 ==================================
See accompanying notes to consolidated financial statements. F-4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY AND ITS BUSINESS ORGANIZATION - Dura Pharmaceuticals, Inc. ("Dura" or the "Company") is engaged in developing and marketing prescription pharmaceutical products for the treatment of respiratory conditions and infectious diseases. The Company executes its business strategy by (1) acquiring currently-marketed or late-stage development products, and companies developing or marketing such pharmaceuticals, to support its presence in high-prescribing physicians' offices and the hospital market, and (2) developing Spiros(R), a pulmonary drug delivery system for both topical and systemic delivery of medications. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Dura and its wholly owned subsidiaries. In addition, the 1998 financial statements include the accounts of DJ Pharma, Inc. (see Note 11). All intercompany transactions and balances are eliminated in consolidation. Certain reclassifications have been made to amounts included in the prior years' financial statements to conform to the presentation for the year ended December 31, 1999. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL - 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. 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. Investments with an original maturity of more than three months are considered short-term investments and have been classified by management as available-for-sale. Such investments are carried at fair value, with unrealized gains and losses included with accumulated other comprehensive income 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 to diversify its cash investments and their maturities that 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. The Company extends credit on an uncollateralized basis primarily to wholesale drug distributors and retail pharmacy chains throughout the United States. Historically, the Company has not experienced significant credit losses on its customer accounts. INVENTORY - Inventory is stated at the lower of cost (first-in, first-out method) or market and is comprised primarily of finished goods and samples. PROPERTY - Property is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets as follows:
Description Lives ------------------------------------------------------ ---------------- Buildings 7-40 years Machinery and equipment 3-10 years Furniture and fixtures 5-7 years
F-5 LICENSE AGREEMENTS AND PRODUCT RIGHTS - The cost of license agreements and product rights are capitalized and amortized on a straight-line basis over the periods estimated to be benefited, ranging from 6 to 25 years. EVALUATION OF LICENSE AGREEMENTS, PRODUCT RIGHTS AND OTHER INTANGIBLE ASSETS - The Company continually evaluates the carrying value of the unamortized balances of license agreements, product rights and other intangible assets to determine whether any impairment of these assets has occurred or whether any revision to the related amortization periods should be made. This evaluation is based on management's projections of the undiscounted future cash flows associated with each product or underlying business. If management's evaluation were to indicate that the carrying values of these intangible assets were impaired, such impairment would be recognized by a write down of the applicable asset to its estimated fair market value (see Note 12). In connection with the acquisition of certain product rights and licenses, the Company made initial payments at the closing of the related transactions and is required to make additional payments, the amount of which is contingent upon future events. Such payments, if any, are recorded by the Company as adjustments to the cost of the product rights as of the date the contingency is resolved. REVENUE RECOGNITION - Revenues from product sales are recognized upon shipment, net of allowances for returns, rebates and chargebacks. The Company is obligated to accept from customers the return of pharmaceuticals which have reached their expiration date. Contract revenue is recognized on a basis consistent with the performance requirements of the contract. Payments received in advance of performance are recorded as deferred revenue. CLINICAL, DEVELOPMENT AND REGULATORY EXPENSES - Clinical, development and regulatory costs are expensed as incurred. NET INCOME (LOSS) PER SHARE - The Company presents basic and diluted earnings per share amounts. Basic earnings per share is calculated based on the weighted average number of shares outstanding during the year, while diluted earnings per share also gives effect to all potential dilutive common shares outstanding during each year such as options, warrants, convertible securities and contingently issuable shares. The Company incurred a net loss in 1997 and, as such, the weighted average number of shares used for diluted earnings per share do not include potential dilutive common shares as their inclusion would be antidilutive. ACCOUNTING FOR STOCK-BASED COMPENSATION - As permitted by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," the Company accounts for costs of stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, the Company discloses the pro forma effect on net income (loss) and related per share amounts using the fair value-based method to account for its stock-based compensation (see Note 9). F-6 3. SHORT-TERM INVESTMENTS The following is a summary of short-term investments as of December 31, 1999 and 1998 (in thousands):
UNREALIZED ESTIMATED COST GAINS/(LOSSES) FAIR VALUE December 31, 1999: U.S. government securities $111,324 $ (964) $110,360 U.S. corporate debt securities 100,688 (266) 100,422 -------- ------- -------- Total $212,012 $(1,230) $210,782 ======== ======= ======== December 31, 1998: U.S. government securities $ 60,818 $ 142 $ 60,960 U.S. corporate debt securities 177,027 312 177,339 -------- ------- -------- Total $237,845 $ 454 $238,299 ======== ======= ========
The following is a summary of the amortized cost and estimated fair value of short-term investments by contractual maturity at December 31, 1999 (in thousands):
Estimated Cost Fair Value Due in one year or less $ 134,650 $ 134,195 Due after one year through two years 77,362 76,587 --------- --------- Total $ 212,012 $ 210,782 ========= =========
4. LICENSE AGREEMENTS AND PRODUCT RIGHTS The Company has acquired or in-licensed various prescription pharmaceuticals. The following is a summary of license agreements and product rights as of December 31, 1999 and 1998 (in thousands):
AMORTIZATION 1999 1998 PERIOD Products - at cost: Maxipime-Registered Trademark-/ Azactam-Registered Trademark- $ 130,860 $ 113,909 25 years Ceclor-Registered Trademark- CD 94,377 79,377 25 years Nasarel-Registered Trademark-/ Nasalide-Registered Trademark- 85,298 85,298 25 years Myambutol-Registered Trademark- 57,657 44,584 20 years Entex-Registered Trademark- products 44,655 44,655 15 years Other 21,940 34,423 6-25 years --------- --------- 434,787 402,246 Less accumulated amortization (45,156) (24,996) --------- --------- License agreements and product rights $ 389,631 $ 377,250 ========= =========
F-7 MAXIPIME/AZACTAM - On December 31, 1998, the Company acquired from Bristol-Myers Squibb Company ("BMS") the exclusive U.S. distribution rights for the patented hospital antibiotic products Maxipime (cefepime hydrochloride) for Injection and Azactam (aztreonam) for Injection. The purchase price consisted of $60 million paid in cash at closing, payments totaling $4 million due in 1999 and a payment of $70 million due in 2003, plus additional contingent payments due from 1999 through 2003 based on sales of Maxipime and Azactam during that period. Contingent payments totaling $10.6 million were made in 1999. Based on historical sales data, the Company estimates that future contingent payments could approximate $100 million in the aggregate. CECLOR CD - On September 5, 1996, the Company acquired from Eli Lilly and Company exclusive U.S. marketing rights to the patented antibiotics Ceclor CD (cefaclor extended release tablets) and Keftab-Registered Trademark- (cephalexin hydrochloride). The purchase price consisted of $100 million paid in cash at closing. Additional future contingent payments of $15 million per year starting in 1999 and ending in 2003 are subject to Ceclor CD remaining available by prescription only with no competing forms of extended release cefaclor, as defined in the licensing agreement. Keftab, included in "Other" above, was licensed to DJ Pharma in January 1999 (see Note 11). NASAREL/NASALIDE - On May 7, 1997, the Company acquired from Syntex (USA), Inc. and other members of the Roche Group exclusive U.S. rights to the intranasal steroid products Nasarel and Nasalide (flunisolide) Nasal Solutions 0.025% for $70 million, which was paid in cash at closing. Pursuant to the purchase agreement, contingent payments totaling $5 million in 1997 and $10 million in 1998 were made as the products remained without a competing nasal formulation of flunisolide. MYAMBUTOL - On August 3, 1998, the Company acquired from an affiliate of American Home Products 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 due through August 2002 contingent upon the amount of net sales of Myambutol during that period. Contingent payments totaling $13.7 million and $4.3 million were made in 1999 and 1998, respectively. Based on historical sales data, the Company estimates that future contingent payments could approximate $40 million in the aggregate. ENTEX PRODUCTS - On July 3, 1996, the Company acquired from Procter & Gamble Pharmaceuticals, Inc. the worldwide rights to the Entex products, consisting of four prescription upper respiratory drugs. The purchase price of $45 million consisted of $25 million paid in cash at closing and $20 million paid in cash in July 1997. 5. PROPERTY The following is a summary of property as of December 31, 1999 and 1998 (in thousands):
1999 1998 Property - at cost: Land $ 4,912 $ 4,912 Buildings 42,759 15,882 Machinery and equipment 39,872 26,082 Furniture and fixtures 4,496 3,059 Construction-in-progress 21,470 46,444 -------- -------- 113,509 96,379 Less accumulated depreciation and amortization (20,176) (11,005) -------- -------- Property $ 93,333 $ 85,374 ======== ========
The Company is currently constructing a manufacturing facility that will be used to formulate, mill, blend and fill drugs to be used with the Company's Spiros system, pending regulatory approval of Spiros products. Capital expenditures of $19.3 million relating to the facility are included in construction-in-progress at December 31, 1999. The Company completed the construction of a research and development facility in January 1999. Capital F-8 expenditures of $25.5 million relating to this facility were included in construction-in-progress at December 31, 1998. 6. DEVELOPMENT AGREEMENTS The Company has a worldwide license from a private inventor to the Spiros system. This system uses a device to aerosolize pharmaceuticals in dry powder formulations for intrapulmonary and intranasal administration. The Company is required to pay the inventor royalties on future sales, if any, of this device. The Company has entered into various arrangements with third parties for the development of Spiros as described below. SPIROS DEVELOPMENT CORPORATION ("SPIROS CORP.") - On December 29, 1995, Spiros Corp. completed a $28 million private placement to fund the development of Spiros for use with certain compounds. The private placement consisted of 933,334 units comprised of one share of Spiros Corp. callable common stock and a Series S warrant (see Note 8) to purchase 2.4 shares of the Company's common stock. In connection with the private placement, the Company made a $13 million contribution to Spiros Corp. In exchange for the Series S warrants and the $13 million contribution, the Company received the right to purchase all of the Spiros Corp. callable common stock. Spiros Corp. engaged the Company to develop the Spiros Corp. products and provide general management services. During 1997, Dura recorded contract revenues for development and administrative services provided for with Spiros Corp. of $19.3 million. On December 19, 1997, the Company acquired all of the outstanding callable common stock and options of Spiros Corp. The purchase price of $45.7 million consisted of 896,606 shares of the Company's common stock and a cash payment of $2 million. The net assets acquired included cash of $1 million and in-process technology. The Company concluded, based on an assessment of the additional development, testing and regulatory approvals required, that the commercial viability of the technology had not yet been established. In addition, no alternative future uses of the technology that would not require regulatory approval have been established. As a result of this assessment, the acquired in-process technology of $44.7 million was expensed as a charge in 1997 (see Note 12). Such acquired in-process technology was licensed to Spiros Corp. II upon its formation (see "Spiros Development Corporation II, Inc." below). SPIROS DEVELOPMENT CORPORATION II, INC. - On December 22, 1997, Spiros Corp. II completed a $101 million public offering of units ("Offering"). Under agreements described below, Spiros Corp. II is using the net proceeds of $94 million from the Offering and a $75 million contribution from Dura to develop Spiros and Spiros applications for use with the drugs albuterol, beclomethasone, budesonide and additional designated compounds ("Compounds"). The Offering consisted of 6,325,000 units sold at $16.00 per unit. Each unit consisted of one share of Spiros Corp. II callable common stock and a warrant ("SDCII warrants") to purchase one-fourth of one share of the Company's common stock. The SDCII warrants are exercisable from January 1, 2000 through December 31, 2002 at an exercise price of $54.84 per share of Dura common stock. As holder of 100% of Spiros Corp. II's special common stock, the Company has the right ("Stock Purchase Option") through December 31, 2002 to purchase all, but not less than all, of the then outstanding shares of Spiros Corp. II callable common stock at predetermined prices. However, the Company is not obligated to purchase such shares of Spiros Corp. II. The purchase price was $24.01 per share (an aggregate of $151.9 million) through December 31, 1999 and increases on a quarterly basis thereafter to a maximum of $45.95 per share (an aggregate of $290.6 million) on December 31, 2002. Such purchase price may be paid, at the Company's option, in cash, shares of the Company's common stock, or any combination of the two. In addition, Dura received an option, through specified dates, to acquire Spiros Corp. II's exclusive rights for the use of Spiros with albuterol and with a second product other than albuterol. A purchase option expense of $75 million, representing the cash contributed to Spiros Corp. II, was recorded in 1997. In 1997, the Company also recorded a warrant subscriptions receivable and corresponding increase in additional paid-in capital of $12.7 million representing the estimated fair market value of the SDCII warrants. At December 31, 1999, the Company had a remaining SDCII warrant subscriptions receivable of $6.1 million. F-9 In connection with the Offering, the Company also entered into certain agreements with Spiros Corp. II which are summarized as follows: TECHNOLOGY LICENSE AGREEMENT - Under this agreement, the Company granted to Spiros Corp. II, subject to existing agreements, an exclusive, worldwide, perpetual, royalty-bearing license to use Spiros in connection with the Compounds. In consideration for this license, the Company will receive an annual technology access fee from Spiros Corp. II equal to the greater of 5% of the net sales of Spiros products, or $2 million. Such agreement expires upon the exercise of the Stock Purchase Option. ALBUTEROL AND PRODUCT OPTION AGREEMENT - Under this agreement, the Company has the right to acquire from Spiros Corp. II for specified time periods the exclusive rights for the use of Spiros with albuterol and for the use of Spiros with a second product other than albuterol ("Product Options"). The formula for determining the purchase price for each of the products is set forth in the agreement and is based, in part, on the costs and expenses incurred by Spiros Corp. II developing the products. MANUFACTURING AND MARKETING AGREEMENT - Under this agreement, Spiros Corp. II granted to the Company an exclusive worldwide license to manufacture and market the Spiros products in exchange for a royalty of 7% on net product sales, as defined. Such agreement expires upon the exercise or expiration of the Stock Purchase Option. In the event Dura exercises its rights under the Product Options, the Manufacturing and Marketing Agreement will terminate with respect to the related product. DEVELOPMENT AGREEMENT - Under this agreement, Spiros Corp. II has engaged the Company to develop the Spiros products and provide general management services to Spiros Corp. II. Dura records contract revenues equal to the amounts due from Spiros Corp. II for services provided less a pro rata amount allocated to the SDCII warrant subscriptions receivable. During 1999, 1998 and 1997, Dura recorded contract revenues of $55.5 million, $47.8 million and $6.6 million for services provided under the agreements with Spiros Corp. II, for which Dura had a receivable totaling $6.8 million and $4.6 million at December 31, 1999 and 1998, respectively. In March 2000 the Company entered into a merger agreement to acquire Spiros Corp. II. Under the agreement, for each share of callable common stock Spiros Corp. II shareholders will receive $13.25 in cash and one five-year warrant to purchase a fractional share of Dura's common stock at $17.94 per share, which represents a 25% premium over the average closing price of Dura's common stock for the ten trading days prior to the date of the merger agreement. The exact fraction of a share of Dura's common stock purchasable under the warrant will be determined based on the average closing price of Dura's common stock for the ten trading days prior to the vote of the Spiros Corp. II shareholders on the merger and will result in a calculated Black-Scholes value for each warrant of between $3.22 and $1.81. The total consideration for the merger as of the date of the merger agreement was calculated to be $100.8 million, or $15.75 per share of callable common stock. Closing of the transaction is subject to Hart-Scott-Rodino clearance, effectiveness of the registration statement for Dura's warrants, and Spiros Corp. II shareholder approval. The Company has received voting agreements in favor of the merger from holders of approximately 22% of Spiros Corp. II's outstanding callable common stock. A special committee of independent members of the Spiros Corp. II's board, formed in December 1999 to evaluate strategic alternatives for Spiros Corp. II, has approved the merger agreement and is recommending that the Spiros Corp. II shareholders approve the merger. The merger is to be accounted for as a purchase and, if completed, will likely result in a significant reduction of contract revenue even though the Company will continue to incur the related development costs. In addition, the Company expects that a charge for acquired in-process technology will be recorded in the period in which the merger is effected. ELI LILLY AND COMPANY ("LILLY") - On September 23, 1998, the Company announced its agreement with Lilly to develop pulmonary delivery technology for insulin. The product under development is based on the Company's Spiros system for proteins and peptides. Under the terms of the agreement, the Company received an up-front payment and will receive funding for research as well as additional payments if defined milestones are achieved. In F-10 addition, the Company will receive royalties and manufacturing payments on products, if any, that reach the market. Lilly received worldwide commercialization rights for any resulting inhaled insulin products. 7. CONVERTIBLE SUBORDINATED NOTES AND OTHER LONG-TERM OBLIGATIONS CONVERTIBLE SUBORDINATED NOTES - In 1997, the Company issued $287.5 million principal amount of 3 1/2% Convertible Subordinated Notes (the "Notes") due July 15, 2002 with interest payable semiannually. The Notes are convertible, at the option of the holder, into shares of the Company's common stock at any time prior to maturity or redemption at a conversion price of $50.635 per share, subject to adjustment under certain conditions. The Company cannot redeem the Notes prior to July 15, 2000. Thereafter, the Company can redeem the Notes from time to time, in whole or in part, at specified redemption prices. The Notes are unsecured and subordinated to all existing and future senior indebtedness of the Company. The indenture governing the Notes does not restrict the incurrence of senior indebtedness or other indebtedness by the Company. Based on quoted market prices, the fair value of the Notes at December 31, 1999 and 1998 was $234.3 million and $211.3 million, respectively. OTHER LONG-TERM OBLIGATIONS - Other long-term obligations include $57.5 million (net of current portion of $1.9 million) which relates to the acquisition of license agreements and product rights. Also, as discussed in Note 4, in connection with the acquisition of certain product rights and licenses, the Company may be obligated to make additional payments through 2004 for such products, the amount of which is contingent upon future events. Based on historical sales information on the products and assuming the other events that trigger the payment of additional consideration occur, the total of these future contingent payments could approximate $210 million, including approximately $48 million in 2000. 8. CAPITAL STOCK 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. TREASURY STOCK - In October 1998, the Board of Directors authorized the Company to purchase up to $50 million of the Company's common stock. At December 31, 1999, the Company had purchased 2,402,500 shares of its common stock at a cost of $28.1 million and reduced its additional paid in capital accordingly. COMMON STOCK WARRANTS - The following table summarizes common stock warrants outstanding at December 31, 1999 (in thousands, except per share amounts):
WARRANTS SHARES COVERED EXERCISE PRICE EXPIRATION WARRANT DESCRIPTION OUTSTANDING BY WARRANTS PER SHARE DATE Series W warrants 240 672 $ 2.38 September 2000 Series S warrants 700 1,680 $19.47 December 2000 SDCII warrants 6,325 1,581 $54.84 December 2002 Other 200 200 $45.12 December 2002 --------- ---------- Total outstanding 7,465 4,133 ========= ==========
F-11 9. STOCK OPTIONS The Company's 1992 stock option plan (the "Plan") provides for the grant of options to officers and other key employees of the Company, and to certain directors, consultants and independent contractors of the Company, to purchase up to 10,107,360 shares of the Company's common stock. The Plan provides for the automatic issuance of options to purchase 6,000 and 15,000 shares of the Company's common stock to non-employee Board members at the date of each annual shareholders' meeting and upon initial election to the Board of Directors, respectively. Generally, options are to be granted at prices equal to at least 100% of the fair market value of the stock at the date of grant, expire not later than ten years from the date of grant and become exercisable ratably over a four-year period following the date of grant. The Plan provides that in the event of a corporate transaction, as defined, all outstanding options shall become fully exercisable immediately prior to the effective date of such transaction and shall terminate upon such effective date. The Board of Directors may also grant officers of the Company limited stock appreciation rights in tandem with their outstanding options. In addition, limited stock appreciation rights are granted in connection with all automatic option grants under the Plan. Upon the occurrence of a hostile takeover, as defined, each outstanding option with such a limited stock appreciation right in effect for at least six months will automatically be canceled in return for a cash distribution from the Company in an amount equal to the excess of the takeover price, as defined, over the aggregate exercise price. As of December 31, 1999 and 1998, options to purchase 369,000 and 264,000 shares of common stock, respectively, were outstanding with limited stock appreciation rights. The following table summarizes stock option activity under the Plan:
SHARES ------------------------------------- WEIGHTED AVERAGE OPTIONS OPTIONS AVAILABLE EXERCISE PRICE OUTSTANDING FOR GRANT PER SHARE Balance, January 1, 1997 3,384,510 344,618 $15.52 Options authorized 1,600,000 Options granted 1,935,175 (1,935,175) $36.42 Options exercised (745,020) $ 6.40 Options canceled (805,478) 805,478 $35.71 ---------- ----------- Balance, December 31, 1997 3,769,187 814,921 $22.67 Options authorized 1,000,000 Options granted 3,458,013 (3,458,013) $14.90 Options exercised (310,466) $ 6.55 Options canceled (3,146,620) 3,146,620 $30.02 ---------- ----------- Balance, December 31, 1998 3,770,114 1,503,528 $10.53 Options authorized 1,500,000 Options granted 1,880,475 (1,880,475) $12.72 Options exercised (158,354) $ 7.29 Options canceled (242,251) 242,251 $10.57 ---------- ----------- Balance, December 31, 1999 5,249,984 1,365,304 $11.80 ========== =========== Exercisable, December 31, 1997 1,386,911 $12.61 ========== Exercisable, December 31, 1998 1,325,347 $10.77 ========== Exercisable, December 31, 1999 2,016,146 $11.49 ==========
F-12 Separately during 1998, the Company granted 192,308 options (54,889 exercisable at December 31, 1999) to a newly-hired executive officer pursuant to a stock option agreement. The options have an exercise price of $10.31 per share, vest ratably over a four-year period, and expire ten years from the date of grant. The following table summarizes information concerning all outstanding and exercisable options as of December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------ ------------------------------- Weighted average Weighted Weighted Range of Number remaining contractual average Number average exercise prices Outstanding life (years) exercise price exercisable exercise price $ 0.25 - $ 5.00 256,050 3.6 $ 3.60 256,050 $ 3.57 $ 5.01 - $10.00 1,225,198 7.7 $ 8.21 622,662 $ 7.56 $ 10.01 - $20.00 3,777,665 8.9 $11.97 1,020,786 $12.44 $ 20.01 - $30.00 129,379 7.4 $27.76 118,211 $28.03 $ 30.01 - $39.94 54,000 7.4 $39.43 53,326 $39.49 - ----------------------------------------------------------------------------------------------------------- 5,442,292 8.3 $11.38 2,071,035 $11.46 ======================================================================================
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." In accordance with the provisions of SFAS No. 123, the Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans and, accordingly, no compensation cost has been recognized for stock options granted to employees in 1999, 1998 or 1997. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income for the year ended December 31, 1999 would have been reduced by $4.4 million ($0.10 per share, basic and diluted), net income for the year ended December 31, 1998 would have been reduced by $3.6 million ($0.08 per share, basic and diluted), and net loss for the year ended December 31, 1997 would have been increased by $5.9 million ($0.14 per share, basic and diluted). Pro forma calculations exclude the effect of stock options granted prior to 1995. Accordingly, the 1999, 1998 and 1997 pro forma adjustments are not indicative of future period pro forma adjustments when the calculation will reflect all applicable stock options. The estimated weighted average fair value at grant date for the options granted during 1999, 1998 and 1997 were $5.61, $5.86 and $14.30 per option, respectively. The fair value of options at date of grant was estimated using the Black-Scholes option-pricing model with the following assumptions:
1999 1998 1997 Expected dividend yield None None None Expected stock price volatility 40% 45% 40% Risk-free interest rate 5.6% 5.2% 6.1% Expected life of options 5 years 5 years 5 years
F-13 10. INCOME TAXES The provision (benefit) for income taxes consisted of the following components (in thousands):
1999 1998 1997 Current: Federal $ 12,633 $ 12,843 $ 21,617 State 340 1,007 2,833 -------- -------- --------- Total 12,973 13,850 24,450 -------- -------- --------- Deferred: Federal 2,079 (14,448) (5,424) State (608) (309) (221) -------- -------- --------- Total 1,471 (14,757) (5,645) -------- -------- --------- Provision (benefit) for income taxes $ 14,444 $ (907) $ 18,805 ======== ======== =========
A reconciliation of the income tax provision (benefit) based on federal statutory rates and income (loss) before income taxes to the provision (benefit) for income taxes as reported is as follows (in thousands):
