-----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, UHMNsr4Le1vUlNpPENKYHKGtDA9iNAAVVyUsk9D0BiN+lKJVWDKeF0V6RoUsfaw6 NVZlHxXbjg29lyWRBno1mg== 0001047469-98-012673.txt : 19980401 0001047469-98-012673.hdr.sgml : 19980401 ACCESSION NUMBER: 0001047469-98-012673 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DURA PHARMACEUTICALS INC /DE/ 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: 98580277 BUSINESS ADDRESS: STREET 1: 7475 LUSK BLVD CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6194572553 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 FORM 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, 1997 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 (619) 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, $.001 PAR VALUE. WARRANTS TO PURCHASE ONE-FOURTH OF ONE SHARE OF COMMON STOCK, PAR VALUE $.001 PER SHARE. THE WARRANTS ARE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT SEPARATELY AND AS PART OF UNITS, EACH UNIT CONSISTING OF ONE SHARE OF CALLABLE COMMON STOCK OF SPIROS DEVELOPMENT CORPORATION II, INC. AND ONE WARRANT. THE WARRANTS ARE NOT SEPARATELY TRADABLE APART FROM THE UNITS PRIOR TO DECEMBER 31, 1999 OR UPON THE EARLIER OCCURRENCE OF CERTAIN EVENTS. 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 . --- --- 1 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 stock held by non-affiliates of the registrant as of February 27, 1998 was $1,003,649,682. 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 deemed to be affiliates, which should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant or that such person is controlled by or under common control with the Registrant. The number of shares of the Registrant's Common Stock outstanding as of February 27, 1998 was 46,142,915. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 21, 1998, to be filed with the Securities and Exchange Commission on or about April 16, 1998, referred to herein as the "Proxy Statement," are incorporated as provided in Part III, and portions of the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1997, attached hereto as Exhibit 13, referred to herein as the "Annual Report," are incorporated as provided in parts II and IV. 2 INDEX Part I: Item 1. Business 4 Item 2. Properties 22 Item 3. Legal Proceedings 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Part II: Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 23 Item 6. Selected Financial Data 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 24 Item 8. Financial Statements and Supplementary Data 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 24 Part III: Item 10. Directors and Executive Officers of the Registrant 24 Item 11. Executive Compensation 24 Item 12. Security Ownership of Certain Beneficial Owners and Management 24 Item 13. Certain Relationships and Related Transactions 25 Part IV: Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 25 Signatures 30 PART I ITEM 1. BUSINESS The discussion of Dura Pharmaceuticals, Inc.'s ("Dura" or "the Company") business contained in this report may contain certain projections, estimates and other forward-looking statements that involve a number of risks and uncertainties. For a discussion of factors which may affect the outcome projected in such statements, see "Risks and Uncertainties" on pages 16 through 22 of this Annual Report on Form 10-K. While this outlook represents management's current judgment on the future direction of the business, such risks and uncertainties could cause actual results to differ materially from any future performance listed below. The Company undertakes no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events and circumstances arising after the date hereof. OVERVIEW The Company is a specialty respiratory pharmaceutical and pulmonary drug delivery company. The Company is engaged in developing and marketing prescription pharmaceutical products for the treatment of asthma, hay fever, chronic obstructive pulmonary disease ("COPD"), the common cold and related respiratory ailments and is developing a pulmonary drug delivery system ("Spiros-Registered Trademark-"). Dura has strategically focused on the U.S. respiratory market because of its size and growth opportunities. The estimated size of the target market for antihistamines, asthma/rhinitis therapies, cough/cold preparations and anti-infectives in 1997 was approximately $10.2 billion. The size and fragmented nature of the market and the identifiable base of physician prescribers allow Dura to achieve significant market penetration with a specialized sales force. The Company currently markets 31 prescription products and also has a separate mail service pharmacy, Health Script pharmacy Services, Inc. ("HealthScript"), which dispenses respiratory pharmaceuticals. Dura employs a dual marketing strategy utilizing its focused field sales force of over 300 people and a dedicated managed care sales and marketing and national account groups that cover managed care organizations and retail pharmacy chains. Dura's field sales force targets a physician base that includes approximately 90,000 U.S. allergists, ear, nose, and throat specialists ("ENTs"), pulmonologists and a selected subset of pediatricians and generalist physicians, who Dura believes collectively write a significant portion of respiratory pharmaceutical prescriptions. Dura believes that its field sales force calls on approximately one-half of the target physician