1999 1998 1997 Provision (benefit) at statutory rates $ 15,557 $ 639 $ (23,060) Charges not deductible or recognizable for tax purposes 43,351 State income tax expense (benefit), net (340) 326 1,779 Change in beginning of year deferred tax valuation allowance (652) (1,545) Impact of foreign income taxed at different rates (722) (260) (364) NOL carryforwards utilized (515) (1,015) Research and development tax credits (325) (583) Federal alternative minimum tax (credit) (235) Other 926 (279) (341) -------- ------ --------- Provision (benefit) for income taxes $ 14,444 $ (907) $ 18,805 ======== ====== =========
F-14 Deferred tax assets and liabilities reflect the impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts recognized for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1999 and 1998 are as follows (in thousands):
1999 1998 Deferred tax assets: Net operating loss carryforwards $ 17,189 $ 18,227 Capitalized research and development 6,990 6,990 Research and development credit carryforwards 1,036 Reserves and accruals not currently deductible 22,661 21,851 Other 388 593 --------- --------- Total deferred tax assets 48,264 47,661 Deferred tax liabilities: Depreciation and amortization (4,458) (1,732) Valuation allowance for deferred tax assets (25,610) (26,262) --------- ---------- Total deferred tax liabilities (30,068) (27,994) --------- ---------- Net deferred tax assets $ 18,196 $ 19,667 ========= ==========
The Company has provided a valuation allowance against deferred tax assets based on management's assessment of the likelihood of realizing those assets. Realization of deferred tax assets is dependent upon having sufficient taxable income during the period that temporary differences and carryforwards are expected to be available to reduce taxable income. During the year ended December 31, 1999, the balance of the beginning of year valuation allowance was reduced by approximately $650,000 due to a change in management's judgment about the Company's ability to realize deferred tax assets relating to net operating loss carryforwards. At December 31, 1999, the Company had federal net operating loss ("NOL") carryforwards of approximately $49.4 million, which begin expiring in 2003. This amount includes NOL carryforwards totaling approximately $21.5 million acquired in connection with the Company's purchase of the callable common stock of Spiros Corp. The availability of the NOL carryforwards is subject to annual limitations pursuant to the "change in ownership" provisions of Section 382 of the Internal Revenue Code. The Company does not provide for income taxes which would be payable if undistributed earnings of its foreign subsidiaries were remitted because the Company considers these earnings to be invested indefinitely. Tax benefits realized from the exercise of stock options are credited directly to shareholders' equity and are reflected on the consolidated statements of shareholders' equity. 11. DJ PHARMA, INC. In July 1998, the Company entered into a series of agreements with a newly-formed, privately held company, DJ Pharma, Inc. ("DJ Pharma"), for the co-promotion of the Company's Keftab, Rondec(R), and certain cough, cold and allergy product lines. DJ Pharma also received an option to license from the Company the exclusive U.S. marketing and distribution rights to these products which it exercised on October 1, 1998. The book value of these product rights was $18.8 million as of December 31, 1998. In exchange for the licensing of the products, Dura received interest-bearing notes receivable totaling $20 million and will receive a percentage of the sales of such products by DJ Pharma over a four-year period. Up to $8 million of the notes is subject to forgiveness in the event that the licensed cough, cold and allergy products cannot be sold on a prescription-only basis through December 31, 2006. In July 1998, the Company provided DJ Pharma with $5 million in financing in the form of an interest-bearing F-15 promissory note, which represented DJ Pharma's sole source of capital until it completed an independent private equity offering in January 1999. Through this offering, DJ Pharma raised $25 million, including $3.6 million from the Company. Subsequent to the offering, Dura holds approximately 10 percent of DJ Pharma's outstanding voting securities. As DJ Pharma had not secured financing independent of the Company's $5 million loan as of December 31, 1998, the accounts of DJ Pharma were included in the Company's 1998 consolidated financial statements. All transactions between the Company and DJ Pharma have been eliminated. Accordingly, the licensing of product rights to DJ Pharma discussed above is not reflected in the accompanying 1998 financial statements and was recorded by the Company in January 1999 after DJ Pharma secured independent financing. No gain or loss was recorded on the licensing of these product rights. The primary effect of including DJ Pharma's activity in the Company's 1998 financial statements was to increase selling, general and administrative expenses by $6 million and to reduce net income by $4.9 million ($0.10 per diluted share). 12. CHARGES FOR ACQUIRED IN-PROCESS TECHNOLOGY, PURCHASE OPTIONS AND OTHER NONRECURRING ITEMS Charges for acquired in-process technology, purchase options and other nonrecurring items in 1998 and 1997 consisted of the following (in thousands):
1998 1997 Impairment of long-term assets $29,332 $ 2,870 Acquired in-process technology 45,989 Acquired purchase options 75,000 Buy-out of royalty agreement 13,780 ------------- ------------- Total $29,332 $137,639 ============= =============
IMPAIRMENT OF LONG-TERM ASSETS - The Company periodically evaluates its ability to recover the carrying value of its long-term assets. In the fourth quarter of 1998, management concluded that the Company would not recover the carrying value of the Rondec product line and, accordingly, recorded a nonrecurring charge of $29.3 million. This conclusion was based on a discounted cash flow forecast for the Rondec products and takes into consideration the terms of the licensing of the marketing and distribution rights of these products to DJ Pharma (see Note 11). Sales of the Rondec products declined significantly beginning in 1998 as the Company focused its promotion efforts away from its branded generic products such as Rondec and toward Dura's patent protected and proprietary products. In 1997, management concluded that the decline in the fair value of an investment in equity securities was "other than temporary" and, accordingly, recorded a charge of $2.9 million to write down the investment to its estimated fair value, which was determined based on quoted market prices. ACQUIRED IN-PROCESS TECHNOLOGY - The charge for acquired in-process technology in 1997 relates to the Company's acquisition of Spiros Corp. (see Note 6). The Company concluded that due to the additional development and testing to be performed and regulatory approvals required, the commercial viability of the technology acquired in this acquisition had not yet been established. As such, a charge to earnings was recorded for the portion of the purchase price allocated to in-process technology. Such acquired in-process technology was licensed to Spiros Corp. II upon its formation (see Note 6). ACQUIRED PURCHASE OPTIONS - In connection with the formation of Spiros Corp. II in 1997, the Company contributed $75 million as consideration for the options to acquire the rights to certain products from Spiros Corp. II (see Note 6). The Company concurrently recorded charges for this purchase option for the amount of cash contributed to Spiros Corp. II. F-16 BUY-OUT OF ROYALTY AGREEMENT - In December 1997, the Company terminated a ten-year royalty agreement which the Company entered into in 1994. The agreement required the Company to make quarterly royalty payments based on sales in specified sales territories. As consideration for terminating the agreement, the Company made a cash payment of $11.3 million (paid in January 1998) and issued a warrant to purchase 200,000 shares of the Company's common stock for $45.12 per share. The estimated fair value of the warrant at issuance was $2.5 million which, when combined with the cash payment, resulted in a nonrecurring charge in 1997 of $13.8 million. 13. COMMITMENTS AND CONTINGENCIES EMPLOYEE SAVINGS PLANS - The Company has a 401(k) plan that allows participating employees to contribute up to 15% of their salary, subject to annual limits. The Board may, at its sole discretion, approve Company contributions. The Company made contributions to the plan totaling $1.9 million, $1.1 million and $867,000 in 1999, 1998 and 1997, respectively. The Company has a non-qualified deferred compensation plan that allows eligible employees to defer up to 100% of their compensation. As of December 31, 1999, $9.2 million has been deferred under this plan which is included in other assets and other long-term obligations. The amounts deferred under this plan are transferred to a trust and managed by an investment manager. Included in the trust investments at December 31, 1999 are 156,250 shares of Spiros Corp. II callable common stock (see Note 6). OPERATING LEASES - In 1999, the Company began a car lease program for its field sales force. Pursuant to non-cancelable lease agreements, the vehicles have a lease term that expires after the earlier of 45 months or 60,000 miles. Rent expense totaled $2.4 million for the fleet car program in 1999. As of December 31, 1999, the Company has future minimum lease payments for 2000, 2001, 2002, and 2003 of $3 million, $2.8 million, $2.7 million, and $590,000, respectively. SETTLEMENT OF THE TERMINATION OF MERGER AGREEMENT WITH SCANDIPHARM, INC. - On December 1, 1997, the Company terminated a merger agreement with Scandipharm, Inc. entered into on October 20, 1997. On January 16, 1998, Scandipharm filed suit against the Company for breach of contract. On January 20, 1998, the Company filed suit against Scandipharm seeking a declaratory judgment that Dura's termination of the merger agreement did not breach the agreement and damages against Scandipharm. On October 4, 1999, the Company settled all litigation with Scandipharm. Under the terms of the settlement, the Company paid $3.5 million to Scandipharm, and the parties dismissed all lawsuits filed against one another. The $3.5 million charge was included with other expense in the accompanying consolidated statements of operations for the year ended December 31, 1999. SHAREHOLDER CLASS ACTION LITIGATION - Commencing on January 27, 1999, several class action suits were filed against the Company and a number of current or former officers and directors of the Company in the United States District Court for the Southern District of California. The lawsuits, which have been consolidated into one action, allege violations of the federal securities laws, and purport to seek damages on behalf of a class of shareholders who purchased Dura common stock during a defined period. The Company believes that the claims in the lawsuit are without merit and intends to defend against them vigorously. 14. SEGMENT INFORMATION The Company operates in two business segments: (1) Pharmaceutical Products and (2) Research and Development. The Pharmaceutical Products segment markets prescription pharmaceutical products for the treatment of respiratory conditions and infectious diseases. The Research and Development segment manages the development of Spiros. Each of the Company's segments operates solely within the United States. Three wholesale customers accounted for 17%, 13%, and 13%, respectively, of 1999 sales. Two wholesale customers accounted for 13% and 11%, respectively, of 1998 sales, and two wholesale customers each individually accounted for 11% of 1997 sales. F-17 The following table summarizes information about the Company's operating segments for the years ended December 31, 1999, 1998, and 1997 (in thousands):
PHARMACEUTICAL RESEARCH AND PRODUCTS DEVELOPMENT CORPORATE CONSOLIDATED Total revenues 1999 $ 232,589 $ 68,837 $ 301,426 1998 $ 138,025 $ 61,127 $ 199,152 1997 $ 151,850 $ 29,473 $ 181,323 Operating income (loss) (1) 1999 $ 37,458 $ 11,599 $ 49,057 1998 $ (20,600) $ 13,191 $ (7,409) 1997 $ 43,965 $(121,982) $ (78,017) Identifiable assets 1999 $ 449,832 $ 58,330 $ 375,312 $ 883,474 1998 $ 413,565 $ 75,990 $ 335,904 $ 825,459 Capital expenditures 1999 $ 7,964 $ 8,921 $ 535 $ 17,420 1998 $ 1,266 $ 40,513 $ 422 $ 42,201 1997 $ 578 $ 8,437 $ 15,064 $ 24,079 Depreciation and amortization 1999 $ 23,215 $ 6,978 $ 1,865 $ 32,058 1998 $ 14,290 $ 4,288 $ 1,876 $ 20,454 1997 $ 11,906 $ 2,516 $ 787 $ 15,209
(1) The 1998 operating loss for the Pharmaceutical Products segment was increased by $36.8 million for the write-off of the carrying value of the Rondec product rights (see Note 12) and for the impact of consolidating DJ Pharma (see Note 11). The 1997 operating income for the Research and Development segment was decreased by $123.8 million for (1) the in-process technology acquired in connection with our acquisition of Spiros Corp. (see Note 6), (2) the purchase option charge resulting from the cash contribution to Spiros Corp. II (see Note 6) and (3) the write-off of the carrying value of a long-term investment (see Note 12). The 1997 operating income for the Pharmaceutical Products segment was decreased by $13.8 million resulting from the termination of a ten-year royalty agreement (see Note 12). F-18 15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of unaudited quarterly results of operations for the years ended December 31, 1999 and 1998 (in thousands, except per share amounts).
FIRST SECOND THIRD FOURTH 1999 QUARTER QUARTER QUARTER QUARTER Total revenues $ 71,247 $ 68,006 $ 71,560 $ 90,613 Gross profit 44,590 40,942 43,804 56,601 Operating income 11,975 11,566 8,850 16,666 Net income 7,766 7,583 3,536 11,119 Net income per share - basic 0.18 0.17 0.08 0.25 Net income per share - diluted 0.17 0.17 0.08 0.24 1998 Total revenues $ 48,766 $ 51,938 $ 43,363 $ 55,085 Gross profit 27,792 27,455 19,163 32,520 Operating income (loss) 8,569 10,047 1,043 (27,068) Net income (loss) 7,164 8,177 2,424 (15,032) Net income (loss) per share - basic 0.16 0.18 0.05 (0.33) Net income (loss) per share - diluted 0.15 0.17 0.05 (0.33)
See Notes 4, 6, and 12 for discussions of transactions that occurred during 1999 and 1998 that affect the comparability of the Company's quarterly results of operations. F-19 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholders of Dura Pharmaceuticals, Inc.: We have audited the accompanying consolidated balance sheets of Dura Pharmaceuticals, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our 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 consolidated financial statements present fairly, in all material respects, the financial position of Dura Pharmaceuticals, Inc. and subsidiaries as of December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP San Diego, California January 24, 2000, (March 20, 2000 as to the merger agreement with Spiros Development Corporation II, Inc. described in Note 6) F-20 EX-4.9 2 EXHIBIT 4.9 EXHIBIT 4.9 VOID AFTER 5:00 P.M., Warrant No. 1 NEW YORK CITY TIME, ON Warrants: 6,325,000 DECEMBER 31, 2002 DURA PHARMACEUTICALS, INC. WARRANTS TO PURCHASE SHARES OF COMMON STOCK CUSIP 26632S 11 7 THIS CERTIFIES THAT, FOR VALUE RECEIVED, Cede & Co., or registered assigns, is the registered holder of the number of Warrants (the "Warrants") set forth above. Each Warrant entitles the holder thereof to purchase from Dura Pharmaceuticals, Inc., a Delaware corporation ("Dura"), subject to the terms and conditions hereinafter set forth and in the Warrant Agreement hereinafter referred to, one-fourth of one fully paid and nonassessable share of Common Stock, par value $.001 per share, of Dura (the "Common Stock"). The Warrants may be exercised at any time or from time to time on or after the first to occur of (i) January 1, 2000, (ii) the exercise by Dura of the Stock Purchase Option, (iii) the termination of the Stock Purchase Option with respect to Dura and (iv) an Acceleration Date (as defined in the Warrant Agreement) (such earliest date being referred to herein as the "Separation Date") and will expire at 5:00 p.m., New York City time, on December 31, 2002 (the "Expiration Date"). Upon the Expiration Date, all rights evidenced by the Warrants shall cease and the Warrants shall become void. Subject to the provisions of the Warrant Agreement, the holder of each Warrant shall have the right to purchase from Dura until the Expiration Date (and Dura shall issue and sell to such holder of a Warrant) one-fourth of one fully paid and nonassessable share of Common Stock (a "Warrant Share") at an exercise price (the "Exercise Price") of $54.84 per share upon surrender of this Warrant Certificate to Dura at the office of the Warrant Agent (as defined in the Warrant Agreement) designated by the Warrant Agent for such purpose with the form of election to purchase appearing on this Warrant Certificate duly completed and signed, together with payment of the Exercise Price by certified or official bank check payable to the order of Dura. The Exercise Price and the number of Warrant Shares that may be purchased upon the exercise of the Warrants and the number of Warrants outstanding are subject to change or adjustment upon the occurrence of certain events set forth in the Warrant Agreement. REFERENCE IS MADE TO THE PROVISIONS OF THIS WARRANT CERTIFICATE SET FORTH ON THE FOLLOWING PAGES, AND SUCH FURTHER PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH ON THE FRONT OF THIS CERTIFICATE. This Warrant Certificate shall not be valid unless countersigned by the Warrant Agent. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, Dura has caused this Warrant Certificate to be executed by its duly authorized officers. Dated: January 1, 2000 DURA PHARMACEUTICALS, INC. By: ----------------------------------------- Robert S. Whitehead President and Chief Operating Officer By: ----------------------------------------- John R. Cook Vice President, Associate General Counsel and Secretary Countersigned: CHASEMELLON SHAREHOLDER SERVICES, L.L.C. as Warrant Agent By: ---------------------------------------- Name: ----------------------------------- Title: ---------------------------------- THIS WARRANT CERTIFICATE IS SUBJECT TO ALL OF THE TERMS AND CONDITIONS OF THE WARRANT AGREEMENT, DATED ON OR ABOUT DECEMBER 22, 1997 (THE "WARRANT AGREEMENT"), BETWEEN DURA AND THE WARRANT AGENT, TO ALL OF WHICH TERMS AND CONDITIONS THE REGISTERED HOLDER OF THE WARRANT CONSENTS BY ACCEPTANCE HEREOF. THE WARRANT AGREEMENT IS INCORPORATED HEREIN BY REFERENCE AND MADE A PART HEREOF AND REFERENCE IS MADE TO THE WARRANT AGREEMENT FOR A FULL DESCRIPTION OF THE RIGHTS, LIMITATIONS OF RIGHTS, OBLIGATIONS, DUTIES AND IMMUNITIES OF THE WARRANT AGENT, DURA AND THE REGISTERED HOLDERS OF WARRANT CERTIFICATES. COPIES OF THE WARRANT AGREEMENT ARE AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE WARRANT AGENT OR MAY BE OBTAINED UPON WRITTEN REQUEST ADDRESSED TO THE WARRANT AGENT AT ITS PRINCIPAL OFFICE AT 400 S. HOPE ST., 4TH FLOOR, LOS ANGELES, CA 90071 Dura shall not be required upon the exercise of the Warrants evidenced by this Warrant Certificate to issue fractional shares, but shall make adjustment therefore in cash on the basis of the current market value of any fractional interest as provided in the Warrant Agreement. Dura has agreed to cause a registration statement under the Securities Act of 1933, as amended, covering the Warrants and Warrant Shares to be effective through the termination of the Exercise Period (as defined in the Warrant Agreement) or until such earlier time as no Warrants remain outstanding, and to register or qualify the Warrants and the Warrant Shares to be delivered upon exercise of the Warrants under the laws of each jurisdiction in which such registration or qualification is necessary. This Warrant Certificate may be exchanged, at the option of the holder upon presentation and surrender hereof to the Warrant Agent, for other Warrant Certificates of different denominations, entitling the holder hereof to purchase in the aggregate the same number of Warrant Shares. Warrants may be assigned or transferred upon surrender of this Warrant Certificate to the Warrant Agent, accompanied (if so required by Dura or the Warrant Agent) by the form of assignment appearing on this Warrant Certificate duly completed and signed, whereupon the Warrant Agent shall execute and deliver to the transferee a new Warrant Certificate entitling the transferee to purchase the same number of Warrant Shares, but without the legend that appears hereon. If the Warrants evidenced by this Warrant Certificate shall be exercised in part, the holder hereof shall be entitled to receive upon surrender hereof another Warrant Certificate or Certificates evidencing the number of Warrants not so exercised. The holder of this Warrant Certificate shall not, by virtue hereof, be entitled to any of the rights of a stockholder in Dura, either at law or in equity, and the rights of the holder are limited to those expressed in the Warrant Agreement. If this Warrant Certificate shall be surrendered for exercise within any period during which the transfer books for the Common Stock are closed for any purpose, Dura shall not be required to make delivery of certificates for shares purchasable upon such transfer until the date of the reopening of said transfer books. Each holder of this Warrant Certificate, by accepting the same, consents and agrees with Dura, the Warrant Agent and with every other holder of a Warrant Certificate that: (a) This Warrant Certificate is transferable on the registry books of the Warrant Agent only upon the terms and conditions set forth in the Warrant Agreement; and (b) Dura and the Warrant Agent may deem and treat the person in whose name this Warrant Certificate is registered as the absolute owner hereof (notwithstanding any notation of ownership or other writing hereon made by anyone other than Dura or the Warrant Agent) for all purposes whatever and neither Dura nor the Warrant Agent shall be affected by any notice to the contrary. This Warrant Certificate shall not be valid or enforceable for any purpose until it shall have been countersigned by the Warrant Agent. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT Custodian ---------------- ----------------------------------- (Cust) (Minor) under Uniform Gifts to Minors Act ------------------------- (State) UNIF TRF MIN ACT Custodian (until age ) ---------------- --------------------- (Cust) under Uniform Transfers --------------------------------- (Minor) to Minors Act -------------------------------------------- (State) Additional abbreviations may also be used though not in the above list. ELECTION TO PURCHASE (TO BE EXECUTED UPON EXERCISE OF WARRANT) The undersigned hereby irrevocably exercises this warrant to purchase _____ shares of Common Stock of Dura Pharmaceuticals, Inc. ("Dura") herewith makes payment of $___________ in payment of the exercise price thereof on the terms and conditions specified in this warrant certificate, surrenders this warrant certificate and all right, title, and interest therein to Dura and directs that the warrant shares deliverable upon the exercise of such warrants be registered in the name and at the address specified below and delivered thereto: Dated: , 200__ ----------------- ------------------------------------------ Signature ------------------------------------------ Signature Signature(s) Guaranteed: By: -------------------------------------------- The signature must be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with member- ship in an approved signature guarantee medallion program), pursuant to S.E.C. Rule 17Ad-15. Name: --------------------------------------------------------------------------- (Please Print) Address: ------------------------------------------------------------------------ City, State and Zip Code: ------------------------------------------------------- Taxpayer's Identification or Social Security Number: ---------------------------- If such number of Warrant Shares is less than the aggregate number of Warrant Shares purchasable hereunder, the undersigned requests that a new Warrant Certificate representing the balance of such Warrant Shares to be registered in the name and at the address specified below and delivered thereto. Name: --------------------------------------------------------------------------- (Please Print) Address: ------------------------------------------------------------------------ City, State and Zip Code: ------------------------------------------------------- Taxpayer's Identification or Social Security Number: ---------------------------- ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sell, assign and transfer to: Name: --------------------------------------------------------------------------- (Please Print) Address: ------------------------------------------------------------------------ City, State and Zip Code: ------------------------------------------------------- Taxpayer's Identification or Social Security Number: ---------------------------- the right to purchase up to _____ Warrant Shares represented by this Warrant and does hereby irrevocably constitute and appoint _______________ attorney to transfer said Warrant on behalf of Dura Pharmaceuticals, Inc., with full power of substitution in the premises. Dated: __________, 200__ ------------------------------------------- Signature ------------------------------------------- Signature Notice: The signature(s) to this assignment must correspond with the name as written upon the face of the Warrant, in every particular, without alteration or enlargement, or any change whatever. Signature(s) Guaranteed: By: ------------------------------------------ The signature must be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with member- ship in an approved signature guarantee medallion program), pursuant to S.E.C. Rule 17Ad-15. EX-10.35 3 EXHIBIT 10.35 Exhibit 10.35 - -------------------------------------------------------------------------------- AMENDMENT NO. 8 TO BUSINESS LOAN AGREEMENT This Amendment No. 8 (the "Amendment") dated as of April 30, 1999, is between Bank of America, N.A. (the "Bank") and Dura Pharmaceuticals, Inc. (the "Borrower"). RECITALS A. The Bank and the Borrower entered into a certain Business Loan Agreement dated as of April 14, 1997, as previously amended (the "Agreement"). B. The Bank and the Borrower desire to further amend the Agreement. AGREEMENT 1 DEFINITIONS. Capitalized terms used but not defined in this Amendment shall have the meaning given to them in the Agreement. 2 AMENDMENTS. The Agreement is hereby amended as follows: 2.1 In Paragraph 1.2 of the Agreement, the date "AUGUST 1, 1999" is substituted for the date "MAY 1 ,1999". 2.1 In Paragraph 6.24 of the Agreement, the date "AUGUST 1, 1999" is substituted for the date "MAY 1, 1999". 3 REPRESENTATIONS AND WARRANTIES. When the Borrower signs this Amendment, the Borrower represents and warrants to the Bank that: (a) there is no event which is, or with notice or lapse of time or both would be, a default under the Agreement except those events, if any, that have been disclosed in writing to the Bank or waived in writing by the Bank, (b) the representations and warranties in the Agreement are true as of the date of this Amendment as if made on the date of this Amendment, (c) this Amendment is within the Borrower's powers, has been duly authorized, and does not conflict with any of the Borrower's organizational papers, and (d) this Amendment does not conflict with any law, agreement, or obligation by which the Borrower is bound. 4 CONDITIONS. This Amendment will be effective when the Bank receives the following items, in form and content acceptable to the Bank: 4.1 A Fifteen Thousand Dollar ($15,000) amendment fee due upon execution of this Amendment. 5 EFFECT OF AMENDMENT. Except as provided in this Amendment, all of the terms and conditions of the Agreement shall remain in full force and effect. This Amendment is executed as of the date stated at the beginning of this Amendment. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION /s/ Susan J. Pepping ------------------------------------------- By: Susan J. Pepping, Vice President DURA PHARMACEUTICALS, INC. /s/ Erle T. Mast - ------------------------------- --------------------------------- By: Erle T. Mast Vice President, Finance /s/ Mitchell R. Woodbury - ------------------------------- --------------------------------- By: Mitchell R. Woodbury Senior Vice President and General Counsel - -------------------------------------------------------------------------------- EX-10.36 4 EXHIBIT 10.36 Exhibit 10.36 - -------------------------------------------------------------------------------- AMENDMENT NO. 9 TO BUSINESS LOAN AGREEMENT This Amendment No. 9 (the "Amendment") dated as of June 30, 1999, is between Bank of America National Trust and Savings Association (the "Bank") and Dura Pharmaceuticals, Inc. (the "Borrower"). RECITALS A. The Bank and the Borrower entered into a certain Business Loan Agreement dated as of April 14, 1997, as previously amended (the "Agreement"). B. The Bank and the Borrower desire to further amend the Agreement. AGREEMENT 1 DEFINITIONS. Capitalized terms used but not defined in this Amendment shall have the meaning given to them in the Agreement. 2 AMENDMENTS. The Agreement is hereby amended as follows: 2.1 In Paragraph 6.4 of the Agreement, the ratio "5.50 TO 1.00" is substituted for the ratio "1.75 TO 1.00". 2.2 In Paragraph 6.12 of the Agreement, the amount "TWO HUNDRED SIXTEEN MILLION DOLLARS ($216,000,000)" is substituted in the amount "ONE HUNDRED NINETY MILLION DOLLARS ($190,000,000)". 2.3 A new Paragraph 6.25 is added to the Agreement, which reads in its entirety as follows: "6.25 LIQUIDITY. To maintain on an unconsolidated basis unencumbered liquid assets equal to at least Seventy Five Million Dollars ($75,000,000). (a) Liquid Assets: means the following: (i)cash and certificates of deposit; (ii)U.S. treasury bills and other obligations of the federal government; (iii)readily marketable securities (including commercial paper, but excluding restricted stock and stock subject to the provisions of Rule 144 of the Securities and Exchange Commission)." 3 REPRESENTATIONS AND WARRANTIES. When the Borrower signs this Amendment, the Borrower represents and warrants to the Bank that: (a) there is no event which is, or with notice or lapse of time or both would be, a default under the Agreement except those events, if any, that have been disclosed in writing to the Bank or waived in writing by the Bank, (b) the representations and warranties in the Agreement are true as of the date of this Amendment as if made on the date of this Amendment, (c) this Amendment is within the Borrower's powers, has been duly authorized, and does not conflict with any of the Borrower's organizational papers, and (d) this Amendment does not conflict with any law, agreement, or obligation by which the Borrower is bound. 4 EFFECT OF AMENDMENT. Except as provided in this Amendment, all of the terms and conditions of the Agreement shall remain in full force and effect. This Amendment is executed as of the date stated at the beginning of this Amendment. - -------------------------------------------------------------------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION /s/ Susan J. Pepping -------------------------------- By: Susan J. Pepping, Vice President DURA PHARMACEUTICALS, INC. /s/ Erle T. Mast -------------------------------- --------------------------------- By: Erle T. Mast Vice President, Finance /s/ Mitchell R. Woodbury -------------------------------- --------------------------------- By: Mitchell R. Woodbury Senior Vice President and General Counsel - -------------------------------------------------------------------------------- EX-10.37 5 EXHIBIT 10.37 EXHIBIT 10.37 AMENDED AND RESTATED PURCHASE AND LICENSE AGREEMENT This Amended and Restated Purchase and License Agreement (the "Agreement") is made and entered into as of January 25, 1999, and is effective as of October 1, 1998, by and between Dura Pharmaceuticals, Inc. ("Dura"), a Delaware corporation, DJ Pharma, Inc., a Delaware corporation ("DJ Pharma") and Dura (Bermuda) Trading Company LTD., a Bermuda corporation ("Dura Bermuda") (solely with respect to the Keftab Products (as hereinafter defined)) with reference to the following facts: RECITALS A. WHEREAS Dura, Dura Bermuda and DJ Pharma are executing this Agreement for the purpose of amending and restating in its entirety that certain Purchase and License Agreement by and between the parties hereto dated October 1, 1998; B. WHEREAS, Dura markets a line of drugs under the trademark "Rondec" ("Rondec Products") whose active ingredients are primarily carbinoxamine maleate and pseudoephedrine hydrochloride, which products are set forth on Exhibit "A" attached hereto and incorporated herein by this reference, and which Rondec Products were acquired from Abbott Laboratories ("Abbott") pursuant to that certain Purchase Agreement between Abbott Laboratories, Ross Products Division and Dura, dated June 14, 1995 (the "Abbott Purchase Agreement") and that certain Supply Agreement between Abbott and Dura, dated June 14, 1995 (the "Abbott Supply Agreement"); C. WHEREAS, Dura produces certain cough, cold and allergy products marketed by Dura under the CCA Trademarks (as hereinafter defined) (the "CCA Products"), and Dura Bermuda has certain license rights with respect to products sold by Dura under the trademark "Keftab" (the "Keftab Products"), which products are set forth, together with the CCA Products, on Exhibit "B" attached hereto and incorporated herein by this reference; D. WHEREAS, DJ Pharma wishes to acquire certain licensing rights to the Rondec Products and CCA Products and sublicensing rights with respect to the Keftab Products through December 31, 2002 (the "Licensing Term") and upon the expiration of such period to, if permitted pursuant and subject to the terms and conditions set forth in this Agreement, (i) acquire all of Dura's assets, rights, title and interests relating to the Rondec Products in the "Rondec Territory," which includes the continental U.S., Hawaii, Alaska and all U.S. military bases wherever located and specifically excludes territories, commonwealths (including Puerto Rico) and possessions of the U.S., and to assume, other than payment obligations under Section 5.1 of the Abbott Purchase Agreement, all of Dura's rights and obligations under the Abbott Purchase Agreement and the Abbott Supply Agreement (as hereinafter defined) pursuant to an Assignment and Assumption Agreement in the form attached hereto as Exhibit "C" and incorporated herein by this reference (the "Assignment"), (ii) acquire all of Dura's assets, rights, title and interests relating to the CCA Products and the CCA Trademarks, and (iii) assume and acquire all of Dura Bermuda's assets, rights, title, interests and obligations related to the Keftab Products (the -1- "Keftab Rights"), including the Keftab trademark set forth on Exhibit "D" attached hereto and incorporated herein by this reference (the "Keftab Trademark") under that certain Licensing Agreement, as amended (the "Licensing Agreement") and that certain Manufacturing Agreement, as amended (the "Manufacturing Agreement"), each of which is by and between Eli Lilly and Company, an Indiana corporation ("Lilly") and Dura, dated August 21, 1996, pursuant to the Assignment; and E. WHEREAS, Dura and Dura Bermuda wish to sell or assign their respective assets, rights, title, interests and obligations to DJ Pharma, as the case may be; NOW, THEREFORE, in consideration of the foregoing premises, the respective representations, warranties, covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. LICENSING AND PURCHASING ARRANGEMENTS WITH RESPECT TO RONDEC PRODUCTS, CCA PRODUCTS AND KEFTAB PRODUCTS 1.1 RIGHTS GRANTED; DISCLOSURE OF KNOW-HOW WITH RESPECT TO THE RONDEC PRODUCTS AND CCA PRODUCTS DURING LICENSING PERIOD (AS HEREINAFTER DEFINED). For a period commencing as of the date of the Closing (as hereinafter defined) and expiring upon the earlier of (i) a termination of this Agreement by Dura pursuant to Section 6 below due to a breach or default by DJ Pharma and (ii) the end of the Licensing Term (the "Licensing Period"), Dura hereby grants the following rights and discloses the following Know-How (as hereinafter defined) to DJ Pharma upon the following terms with respect to the Rondec Products and CCA Products: (a) LICENSE OF KNOW-HOW AND REGULATORY APPROVALS WITH RESPECT TO RONDEC PRODUCTS AND CCA PRODUCTS. Subject to the terms and conditions contained in this Agreement, Dura, as of the Closing and through the Licensing Period, hereby grants to DJ Pharma an exclusive license (except as set forth in Section 1.1 (d) hereof, exclusive even as to Dura) under the Know-How (as hereinafter defined) and Regulatory Approvals (as hereinafter defined), to use, market, distribute, promote, offer for sale and sell the Rondec Products in the Rondec Territory and the CCA Products worldwide (the "CCA Territory"). DJ Pharma accepts all the obligations set forth in this Agreement and agrees to use the Know-How and Regulatory Approvals only in connection with the manufacture, sale, distribution, offering for sale, and promotion of the Rondec Products in the Rondec Territory and the CCA Products in the CCA Territory, only for so long as the licenses granted in this Section 1.1(a) remain in effect. For purposes of this Agreement, "Know-How" shall mean all proprietary technical and clinical information, data and know-how relating to the Rondec Products and the CCA Products, whether or not patentable, owned or licensed by Dura with the right to grant sublicenses as of the Closing or acquired during the Licensing Period by either party or their affiliates (with the right to have or disclose). Know-How shall include, without limitation, all processes, formulas, discoveries, information and inventions whether relating to biological, chemical, pharmacological, toxicological, pharmaceutical, physical and analytical safety, quality control and clinical data, including, without limitation, phase IV clinical study data. Know-How shall also include relevant medical information relating to any of the Rondec Products or CCA Products (such as customer questions, responses thereto and adverse drug event (ADE) history) -2- in Dura's possession. The term Know-How, however, shall not include (a) any know-how, processes, information and data which is, as of the Closing or later becomes, generally available to the public or (b) any general manufacturing know-how not reasonably required by DJ Pharma to exercise the rights granted under this Agreement to the Rondec Products or CCA Products. For purposes of this Agreement, "Regulatory Approvals" shall mean all authorizations by the appropriate domestic governmental regulatory authorities which are required for the marketing, promotion, pricing, distribution and sale of the Rondec Products in the Rondec Territory and the CCA Products in the CCA Territory, each of which are owned by Dura. (b) LICENSE OF TRADEMARKS. Subject to the terms and conditions contained in this Agreement, Dura, as of the Closing and through the end of the Licensing Period, hereby grants to DJ Pharma an exclusive license (exclusive even as to Dura) to use the trademarks associated with the Rondec Products and CCA Products, as set forth on Exhibit "D" attached hereto and incorporated herein by this reference (the "Rondec Trademarks" and the "CCA Trademarks", respectively) only in connection with the manufacture, sale, distribution, offering for sale, and promotion of the Rondec Products in the Rondec Territory and the CCA Products in the CCA Territory. DJ Pharma accepts all the obligations set forth in this Agreement and agrees to use the Rondec Trademarks in the Rondec Territory and the CCA Trademarks in the CCA Territory, only for so long as the license granted under this Section 1.1(b) remains in effect. (c) SUBLICENSING. Prior to the expiration of the Licensing Period, DJ Pharma shall not sublicense or assign any of the rights granted to it under this Section 1.1, without the prior written consent of Dura, which consent may be provided or withheld in Dura's sole discretion. (d) RETAINED RIGHTS. Notwithstanding the licenses granted to DJ Pharma under this Section 1.1, after the Closing and through the end of the Licensing Period (except as otherwise indicated), Dura shall retain ownership of all rights to (a) the current NDC numbers it uses for each of the Rondec Products and CCA Products (retained (to the extent required by applicable laws and regulations) through and after the Second Closing (as defined below)), (b) the real and personal property (including, without limitation, all equipment) and general manufacturing know-how used by Dura in manufacturing the Rondec Products or CCA Products (either before, during or after the Licensing Period) other than Know-How (retained through and after the Second Closing), (c) all accounts receivable from sales of the Rondec Products and CCA Products by or on behalf of Dura prior to the Closing, and (d) all inventories of the Rondec Products or CCA Products that have not otherwise been purchased by DJ Pharma pursuant to the Dura Supply Agreement. In addition, Dura retains ownership of and the right to use the Know-How to manufacture Rondec Products and CCA Products for DJ Pharma under the Dura Supply Agreement until the end of the Licensing Period. (e) DURA SUPPLY AGREEMENT. By the date of Closing (as hereinafter defined), Dura, Dura Bermuda, and DJ Pharma shall enter into a Dura Supply Agreement (the "Dura Supply Agreement") which shall set forth the respective rights and obligations of the parties regarding Rondec Products and CCA Products to be supplied by Dura for DJ Pharma pursuant to the terms of the Dura Supply Agreement. -3- (f) PROMOTION, MARKETING AND SALE OF PRODUCTS. (i) REFERRALS. As of the Closing and through the Licensing Period, Dura shall refer to DJ Pharma any sales inquiry received from a third party in the Rondec Territory with respect to the Rondec Products or from a third party in the CCA Territory with respect to the CCA Products. (ii) MATERIALS AND PROMOTIONAL CLAIMS. For so long as the Rondec Products are sold in the Rondec Territory and the CCA Products are sold in the CCA Territory and prior to the expiration of the Licensing Period, DJ Pharma shall not distribute any written materials or make any promotional claims regarding the Rondec Products or the CCA Products, respectively, unless such written materials or promotional claims have first been reviewed and approved by Dura, such approval not to be unreasonably withheld. Dura agrees to provide DJ Pharma with its approval or rejection of such written materials and promotional claims within thirty (30) days of receipt by Dura. Notwithstanding the foregoing, DJ Pharma at all times shall be solely responsible for complying with all applicable laws and regulations in its promotion and marketing of the Rondec Products and CCA Products. (g) USE OF TRADEMARKS. Prior to the expiration of the Licensing Period, DJ Pharma agrees to use the Rondec Trademarks only in connection with the Rondec Products and the CCA Trademarks only in connection with the CCA Products and in the manner and style which shall have the prior written approval of Dura, which shall not be unreasonably withheld. DJ Pharma shall submit to Dura samples of all commercial material containing any of the Rondec Trademarks or CCA Trademarks. Dura, within thirty (30) days of its receipt of such materials, shall have the right to reasonably comment on the usage of the Rondec Trademarks or CCA Trademarks in such materials and DJ Pharma, at its own cost and expense, will promptly correct any improper usage of the Rondec Trademarks or CCA Trademarks. Prior to the time Dura assigns such Rondec Trademarks or CCA Trademarks to DJ Pharma pursuant to this Agreement, DJ Pharma agrees not to claim or to assert any right of ownership in or to such Rondec Trademarks or CCA Trademarks or the goodwill associated therewith and shall take no action intended to destroy, damage or materially impair in any way the ownership or rights of Dura in and to such Rondec Trademarks or CCA Trademarks. Prior to the time Dura assigns such CCA Trademarks or Rondec Trademarks to DJ Pharma pursuant to this Agreement, DJ Pharma shall not register anywhere in the world in its own name or on behalf of any other person or entity, any trademark, trade dress, brands, labeling, designs or other indicia of ownership identical to, or confusingly similar to, the Rondec Trademarks or CCA Trademarks, and shall not associate the Rondec Trademarks or CCA Trademarks with any articles other than the Rondec Products or CCA Products, respectively and shall, at the request of Dura, do all such acts and things and execute all such documents as Dura shall in its reasonable discretion consider necessary or proper to register or maintain the registration of the Rondec Trademarks and CCA Trademarks in the Rondec Territory or any country of the CCA Territory, respectively. Should usage of the Rondec Trademarks or CCA Trademarks in any country vest title thereto in DJ Pharma prior to the time Dura assigns the Rondec Trademarks or CCA Trademarks, respectively, pursuant to Section 1.3(a) hereof, then DJ Pharma shall, at Dura's request, immediately assign and transfer such title to Dura. (h) QUALITY CONTROL. DJ Pharma will not permit the quality of the Rondec Products or CCA Products to deteriorate while such Products are in its possession so as to -4- adversely affect the goodwill associated with the Rondec Trademarks or CCA Trademarks, respectively. DJ Pharma shall, upon request of Dura, from time to time furnish Dura, without charge, specifications and samples of Rondec Products or CCA Products for quality review by Dura. Dura or an authorized representative thereof shall have the right, at all reasonable times, to inspect the finished goods in relation to which the Rondec Trademarks or CCA Trademarks are to be used, as part of appropriate quality control. (i) INFRINGEMENT OF TRADEMARKS. In the event that, during the term of the license granted to DJ Pharma under Section 1.1 hereof, either DJ Pharma or Dura learn that any of the Rondec Trademarks or CCA Trademarks is being infringed in any territory by any other party, it shall promptly notify the other of such infringement. In such event both DJ Pharma and Dura shall have the right, but not the obligation to act jointly to terminate any such third party infringement, including, without limitation, prosecuting a lawsuit or other legal proceeding at both Dura's and DJ Pharma's joint expense to be shared equally between Dura and DJ Pharma. Any recovery received as a result of such joint action to terminate an infringement of the Rondec Trademarks or CCA Trademarks, less the reimbursement of each Dura and DJ Pharma for the out-of-pocket expenses incurred in taking, joining and prosecuting such action, shall be shared equally between Dura and DJ Pharma. In the event either DJ Pharma or Dura elects to not take any action to terminate such third party infringement (the "Non-Acting Party") within sixty (60) days following notice from the other of a claim of infringement, such other party (the "Acting Party") shall have the right, but not the obligation, to act to terminate any such third party infringement, including, without limitation, prosecuting a lawsuit or other legal proceeding, at the Acting Party's own expense; and the Acting Party may retain any recovery it may receive as a result of its actions to terminate such infringement. Notwithstanding the foregoing, the Non-Acting Party shall fully cooperate with the Acting Party in any action the Acting Party takes to terminate such infringement and, to the extent the Acting Party recovers damages from such third party, through settlement or otherwise, the Non-Acting Party shall be reimbursed by the Acting Party for all reasonable expenses, if any, incurred in connection therewith. 1.2 RIGHTS GRANTED WITH RESPECT TO THE KEFTAB PRODUCTS FOR THE LICENSING PERIOD. For the duration of the Licensing Period and subject to the terms and conditions set forth in this Agreement and the Licensing Agreement, except as set forth in Section 1.2(b) hereof, Dura Bermuda hereby exclusively (even as to Dura Bermuda) sublicenses to DJ Pharma the Keftab Rights under the Licensing Agreement in the fifty (50) states and the District of Columbia comprising the United States (the "Keftab Territory"). In addition to the terms and conditions set forth in the Licensing Agreement with respect to the Keftab Products, DJ Pharma agrees to the following terms with respect to its use of the Keftab Products during the Licensing Period: (a) SUBLICENSING. Prior to the expiration of the Licensing Period, DJ Pharma shall not assign or sublicense any of the rights granted to it under this Section 1.2, without the prior written consent of Dura Bermuda, which consent may be provided or withheld in Dura Bermuda's sole discretion. (b) RETAINED RIGHTS. Notwithstanding the licenses granted to DJ Pharma under this Section 1.2, after the Closing and through the end of the Licensing Period (except as otherwise indicated), Dura Bermuda shall retain ownership of all rights to (a) the current NDC numbers it uses for each of the Keftab Products (retained (to the extent required by applicable laws and regulations) through and after the Second Closing), (b) all accounts receivable from -5- sales of the Keftab Products by or on behalf of Dura Bermuda prior to the Closing, and (c) all inventories of the Keftab Products that have not otherwise been purchased by DJ Pharma pursuant to the Dura Supply Agreement. (c) REFERRALS. As of the Closing and through the Licensing Period, Dura and Dura Bermuda shall refer to DJ Pharma any sales inquiry received from a third party in the Keftab Territory with respect to the Keftab Products. (d) MATERIALS AND PROMOTIONAL CLAIMS. For so long as the Keftab Products are sold in the Keftab Territory and prior to the expiration of the Licensing Period, DJ Pharma shall not distribute any written materials or make any promotional claims regarding the Keftab Products, unless such written materials or promotional claims have first been reviewed and approved by Dura Bermuda, such approval not to be unreasonably withheld. Dura Bermuda agrees to provide DJ Pharma with its approval or rejection of such written materials and promotional claims within thirty (30) days of receipt by Dura Bermuda. Notwithstanding the foregoing, DJ Pharma at all times shall be solely responsible for complying with all applicable laws and regulations in its promotion and marketing of the Keftab Products. (e) QUALITY CONTROL. DJ Pharma will not permit the quality of the Keftab Products to deteriorate while such Products are in its possession so as to adversely affect the goodwill associated with the Keftab Trademark. DJ Pharma shall, upon request of Dura Bermuda, from time to time furnish Dura Bermuda, without charge, specifications and samples of Keftab Products for quality review by Dura Bermuda. Dura Bermuda or an authorized representative thereof shall have the right, at all reasonable times, to inspect the finished goods in relation to which the Keftab Trademark is to be used, as part of appropriate quality control. (f) DURA SUPPLY AGREEMENT. By the date of Closing, Dura, Dura Bermuda, and DJ Pharma shall enter into the Dura Supply Agreement. (g) USE OF TRADEMARKS. Prior to the expiration of the Licensing Period, DJ Pharma agrees to use the Keftab Trademark only in connection with the Keftab Products and in the manner and style which shall have the prior written approval of Dura Bermuda, which shall not be unreasonably withheld. DJ Pharma shall submit to Dura Bermuda samples of all commercial material intended for use by DJ Pharma containing the Keftab Trademark. Dura Bermuda, within thirty (30) days of its receipt of such materials, shall have the right to reasonably comment on the usage of the Keftab Trademark in such materials and DJ Pharma, at its own cost and expense, will promptly correct any improper usage of the Keftab Trademark . Prior to the time Dura Bermuda assigns such Keftab Trademark to DJ Pharma pursuant to Section 1.4 of this Agreement, DJ Pharma agrees not to claim or to assert any right of ownership in or to such Keftab Trademark or the goodwill associated therewith and shall take no action which may destroy, damage or materially impair in any way the ownership or rights of Dura in and to such Keftab Trademark. DJ Pharma shall not register at anytime anywhere in the world, except in the Keftab Territory pursuant to the terms of the Licensing Agreement following assignment of the Keftab Trademark under this Agreement, in its own name or on behalf of any other person or entity, any trademark, trade dress, brands, labeling, designs or other indicia of ownership identical to, or confusingly similar to, the Keftab Trademark. Prior to the time Dura Bermuda assigns such Keftab Trademark to DJ Pharma pursuant to this Agreement, DJ Pharma shall not associate the Keftab Trademark with any articles other than the Keftab Products and -6- shall, at the request of Dura Bermuda, do all such acts and things and execute all such documents as Dura Bermuda shall in its reasonable discretion consider necessary or proper to register or maintain the registration of the Keftab Trademark in the Keftab Territory. Should usage of the Keftab Trademark in any country vest title thereto in DJ Pharma prior to the time Dura Bermuda assigns the Keftab Trademark pursuant to this Agreement, then DJ Pharma shall, at Dura Bermuda's request, immediately assign and transfer such title to Dura Bermuda. Upon Dura Bermuda's assignment of Keftab Trademark to DJ Pharma pursuant to this Agreement, DJ Pharma understands and agrees that its use of the Keftab Trademark will be subject to the terms and conditions of the Licensing Agreement. (h) INFRINGEMENT OF TRADEMARKS. In the event that, during the term of the license granted to DJ Pharma under Section 1.2 hereof, either DJ Pharma or Dura Bermuda learn that the Keftab Trademark is being infringed in any territory by any other party, it shall promptly notify the other of such infringement. In such event both DJ Pharma and Dura Bermuda shall have the right, but not the obligation to act jointly to terminate any such third party infringement, including, without limitation, prosecuting a lawsuit or other legal proceeding at both Dura Bermuda's and DJ Pharma's joint expense to be shared equally between Dura Bermuda and DJ Pharma. Any recovery received as a result of such joint action to terminate an infringement of the Keftab Trademark, less the reimbursement of each Dura Bermuda and DJ Pharma for the out-of-pocket expenses incurred in taking, joining and prosecuting such action, shall be shared equally between Dura Bermuda and DJ Pharma. In the event either DJ Pharma or Dura Bermuda elects to not take any action to terminate such third party infringement (the "Non-Acting Entity") within sixty (60) days following notice from the other of a claim of infringement, such other party (the "Acting Entity") shall have the right, but not the obligation, to act to terminate any such third party infringement, including, without limitation, prosecuting a lawsuit or other legal proceeding, at the Acting Entity's own expense; and the Acting Entity may retain any recovery it may receive as a result of its actions to terminate such infringement. Notwithstanding the foregoing, the Non-Acting Entity shall fully cooperate with the Acting Entity in any action the Acting Entity takes to terminate such infringement and, to the extent the Acting Entity recovers damages from such third party, through settlement or otherwise, the Non-Acting Entity shall be reimbursed by the Acting Entity for all reasonable expenses, if any, incurred in connection therewith. 1.3 PURCHASE AND SALE OF THE RONDEC PURCHASED ASSETS (AS HEREINAFTER DEFINED) AND THE CCA PURCHASED ASSETS (AS HEREINAFTER DEFINED). (a) UPON EXPIRATION OF THE LICENSING PERIOD. Subject to the terms and conditions of this Agreement, at the expiration of the Licensing Term, (x) Dura shall, without further consideration (except as otherwise set forth herein), transfer, assign and deliver to DJ Pharma the following assets of Dura relating to each of the Rondec Products in the Rondec Territory (the "Rondec Purchased Assets") and to each of the CCA Products in the CCA Territory (the "CCA Purchased Assets") and (y) DJ Pharma shall additionally have a fully-paid, irrevocable license and right under the rights granted in Section 1.1 above: (i) TRADEMARKS. All of the Rondec Trademarks and CCA Trademarks. -7- (ii) REGULATORY HISTORY. A copy of all documents pertaining to the Rondec Products' and CCA Products' regulatory history including any existing correspondence with the FDA. (iii) FORMULATIONS. All formulations including copies of all documentation for the Rondec Products and CCA Products and the medical information set forth in Exhibit "E" attached hereto and incorporated herein by this reference. (iv) MANUFACTURING INFORMATION; BOOKS AND RECORDS. Copies of all relevant manufacturing information and technology for the Rondec Products and CCA Products including, but not limited to, suppliers, production costs and specifications. Copies of all files and records of Dura specifically relating to the Rondec Products and CCA Products, whether in hard copy or magnetic form including without limitation, all research and development files, including, without limitation, FDA and other governmental agency or instrumentality files pertaining to the Rondec Products, CCA Products or registrations thereto, market studies, copies of consumer complaint files, response letters, adverse event reports, manufacturing worksheets, copies of manufacturing quality records and assurance information, packaging information, sales histories, files, reports, operating records and quality control histories with respect to the Rondec Products and CCA Products. (v) MARKETING INFORMATION. All marketing and sales material and information for the Rondec Products, CCA Products and all copyrights and moral rights thereto. (vi) TRADEMARK LICENSES. The Rondec Products, the CCA Products, the Rondec Trademarks and the CCA Trademarks on the existing respective Rondec and CCA inventory packaging, except for the trade names Dura and Dura Pharmaceuticals, Inc., which DJ Pharma acquires from Dura under this Section 1 and the right to continue to use such Rondec Trademarks, CCA Trademarks and other information on Rondec Product and CCA Product labels as used thereon by Dura prior to the Second Closing, until DJ Pharma files appropriate drug listings with the FDA which include representative labeling, but no later than one hundred eighty (180) days from the Second Closing or such period of time permitted by applicable law. (vii) KNOW-HOW AND REGULATORY APPROVALS. All of the Know-How and Regulatory Approvals as set forth in Section 1.1(a) hereof. (viii) OTHER RIGHTS. All other intellectual property, proprietary or other rights owned by Dura solely with respect to the Rondec Products or CCA Products, including without limitation such intellectual property set forth on Exhibit "D" attached hereto and incorporated herein by this reference. (b) EXCLUDED ASSETS. Notwithstanding the foregoing, Dura is not selling, and DJ Pharma is not purchasing, pursuant to this Agreement any tangible or intangible assets, properties or rights of Dura not expressly included in the Rondec Purchased Assets or CCA Purchased Assets. Except for the Rondec Trademarks and CCA Trademarks set forth in Section 1.3 hereof, DJ Pharma is not purchasing or licensing any rights to the trade names Dura or Dura Pharmaceuticals, Inc. or any logo associated with them. -8- 1.4 ASSIGNMENT AND ASSUMPTION OF LICENSE AGREEMENT WITH RESPECT TO KEFTAB PRODUCTS UPON EXPIRATION OF LICENSING PERIOD. Subject to the terms and conditions of this Agreement and the Assignment, at the expiration of the Licensing Term, (i) Dura Bermuda shall without further consideration (except as otherwise provided herein), transfer, assign and deliver to DJ Pharma the Keftab Rights and (ii) DJ Pharma shall additionally have a fully-paid, irrevocable license and right under the Keftab Rights. 