base. Dura's managed care sales and marketing group concentrates on sales to large regional and national managed care organizations. Dura expects to continue expanding both the field sales force and the managed care sales and marketing group as warranted by market opportunities. This marketing strategy has allowed Dura to leverage its distribution capabilities by acquiring the rights to market additional prescription pharmaceutical products through acquisition, in-license or co-promotion arrangements. Since 1992, Dura has acquired 19 products targeted at the U.S. respiratory market. In September 1996, Dura acquired from Eli Lilly and Company ("Lilly") exclusive U.S. marketing rights to the antibiotics Keftab-Registered Trademark- and Ceclor-Registered Trademark- CD. Dura began marketing Keftab in September 1996 and launched Ceclor CD in October 1996. In May 1997, Dura acquired from Syntex (USA) Inc. and other members of the Roche Group (collectively, "Syntex") the exclusive U.S. rights to the intranasal steroid products Nasarel-Registered Trademark- and Nasalide-Registered Trademark-. Another key component of Dura's strategy is to develop the Spiros-Registered Trademark- pulmonary drug delivery system. Spiros is being designed to aerosolize pharmaceuticals in dry powder formulations for delivery to the lungs while providing certain advantages over other currently used methods of pulmonary drug delivery. Dura has a three-level development program for Spiros which entails (i) developing, on behalf of Spiros Development Corporation II, Inc. ("Spiros Corp. II"), certain drug compounds for use in Spiros, including in the near-term albuterol, beclomethasone and ipratropium, three of the pharmaceutical agents most frequently prescribed to 4 treat respiratory conditions, (ii) licensing Spiros primarily to pharmaceutical companies, generally for use with certain of their proprietary respiratory products, and (iii) developing Spiros, generally in collaboration with third parties, for the systemic delivery of compounds, including certain proteins and peptides, through the lungs for respiratory and non-respiratory indications as an alternative to current invasive delivery techniques. In March 1997, patient dosing was completed in long-term and short-term pivotal clinical trials for albuterol in the Spiros cassette system. In November 1997, Dura announced, on behalf of Spiros Development Corporation ("Spiros Corp."), that it had submitted a New Drug Application ("NDA") with the United States Food and Drug Administration ("FDA") for albuterol in the Spiros cassette system. In January 1998, the FDA informed Dura that the application was accepted for filing. RELATIONSHIP WITH SPIROS CORP. AND SPIROS CORP. II RELATIONSHIP WITH SPIROS CORP. On December 29, 1995, Spiros Corp. and Dura 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 at $30.00 per unit. Each unit consisted of one share of Spiros Corp. callable common stock and a Series S warrant 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 and to acquire the exclusive rights for the use of Spiros with albuterol. Pursuant to a development and management agreement, Spiros Corp. engaged the Company to develop the Spiros Corp. products and provide general management services to Spiros Corp. On December 19, 1997, the Company exercised its right to purchase 100% of Spiros Corp.'s outstanding callable common stock. RELATIONSHIP WITH SPIROS CORP. II. On December 22, 1997, Dura and Spiros Corp. II, a separate, newly-formed Delaware corporation, completed a $101 million public offering (the "Offering"). Under agreements with the Company, Spiros Corp. II will use the net proceeds of $94 million from the Offering and a $75 million contribution from Dura to develop Spiros and Spiros applications for albuterol, beclomethasone, ipratropium, albuterol-ipratropium combination, budesonide and additional designated compounds (the "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 (the "SDCII Warrants") to purchase one-fourth of one share of Dura's common stock. The SDCII Warrants will be exercisable from January 1, 2000 through December 31, 2002 at an exercise price of $54.84 per share of Dura common stock. In consideration of the SDCII Warrants and the contribution of $75 million to Spiros Corp. II, the Company has the right 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 (the "Purchase Option") and an option, through specified dates, to acquire Spiros Corp. II's exclusive rights for the use of Spiros with albuterol (the "Albuterol Option") and for the use of Spiros with a second product other than albuterol (the "Product Option"). The purchase price for the Purchase Option may be paid, at the Company's option, in cash, shares of Dura's common stock, or a combination thereof. The purchase price for the Albuterol Option and the Product Option may only be paid in cash. In connection with the Offering, the Company also entered into certain other 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. ALBUTEROL AND PRODUCT OPTION AGREEMENT. Under this agreement, the Company has the Albuterol Option and the Product Option. 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. 