2. PAYMENTS 2.1 FOR PURCHASE AND LICENSING RIGHTS WITH RESPECT TO THE PRODUCTS. In consideration for the purchase and licensing rights as set forth in Section 1 hereof, DJ Pharma shall (i) * hereinafter defined) and (ii) pay to Dura with respect to the Rondec Products and CCA Products and to Dura Bermuda with respect to the Keftab Rights the following licensing fees during the Licensing Period: (a) for * (as hereinafter defined) * (as hereinafter defined) of the Products during such *; (b) for * (as hereinafter defined) * during such *; (c) * during each * in the *; (d) * during each * in the *; and (e) * during each * in the * and the *. Notwithstanding the foregoing, * under Sections 2.1(a)-(e) hereof * (all of which are exclusive of the costs of inventory and product supply under the Dura Supply Agreement) during the respective calendar year: (i) * (ii) * (iii) * and (iv) *. Notwithstanding the foregoing, * (collectively, the " * ") in any way *, including, without limitation, *. -9- *Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed with the Secretary of the Commission without the Mark pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. For purposes of this Agreement: (A) a "Contract Quarter" shall mean each quarter in the Contract Year commencing October 1, 1998 and ending September 30, 1999; (B) the first "Contract Year" shall mean the period of twelve (12) consecutive months commencing on October 1, 1998, and each subsequent Contract Year shall begin on the respective anniversary thereof; and (C) "Net Sales" shall mean (i) the gross amount of sales invoiced to third parties by DJ Pharma less the reasonable and customary accrual-basis deductions from such gross amounts including: (a) normal and customary trade and quantity discounts, allowances and credits actually allowed or paid; (b) credits or allowances given or made for return of previously sold products; (c) sales or excise taxes, as adjusted for rebates and refunds; and (d) chargeback payments and rebates granted to managed health care organizations, employer groups or to federal, state and local governments, their agencies, purchasers and reimbursers or to trade customers, including, but not limited to, wholesalers and chain and pharmacy buying groups, which are specifically identified to the sale of the Products by DJ Pharma. All amounts under this Section shall be determined from the books and records of DJ Pharma which shall be maintained in accordance with GAAP. 2.2 REDUCTION OF PAYMENTS. Each monthly payment due under Section 2.1 of this Agreement for each Rondec Product, CCA Product and Keftab Product sold by DJ Pharma during such month shall be reduced by the unit Supply Price (as defined in the Dura Supply Agreement) multiplied by the number of units of each such Product sold by DJ Pharma during such month (such reduced amount defined herein as the "Net Royalty Payments"). 2.3 PAYMENTS. For each calendar month in which DJ Pharma is obligated to make payments to Dura with respect to sales pursuant to Section 2.1 hereof, DJ Pharma shall, within thirty (30) days following the close of each such calendar month, furnish to Dura a written report for the calendar month showing (i) the number of units of each Rondec Product, CCA Product or Keftab Product, as the case may be, sold by DJ Pharma during such calendar month, (ii) the Net Sales of Rondec Products, CCA Products and Keftab Products sold by DJ Pharma during such calendar month, and (iii) the amounts payable under this Section 2 for such calendar month. Simultaneously with the submission of the written report, DJ Pharma shall pay to Dura , for the account of DJ Pharma, a sum equal to the aggregate amount due for such calendar month calculated in accordance with this Agreement. Payments due hereunder shall be paid by wire transfer to a bank account as designated from time to time by Dura. 2.4 MAINTENANCE OF RECORDS BY DJ PHARMA; AUDITS. (a) RECORDKEEPING BY DJ PHARMA. DJ Pharma shall keep accurate books and accounts of record in connection with the sale by DJ Pharma of the Products in sufficient detail to (i) permit accurate determination of all figures necessary for verification of payments or refunds required to be paid hereunder and (ii) verify compliance with Section 2.6 hereof. Records pursuant to this Section 2.4(a) shall be maintained for a period of three (3) years after the end of the year in which they were generated. (b) AUDIT BY DURA. Dura, through an independent certified public accountant, shall have the right to access such books and records of DJ Pharma one time per year unless permitted more frequently pursuant to this Section 2.4(b): (a) to verify the accuracy of the reports and all payments or refunds made hereunder and (b) to verify compliance with the provisions of Section 2.6 hereof. Notwithstanding the foregoing should an audit by Dura pursuant to this -10- Section 2.4(b) show a Material Underpayment (as hereinafter defined) by DJ Pharma, Dura shall be permitted to conduct audits pursuant to this Section 2.4(b) as many times in any year as Dura may deem reasonably necessary. Dura's right to have such books and records examined shall survive termination or expiration of this Agreement for a period of six months following such termination or expiration. (c) UNDERPAYMENTS/OVERPAYMENTS. If such independent certified public accountant's report shows any underpayment, DJ Pharma shall remit to Dura within thirty (30) days after DJ Pharma's receipt of such report (i) the amount of such underpayment to Dura and (ii) if such underpayment to Dura exceeds five percent (5%) of the total amount owed for the calendar year then being audited ("Material Underpayment"), the reasonable fees and expenses of such independent certified public accountant performing the audit. Any overpayments, less the reasonable fees and expenses of such independent certified public accountant, shall be fully creditable against amounts payable in subsequent payment periods, if any. If no amounts are payable in subsequent periods, Dura shall credit any overpayments, less the reasonable fees and expenses of such independent certified public accounting firm, to principal outstanding under the Subordinated Product Acquisition Notes. (d) ADDITIONAL AUDIT REQUIREMENTS UNDER THE LICENSING AGREEMENT. In addition to the audit requirements set forth above, DJ Pharma understands and agrees that with respect to the Keftab Products it shall also be subject to audit by Lilly and such other audit requirements as set forth in the Licensing Agreement. 2.5 TAXES AND WITHHOLDING. All taxes, assessments and fees of any nature levied or incurred on account of any payments from DJ Pharma to Dura accruing under this Agreement, by national, state or local governments, will be assumed and paid by DJ Pharma, except taxes levied thereon as income to Dura, and if such taxes are required to be withheld by DJ Pharma they will be deducted from payments due to Dura and will be timely paid by DJ Pharma to the proper taxing authority for the account of Dura, and a receipt or other proof of payment therefor secured and sent to Dura as soon as practicable. 2.6 TIMING OF SALES. DJ Pharma agrees that it shall not, by any artifice, or unreasonable action or omission cause sales of any of the Rondec Products, CCA Products or Keftab Products to occur later than they would otherwise have occurred. Such actions or acts of omission may include, without limitation, announcing or implementing changes in the price of the Products in such a way as to delay the filling of orders from one Contract Quarter or Contract Year to the next. If DJ Pharma has taken any such actions or committed any such act of omission then for all purposes of payment of amounts under Section 2 hereof such sales shall be treated as if made during the period they would have been made were it not for the act or omission on the part of DJ Pharma. 2.7 ADJUSTMENT OF PAYMENTS RELATED TO RONDEC PRODUCTS OR CCA PRODUCTS. In the event of the occurrence of an * (as hereinafter defined) at any time up to and through *, DJ Pharma's future payment obligations to Dura or Dura Bermuda as of the * (as hereinafter defined) shall be adjusted as follows: -11- *Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed with the Secretary of the Commission without the Mark pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. (a) * EXCEED ADJUSTED NET SALES AMOUNT. In the event that the * (as hereinafter defined) for a * (as hereinafter defined) or * (as hereinafter defined), as the case may be, * by DJ Pharma of such * or * (the "Adjusted Net Sales Amount") as of the *, then DJ Pharma (i) may * for the Products as of the * and (ii) may * (as hereinafter defined) * (x) * (such * to be determined assuming * of the *, as the case may be, for the * immediately preceding the * to total * (the " * ") and (y) *. (b) ADJUSTED NET SALES EXCEED *. (i) DURING PERIOD COMMENCING AS OF THE CLOSING AND ENDING AS OF *. In the event that at any time in the period commencing as of the Closing and ending *, the Adjusted Net Sales Amount exceeds the *, then DJ Pharma's * may be * (x) * (such * to be determined assuming * and (y) the *. (ii) DURING PERIOD COMMENCING AS OF * AND ENDING AS OF *. In the event that at any time in the period commencing * and ending *, the Adjusted Net Sales Amount exceeds the *, then DJ Pharma's * shall be * (i) * (x) * (such * to be determined assuming *) and (y) * (ii) the amount by which the *. (c) ADJUSTMENT TO *. In addition to the adjustments set forth in Sections 2.7 (a) and (b) hereof, the * (as hereinafter defined) will be * in effect for the respective period * of the respective *, as the case may be, for the * immediately preceding -12- *Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed with the Secretary of the Commission without the Mark pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. the * to total Net Sales of the Products for the * months immediately preceding the *. Any * will * for any remaining period ratably based upon the * for such period immediately prior to such reduction. In the event of an adjustment of payments pursuant to this Section 2.7 *. In addition, *. Attached as Exhibit H are examples of the calculations set forth in Sections 2.7 (a)-(c) above, based on select hypothetical scenarios. For purposes of this Section 2.7 the " * " shall equal the * of (i) the result of (a) the * (b) the total Net Sales of the Rondec Products and CCA Products for the * (ii) the *. For purposes of this Section 2.7 an " * " shall be deemed to have occurred at such time as the *, or other * as a result of any such action by DJ Pharma, and which (a) *, or (b) *, or (c) *. Any of the * impacted as set forth in subsections (a)-(c) of this paragraph by the * are defined herein as the *. For purposes of this Section 2.7 the " * " shall be, except as set forth herein, the date upon which * of the occurrence of any or all of the foregoing events. With respect to the * as set forth in subsection (a) of the foregoing paragraph, the * shall be on the *. For purposes of this Section 2.7 " * " shall * (i) the result of (a) * (b) * -13- *Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed with the Secretary of the Commission without the Mark pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. * (ii) * immediately follow *; in each case after giving effect to any previous * pursuant to this Section 2.7 or Section 7.2(h). 3. CLOSING AND SECOND CLOSING 3.1 TIME AND PLACE OF THE CLOSING. The closing shall occur on January 25, 1999 (the "Closing"), and all such transactions shall be effective as of 8:00 a.m. pacific standard time on January 25, 1999. 3.2 ACTIONS TO BE TAKEN AT THE CLOSING. At the Closing, the following actions shall be deemed to have occurred simultaneously and shall be effective as of 8:00 a.m. pacific standard time on January 25, 1999: (a) Except as otherwise indicated, at the Closing, Dura and Dura Bermuda (where applicable) shall deliver to DJ Pharma the following: (i) an executed original of this Agreement; (ii) an executed original of the Dura Supply Agreement; (iii) executed originals of all investment documents related to that certain DJ Pharma, Inc. * Agreement by and among DJ Pharma, the * (as defined therein) and the * (as defined therein), dated January 25, 1998 (collectively, the "* Documents"); (iv) * pursuant to the * Agreement (as hereinafter defined) in the amount of *; (v) * by Dura and Dura Bermuda in connection with Dura or Dura Bermuda's * pursuant to the DJ Pharma * Agreements; and (vi) such other documents as may be required or necessary to fully effectuate the transactions contemplated herein. (b) At the Closing (except as otherwise indicated below), DJ Pharma shall deliver to Dura and to Dura Bermuda (where applicable) the following: (i) an executed original of this Agreement; (ii) an executed original of the Dura Supply Agreement; (iii) an executed original of the * and of the *, which together with the * is collectively referred to herein as the * -14- *Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed with the Secretary of the Commission without the Mark pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. *, both of which are attached hereto as Exhibit F and incorporated herein by this reference; (iv) an executed original of the * attached hereto as Exhibit G and incorporated herein by this reference; (v) executed originals of the * Documents; (vi) Certificate of Incorporation and By-Laws of DJ Pharma certified as of the date of Closing; (vii) full payment of fees to Dura (up to an amount not to exceed * ) as set forth in Section 7A of that certain * Agreement by and among DJ Pharma and the * (as defined therein), dated January 25, 1998 (the "* Agreement"), as set forth on an estimated statement provided by Dura to DJ Pharma as of the Closing. In connection with the foregoing, DJ Pharma understands and agrees that such amount may be increased following final computations by Dura of * and DJ Pharma agrees to pay such increased amount (up to an aggregate amount of * under this Section 3.2 (b)(vii) promptly following Dura's submission to DJ Pharma of such final computation; and (viii) full payment of all outstanding obligations due and payable pursuant to section 2.2 of the * Agreement by and between Dura and DJ Pharma; and (ix) such other documents as may be required or necessary to fully effectuate the transactions contemplated herein. (c) At the Closing, each party shall provide to the other party copies, certified (as appropriate) by the Secretary, Assistant Secretary or other appropriate officer of the party, of resolutions of the party's Board of Directors authorizing the execution, delivery and performance of this Agreement and all other agreements, documents and instruments relating hereto, and the consummation of the transactions contemplated hereby. (d) Effective as of the Closing the following documents and all exhibits thereto shall be deemed terminated and of no further force and effect: (i) that certain * and the * between the parties hereto, each dated October 1, 1998; (ii) the * by and between DJ Pharma and Dura, dated October 1, 1998; (iii) the * by and between DJ Pharma and Dura, dated July 28, 1998 and October 1, 1998 (the " * "); (iv) the * by and between Dura and DJ Pharma and all exhibits thereto; -15- *Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed with the Secretary of the Commission without the Mark pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. (v) the *, dated July 28, 1998, *; (vi) the *, dated July 28, 1998, *; (vii) the Assignment of the Abbott Purchase Agreement and Abbott Supply Agreement; and (viii) the * Agreement by and between Dura, Dura Bermuda and DJ Pharma, dated December 31, 1998. 3.3 TIME AND PLACE OF THE SECOND CLOSING. The closing of the transfer of the rights and obligations of Dura in and to the Rondec Products and CCA Products and Dura and/or Dura Bermuda in and to the Keftab Products (the "Second Closing") shall occur on * (or at such other date as may be mutually agreed upon by the parties), and all such transactions shall be effective as of the close of business on the date of the Second Closing. 3.4 ACTIONS TO BE TAKEN AT THE SECOND CLOSING. At the Second Closing, the parties shall deliver to each other an executed original of an assignment of the Abbott Purchase Agreement, the Abbott Supply Agreement, the Licensing Agreement and the Manufacturing Agreement to be assigned in the form of the Assignment and such other assignments or documents as may be required or necessary to fully effectuate the transactions contemplated herein. 3.5 NOTIFICATION CONCERNING TRANSFER OF PRODUCTS AND RIGHTS. Promptly after the Second Closing, DJ Pharma will, to the extent required by applicable laws and regulations, notify customers of the Products that DJ Pharma has purchased the Rondec Products, the CCA Products, and has licensed the Keftab Rights. 3.6 CONDITIONS TO CLOSINGS. (a) DJ PHARMA CONDITIONS TO CLOSINGS. The representations and warranties of Dura and Dura Bermuda contained in this Agreement will in all material respects be true as of the date of the Closing and the Second Closing with the same effect as though made at the respective closing; and Dura and Dura Bermuda will have delivered to DJ Pharma a certificate, dated as of the respective closing thereof and signed by its President or a Vice President, to such effect. (b) DURA AND DURA BERMUDA CONDITIONS TO CLOSINGS. The representations and warranties of DJ Pharma contained in this Agreement will in all material respects be true as of the Closing and the Second Closing with the same effect as though made at the respective closing; and DJ Pharma will have delivered to Dura and Dura Bermuda a certificate, dated as of the respective closing thereof and signed by its President or a Vice President, to such effect. 4. INDEMNIFICATION 4.1 INDEMNIFICATION. -16- *Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed with the Secretary of the Commission without the Mark pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. (a) Dura and Dura Bermuda shall indemnify, defend and hold DJ Pharma and its directors, officers, employees, agents and representatives (collectively the "DJ Pharma Parties") harmless from and against any and all costs, losses, claims, liabilities, fines, penalties, damages and expenses, court costs, and reasonable fees and disbursements of counsel, consultants and expert witnesses (including interest which may be imposed in connection with any of the foregoing) (collectively, "Damages") incurred or suffered by the DJ Pharma Parties excluding incidental or consequential damages suffered or incurred by the DJ Pharma Parties directly (as opposed to incidental or consequential Damages suffered or incurred by third parties who are, in turn, seeking the same from the DJ Pharma Parties, which shall be covered by the indemnity set forth herein) as a consequence of: (i) any breach of any representation or warranty made by Dura or Dura Bermuda in this Agreement, provided that notice of a claim based upon any such breach is received by Dura or Dura Bermuda prior to the expiration of such representation and warranty pursuant to Section 11.9; (ii) any failure to perform duly and punctually any covenant, agreement or undertaking on the part of Dura or Dura Bermuda contained in this Agreement; (iii) any material misrepresentation in or material omission from any agreement, instrument or document delivered by Dura or Dura Bermuda pursuant to the terms of this Agreement; (iv) any activity conducted or liability incurred by Dura or Dura Bermuda in respect to the marketing, sale, and distribution of the Products prior to the Closing; provided, however, that such indemnity shall not apply to the extent such liability results from any act or omission by DJ Pharma, under that certain Co-Promotion Agreement between the parties hereto, dated July 28, 1998, or otherwise; or (v) any other liability of Dura not specifically assumed by DJ Pharma pursuant to this Agreement. (b) The DJ Pharma Parties shall indemnify, defend and hold Dura and Dura Bermuda, and each of their respective directors, officers, employees, agents and representatives (collectively the "Dura Parties") harmless from and against any and all Damages incurred or suffered by the Dura Parties (excluding incidental or consequential Damages suffered or incurred by Dura directly (as opposed to incidental or consequential Damages suffered or incurred by third parties who are, in turn, seeking the same from Dura, which shall be covered by the indemnity set forth herein) as a consequence of: (i) any breach of any representation or warranty made by DJ Pharma in this Agreement, provided that notice of a claim based upon any such breach is received by DJ Pharma prior to the expiration of such representation and warranty pursuant to Section 11.9; (ii) any failure to perform duly and punctually any covenant, agreement or undertaking on the part of DJ Pharma contained in this Agreement; -17- (iii) any material misrepresentation in or material omission from any agreement, instrument or document delivered by DJ Pharma pursuant to the terms of this Agreement; or (iv) any and all liabilities and obligations relating to the CCA Products, the Rondec Products and the Keftab Products or Rights which are hereby expressly assumed by DJ Pharma as set forth in Section 8.3 hereof. 4.2 NOTICE AND OPPORTUNITY TO DEFEND. Promptly after receipt by a party hereto of notice of any claim which could give rise to a right to indemnification pursuant to Section 4.1, such party (the "Indemnified Party") shall give the other party (the "Indemnifying Party") written notice describing the claim in reasonable detail. The failure of an Indemnified Party to give notice in the manner provided herein shall not relieve the Indemnifying Party of its obligations under this Section , except to the extent that such failure to give notice materially prejudices the Indemnifying Party's ability to defend such claim. The Indemnifying Party shall have the right, at its option, to compromise or defend, at its own expense and by its own counsel, any such matter involving the asserted liability of the party seeking such indemnification. If the Indemnifying Party shall undertake to compromise or defend any such asserted liability, it shall promptly (and in any event not less than ten (10) days after receipt of the Indemnified Party's original notice) notify the Indemnified Party in writing of its intention to do so, and the Indemnified Party agrees to cooperate fully with the Indemnifying Party and its counsel in the compromise or defense against any such asserted liability. All reasonable costs and expenses incurred in connection with such cooperation shall be borne by the Indemnifying Party. If the Indemnifying Party elects not to compromise or defend the asserted liability, fails to notify the Indemnified Party of its election to compromise or defend as herein provided, fails to admit its obligation to indemnify under this Agreement with respect to the claim, or, if in the reasonable opinion of the Indemnified Party, the claim could result in the Indemnified Party becoming subject to injunctive relief or relief other than the payment of money damages that could materially adversely affect the ongoing business of the Indemnified Party in any manner, the Indemnified Party shall have the right, at its option, to pay, compromise or defend such asserted liability by its own counsel and its reasonable costs and expenses shall be included as part of the indemnification obligation of the Indemnifying Party hereunder. Notwithstanding the foregoing, neither the Indemnifying Party nor the Indemnified Party may settle or compromise any claim over the objection of the other; provided, however, that consent to settlement or compromise shall not be unreasonably withheld. In any event, the Indemnified Party and the Indemnifying Party may participate, at their own expense, in the defense of such asserted liability. If the Indemnifying Party chooses to defend any claim, the Indemnified Party shall make available to the Indemnifying Party any books, records or other documents within its control that are necessary or appropriate for such defense. Notwithstanding anything to the contrary in this Section 4.2, the party conducting the defense of a claim shall (a) keep the other party informed on a reasonable and timely basis as to the status of the defense of such claim (but only to the extent such other party is not participating jointly in the defense of such claim), and (b) conduct the defense of such claim in a prudent manner, and the Indemnifying Party shall not cease to defend, settle or otherwise dispose of any claim without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld). -18- 4.3 INDEMNIFICATION PAYMENT OBLIGATION. No Indemnifying Party will have any obligations under Sections 4.l(a) or 4.1(b) until the cumulative aggregate amount of Damages incurred or suffered by the Indemnified Party which the Indemnifying Party is otherwise subject to under this Agreement exceeds * at which time the entire cumulative aggregate amount of such Damages shall be covered. The provisions of this Section 4.3 shall not limit or otherwise affect the obligations of any Indemnifying Party under any other Section of this Agreement. 4.4 INDEMNIFICATION PAYMENT; ADJUSTMENTS. The amount of any Damages for which indemnification is provided under this Section 4 shall be reduced to take account of any net tax benefit and shall be increased to take account of any net tax detriment arising from the incurrence or payment of any such Damages or from the receipt of any such indemnification payment and shall be reduced by the insurance proceeds received and any other amount recovered, if any, by the Indemnified Party with respect to any Damages; provided, however, that an Indemnified Party shall not be subject to an obligation to pursue an insurance claim relating to any Damages for which indemnification is sought hereunder if pursuing such claim is reasonably likely to result in increased premiums or materially and adversely affect a party's insurability. If any Indemnified Party shall have received any payment pursuant to this Section 4 with respect to any Damages and shall subsequently have received insurance proceeds or other amounts with respect to such Damages, then such Indemnified Party shall pay to the Indemnifying Party an amount equal to the difference (if any) between (i) the sum of the amount of those insurance proceeds or other amounts received and the amount of the payment by such Indemnifying Party pursuant to this Section 4 with respect to such Damages and (ii) the amount necessary to fully and completely indemnify and hold harmless such Indemnified Party from and against such Damages; provided, however, in no event will such Indemnified Party have any obligation pursuant to this sentence to pay to such Indemnifying Party an amount greater than the amount of the payment by such Indemnifying Party pursuant to this Section 4 with respect to such Damages. 4.5 INDEMNIFICATION PAYMENT. Upon the final determination of liability and the amount of the indemnification payment under this Section 4, the appropriate party shall pay to the other, as the case may be, within ten (10) business days after such determination, the amount of any claim for indemnification made hereunder. 4.6 INSURANCE. DJ Pharma shall obtain and maintain at all times during the term of this Agreement, Commercial General Liability Insurance, including Products Liability Insurance, with reputable and financially secure insurance carriers to cover its indemnification obligations under this Section 4, with limits of not less than * per occurrence and in the aggregate for general liability insurance and * per occurrence and in the aggregate for products liability insurance. DJ Pharma shall provide Dura with a Certificate of Insurance evidencing this coverage within fifteen (15) days after the Closing. Such products liability insurance policy shall name Dura as an additional insured and DJ Pharma shall use its commercially reasonable efforts to ensure that such insurance policy contains a provision requiring thirty (30) day advance notice to Dura in the event of its cancellation or termination. During the Licensing Period, Dura and Dura Bermuda shall each maintain insurance with third parties sufficient to cover its obligations under Section 4. 5. DISPUTE RESOLUTION -19- *Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed with the Secretary of the Commission without the Mark pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. 5.1 GOOD FAITH DISCUSSION; ADR PROCESS. Except as set forth in Section 10, the parties shall attempt to resolve through good faith discussions any dispute which arises under this Agreement. If they are unable to resolve the dispute within thirty (30) calendar days after delivery of written notice of the dispute from one party to the other, either party may seek to resolve it by initiating an Alternative Dispute Resolution Arbitration ("ADR") in which the American Arbitration Association (the "AAA") shall select the neutral ("Neutral") as provided herein. Notwithstanding the foregoing, the parties hereto may seek legal channels other than ADR to the extent necessary to enforce the terms of Section 10 herein. The ADR shall be conducted in accordance with the Commercial Arbitration Rules of the AAA, except as otherwise provided below. 5.2 ADR ISSUES: SELECTION OF NEUTRAL. An ADR shall be initiated by a party by sending written notice thereof to the other party and the AAA, which notice shall state the issues to be resolved. Within ten (10) business days after receipt of such notice, the other party may, by sending written notice to the initiating party and the AAA, add issues to be resolved. Within twenty (20) business days after the date of the original ADR notice, the AAA shall nominate to the parties at least five (5) qualified nominees from the AAA's Panel of distinguished Neutrals. The parties shall have five (5) business days after the receipt of such nominations to agree on a Neutral or, failing to agree, to rank-order their preferences with the most preferred being given the lowest number, and mail the rank-order to the AAA. The AAA shall notify the parties of their selection. If all nominees are unacceptable to a party, the procedure shall be repeated and, if the parties cannot select a neutral the second time, the AAA shall select the Neutral. 5.3 NEUTRAL WITH SPECIAL EXPERTISE. In the event of a dispute between the parties relating to the calculation of any commissions or the amount of other consideration payable under this Agreement (including, without limitation, the results of any audit conducted on behalf of a party pursuant to this Agreement), then, in addition to the procedure set forth in Section 5.2 above, the Neutral shall be a partner or full member of an internationally recognized certified public accounting firm which is not an auditing firm for either party and has not provided material services to either party during the last two (2) year period prior to the date of ADR initiation. 5.4 ADR HEARING. The Neutral shall hold a hearing to resolve the issues within one hundred twenty (120) business days after selection in San Diego, California. Each party may be represented by counsel. Prior to the hearing the parties shall be entitled to engage in discovery under procedures of the Federal Rules of Civil Procedure; PROVIDED, HOWEVER, that a party may not submit more than fifty (50) written interrogatories or take more than four (4) depositions. There shall not be any, and the Neutral shall not permit, any discovery within thirty (30) days of the hearing. The Neutral shall have sole discretion regarding the admissibility of evidence and conduct of the hearing. At least five (5) business days prior to the hearing, each party shall submit to the other party and the Neutral a copy of all exhibits on which such party intends to rely at the hearing, a pre-hearing brief (up to 5 pages), and a proposed disposition of the dispute (up to 5 pages). The proposed disposition shall be limited to proposed rulings and remedies on each issue, and shall contain no argument on or analysis of the facts or issues; PROVIDED, however, that the parties will not present proposed monetary remedies. Within five (5) business -20- days after close of the hearing, each party may submit a post-hearing brief (up to 5 pages) to the Neutral. 5.5 ADR RULING; FEES AND EXPENSES. The Neutral shall render a disposition on the proposed rulings as expeditiously as possible after the hearing, but not later than fifteen (15) business days after the conclusion of the hearing. The Neutral shall rule on each issue and shall adopt in its entirety the proposed ruling of one of the parties on each issue. In the circumstance where the Neutral rules for a party on a claim in the form of a claim for monetary damages, the parties will then submit a proposed remedy within ten (10) days of notice of the ruling. The proposed remedy may be accompanied by a brief in support of the remedy not to exceed five (5) pages. The Neutral will rule on and adopt one of the proposed remedies within ten (10) days of their submission. The Neutral's disposition shall be final and not appealable, except that either party shall have the right to appeal such disposition on the basis it was affected by fraud or bad faith in connection with the ADR proceedings. A judgement on the Neutral's disposition may be entered in any court having jurisdiction over the parties. The prevailing party shall be entitled to recover from the non-prevailing party the reasonable fees and expenses of the Neutral, as well as the standard charges of the AAA for its assistance. 6. TERMINATION OF AGREEMENT 6.1 TERMINATION FOR CAUSE - BOTH PARTIES. Notwithstanding anything to the contrary in this Agreement, this Agreement may be terminated prior to the Second Closing by written notice at any time prior to the Second Closing: (a) by Dura or Dura Bermuda for material breach by DJ Pharma or by DJ Pharma for material breach by Dura or Dura Bermuda, which breach remains uncured for thirty (30) days in the case of nonpayment of any amount due and unless otherwise set forth herein, ninety (90) days for all other breaches, each measured from the date written notice of such breach is given to the breaching party or, if such breach is not susceptible of cure within such ninety (90) day period and the breaching party uses diligent good faith efforts to cure such breach, for one hundred eighty (180) days after written notice to the breaching party. Notwithstanding the foregoing, in the event of a payment default by DJ Pharma as a result of * (as hereinafter defined) at any one time during the term of this Agreement, DJ Pharma shall be afforded the opportunity to cure such payment default (as well as any other payment default occurring within 150 days thereafter) for a period of one hundred fifty (150) days following written notice by Dura to DJ Pharma of the initial payment breach, provided that the following conditions have been met: (i) DJ Pharma has not previously breached any payment requirements under this Agreement; (ii) During such 150 day cure period DJ Pharma uses diligent good faith efforts to cure such breach; (iii) any nonpayment breaches or events warranting termination under this Agreement which occur during such 150 day cure period shall be cured by the expiration of such 150 day cure period (or earlier if the applicable cure period described in this Section 6 expires earlier than the 150 day cure period); -21- *Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed with the Secretary of the Commission without the Mark pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. (iv) During such 150 day cure period DJ Pharma does not * ; (v) *; and (vi) upon termination of such cure period, DJ Pharma agrees to pay Dura all outstanding amounts due plus interest accrued as of the date the amounts became overdue at a rate equal to the Prime Rate in effect at the time of default (as published by the Wall Street Journal) plus six percent (6%) per annum (or the highest amount allowed by law, if such lawful amount is lower than the foregoing). (b) by Dura or Dura Bermuda or by DJ Pharma immediately upon the filing or institution of bankruptcy, reorganization, liquidation or receivership proceedings, or upon an assignment of a substantial portion of the assets for the benefit of creditors by the other party, or in the event a receiver or custodian is appointed for such party's business, or if a substantial portion of such party's business is subject to attachment or similar process; provided, however, in the case of any involuntary bankruptcy proceeding such right to terminate shall only become effective if the proceedings are not dismissed within ninety (90) days after the filing thereof. 6.2 TERMINATION FOR CAUSE - DURA AND DURA BERMUDA. Prior to Dura's transfer to DJ Pharma of the Rondec Purchased Assets and the CCA Purchased Assets and Dura and/or Dura Bermuda's assignment, as the case may be, of the Keftab Rights, this Agreement may be terminated by Dura and Dura Bermuda, at their option and discretion, if the Dura Supply Agreement is terminated prior to its natural expiration due to a material, uncured breach by DJ Pharma. 6.3 TERMINATION FOR CAUSE - DJ PHARMA. Prior to Dura's transfer to DJ Pharma of the Rondec Purchased Assets and the CCA Purchased Assets and Dura and/or Dura Bermuda's assignment of the Keftab Rights, as the case may be, this Agreement may be terminated by DJ Pharma, at its option and discretion, if the Dura Supply Agreement is terminated prior to its natural expiration due to a material, uncured breach by Dura or Dura Bermuda. Notwithstanding the foregoing, DJ Pharma understands and agrees that while Dura shall use commercially reasonable efforts to supply Products to DJ Pharma, Dura cannot guarantee supplies from third party manufacturers and that any failure of third party manufacturers to supply Products to or on behalf of DJ Pharma shall in no event result in a right of termination of this Agreement by DJ Pharma. 6.4 EFFECT OF TERMINATION. (a) In the event of termination by Dura or Dura Bermuda, DJ Pharma shall return all Dura documents in its possession within fourteen (14) days of any such termination. (b) In the event of termination by DJ Pharma as a result of a material breach by Dura or Dura Bermuda, DJ Pharma shall have any and all remedies available at law or equity. -22- *Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed with the Secretary of the Commission without the Mark pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. (c) In the event of termination by Dura or Dura Bermuda as a result of a material breach by DJ Pharma prior to the expiration of the Licensing Term, Dura may at its option terminate the purchase and license rights set forth in Section 1 hereof with respect to the Products. In the event of termination by Dura or Dura Bermuda at any time as a result of material breach by DJ Pharma, Dura or Dura Bermuda shall in addition to the remedies set forth in this Section 6.4(c) have any and all remedies available at law or equity; Notwithstanding the foregoing in the event Dura terminates the purchase and license rights with respect to the Products following DJ Pharma's failure to cure a payment default within the 150 day cure period following such default * as of the * pursuant to Section 2 hereof * (x) the amount of * and (y) *. (d) Expiration or termination of this Agreement shall not relieve the parties of any obligation accruing prior to such expiration or termination. 7. REPRESENTATIONS, WARRANTIES AND COVENANTS 7.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF DURA WITH RESPECT TO THE CCA PRODUCTS AND THE RONDEC PRODUCTS. As of the date of this Agreement and as of the Second Closing, Dura hereby represents, warrants and covenants to DJ Pharma the following, all with respect to the CCA Products in the CCA Territory and the Rondec Products in the Rondec Territory (collectively, the "CCA/Rondec Products") only: (a) AUTHORITY. Dura has the necessary corporate power and authority to enter into and deliver this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby by Dura have been duly authorized by Dura. This Agreement constitutes the legal, valid and binding obligation of Dura, enforceable in accordance with its terms (except as such enforcement may be limited by applicable bankruptcy, insolvency, moratorium, or similar laws affecting the rights of creditors generally or by general principles of equity). Neither the execution, delivery or performance of this Agreement by Dura, nor the consummation of the transactions contemplated hereby nor compliance by Dura with the terms and provisions of this Agreement will result in a violation or breach of any term or provision of Dura's Certificate of Incorporation or By-laws, or of any statute, rule or regulation applicable to Dura, nor conflict with or constitute a default under any agreement to which Dura is a party or to which its assets are subject, or any instrument, judgment, decree, writ, or other restriction to which Dura is a party or by which its assets are bound. (b) TITLE TO ASSETS, LIENS AND ENCUMBRANCES. Except as set forth in Schedule 7.1(b) hereof, Dura has good title to the CCA/Rondec Products and the inventory of Rondec Products and CCA Products and any inventions, know-how, trade secrets, intellectual property rights and technology necessary to transfer, assign and deliver the Rondec Purchased Assets and CCA Purchased Assets and has the right to grant the rights in connection with the CCA/Rondec Products to DJ Pharma as set forth herein, free and clear of all security interests, liens, claims, restrictions, royalty obligations and encumbrances whatsoever other than any of the -23- *Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed with the Secretary of the Commission without the Mark pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. foregoing which will not interfere with DJ Pharma's rights to manufacture or have manufactured, distribute, offer for sale, market and sell the CCA/Rondec Products. Such rights licensed, assigned, transferred or delivered to DJ Pharma represent all of the rights which Dura owns or has with respect to the CCA/Rondec Products and constitute all of the rights necessary for DJ Pharma to market, distribute, offer for sale, promote and sell each of the CCA/Rondec Products (and manufacture the Rondec Products and CCA Products). Dura is the non-exclusive licensee of the Rondec Patent in the Rondec Territory and has exclusive rights to the U.S. trademarks RONDEC-Registered Trademark- and RONDEC-TR-Registered Trademark- for medicine and pharmaceutical preparations in the Rondec Territory. No other unrelated party has been granted a license or other permission to use the trademarks RONDEC-Registered Trademark- and RONDEC-TR-Registered Trademark- in the Rondec Territory for medicine and pharmaceutical preparations, and upon the Closing, with the exception of the supply and manufacture of the Rondec Products under the Abbott Supply Agreement, DJ Pharma will have the sole right to use the trademarks RONDEC-Registered Trademark- and RONDEC-TR-Registered Trademark- in the Rondec Territory for medicine and pharmaceutical preparations. Dura is the sole owner of the CCA Trademarks. No other party has been granted a license or other permission to use the CCA Trademarks, and upon the Closing, with the exception of the supply and manufacture of the CCA Products under the Dura Supply Agreement, DJ Pharma will have the sole right to use the CCA Trademarks. (c) CLAIMS; LITIGATION. Dura is not aware of any claim, suit, action, arbitration, governmental investigation or other proceeding, nor any order, decree or judgment pending or in effect, or threatened by, against or relating to the CCA/Rondec Products, the CCA Trademarks, the Rondec Patent or the trademark Rondec which if determined adversely would have an adverse effect on DJ Pharma's rights to manufacture or have manufactured, market, distribute, offer for sale and sell the CCA/Rondec Products. (d) COMPLIANCE WITH LAWS. Dura is currently in compliance with all laws, ordinances, treaties and governmental rules, orders and regulations applicable to it with respect to the CCA/Rondec Products, the CCA Trademarks and the trademarks RONDEC-Registered Trademark- and RONDEC-TR-Registered Trademark-. (e) INTELLECTUAL PROPERTY. Exhibit D hereof sets forth a true and correct list of all material patents, trademarks, service marks, trade names, copyrights and applications for registration and registrations thereof, owned or licensed by Dura, and used with respect to the CCA/Rondec Products (collectively, the "Intellectual Property"). Other than the Intellectual Property, to the best of Dura's knowledge, there are no patents, trademarks, service marks, trade names, copyrights, applications for registration or registrations thereof necessary for manufacture, marketing or sale of CCA Products or the Rondec Products as currently manufactured, marketed and sold by Dura. Dura has good and marketable title to, or other legal right to use, the Intellectual Property, free and clear of any license, royalty arrangement, lien, claim or encumbrance of any nature whatsoever other than any of the foregoing which will not interfere with DJ Pharma's rights to manufacture, distribute, offer for sale, market and sell the CCA/Rondec Products. (f) CONTRACTS. Schedule 7.1(f) sets forth a true and complete list of the entities with whom Dura has contracts as of the Closing relating to the CCA/Rondec Products, and copies of such contracts or relevant portions of contracts have been made or will be made available to DJ Pharma for inspection prior to the Closing. Such contracts constitute the only written contracts, arrangements, commitments and agreements, currently in force and used by -24- Dura with respect to the manufacture, marketing, distribution, offering for sale or sale of the Products in the applicable territories. Such contracts are valid and binding, enforceable by or against Dura in accordance with their respective terms and are in full force and effect. Neither Dura nor, to Dura's best knowledge, any other party thereto, is in breach of any provision of or in default under any term of any such contract, and there exists no condition or event which after lapse of time or notice (or both) would constitute any such breach or default or result in any right to accelerate or any loss of rights. (g) [Intentionally Omitted.] (h) COMPLIANCE WITH CONTRACT OBLIGATIONS. Dura is in compliance and shall at all times remain in compliance with any and all contract obligations with DJ Pharma, including without limitation, under this Agreement, the ongoing covenants and representations herein, any outstanding notes or contracts currently or hereinafter in effect and with other parties to the extent related to the subject matter hereof, including, without limitation, obligations under the Abbott Purchase Agreement or the Abbott Supply Agreement which are not expressly assumed by DJ Pharma. In the event of a breach of payment terms by Dura under the Abbott Purchase Agreement or the Abbott Supply Agreement which results in DJ Pharma's inability to acquire, market and sell the Rondec Products as contemplated herein, DJ Pharma shall have the right to cure such breach by making such payment and offsetting it against an equal amount of Net Royalty Payments for the Products not yet due by DJ Pharma to Dura or under the Subordinated Product Acquisition Notes. (i) ACCESS TO BOOKS AND RECORDS. Subsequent to the Second Closing (for the Rondec Products and CCA Products), each party agrees that they will grant to each other and each other's agents reasonable access during normal business hours upon reasonable notice to any books and records then in their possession or in the possession of their respective affiliates to the extent of information contained in such books or records that relates to Dura's operation of the Rondec Purchased Assets and the CCA Purchased Assets prior to the Second Closing, and is shown to be needed for tax, operations, regulatory or accounting purposes. 7.2 REPRESENTATIONS, WARRANTIES AND COVENANTS OF DURA BERMUDA WITH RESPECT TO THE KEFTAB PRODUCTS. As of the date of this Agreement and as of the Second Closing, Dura and Dura Bermuda hereby represent, warrant and covenant to DJ Pharma the following, all with respect to the Keftab Products in the Keftab Territory only: (a) AUTHORITY. Dura Bermuda has the necessary corporate power and authority to enter into and deliver this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby by Dura Bermuda have been duly authorized by Dura Bermuda. This Agreement constitutes the legal, valid and binding obligation of Dura Bermuda, enforceable in accordance with its terms (except as such enforcement may be limited by applicable bankruptcy, insolvency, moratorium, or similar laws affecting the rights of creditors generally or by general principles of equity). Neither the execution, delivery or performance of this Agreement by Dura Bermuda, nor the consummation of the transactions contemplated hereby nor compliance by Dura Bermuda with the terms and provisions of this Agreement will result in a violation or breach of any term or provision of Dura Bermuda's Certificate of Incorporation and Memorandum of Association of Company Limited -25- by Shares or Bye-laws, or of any statute, rule or regulation applicable to Dura Bermuda, nor conflict with or constitute a default under any agreement to which Dura Bermuda is a party or to which its assets are subject, or any instrument, judgment, decree, writ, or other restriction to which Dura Bermuda is a party or by which its assets are bound. (b) TITLE TO ASSETS, LIENS AND ENCUMBRANCES. Except as set forth in Schedule 7.2(b) hereof, Dura Bermuda has good title to the Keftab Products and any inventions, know-how, trade secrets, intellectual property rights and technology necessary to assign, transfer and deliver the Keftab Rights, and Dura Bermuda has the right to grant the rights to the Keftab Products to DJ Pharma as set forth herein, free and clear of all security interests, liens, claims, restrictions, royalty obligations and encumbrances whatsoever other than any of the foregoing which will not interfere with DJ Pharma's rights to manufacture or have manufactured, market, distribute, offer for sale and sell the Keftab Products. In connection with Dura's security interest with respect to the Keftab Products pursuant to the terms of the Dura Bermuda Security Agreement (as defined in Schedule 7.2(b) hereof), Dura hereby covenants that should Dura exercise its rights at any time during the Licensing Period with respect to its security interest in the Keftab Products under the Dura Bermuda Security Agreement, Dura shall assume all of Dura Bermuda's obligations to DJ Pharma with respect to the Keftab Products under this Agreement. Notwithstanding the foregoing, Dura hereby covenants that should the Keftab Rights be transferred to DJ Pharma pursant to Section 1.4 hereof, and if as of such time Dura has not exercised its rights under the Dura Bermuda Security Agreement with respect to the Keftab Products, Dura shall as of the Second Closing release its security interest under the Dura Bermuda Security Agreement with respect to the Keftab Products. Such rights licensed, assigned, delivered or transferred to DJ Pharma under this Agreement and the Assignment (at Second Closing) represent all of the rights which Dura Bermuda owns or has with respect to the Keftab Products and constitute all of the rights necessary for DJ Pharma to market, promote, distribute, offer for sale, and sell each of the Keftab Products. Dura Bermuda has the right to grant the rights to the Keftab Rights under the Assignment (by Second Closing) and to the Keftab Trademark and as set forth under the Licensing Agreement. (c) CLAIMS; LITIGATION. Neither Dura nor Dura Bermuda is aware of any claim, suit, action, arbitration, governmental investigation or other proceeding, nor any order, decree or judgment pending or in effect, or threatened by, against or relating to the Keftab Products or the Keftab Trademark in the Keftab Territory, which if determined adversely would have an adverse effect on DJ Pharma's rights to manufacture or have manufactured, market and sell the Keftab Products. (d) COMPLIANCE WITH LAWS. Dura Bermuda is currently in compliance with all material laws, ordinances, treaties and governmental rules, orders and regulations applicable to it with respect to the Keftab Products and the Keftab Trademark. (e) INTELLECTUAL PROPERTY. Exhibit D hereof sets forth a true and correct list of all material patents, trademarks, service marks, trade names, copyrights and applications for registration and registrations thereof, owned or licensed by Dura Bermuda subject to the terms of the License Agreement, and used with respect to the Keftab Products in the Keftab Territory (collectively, the "Keftab Intellectual Property"). Other than the Keftab Intellectual Property, to the best of Dura Bermuda's knowledge, there are no material patents, trademarks, service marks, trade names, copyrights, applications for registration or registrations thereof necessary for -26- manufacture, marketing or sale of the Keftab Products as currently manufactured, marketed and sold by Dura Bermuda. Dura Bermuda has good and marketable title to, or other legal right to use, the Keftab Intellectual Property, free and clear of any license, royalty arrangement, lien, claim or encumbrance of any nature whatsoever other than any of the foregoing which will not interfere with DJ Pharma's rights to manufacture, market, distribute, offer for sale and sell the Keftab Products. (f) CONTRACTS. Schedule 7.2(f) sets forth a true and complete list of the entities with whom Dura Bermuda has contracts as of Closing relating to the Keftab Products, and copies of such contracts or relevant portions of contracts have been made or will be made available to DJ Pharma for inspection prior to the Closing. Such contracts constitute the only written contracts, arrangements, commitments and agreements, currently in force and used by Dura Bermuda with respect to the manufacture, marketing, distribution, offering for sale, or sale of the Keftab Products in the Keftab Territory. Such contracts are valid and binding, enforceable by or against Dura Bermuda in accordance with their respective terms and are in full force and effect. Neither Dura Bermuda nor, to Dura Bermuda's best knowledge, any other party thereto, is in breach of any provision of or in default under any term of any such contract, and there exists no condition or event which after lapse of time or notice (or both) would constitute any such breach or default or result in any right to accelerate or any loss of rights. (g) INVENTORY. [Intentionally Omitted.] (h) COMPLIANCE WITH LICENSING AGREEMENT. Dura Bermuda shall comply from and after the Closing and through the Second Closing in all respects with the terms and conditions of the Licensing Agreement and the Manufacturing Agreement. In the event * (x) *, respectively, and which is *, results in * or (y) Dura or Dura Bermuda receive during the Licensing Period any * and are * as a result of a * pursuant to Section 2.1 hereof will be * (Net Sales of Rondec Products and CCA Products for the * contemplated by this Section 7.2(h) * pursuant to this Section 7.2(h) *. Any * will * for such period immediately prior to *. In addition, DJ Pharma's payment obligations to Dura or Dura Bermuda * with respect to the Products may be *, with such * applying during the Licensing Period * and upon termination of the Licensing Term * -27- *Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed with the Secretary of the Commission without the Mark pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. *. For purposes of applying the foregoing reduction only, * shall be recalculated as if the *. The foregoing adjustments shall not in any way impact or lessen any other obligations of DJ Pharma to Dura including, without limitation, continuing obligations under the Dura Supply Agreement *. Further upon any adjustments pursuant to this Section 7.2(h), the right, title and interest to the Keftab Products or Keftab Rights shall immediately vest in Dura or Dura Bermuda and DJ Pharma shall have no further right, title or interest with respect to such Keftab Products or Keftab Rights. In addition all documentation and materials related to the Keftab Products and Keftab Rights shall be immediately returned by DJ Pharma to Dura Bermuda. For purposes of this Section 7.2(h) " * " shall equal the * (i) the result of (a) * including the * (b) * including * (ii) * remaining in the Licensing Period which immediately follow * which includes the *; in each case after giving effect to any previous adjustment in *. (i) COMPLIANCE WITH DJ PHARMA CONTRACT OBLIGATIONS. Dura Bermuda is in compliance and shall at all times remain in compliance with any and all contract obligations with DJ Pharma, including without limitation, under this Agreement, the ongoing covenants and representations herein, any outstanding notes or contracts currently or hereinafter in effect. (j) ACCESS TO BOOKS AND RECORDS. Subsequent to the Second Closing, each party agrees that they will grant to each other and each other's agents reasonable access during normal business hours upon reasonable notice to any books and records then in their possession or in the possession of their respective affiliates to the extent of information contained in such books or records that related to Dura's or Dura Bermuda's operation of the Keftab Rights or the Keftab Products prior to the Second Closing, respectively and is shown to be needed for tax, operations, regulatory or accounting purposes. 8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF DJ PHARMA. As of the date of this Agreement and as of the Closing, DJ Pharma hereby represents, warrants and covenants to Dura as follows: 8.1 AUTHORITY. DJ Pharma has the necessary corporate power and authority to enter into and deliver this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby by DJ Pharma has been duly authorized by DJ Pharma. This Agreement constitutes the legal, valid and binding obligation of DJ Pharma, enforceable in accordance with its terms (except as such enforcement may be limited by applicable bankruptcy, insolvency, moratorium or similar laws affecting the rights of creditors generally or by general principles of equity). Neither the execution, delivery or performance of this Agreement by DJ Pharma, nor the consummation of the transactions contemplated hereby nor compliance by DJ Pharma with the terms and provisions of this Agreement will result in a -28- *Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed with the Secretary of the Commission without the Mark pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. violation or breach of any term or provision of DJ Pharma's Certificate of Incorporation or by-laws, or of any statute, rule or regulation applicable to DJ Pharma, nor conflict with or constitute a default under any agreement to which DJ Pharma is a party or to which its asserts are subject, or any instrument, judgment, decree, writ, or other restriction to which DJ Pharma is a party or by which its assets are bound. 8.2 COMPLIANCE WITH LAWS. DJ Pharma is in compliance with all governmental laws, rules and regulations applicable to its business and it shall at all times comply with all applicable laws regulating its activities under this Agreement. 8.3 ASSUMPTION OF LIABILITIES AND OBLIGATIONS; COMPLIANCE WITH DURA CONTRACT OBLIGATIONS. Except as set forth herein, DJ Pharma hereby expressly assumes all Assumed Liabilities (as defined in the Licensing Agreement) and any and all other liabilities and obligations relating to the Products, including without limitation all such liabilities and obligations with respect to the Products as set forth under the Abbott Purchase Agreement, the Abbott Supply Agreement, the Licensing Agreement and the Manufacturing Agreement (collectively, the "Product Agreements"). In this regard, DJ Pharma hereby assumes and agrees to bear and be responsible for and to perform and satisfy all responsibilities, duties (including, without limitation, compliance with all applicable laws and regulations), obligations, claims, Damages, liabilities, burdens and problems of any nature whatsoever (collectively, the "Obligations") associated directly or indirectly with DJ Pharma's ownership, Activities or other use of the Products, from and after the Closing, including, without limitation, all recalls, rebates, returns, reimbursements, chargebacks, minimum purchase requirements under the Manufacturing Agreement or Abbott Supply Agreement, all warranty claims and all product liability claims (without regard to the nature of the causes of action alleged or theories of recovery asserted) arising in connection with any of the Products sold or Keftab Rights exercised on or after the Closing, except for those Obligations, Activities or Damages with respect to which Dura is providing indemnification pursuant to the provisions of Section 4 of this Agreement. Notwithstanding the foregoing, DJ Pharma shall not be liable and does not assume (i) payment obligations under Sections 3 and 5 of the Licensing Agreement and Abbott Purchase Agreement, (ii) any obligations under the Product Agreements which do not relate to any of the Products, (iii) any obligations under the Product Agreements which accrued prior to October 1, 1998, or (iv) any obligations expressly assumed by Dura under the Dura Supply Agreement or required in order to fulfill its obligations as a facilitator of supplies pursuant to the terms of the Dura Supply Agreement. DJ Pharma is in compliance and shall at all times remain in compliance with any and all contract obligations, to the extent specified in this Section 8.3 under this Agreement, the Licensing Agreement, the Manufacturing Agreement, the Abbott Purchase Agreement, the Abbott Supply Agreement, the Dura Supply Agreement, and *. In the event of an event of * during such time as *, Dura or Dura Bermuda shall have all rights and remedies available at law or equity under the terms of *, but such *. 8.4 PROMOTIONAL AND MARKETING EFFORTS. DJ Pharma hereby covenants to use its commercially reasonable efforts to diligently and actively market and promote the Products -29- *Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed with the Secretary of the Commission without the Mark pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. during the Licensing Period and hereby agrees to establish and spend the following * sales and marketing budget in connection with the diligent promotion of such Products (the "Marketing Budget") during the Licensing Period: (i) *, the Marketing Budget must * (x) * for the respective period as set forth in Section 2.1 hereof * in the * calendar year and (y) * for the respective period as set forth in * hereof * (ii) From * the Marketing Budget must * (x) * in the * calendar year and (y) *. 9. NO IMPLIED WARRANTIES. EXCEPT AS EXPRESSLY PROVIDED IN SECTION 7 HEREOF, NEITHER DURA NOR DURA BERMUDA MAKE ANY REPRESENTATION OR WARRANTY AS TO THE CCA PRODUCTS, RONDEC PRODUCTS, THE KEFTAB PRODUCTS OR KEFTAB RIGHTS OR THE MANUFACTURING, MARKETING AND SALE OF SUCH PRODUCTS OR OTHER ACTIVITIES WITH RESPECT TO SUCH RIGHTS (COLLECTIVELY, THE "ACTIVITIES"), EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, BY STATUTE OR OTHERWISE, AND DURA AND DURA BERMUDA SPECIFICALLY DISCLAIM ANY AND ALL IMPLIED OR STATUTORY WARRANTIES. WITHOUT LIMITING THE FOREGOING, DJ PHARMA ACKNOWLEDGES THAT IT HAS NO AND IS NOT RELYING UPON AN IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE, OR UPON ANY REPRESENTATION OR WARRANTY WHATSOEVER AS TO THE PROSPECTS (FINANCIAL, REGULATORY OR OTHERWISE), OR THE VALIDITY OR LIKELIHOOD OF SUCCESS OF THE ACTIVITIES AFTER THE CLOSING OR THE SECOND CLOSING, AS APPLICABLE. 10. CONFIDENTIALITY 10.1 CONFIDENTIALITY. Each party (the "Receiving Party") recognizes that certain information of the other Party (the "Disclosing Party") and its affiliates (or other third party to whom the Disclosing Party has an obligation of confidentiality) disclosed to the Receiving Party in connection with this Agreement and the transactions contemplated herein, including without limitation Know-How, is of proprietary value and is to be considered highly confidential ("Confidential Information"). The Receiving Party and its respective affiliates agree not to disclose such Confidential Information to others, or use it for the benefit of others, except to or for those third parties permitted under the terms of this Agreement who reasonably require same for the purposes hereof and who are bound to such party by a like obligation as to confidentiality, without the express written permission of the other party. Notwithstanding the foregoing, DJ Pharma shall not have any such obligations of confidentiality with regard to any Rondec Purchased Assets or CCA Purchased Assets or Keftab Rights after the Closing or Second Closing which is not addressed in any agreements regarding such Rondec or CCA Purchased Assets or Keftab Rights, as applicable, nor shall the Receiving Party have any obligation of confidentiality with regard to information which: -30- *Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed with the Secretary of the Commission without the Mark pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. (a) can be demonstrated by written records to have been known to the Receiving Party at the time of receipt, with the exception of certain information transferred by Dura or Dura Bermuda to DJ Pharma upon the Second Closing which will be deemed and shall as of the Second Closing be treated as Confidential Information by Dura or Dura Bermuda pursuant to the terms of this Section 10; (b) was subsequently otherwise legally acquired by the Receiving Party from a third party having an independent right to disclose the information; (c) which now or later becomes publicly known without breach of this Agreement by the Receiving Party; (d) which is independently developed by employees of the Receiving Party without the aid, use or application of the Confidential Information; or (e) which is required by law, regulation, rule, act, or order of any governmental authority or agency, to be disclosed by the Receiving Party; PROVIDED, HOWEVER, that the Receiving Party shall make its best efforts to give the Disclosing Party sufficient advance notice to permit it to seek a protective order or other similar order with respect to such Confidential Information and thereafter discloses only the minimum Confidential Information required to be disclosed in order to comply. The Receiving Party's obligation of confidentiality shall be in force during the term of this Agreement and any extension hereof, and shall extend for a period of ten (10) years from the expiration or termination of this Agreement or any extension thereof. 10.2 RETURN OF INFORMATION. Upon the termination of this Agreement, DJ Pharma shall return to Dura all documents and unused promotional materials, including all copies, which DJ Pharma acquired from Dura or any of its related entities under this Agreement. 10.3 EQUITABLE RELIEF. Each Party acknowledges and agrees that breach of any of the terms of this Section 10 would cause irreparable harm and damage to the other and that such damage may not be ascertainable in money damages and that as a result thereof the non-breaching party would be entitled to seek equitable or injunctive relief restraining any breach or future violation of the terms contained herein by the breaching party without the necessity of proving actual damages. Such right to equitable relief is in addition to whatever remedies either party may be entitled to as a matter of law or equity, including money damages. 11. MISCELLANEOUS 11.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that DJ Pharma may not assign any of its rights, duties, or obligations hereunder without the prior written consent of Dura, which consent may be withheld in Dura's sole discretion. 11.2 NOTICES. All notices or other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand, prepaid telex, cable, telegram or facsimile and confirmed in writing, or mailed first class, postage -31- prepaid, by registered or certified mail, return receipt requested (mailed notices and notices sent by telex, cable or telegram shall be deemed to have been given on the date received) as follows: If to DURA: Dura Pharmaceuticals, Inc. 7475 Lusk Boulevard San Diego, CA 92121 Attention: Office of the General Counsel Facsimile: (619) 657-0981 with a copy to: Brobeck, Phleger & Harrison, LLP 550 West "C" Street, Suite 1300 San Diego, CA 92101-3532 Attention: Faye H. Russell, Esq. Facsimile: (619) 234-3848 If to DJ PHARMA: DJ Pharma, Inc. 12730 High Bluff Drive San Diego, CA 92130 Attention: James W. Newman, President Facsimile: (619) 509-8610 with a copy to: Pillsbury Madison & Sutro LLP 101 West Broadway, 18th Floor San Diego, CA 92101 Attention: David R. Snyder, Esq. Facsimile: (619) 236-1995 If to DURA BERMUDA: Dura (Bermuda) Trading Company LTD 102 St. James Court Flatts, Smiths FLO4, Bermuda Attention: Kevin Insley, President Facsimile: (441) 292-2224 11.3 GOVERNING LAW. This Agreement shall be governed and construed in accordance with the laws of the State of California excluding any choice of law rules which may direct the application of the law of another state. 11.4 CAPTIONS. All section titles or captions contained in this Agreement, in any Schedule referred to herein or in any Exhibit annexed hereto, and the table of contents, if any, to this Agreement are for convenience only, shall not be deemed a part of this Agreement and shall not affect the meaning or interpretation of this Agreement. 11.5 NO THIRD-PARTY RIGHTS. No provision of this Agreement shall be deemed or construed in any way to result in the creation of any rights or obligation in any other individual, group, entity, or organization not a party to this Agreement. 11.6 NO IMPLIED WAIVERS. No failure on the part of either party to exercise and no delay in exercising any right, power, remedy or privilege under this Agreement shall impair, -32- prejudice or constitute a waiver of any such right, power, remedy or privilege nor shall any such waiver or any single or partial exercise of any such right, power remedy or privilege preclude any other or further exercise thereof or the exercise of any other right, power, remedy or privilege. No waiver of either party of any default, right, power, remedy or privilege shall be effective unless in writing, nor shall any such waiver operate as a waiver of any other or the same default, right, power, remedy or privilege respectively on a future occasion. 11.7 RELATIONSHIP OF THE PARTIES. Nothing contained in this Agreement is intended or is to be construed to constitute DJ Pharma, Dura, Dura Bermuda (or any of their affiliates) as partners or joint venturers or either party as an employee or agent of the other. Neither party hereto shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of the other party or to bind the other party to any contract, agreement or undertaking with any other individual, entity, group or organization, and no conduct of the parties shall be deemed to infer such right. 11.8 FURTHER ASSURANCE. Each party hereby agrees to duly execute and deliver, or cause to be duly executed and delivered, such further instruments and do and cause to be done such further acts and things, including, without limitation, the filing of such additional assignments, agreements, documents and instruments, that may be necessary or as the other party hereto may at any time and from time to time reasonably request in connection with this Agreement or to carry out more effectively the provisions and purposes hereof or to better assure and confirm unto such other party its rights and remedies under, this Agreement. 11.9 SURVIVAL. The provisions of this Agreement shall survive the closings and continue in full force and effect in accordance with their terms. 11.10 AMENDMENTS AND MODIFICATIONS. No amendment, modification, termination or discharge of any provision of this Agreement, nor consent by DJ Pharma or Dura to any departure therefrom, shall in any event be effective unless the same shall be in writing specifically identifying this Agreement and the provision intended to be amended, modified, terminated or discharged and signed by DJ Pharma and Dura, and each amendment, modification, termination or discharge shall be effective only in the specific instance and for the specific purpose for which given. No provision of this Agreement shall be varied, contradicted or explained by any other agreement, course of dealing or performance or usage of trade or any other matter not set forth in an agreement in writing and signed by DJ Pharma, Dura and Dura Bermuda. 11.11 SEVERABILITY. If any provision hereof should be held invalid, illegal or unenforceable in any respect in any jurisdiction, then, to the fullest extent permitted by law, (a) all other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in order to carry out the intentions of the parties hereto as nearly as may be possible and (b) such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of such provision in any other jurisdiction. 11.12 CONSTRUCTION. Except as otherwise provided herein,, references to Articles, Sections, Schedules and Exhibits are to those contained in this Agreement. Any Schedules or Exhibits form an integral part of this Agreement and reference to this Agreement include references thereto. Unless the context otherwise requires, words importing the singular include -33- the plural and vice versa, words importing the masculine include the feminine, and words importing persons includes corporations. Headings used herein are for convenience only and shall not in any way affect the construction of, or be taken into consideration in interpreting, this Agreement. 11.13 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, and all of which counterparts, taken together, shall constitute one and the same instrument. 11.14 ENTIRE AGREEMENT. This Agreement, together with any agreements referenced herein, constitute the entire agreement of DJ Pharma, Dura, and Dura Bermuda with respect to the subject matter hereof. This Agreement supersedes all prior or contemporaneous understandings or agreements, whether written or oral, between DJ Pharma, Dura and Dura Bermuda with respect to such subject matter. 11.15 FORCE MAJEURE (a) EVENTS OF FORCE MAJEURE. Failure of either party to perform its obligations under this Agreement shall not subject such party to any liability to the other if such failure is caused by or results from causes beyond the reasonable control of the affected party such as but not limited to acts of God, fire, explosion, flood, drought, war, riot, sabotage, embargo, strikes or other labor trouble, or compliance with any law, order or regulation of any government entity acting with color of right which is promulgated after the date hereof. (b) CONSEQUENCES OF FORCE MAJEURE. Upon occurrence of an event of force majeure the party affected shall promptly notify the other in writing, setting forth the details of the occurrence, and make every attempt to resume the performance of its obligations as soon as practicable after the force majeure event ceases. 11.16 SALES TAX. Any and all sales or use taxes payable with respect to the Rondec and CCA Purchased Assets, the Keftab Rights, and the transactions contemplated under this Agreement (except for taxes levied thereon as income to Dura) shall be borne by DJ Pharma. Any and all transfer taxes payable as a result of the transaction shall be paid by Dura. 11.17 NO FINDERS FEE. Each party to this Agreement represents and warrants that no broker or finder has acted for it in connection with this Agreement or the transactions contemplated by this Agreement and that no broker or finder is entitled to any brokerage or finders fee or other commission in respect thereof based in any way on agreements, arrangements or understandings made by it. 11.18 PUBLICITY. Dura and DJ Pharma agree not to disclose the existence of this Agreement or use the name of the other in any publicity, press release, advertising or information which is disseminated to the general public without the other party's prior written approval, which approval shall not be unreasonably withheld, unless such disclosure shall be required by applicable law or regulatory agencies, in which case the other party shall have the opportunity to review and approve the form of disclosure (such approval not to be unreasonably withheld). -34- 11.19 ATTORNEYS' FEES. In the event it becomes necessary for either party (or any of its affiliates) to institute any action at law or in equity against the other party to enforce its rights under Section 11 hereof, the prevailing party shall be entitled to recover from the non-prevailing party reasonable attorneys' fees, court costs and expenses relating to such action. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -35- IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. DURA PHARMACEUTICALS, INC. DJ PHARMA, INC. By: /s/ Michael Borer By: /s/ James W. Newman ---------------------------------- ------------------------- Title: Senior Vice President and CFO Title: CEO and PRESIDENT ---------------------------------- ------------------------- DURA (BERMUDA) TRADING COMPANY LTD. By: /s/ Kevin Insley ------------------------- Title: President ------------------------- [SIGNATURE PAGE TO AMENDED AND RESTATED PURCHASE AND LICENSE AGREEMENT] EX-10.38 6 EXHIBIT 10.38 EXHIBIT 10.38 AMENDMENT NO. 1 TO AMENDED AND RESTATED PURCHASE AND LICENSE AGREEMENT This AMENDMENT NO. 1 TO AMENDED AND RESTATED PURCHASE AND LICENSE AGREEMENT (the "Amendment") is entered into as of December 30, 1999, by and among Dura Pharmaceuticals, Inc. ("Dura"), DJ Pharma, Inc. ("DJ Pharma") and Dura (Bermuda) Trading Company LTD. ("Dura Bermuda") (the latter solely with respect to the Keftab Products), and amends and restates certain provisions of that certain Amended and Restated Purchase and License Agreement entered into as of January 25, 1999, and effective as of October 1, 1998 (the "Agreement"), among Dura, DJ Pharma and Dura Bermuda (the latter solely with respect to the Keftab Products). Capitalized terms used but not defined herein shall have the meanings given to them in the Agreement. RECITALS A. Pursuant to the Agreement, DJ Pharma received certain rights to certain products from Dura and Dura Bermuda and assumed certain obligations to Dura and DJ Pharma in connection therewith. B. * between DJ Pharma, on the one hand, and Dura and Dura Bermuda, on the other hand, *. C. DJ Pharma, Dura and Dura Bermuda are entering into this Amendment to * and to * under the Agreement. NOW, THEREFORE, in consideration of the mutual agreements contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Dura, DJ Pharma and Dura Bermuda hereby agree as follows: 1. AMENDMENTS TO AGREEMENT. The Agreement is hereby amended and restated as follows: 1.1 SECTION 2.1. Section 2.1 of the Agreement is hereby amended and restated in its entirety to read as follows: "2.1 FOR PURCHASE AND LICENSING RIGHTS WITH RESPECT TO THE PRODUCTS. In consideration for the purchase and licensing rights as set forth in Section 1 hereof, DJ Pharma shall (i) * (as hereinafter defined) and (ii) pay to Dura with respect to the Rondec Products and CCA Products and to Dura Bermuda with respect to the Keftab Rights the following licensing fees during the Licensing Period: 1 *Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed with the Secretary of the Commission without the Mark pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. (a) for * (as hereinafter defined) * aggregate Net Sales (as hereinafter defined) of the Products during such *; (b) for * (as hereinafter defined) * during such *; (c) * during *; (d) * during *; and (e) * during * and the *. Notwithstanding the foregoing, * under Sections 2.1(a)-(e) hereof, after subtracting therefrom the costs of all Products sold by DJ Pharma during the respective calendar year as permitted by Section 2.2, * during the respective calendar year: (i) * (ii) * (iii) * and (iv) *. For example, (a) in the event that * and the *, but (b) * under Sections 2.1(e) and 2.2 *. Notwithstanding the foregoing, * (collectively, the " * ") in any way * 2 *Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed with the Secretary of the Commission without the Mark pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. *, including, without limitation, *. For purposes of this Agreement: (A) a "Contract Quarter" shall mean each quarter in the Contract Year commencing October 1, 1998 and ending September 30, 1999; (B) the first "Contract Year" shall mean the period of twelve (12) consecutive months commencing on October 1, 1998, and each subsequent Contract Year shall begin on the respective anniversary thereof; and (C) "Net Sales" shall mean (i) the gross amount of sales invoiced to third parties by DJ Pharma less the reasonable and customary accrual-basis deductions from such gross amounts including: (a) normal and customary trade and quantity discounts, allowances and credits actually allowed or paid; (b) credits or allowances given or made for return of previously sold products; (c) sales or excise taxes, as adjusted for rebates and refunds; and (d) chargeback payments and rebates granted to managed health care organizations, employer groups or to federal, state and local governments, their agencies, purchasers and reimbursers or to trade customers, including, but not limited to, wholesalers and chain and pharmacy buying groups, which are specifically identified to the sale of the Products by DJ Pharma. All amounts under this Section shall be determined from the books and records of DJ Pharma which shall be maintained in accordance with GAAP." 1.2 SECTION 2.8. A new Section 2.8 is hereby added to the Agreement as follows: "2.8 PRODUCT RETURNS. DJ Pharma shall process, and hereby assumes and agrees to be responsible for and to perform and satisfy all obligations associated with the processing of, all Products that were sold by Dura prior to October 1, 1998, and that are returned in compliance with Dura's returned goods policy for credit after the Closing. Dura shall reimburse DJ Pharma for certain of the costs it incurs in performing the foregoing obligations as follows: (a) CREDITS. Dura shall reimburse DJ Pharma for * of the credits DJ Pharma issues with respect to all of the Products that were sold by Dura prior to October 1, 1998, and that are returned in compliance with Dura's returned goods policy for credit after the Closing. (b) EXCHANGES. Dura shall reimburse DJ Pharma for * pursuant to the Dura Supply Agreement for all of the Products that are delivered by DJ Pharma in exchange for Products that were sold by Dura prior to October 1, 1998, and that are returned in compliance with Dura's returned goods policy for exchange after the 3 *Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed with the Secretary of the Commission without the Mark pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Closing * (calculated based on the wholesale list price for such Products at the time DJ Pharma ships the replacement Products), * at the time DJ Pharma ships the replacement Products, and * (calculated based on the wholesale list price for such Products at the time DJ Pharma ships the replacement Products), * at the time DJ Pharma ships the replacement Products. (c) CERTAIN OTHER COSTS. Dura shall reimburse DJ Pharma for * for the services rendered in connection with all of the Products that were sold by Dura prior to October 1, 1998, and that are returned in compliance with Dura's returned goods policy for credit or exchange after the Closing * time DJ Pharma ships the replacement Products for all of the Products that were sold by Dura prior to October 1, 1998, and that are returned in compliance with Dura's returned goods policy for exchange after the Closing. (d) NO OTHER OBLIGATIONS. Neither Dura nor Dura Bermuda shall have any obligation or liability to DJ Pharma in connection with DJ Pharma's performance of its obligations under this Section except as expressly set forth in subsections (a) - (c) above, including, without limitation, any obligation to reimburse DJ Pharma for any of the internal or indirect costs it may incur in performing its obligations under this Section. (e) DJ PHARMA COOPERATION. In addition to maintaining accurate books and accounts of record in sufficient detail to permit Dura and Dura Bermuda to verify all payments that they may be required to make pursuant to this Section as required by Section 2.4 above, DJ Pharma shall also cooperate with Dura and Dura Bermuda as reasonably requested *. 2. ACKNOWLEDGMENTS. 2.1 ACKNOWLEDGMENT BY DJ PHARMA. DJ Pharma hereby acknowledges and agrees that as of the date of this Amendment it does not know of, nor does it have any intent to assert now or at any time in the future, any claims or causes of 4 *Certain confidential portions of this Exhibit were omitted by means of marking such portions with an asterisk (the "Mark"). This Exhibit has been filed with the Secretary of the Commission without the Mark pursuant to the Company's application requesting confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. action against Dura, Dura Bermuda or any of their directors, officers, employees, agents, stockholders, partners, attorneys, assignees, parents or subsidiaries, individually or collectively, for any breach or other failure to perform any obligation owing to DJ Pharma, whether legal, equitable, statutory or otherwise, including without limitation any and all obligations owing under the Agreement and all related agreements. 2.2 ACKNOWLEDGMENT BY DURA AND DURA BERMUDA. Dura and Dura Bermuda each hereby acknowledges and agrees that as of the date of this Amendment it does not know of, nor does it have any intent to assert now or at any time in the future, any claims or causes of action against DJ Pharma or any of its directors, officers, employees, agents, stockholders, partners, attorneys, assignees, parents or subsidiaries, individually or collectively, for any breach or other failure to perform any obligation owing to Dura or Dura Bermuda, whether legal, equitable, statutory or otherwise, including without limitation any and all obligations owing under the Agreement and all related agreements. 3. MISCELLANEOUS. 3.1 ENTIRE AGREEMENT; CONFLICTS. This Amendment constitutes the entire agreement among Dura, DJ Pharma and Dura Bermuda with respect to the amendment to the Agreement set forth herein. This Amendment supersedes all prior or contemporaneous understanding or agreements, whether written or oral, between Dura, DJ Pharma and Dura Bermuda with respect to such amendment. In the event of any conflict between the terms of this Amendment and the terms of the Agreement, the terms of this Amendment shall govern and control. 3.2 GOVERNING LAW. This Amendment shall be governed and construed in accordance with the laws of the State of California excluding any choice of law rules which may direct the application of the law of another state. 3.3 CAPTIONS. All section titles or captions contained in this Amendment are for convenience only, shall not be deemed a part of this Amendment and shall not affect the meaning or interpretation of this Amendment. 3.4 NO THIRD PARTY RIGHTS. No provision of this Amendment shall be deemed or construed in any way to result in the creation of any rights or obligation in any other individual, group, entity or organization not a party to this Amendment. 3.5 NO IMPLIED WAIVERS. No failure on the party of any party to exercise and no delay in exercising any right, power, remedy or privilege under this Amendment shall impair, prejudice or constitute a waiver of any such right, power, remedy or privilege, nor shall any such waiver or any single or partial exercise of any such right, power, remedy or privilege preclude any other or further exercise thereof or the exercise of any other right, power, remedy or privilege. No waiver by any party of any default, right, power, remedy or privilege shall be effective unless in writing, nor 5 shall any such waiver operate as a waiver of any other or the same default, right, power, remedy or privilege respectively on a future occasion. 3.6 AMENDMENTS AND MODIFICATIONS. No amendment, modification, termination or discharge of any provision of this Amendment, nor consent by Dura, DJ Pharma or Dura Bermuda to any departure therefrom, shall in any event be effective unless the same shall be in writing specifically identifying this Amendment and the provision intended to be amended, modified, terminated or discharged and signed by Dura, DJ Pharma and Dura Bermuda, and each amendment, modification, termination or discharge shall be effective only in the specific instance and for the specific purpose for which given. No provision of this Amendment shall be varied, contradicted or explained by any other agreement, course of dealing or performance or usage of trade or any other matter not set forth in an agreement in writing and signed by Dura, DJ Pharma and Dura Bermuda. 3.7 SEVERABILITY. If any provision of this Amendment should be held to be invalid, illegal or unenforceable in any respect in any jurisdiction, then, to the fullest extent permitted by law, (a) all other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in order to carry out the intentions of the parties hereto as nearly as may be possible and (b) such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of such provision in any other jurisdiction. 3.8 COUNTERPARTS. This Amendment may be executed in any number of counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, and all of which counterparts, taken together, shall constitute one and the same instrument. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 6 IN WITNESS WHEREOF, Dura, DJ Pharma and Dura Bermuda have each caused this Amendment to be executed by their duly authorized representatives as of the date first written above. DURA PHARMACEUTICALS, INC. By: /s/ Erle Mast ----------------------- Its: Vice President Finance ----------------------- DURA (BERMUDA) TRADING COMPANY LTD. By: /s/ Kevin Insley ----------------------- Its: President ----------------------- DJ PHARMA, INC. By: /s/ Jerry E. Canning ----------------------- Its: Vice President, Finance ----------------------- [SIGNATURE PAGE TO AMENDMENT NO. 1 TO AMENDED AND RESTATED PURCHASE AND LICENSE AGREEMENT] 7 EX-10.39 7 EXHIBIT 10.39 Exhibit 10.39 DURA PHARMACEUTICALS, INC. BOARD OF DIRECTORS DEFERRED COMPENSATION PLAN ARTICLE I PURPOSE This Deferred Compensation Plan is designed to provide members of the Board of Directors at Dura Pharmaceuticals, Inc. (the "Company") who are not employees of the Company an opportunity to defer certain compensation received by them from the Company in accordance with the terms and conditions set forth herein. This Plan shall be effective January 1, 2000. In order for the Plan to accomplish its objective, it must meet certain requirements to insure that Eligible Directors are not taxed on their deferred compensation until paid. If the Plan is found not to comply with the requirements for income tax deferral, the Plan will be "unwound" and all deferred amounts will be paid to the Participants in accordance with their interests under the Plan. This will cause the recipients to lose the benefit of the deferral of taxable income and to recognize taxable income. ARTICLE II DEFINITIONS In this Plan, the following terms have the meanings indicated below: 2.01 "ACCOUNT" means amounts credited to a Participant under Article III of the Plan, as adjusted for any earnings and losses thereon under Article IV of the Plan and distributions under Article VI of the Plan. To the extent it considers necessary or appropriate, the Committee or its delegate shall maintain a separate sub-account for each type of deferral under the Plan or shall otherwise provide a means for determining that portion of an Account attributable to each type. 2.02 "BENEFICIARY" means the person or persons, natural or otherwise, designated in writing, to receive a Participant's vested Account if the Participant dies before distribution of his or her entire vested Account. A Participant may designate one or more primary Beneficiaries and one or more secondary Beneficiaries. A Participant's Beneficiary designation will be made in writing pursuant to such procedures as the Committee may establish and delivered to the Committee before the Participant's death. The Participant may revoke or change this designation at any time before his or her death by following such procedures as the Committee will establish. If the Committee has not received a Participant's Beneficiary designation before the Participant's death or if the Participant does not otherwise have an effective Beneficiary designation on file when he or she dies, the Participant's vested Account will be distributed to the Participant's estate. 2.03 "BOARD" means the board of directors of Dura Pharmaceuticals, Inc. 2.04 "CASH SUB-ACCOUNT" means amounts credited to a Participant's Account under Article III that shall earn interest in accordance with Article IV. 1. 2.05 "COMPENSATION" means the annual retainer, board meeting fees, committee meeting fees and, if applicable, any other cash compensation received by a Participant from the Company during the Plan Year. 2.06 "COMPENSATION DEFERRAL" means a Participant's deferral of all or any portion of his or her Compensation pursuant to Article III. 2.07 "CESSATION OF SERVICE" means cessation of service as a non-employee Director of the Company, by reason other than death. 2.08 "CODE" means the Internal Revenue Code of 1986, as amended. 2.09 "COMMITTEE" means the Dura Pharmaceuticals, Inc. Board of Directors Deferred Compensation Plan Committee, as constituted from time to time. The Committee has full discretionary authority to administer and interpret the Plan, to determine eligibility for Plan benefits, to select employees for Plan participation, and to correct errors. The Committee may delegate its duties and responsibilities and, unless the Committee expressly provides to the contrary, any such delegation will carry with it the Committee's full discretionary authority to accomplish the delegation. Decisions of the Committee and its delegate will be final and binding on all persons. 2.10 "COMPANY" means Dura Pharmaceuticals, Inc. 2.11 "COMMON STOCK UNIT SUB-ACCOUNT" means amounts credited to a Participant's Account under Article III that are converted to units whose value tracks changes in the Fair Market Value of the common stock of Dura Pharmaceuticals, Inc. 2.12 "ELIGIBLE DIRECTOR" means a non-employee Director of the Company. 2.13 FAIR MARKET VALUE" means the closing market price per share of the Company's common stock as reported on the NASDAQ Stock Market on the preceding trading day. 2.14 "PARTICIPANT" means a current or former Eligible Director who retains an Account. 2.15 "PLAN" means this Dura Pharmaceuticals, Inc. Board of Directors Deferred Compensation Plan, as amended from time to time. 2.16 "PLAN YEAR" means the calendar year, beginning with the calendar year 2000. ARTICLE III COMPENSATION DEFERRALS 3.01 COMPENSATION DEFERRALS. (a) ELECTIONS. In order to be eligible for Compensation Deferrals for a Plan Year, an Eligible Director must make an election to make Compensation Deferrals for such Plan Year. Such election generally must be made by an Eligible Director and received by the Company before the calendar year in which the Compensation is earned. However, if an individual first becomes an Eligible Director during a Plan Year, an Eligible Director may elect, within thirty (30) days after he or she is first notified that he or she is eligible to participate in the Plan, to elect Compensation Deferrals with respect to Compensation for services performed after the 2. election during such Plan Year. Elections will remain in effect for one Plan Year or, if the Committee so permits, all subsequent Plan Years during which the individual remains an Eligible Director. Such election may be revoked, but any revocation cannot be made effective before the first day of the Plan Year beginning after the date the revocation is filed. (b) LATE ELECTION. If an Eligible Director does not make a timely election for a Plan Year, no Compensation Deferrals will be made under the Plan on behalf of that Eligible Director with regard to that election for that Plan Year. (c) AMOUNT. An Eligible Director may elect to defer receipt of any whole percentage or whole dollar amount of his or her Compensation. (d) CREDITING. Compensation Deferrals will be credited to Eligible Directors' Accounts as of the last day of the calendar quarter in which such Compensation would otherwise have been paid. ARTICLE IV EARNINGS ON COMPENSATION DEFERRALS 4.01 EARNINGS METHODS. An Eligible Director must irrevocably elect at the time that he or she elects Compensation Deferrals whether those Compensation Deferrals will be credited to his or her Cash Sub-Account or Common Stock Unit Sub-Account. Amounts credited to either Sub-Account will remain in such Sub-Account until distributed to the Eligible Director or his or her Beneficiary pursuant to Article VI. No transfers will be made between Sub-Accounts. 4.02 CASH SUB-ACCOUNT. Compensation Deferrals directed by a Participant to his or her Cash Sub-Account shall earn interest at the rate of prime plus one percent, compounded quarterly. The prime interest rate shall be determined as of the first day of each calendar quarter as quoted in the Wall Street Journal. 4.03 COMMON STOCK UNIT SUB-ACCOUNT. Compensation Deferrals directed by a Participant to his or her Common Stock Unit Sub-Account shall be converted to units as of the effective date of each deferral. The number of units credited to the Common Stock Unit Sub-Account shall be determined by dividing the amount of the Compensation Deferral by the Fair Market Value of the Company's common stock as of the effective date of the deferral. The number of units credited to a Participant's Common Stock Sub-Account will change only by subsequent deferrals into or distributions from this Sub-Account. Units credited to a Participant's Common Stock Unit Sub-Account shall be converted to an equal number of shares of the Company's common stock upon distribution to the Participant in accordance with Article VI. ARTICLE V VESTING Each Participant shall at all times have a fully-vested and non-forfeitable right to his or her Account. 3. ARTICLE VI DISTRIBUTIONS 6.01 DISTRIBUTION OF BENEFITS. Eligible Directors must elect the manner in which their Accounts will be paid out by following the procedures described below and by satisfying such additional requirements as the Committee may determine. (a) ELECTIONS. When an Eligible Director first confirms his or her initial participation in the Plan the Eligible Director must elect, in writing, which of the distribution options described below will govern payment of the Eligible Director's Account. (b) TIMING. A Participant may elect to have his or her Account distributed, based on the Participant's election under (a) above, within the 30 to 60 day period following one of the following distribution events: (i) the date of the Participant's Cessation of Service, (ii) the date of the Participant's death, (iii) the date, if any, specified by the Participant in his or her election or (iv) the earliest of any (i), (ii) or (iii) above elected by the Participant. Under option (iii) above, the date specified must be at least twelve (12) months from the date of initial election to defer and in no event later than the fifth (5th) anniversary of Participant's Cessation of Service. (c) FORM. A Participant's Account will be distributed, based on the Participant's election under (a) above, in one of the following forms: (i) a lump sum, (ii) a series of annual installments, not in excess of five (5) or (iii) a distribution schedule specified by the Participant and approved by the Committee. The amount of each installment will be the amount, if any, specified by the Participant or the remaining balance of the Participant's Account divided by the number of installments remaining (including the installment to be made). Amounts credited to a Participant's Cash Sub-Account reflecting Compensation Deferrals (including earnings thereon) shall be distributed in cash. Units credited to a Participant's Common Stock Unit Sub-Account will be paid in registered shares of the Company's common stock. For purposes of distribution, each unit shall be equal to one share of common stock. (d) SUBSEQUENT ELECTIONS. A Participant may change a distribution election with respect to his or her Account by submitting the change to the Committee, in writing, at least twelve (12) months before the Participant was originally to receive such distribution. The subsequent election will be valid only if the distribution does in fact occur more than twelve (12) months after the date of such subsequent election. (e) DEFAULT. If, upon a Participant's Cessation of Service, the Committee does not have a proper distribution election on file for that Participant, that Participant's Account will be distributed to the Participant in one lump sum within the 30 to 60 day period after the Participant's Cessation of Service. 6.02 DEATH. If a Participant dies with an amount in his or her Account, whether or not the Participant was receiving payouts from that Account at the time of his or her death, the Participant's Beneficiary will receive that Participant's Account, in accordance with the time and form of distribution set forth in (b) and (c) above. 6.03 ACCELERATED DISTRIBUTIONS. Pursuant to the following restrictions, a Participant may accelerate the timing and form of distribution: 4. (a) HARDSHIP WITHDRAWAL. If a Participant has an immediate and heavy financial need and has no other resources reasonably available to meet this need, Participant may request a hardship withdrawal. An immediate and heavy financial means an unanticipated emergency caused by events beyond the control of the Participant that would result in a severe financial hardship to the Participant if withdrawal were not permitted. The total hardship withdrawal must be approved by the Committee, and shall be limited to the amount necessary to meet the financial need, and in no event may such amount exceed the Participant's Account. (b) FORFEITURE. Absent a demonstration of immediate and heavy financial need described above in paragraph (a), a Participant may elect to receive ninety percent (90%) of his or her entire Account in an early distribution at any time upon thirty (30) days written request, in which case the remaining ten percent (10%) of the Participant's entire Account shall be permanently forfeited. A Participant electing to receive a forfeiture distribution may not again participate in the Plan until the Plan Year that begins at least twelve (12) months following the end of the Plan Year in which such distribution occurred. ARTICLE VII AMENDMENT OR TERMINATION OF PLAN 7.01 AMENDMENT OF PLAN. The Company shall have the right to amend the Plan, at any time from time to time, in whole or in part. Any amendment must be made in writing; no oral amendment will be effective. No amendment may, without the consent of an affected Participant (or, if the Participant is deceased, the Participant's Beneficiary), adversely affect the Participant's or the Beneficiary's rights and obligations under the Plan with respect to amounts already credited to a Participant's Account. The Company shall notify each Participant in writing of any Plan amendment. 7.02 TERMINATION. Although the Company has established this Plan with the intention and expectation to maintain the Plan indefinitely, the Company may terminate or discontinue the Plan in whole or in part at any time without any liability for such termination or discontinuance. Upon Plan termination, all Compensation Deferrals shall cease. The Company shall retain each Participant's Compensation Deferrals (and earnings and losses thereon) until distribution of benefits commences under Article VI. Notwithstanding the foregoing, if the Plan is terminated, the Company retains the right to determine that all Accounts will be paid out as soon as practicable thereafter in single sum distributions. ARTICLE VIII MISCELLANEOUS 8.01 LIMITATION OF RIGHTS. Participation in this Plan does not give any individual the right to be retained in the service of the Company or of any related entity or to continue to serve as a member of the Board. 8.02 CLAIMS PROCEDURE. If a Participant or Beneficiary ("Claimant") believes that he or she is entitled to a greater benefit under the Plan, the Claimant may submit a signed, written application to the Committee within 90 days of having been denied such a greater benefit. The Claimant will generally be notified of the approval or denial of this application within 90 days of the date that the Committee receives the application. If the claim is denied, the notification will state specific reasons for the denial and the Claimant will have 60 days to file a signed, written request for a review of the denial with the Committee. This request will include the reasons for 5. requesting a review, facts supporting the request and any other relevant comments. The Committee, operating pursuant to its discretionary authority to administer and interpret the Plan and to determine eligibility for benefits under the terms of the Plan, will generally make a final, written determination of the Claimant's eligibility for benefits within 60 days of receipt of the request for review. 8.03 INDEMNIFICATION. The Company will indemnify and hold harmless the Directors, the members of the Committee, and employees of the Company who may be deemed fiduciaries of the Plan, from and against any and all liabilities, claims, costs and expenses, including attorneys' fees, arising out of an alleged breach in the performance of their fiduciary duties under the Plan, other than such liabilities, claims, costs and expenses as may result from the gross negligence or willful misconduct of such persons. The Company shall have the right, but not the obligation, to conduct the defense of such persons in any proceeding to which this Section applies. 8.04 ASSIGNMENT. To the fullest extent permitted by law, benefits under the Plan and rights thereto are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of a Participant or a Beneficiary. 8.05 INABILITY TO LOCATE RECIPIENT. If a benefit under the Plan remains unpaid for two years from the date it becomes payable, solely by reason of the inability of the Committee to locate the Participant or Beneficiary entitled to the payment, the benefit shall be treated as forfeited. Any amount forfeited in this manner shall be restored without interest upon presentation of an authenticated written claim by the person entitled to the benefit. 8.06 APPLICABLE LAW. To the extent not governed by Federal law, the Plan is governed by the laws of the State of California. If any provision of the Plan is held to be invalid or unenforceable, the remaining provisions of the Plan will continue to be fully effective. 8.07 NO FUNDING. The Plan constitutes a mere promise by the Company to make payments in the future in accordance with the terms of the Plan. Participants and Beneficiaries have the status of general unsecured creditors of the Company. Plan benefits will be paid from the general assets of the Company and nothing in the Plan will be construed to give any Participant or any other person rights to any specific assets of the Company. In all events, it is the intention of the Company and all Participants that the Plan be treated as unfunded for tax purposes. 6. EX-10.40 8 EXHIBIT 10.40 Exhibit 10.40 EXECUTIVE CHANGE OF CONTROL SEVERANCE AGREEMENT THIS EXECUTIVE CHANGE OF CONTROL SEVERANCE AGREEMENT dated as of January 1, 2000 by and between Dura Pharmaceuticals, Inc., (the "Company"), and _____________ ("Executive"); W I T N E S S E T H: WHEREAS, the Company desires to create a greater incentive for Executive to remain in the employ of the Company, particularly in the event of any possible change or threatened change of control of the Company, NOW, THEREFORE, in partial consideration of Executive's past and future services to the Company and the mutual covenants contained herein, the parties hereto hereby agree as follows: 1. TERMINATION FOLLOWING A CHANGE OF CONTROL. (a) QUALIFYING TERMINATION. Executive shall be entitled to the compensation and benefits listed in Paragraph 1(b), in addition to compensation and benefits to which Executive would otherwise be entitled as of the date of termination, if Executive's employment with the Company is terminated either (i) by the Company for any reason other than for Cause or (ii) by Executive for Good Reason, in each case within two (2) years following the occurrence of any Change of Control or successive Change of Control that occurs during the Period of Coverage (in each case a "Qualified Termination") and Executive properly executes, and does not revoke or attempt to revoke, a release of claims against the Company, its affiliates and their employees and agents in the form attached as EXHIBIT A. (b) COMPENSATION AND BENEFITS. (i) LUMP SUM PAYMENT OF SALARY AND BONUS. Within ten (ten) business days after a Qualified Termination (or, if later, the last day of any period during which the release referred to in Paragraph 3 may be revoked by Executive), the Company shall make a lump sum cash payment to Executive, subject to any mandatory tax withholding, equal to ____ times the sum of Executive's Base Salary and Executive's Average Annual Bonus. (ii) WELFARE BENEFIT COVERAGE. The Company will, at normal employee rates, provide Executive and, to the extent available before the Qualified Termination, Executive's eligible dependents with coverage under the Company's medical/dental plan, life insurance and accident plan and disability plan until the earlier of (A) ___________ months after the date of Executive's Qualified Termination or (B) the first date that Executive is covered under another employer's program which provides substantially the same level of benefit coverage without exclusion for pre-existing conditions. After this period of coverage, Executive (and, if 1. applicable, Executive's eligible dependents) may elect to continue coverage under the Company's group medical/dental plan at Executive's own expense in accordance with the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") and, for purposes of determining the maximum period of COBRA coverage, such maximum period will begin immediately following the end of Company-subsidized coverage. (iii) ACCELERATION OF STOCK OPTIONS. Each outstanding Company stock option which Executive holds at the time of a Qualified Termination, to the extent not otherwise exercisable for all the shares of Company common stock subject to that stock option, will immediately become exercisable for all those option shares and may be exercised for any or all of those shares as fully vested shares. (iv) ACCELERATION OF RESTRICTED STOCK. All contractual restrictions and repurchase rights shall immediately lapse with respect to any shares of Company restricted stock held by Executive at the time of a Qualified Termination. (v) DEFERRED COMPENSATION PLAN. Solely for purposes of determining the commencement date for the payment of any deferred compensation to which Executive may be entitled under a Company non-qualified deferred compensation plan, Executive's employment with the Company will be deemed to continue for a period of ____ months after a Qualifying Termination. However, no portion of the payments Executive is entitled to receive under Section 1 of this Agreement will be eligible for deferral under such plan. (vi) CASH-OUT OF AFFILIATE STOCK OPTIONS. Each outstanding option granted to Executive on stock of Spiros Development Corporation II, Inc. and any similar outstanding option granted to Executive on securities of an affiliate of the Company shall be cancelled as of the date of Executive's Qualified Termination. With respect to each such option, whether or not vested, Executive shall be entitled to an immediate cash payment equal to the excess, if any, of the aggregate Fair Market Value (as defined below) of the securities subject to such option and the aggregated exercise price of such option. (vii) EXCESS TAX GROSS-UP PAYMENT. If any compensation payable hereunder, either alone or when aggregated with other compensation payable to Executive, would constitute a parachute payment that would subject Executive to an excise tax under Section 4999 of the Internal Revenue Code, Executive shall be entitled to receive an additional lump sum cash payment, subject to mandatory tax withholding, which, when added to all compensation payable to Executive that constitutes a parachute payment, provides Executive with the same after tax-compensation that he would have received from such parachute payments had none of such compensation constituted a parachute payment. The procedures for making such payment are set forth in Section 2 hereof. (viii) JOB SEARCH ASSISTANCE. The Company will, at its sole expense, provide Executive with individual outplacement counseling for up to twelve (12) months by a provider selected by the Company at levels customary for positions held by Executive. (ix) LIMITATION ON ACCELERATION. Notwithstanding the above, if it is reasonably determined by the Company's Board of Directors, upon consultation with Company management 2. and the Company's independent auditors, that the acceleration of vesting of stock options or restricted stock or the acceleration and cash-out of affiliate options provided under Paragraph 1(b)(iii), (iv) or (vi) above upon a Change in Control (to the extent that those Paragraphs provide for acceleration or cash-out that would not otherwise occur under the terms of the instruments evidencing such options or restricted stock) would preclude accounting for any proposed business combination of the Company as a pooling of interests, and the Board of Directors otherwise desires to approve such a proposed business transaction which requires as a condition to the closing of such transaction that it be accounted for as a pooling of interests, then, solely to the extent necessary to permit such accounting, such acceleration or cash-out shall not occur. The previous sentence shall not limit any acceleration of vesting or cash-out of any option or restricted stock that would occur, in absence of Paragraphs 1(b)(iii) (iv) and (vi) above, under the terms of the instruments underlying such option or restricted stock. The compensation and benefits payable hereunder shall not be reduced or offset by any amounts that Executive earns or could earn from any other sources following Executive's Qualified Termination. However, except to the extent the Company expressly agrees otherwise in writing, if the Company becomes obligated to pay Executive any severance pay or severance benefits (excluding any amounts deemed to be received by Executive on account of the forgiveness of any loan due by Executive, if applicable) under a separate employment or severance agreement or arrangement, the benefits payable hereunder shall be reduced by the amount of benefits payable under such other agreement or arrangement. (c) TERMINATIONS BY REASON OF SUBSEQUENT TRANSACTIONS. Notwithstanding the foregoing, if an otherwise Qualifying Termination occurs by reason of the sale of a subsidiary of the Company or all or a portion or the assets or business of the Company or one of its subsidiaries and Executive is offered a Comparable Position (as defined below) with the purchaser or the parent of the purchaser or the sold subsidiary, then Executive shall not be entitled to any benefits under this Paragraph 1, whether or not Executive accepts such position. However, if Executive accepts such position and, within two (2) years following the Change of Control, Executive's employment is involuntarily terminated without Cause or by Executive for Good Reason, Executive shall be entitled to the benefits under Paragraph 1(b), less any severance benefits (excluding any amounts deemed to be received by Executive on account of the forgiveness of any loan due by Executive, if applicable) or similar benefits payable by the entity from which his or her employment is terminated. 2. EXCISE TAX GROSS-UP PROCEDURES. The amount of any such Tax Gross-Up to which Executive becomes entitled under Paragraph 1(b)(vii), will be determined pursuant to the following: X = Y divided by (1 - (A + B + C)), where X is the total dollar amount of the Tax Gross-Up payable to Executive; Y is the total Excise Tax imposed on Executive; 3. A is the Excise Tax rate in effect at the time; B is the highest combined marginal federal income and applicable state income tax rate in effect for Executive, after taking into account the deductibility of state income taxes against federal income taxes to the extent allowable, for the calendar year in which the Tax Gross-Up is paid; and C is the applicable Hospital Insurance (Medicare) Tax Rate in effect for Executive for the calendar year in which the Tax Gross-Up is paid; provided if there is a change in the tax laws after the date hereof that would render the amount determined above insufficient to fully reimburse Executive on an after-tax basis for the amount of any Excise Tax, Executive shall be entitled to such additional amount as may be necessary to provide him with such reimbursement. Within ninety (90) days after a determination is made by the Internal Revenue Service or Executive's tax advisor that an item of compensation or benefit payable hereunder constitutes a parachute payment under Code Section 280G for which Executive is liable for an Excise Tax, Executive shall identify the nature of the payment to the Company and submit to the Company the calculation of the Excise Tax attributable to that payment and the Tax Gross-Up to which Executive is entitled with respect to such tax liability. The Company will pay such Tax Gross-Up to Executive (net of all applicable withholding taxes, including any taxes required to be withheld under Code Section 4999) within ten (10) business days after Executive's submission of the calculation of such Excise Tax and the resulting Tax Gross-Up, provided such calculations represent a reasonable interpretation of the applicable law and regulations. In the event that Executive's actual Excise Tax liability is determined by a Final Determination to be greater than the Excise Tax liability previously taken into account for purposes of the Tax Gross-Up paid to Executive pursuant to this Section 2, then within ninety (90) days following the Final Determination, Executive shall submit to the Company a new Excise Tax calculation based upon the Final Determination. Within ten (10) business days after receipt of such calculation, the Company shall pay Executive the additional Tax Gross-Up attributable to such excess Excise Tax liability. In the event that Executive's actual Excise Tax liability is determined by a Final Determination to be less than the Excise Tax liability previously taken into account for purposes of the Tax Gross-Up paid to Executive pursuant to this Section 2, then Executive shall refund to the Company, promptly upon receipt, any federal or state tax refund attributable to the Excise Tax overpayment. For purposes of this Paragraph 2, a "Final Determination" means an audit adjustment by the Internal Revenue Service that is either (i) agreed to by both Executive (or his estate) and the Company (such agreement by the Company to be not unreasonably withheld) or 4. (ii) sustained by a court of competent jurisdiction in a decision with which Executive and the Company concur (such concurrence by the Company to be not unreasonably withheld) or with respect to which the period within which an appeal may be filed has lapsed without a notice of appeal being filed. 3. FAILURE TO EXECUTE A RELEASE. All compensation and benefits under Paragraph 1 above are in consideration for Executive's execution of a release of claims against the Company, its affiliates and their employees and agents in the form attached as EXHIBIT A hereto, which release Executive does not subsequently revoke or attempt to revoke. If Executive doesn't properly execute such a release or if Executive attempts to revoke such release, Executive will not be entitled to any of the benefits provided under Paragraph 1. 4. DEFINITIONS. (a) AVERAGE ANNUAL BONUS. "Average Annual Bonus" means, at any time, the greatest of (i) the average of the annual bonuses paid to Executive in each of the two (2) years prior to the Change of Control, (ii) the average of the annual bonuses paid to Executive in each of the two (2) years prior to the Qualifying Termination or (iii) in the event Executive is entitled to receive an annual bonus under a written agreement for the year during which the Qualifying Termination occurs, the annual bonus to which Executive is entitled under such written agreement. In the event Executive, at the time of the Qualifying Termination, has received only one (1) annual bonus, the Average Annual Bonus for such Executive shall be the amount of such bonus. (b) BASE SALARY. "Base Salary" means the greater of the annual rate of base salary in effect for Executive at the time of Executive's Qualified Termination or the annual rate of base salary in effect for Executive immediately before the Change of Control. (c) CAUSE. "Cause" means Executive's conviction of any felony, Executive's commission of any act of fraud or embezzlement, or Executive's unauthorized use or disclosure of confidential information or trade secrets of the Company or its subsidiaries. (d) CHANGE OF CONTROL. A "Change of Control" shall have occurred if: (i) a majority of the directors of the Company are persons other than persons: (A) for whose election proxies shall have been solicited by the Board of Directors of the Company, or (B) who are then serving as directors appointed by the Board of Directors to fill vacancies on the Board of Directors caused by death or resignation (but not by removal) or to fill newly-created directorships; or (ii) thirty percent (30%) or more of the outstanding voting power of the Company shall have been acquired or beneficially owned (as defined in 5. Rule 13d-3 under the 1934 Act or any successor rule thereto) by any person or group of two or more persons acting as a partnership, limited partnership, syndicate, or other group acting in concert for the purpose of acquiring, holding or disposing of voting stock of the Company; or (iii) a reorganization, merger, consolidation or other corporate transaction or sale or other disposition of all or substantially all of the assets of the Company occurs (other than (i) a transaction with a subsidiary of the Company or (ii) a transaction in which the holders of voting stock of the Company immediately before the merger as a class continue to hold immediately after the merger more than fifty percent (50%) of all outstanding voting power of the surviving or resulting corporation or its parent (including, without limitation, a company which owns directly or indirectly the Company or all or substantially all of its pre-acquisition assets) in substantially the same proportion as their ownership of common stock of the Company immediately before the transaction); or (iv) the Company's shareholders approve the complete liquidation or dissolution of the Company. (e) COMPARABLE POSITION. A Comparable Position, for purposes of this Agreement, means a position with a successor to part or all of the business of the Company if the terms of the position do not differ from Executive's prior position with the Company in any manner that would constitute Good Reason, assuming that the terms of Executive's employment were changed to the terms of such position with the successor. (f) FAIR MARKET VALUE. For purposes of Paragraph 1(b)(vi), "Fair Market Value" per unit of a security subject to an option on any relevant date shall be determined under the terms of the instruments evidencing the option, if such instrument provides an objective method for determining such fair market value or, if such instrument does not so provide, shall be determined in accordance with the following provisions: (i) If the security is not at the time listed or admitted to trading on any Stock Exchange but is traded on the NASDAQ National Market System, the Fair Market Value shall be the closing selling price per unit of security on the date in question, as the price is reported by the National Association of Securities Dealers through the NASDAQ National Market System or any successor system. If there is no closing selling price for the security on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists; or (ii) If the security is at the time listed or admitted to trading on any Stock Exchange, then the Fair Market Value shall be the closing selling price per unit of security on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the security, as such price is officially 6. quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the security on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists; or (iii) If the security is at the time neither listed nor admitted to trading on any Stock Exchange nor traded on the NASDAQ National Market System, then such Fair Market Value shall be determined pursuant to an appraisal made by an independent appraiser mutually agreed to by the Company and Executive. (g) GOOD REASON. "Good Reason" means (i) a material reduction in Executive's level of duties or responsibilities or the nature of Executive's functions or (ii) a reduction in Executive's base salary or a reduction in Executive's total cash compensation (consisting of base salary and target bonus), or (iii) the failure to provide Executive with employee benefits (including medical/dental, disability and life insurance) that are substantially equivalent to the benefits provided to Executive immediately before the Change of Control, or (iv) a relocation of Executive's principal place of employment by more than thirty (30) miles, if the new location is both (A) more than thirty (30) miles from Executive's principal residence and (B) farther from Executive's principal residence than Executive's principal place of employment immediately before such relocation, or (v) the breach of the terms of any compensation agreement or arrangement between the Company and Executive or (vi) the repudiation or failure by the Company or its successor to acknowledge (upon Executive's written request) or to comply with any of its obligations under this Agreement. (h) PERIOD OF COVERAGE. The "Period of Coverage" shall be the period commencing with the date of this Agreement and ending ten (10) years thereafter, unless either (i) the Company, by written action of its Board of Directors, extends the period or (ii) the Company has entered into a definitive agreement to consummate a transaction that would constitute a Change of Control, in which case the period of coverage will continue until the date specified by the Board of Directors or the date on which the pending transaction is consummated or abandoned, respectively. 5. ARBITRATION. Except as otherwise provided in Paragraph 2, any controversy between Executive and the Company involving the construction or application of any of the terms, provisions, or conditions of this Agreement or otherwise arising out of or relating to this Agreement shall be settled by binding arbitration in accordance with the then current applicable rules of the American Arbitration Association, and judgment on the award rendered by the arbitrator(s) may be entered by any court having jurisdiction thereof. The location of the arbitration shall be in San Diego, California. The expenses incurred by both parties in settling such controversy, including the expenses of arbitration and reasonable attorney fees, shall be born by the Company. 7. 6. MISCELLANEOUS. (a) CAPTIONS. The captions in this Agreement are not part of the provisions hereof, are merely for the purpose of reference and shall have no force or effect. (b) GOVERNING LAW. This Agreement is made in, and shall be governed by and construed in accordance with the laws of, the State of California, to the extent not preempted by the Employee Retirement Income Security Act of 1974, as amended. This Agreement, to the extent that it provides for severance benefits, together with similar agreements with other executives of the Company, is intended, for purposes of ERISA, to qualify as an employee welfare benefit plan for a select group of management or highly compensated employees. (c) AMENDMENT OR MODIFICATION. This Agreement contains the entire agreement of the parties with respect to the subject matter hereof and no amendment or modification shall be effective unless made in writing executed by an authorized officer of the Company and Executive. (d) SUCCESSORS AND BENEFICIARIES. This Agreement shall be binding on and inure to the benefit of the successors, assigns, heirs, devisees and personal representatives of the parties, including any successor to the Company by merger or combination and any purchaser of all or substantially all of the assets of the Company. Should Executive die before receipt of all benefits to which Executive becomes entitled under this Agreement, the payment of such benefits will be made, on the due date or dates hereunder had Executive survived, to the executors or administrators of Executive's estate. (e) NOTICES. All notices given hereunder shall be in writing and shall be sent by registered or certified mail or delivered by hand and, if intended for the Company, shall be addressed to it (if sent by mail) or delivered to it (if delivered by hand) at its principal office for the attention of the Secretary of the Company or at such other address and for the attention of such other person of which the Company shall have given notice to Executive in the manner herein provided; and, if intended for Executive, shall be delivered personally or shall be addressed (if sent by mail) at the then current residence address as reflected in the personnel records of the Company, or at such other address or to such designee of which Executive shall have given notice to the Company in the manner herein provided. Each such notice shall be deemed to be given on the date received at the address of the addressee or, if delivered personally, on the date so delivered. (f) DISTRIBUTIONS. The benefits to which Executive may become entitled under this Agreement will be paid, when due, from the general assets of the Company. Executive's right (or the right of the executors or administrators of Executive's estate) to receive any such payments will at all times be that of a general creditor of the Company and will have no priority over the claims of other general creditors of the Company. The benefits provided under this Agreement are 8. intended to be unfunded for purposes of the Employee Retirement Security Act of 1974. (g) RIGHTS AND REMEDIES. All rights and remedies provided pursuant to this Agreement or by law will be cumulative, and no such right or remedy will be exclusive of any other. A party may pursue any one or more rights or remedies hereunder or may seek damages or specific performance in the event of another party's breach hereunder or may pursue any other remedy by law or equity, whether or not stated in this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. DURA PHARMACEUTICALS, INC. By -------------------------------------- Cam L. Garner Chairman and Chief Executive Officer EXECUTIVE: ---------------------------------------- 9. [LOGO] EXHIBIT A SEPARATION AGREEMENT AND GENERAL RELEASE In consideration of the severance benefits to be provided to ______ ("Employee") under the Executive Change of Control Severance Agreement (the "Severance Agreement"), dated as of January 1, 2000, by and between Dura Pharmaceuticals, Inc., a Delaware corporation ("Dura") and Employee, this General Release (the "Release") is entered into as of ___________, 20__, by and between Dura and Employee with respect to the following: (a) Employee has been employed as a _______________ for Dura. (b) The employment relationship was terminated effective ______________ , 20__. (c) Dura and Employee desire to enter into an agreement with regard to termination of that employment relationship to resolve any and all known or unknown claims between them, neither party admitting any liability or fault. THE PARTIES THEREFORE HEREBY AGREE AND PROMISE in consideration of all of the following terms and conditions as follows: 1. Employee's employment with Dura is terminated effective ____________, 20__ . 2. As contemplated by the Severance Agreement, and in consideration of the severance benefit (excluding any amounts deemed to be received by Employee on account of the forgiveness of any loan due by Employee, if applicable) to be provided to Employee under the Severance Agreement, Employee irrevocably and unconditionally releases forever Dura and each of its stockholders, predecessors, successors, assigns, agents, directors, officers, employees, representatives, affiliates, and all persons acting by, through, under, or in concert with any of them (collectively referred to as "Releases"), from any and all claims, complaints, liabilities, obligations, agreements, damages, and actions of any nature, known or unknown, suspected or unsuspected, that he/she ever had, now has, or hereafter may have by reason of any matter, cause, or thing relating in any way to his/her employment relationship or the termination of his/her employment relationship with Dura. 3. Employee further waives any an all claims based on state or federal statutes prohibiting discrimination involving age, sex, race, color, national origin, physical or mental impairment, marital status, or religion, including but not limited to Title VII, the Equal Pay Act, or the Fair Employment and Housing Act, whether such claim be based upon an action filed by the Employee or by a governmental agency. 1 4. Employee expressively waives and relinquishes all rights and benefits afforded by Section 1542 of the Civil Code of the State of California, and does so understanding and acknowledging the significance of this waiver of Section 1542. Section 1542 of the Civil Code of the State of California states as follows: "A General release does not extend to claims which the creditor does not know or suspect to exist in his/her favor at the time of the executing the release, which if known by his/her must have materially affected his/her settlement with the debtor." Thus, notwithstanding the provisions of Section 1542, and for the purpose of implementing a full and complete release and discharge of the Releasees, Employee expressly acknowledges that this Agreement is intended to include in its effect, without limitation, all claims that Employee does not know or suspect to exist in his/her favor at the time of execution, and the extinguishment of any of these claims. 5. Employee hereby reaffirms his/her obligations under the Confidentiality Agreement and Acknowledgement of Confidentiality previously executed by Employee. 6. This Agreement shall be governed by and interpreted according to the laws of the State of California without regard to its conflict of laws provisions. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by binding arbitration in San Diego County, California, administered by the American Arbitration Association in accordance with its applicable rules. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. 7. Should any provision of this Agreement be declared or be determined by a court to be illegal or invalid, the validity of the remaining parts, terms, and provisions shall not be affected thereby and said illegal or invalid part, term, or provision shall be deemed not to be a part of this Agreement. 8. This Agreement and all of its provisions shall be binding upon, and inure to the benefit of, any successors, assigns, personal representatives or heirs of the parties hereto. 9. Employee represents and acknowledges that in executing this Agreement, he/she does not rely and has not relied upon any representation or statement not set forth herein made by any of the Releasees, their agents or representatives. Employee confirms that he/she has been encouraged to and has had the opportunity to seek the advice of legal counsel with respect to executing this Agreement. The parties acknowledge that each has read this Agreement, that each fully understands their rights, privileges and duties under this Agreement, and that each enters into this Agreement voluntarily and without coercion or duress. 10. [INCLUDE FOR EMPLOYEES AGE 40+] Employee acknowledges he/she is entitled to twenty-one (21) days' time in which to consider this Agreement. Employee acknowledges that he/she has obtained or had the opportunity to obtain the advice and counsel from the legal representative of his/her choice and that he/she executes this 2 Agreement having had sufficient time within which to consider its terms. Employee represents that if he/she executes this Agreement before twenty-one (21) days have elapsed, he/she does so voluntarily, upon the advice and with the approval of his/her legal counsel, and that he/she voluntarily waives any remaining consideration period. 11. [INCLUDE FOR EMPLOYEES AGE 40+] Employee understands that after executing this Agreement, he/she has the right to revoke it within seven (7) days after his/her execution of it. Employee understands that this Agreement will not become effective and enforceable unless the seven (7) day revocation period passes and Employee does not revoke the Agreement in writing. Employee understands that this Agreement may not be revoked after the seven (7) day revocation period has passed. Employee understands that any revocation of this Agreement must be in writing and delivered to Dura within the seven (7) day period. PLEASE READ CAREFULLY. THIS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN OR UNKNOWN CLAIMS. Executed as of the date first written above at ___________________. (City and State) After signature by Employee, an original of this Separation Agreement and General Release is to be forwarded to the Human Resources Development Department. DURA PHARMACEUTICALS, INC. EMPLOYEE By: ---------------------------------- ---------------------------- Name: (Employee name) -------------------------------- Title: ------------------------------- 3 DURA PHARMACEUTICALS, INC. EXECUTIVE CHANGE OF CONTROL SEVERANCE AGREEMENTS ENTERED INTO JANUARY 1, 2000 ----------------------------
- ------------------------------------ ------------------------- ----------------------------------- ----------------------------- SECTION 1(b)(i) SECTION 1(b)(ii) (b) Lump Sum Payment of WELFARE BENEFIT NAME TITLE Salary and Bonus COVERAGE - ------------------------------------ ------------------------- ----------------------------------- ----------------------------- - ------------------------------------ ------------------------- ----------------------------------- ----------------------------- Cam L. Garner Chairman and CEO 2.0 times the sum of Base Salary Continuation for 24 months plus Average Annual Bonus following a Qualified Termination - ------------------------------------ ------------------------- ----------------------------------- ----------------------------- - ------------------------------------ ------------------------- ----------------------------------- ----------------------------- Robert S. Whitehead President 1.5 times the sum of Base Salary Continuation for 18 months David S. Kabakoff President plus Average Annual Bonus following a Qualified Mitchell R. Woodbury Sr. Vice President Termination Michael T. Borer Sr. Vice President Lloyd E. Flanders Sr. Vice President - ------------------------------------ ------------------------- ----------------------------------- ----------------------------- - ------------------------------------ ------------------------- ----------------------------------- ----------------------------- John R. Cook Vice President .75 times the sum of Base Salary Continuation for 9 months Chester Damecki Vice President plus Average Annual Bonus following a Qualified Diane S. Goostree Vice President Termination Susan M. Hanan Vice President Malcolm R. Hill Vice President Robert W. Keith Vice President Damien Lamendola Vice President Erle T. Mast Vice President Peter W. Schineller Vice President Robert K. Schultz Vice President J. Gregory Wease Vice President Carol A. Wells Vice President Clyde L. Witham Vice President - ------------------------------------ ------------------------- ----------------------------------- -----------------------------
---------------------------------------------- SECTION 1(b)(v) DEFERRED COMPENSATION PLAN ---------------------------------------------- ---------------------------------------------- Cam L. Garner Continuation as a non-employee participant for 24 months following a Qualified Termination - ------------------------------------ ---------------------------------------------- - ------------------------------------ ---------------------------------------------- Robert S. Whitehead Continuation as a non-employee participant David S. Kabakoff for 18 months following a Qualified Mitchell R. Woodbury Termination Michael T. Borer Lloyd E. Flanders - ------------------------------------ ---------------------------------------------- - ------------------------------------ ---------------------------------------------- John R. Cook Continuation as a non-employee participant Chester Damecki for 9 months following a Qualified Diane S. Goostree Termination Susan M. Hanan Malcolm R. Hill Robert W. Keith Damien Lamendola Erle T. Mast Peter W. Schineller Robert K. Schultz J. Gregory Wease Carol A. Wells Clyde L. Witham - ------------------------------------
EX-11 9 EXHIBIT 11 EXHIBIT 11 DURA PHARMACEUTICALS, INC. STATEMENTS RE COMPUTATIONS OF NET INCOME (LOSS) PER SHARE
1999 1998 1997 ------------------ ------------------ ------------------ NET INCOME PER SHARE - BASIC Net income $ 30,004,000 $ 2,733,000 $ (84,692,000) ================== ================== ================== Weighted average number of common shares: Common stock 44,132,372 46,028,396 43,828,208 ================== ================== ================== Net income per share $ 0.68 $ 0.06 $ (1.93) ================== ================== ================== NET INCOME PER SHARE - DILUTED Net income $ 30,004,000 $ 2,733,000 $ (84,692,000) ================== ================== ================== Weighted average number of common and common equivalent shares assuming issuance of all dilutive contingent shares: Common stock 44,132,372 46,028,396 43,828,208 Stock options 906,859 744,155 - Warrants 633,070 1,036,440 - ------------------ ------------------ ------------------ Total 45,672,301 47,808,991 43,828,208 ================== ================== ================== Net income per share $ 0.66 $ 0.06 $ (1.93) ================== ================== ==================
EX-21 10 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
Subsidiary Name Jurisdiction D.B.A. - --------------- ------------ ------ Dura (Bermuda) Trading Company Ltd. Bermuda n/a
EX-23 11 EXHIBIT 23 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-90891 on Form S-8 and Registration Statement Nos. 33-71798, 33-93914 and 333-37955 on Form S-3 of Dura Pharmaceuticals, Inc. of our report dated January 24, 2000, (March 20, 2000 as to the merger agreement with Spiros Development Corporation II, Inc. described in Note 6), appearing in this Annual Report on Form 10-K of Dura Pharmaceuticals, Inc. for the year ended December 31, 1999. /s/ DELOITTE & TOUCHE LLP San Diego, California March 28, 2000 EX-27 12 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE NOTES THERETO, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS AND NOTES. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 63,631 210,782 44,632 0 12,938 343,506 113,509 (20,176) 883,474 87,581 287,500 0 0 44 441,695 883,474 231,776 301,426 45,839 252,369 0 0 18,175 44,448 14,444 30,004 0 0 0 30,004 0.68 0.66
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