5 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. RECENT DEVELOPMENT On February 22, 1998, the Company announced that it planned to begin expanding its sales force immediately from approximately 270 representatives to over 450 representatives by the end of 1998 to increase the promotional activity of its current products and to prepare for the launch, subject to receiving regulatory approval, of Albuterol Spiros-TM-. The Company expects that the rapid expansion of its sales force will result in an increase in 1998 in its selling, general and administrative expenses, both in total and as a percentage of revenues, as compared to 1997. U.S. RESPIRATORY MARKET Dura divides the U.S. respiratory market into three primary segments: (i) respiratory infection, (ii) allergy, cough and cold and (iii) asthma and COPD. RESPIRATORY INFECTION. Respiratory infections are generally caused by a variety of bacteria and can affect either the upper respiratory tract (nasal cavity, sinuses and throat) or the lower respiratory tract (lungs). The resulting diagnoses include sinusitis, tonsillitis and bronchitis. These 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 market for these classes is very large, totaling $4.8 billion in 1997 for the oral solid forms alone. The cephalosporin class accounts for approximately $1.4 billion of this total. ALLERGY, COUGH AND COLD. While the causes of allergies (which can be seasonal or perennial) and cough and colds differ, nasal congestion and sneezing are common symptoms of these diseases. The U.S. combined market for therapeutic drugs to treat allergies, coughs and colds was over $2.2 billion in 1997. Antihistamines and antihistamine/decongestant combinations are the most widely used forms of therapy for allergies and represent the largest portion of the allergy, cough and cold market in the U.S. An additional form of therapy for allergies includes intranasal steroids, such as Nasarel and Nasalide, which are increasingly being prescribed for allergic rhinitis. Cough and cold preparations represent the next largest portion of the allergy, cough and cold market and include decongestant and decongestant/expectorant combinations, cough suppressants and antihistamine combinations and expectorants. ASTHMA AND COPD. Asthma is a complex physiological disorder characterized by airway hyperactivity to a variety of stimuli such as dust, pollen, stress or physical exercise, resulting in airway obstruction that is partially or temporarily reversible. The U.S. asthma population has grown steadily in recent years. COPD is a complex condition comprising a combination of chronic bronchitis, emphysema and airway obstruction. The disease affects males more often than females and is exacerbated by smoking and other insults to the lung. Incidence is as high as 20% of the adult male population, though only a minority are clinically disabled. The U.S. combined market for therapeutic drugs to treat asthma and COPD was approximately $2.9 billion in 1997. STRATEGY Dura's objective is to be a leading supplier of respiratory pharmaceuticals and pulmonary drug delivery systems. Dura attempts to achieve this objective through the implementation of the following strategies: FOCUSING MARKETING EFFORTS ON RESPIRATORY PHYSICIAN SPECIALISTS. Dura employs a dual marketing strategy utilizing its focused field sales force and a dedicated managed care sales and marketing group. Dura's field sales force targets a physician base that includes approximately 90,000 U.S. 6 allergists, ENTs, pulmonologists and a selected subset of pediatricians and generalist physicians, who Dura believes collectively write a significant portion of respiratory pharmaceutical prescriptions. Dura believes that its field sales force calls on approximately one-half of the target physician base. Dura's managed care sales and marketing group concentrates on sales to large regional and national managed care organizations. Dura expects to continue expanding both the field sales force and the managed care sales and marketing group as warranted by market opportunities. ACQUIRING, IN-LICENSING OR CO-PROMOTING RESPIRATORY PRESCRIPTION PHARMACEUTICALS. Dura seeks to acquire, in-license or co-promote respiratory prescription pharmaceuticals or companies developing and/or marketing such pharmaceuticals. Dura is particularly focused on respiratory drugs that are under-promoted by large pharmaceutical companies. Dura believes that the pharmaceutical industry is undergoing a restructuring that may create greater opportunities for Dura. For example, many large pharmaceutical companies are consolidating and merging and/or redirecting their sales forces, which may lead to the underpromotion of certain products deemed too small for large sales forces and create significant acquisition, in-licensing and co-promotion opportunities. Additionally, consolidation within the sector may make small product lines less desirable to large pharmaceutical companies. Dura is actively pursuing the acquisition of rights to products and/or companies, which may require the use of substantial capital resources. DEVELOPING SPIROS. Dura has a three-level development program for Spiros which entails (i) developing, on behalf of Spiros Corp. II, certain drug compounds for use in Spiros, including in the near-term albuterol, beclomethasone and ipratropium, three of the pharmaceutical agents most frequently prescribed to treat respiratory conditions, (ii) licensing Spiros primarily to pharmaceutical companies, generally for use with certain of their proprietary respiratory products, and (iii) developing Spiros, generally in collaboration with third parties, for the systemic delivery of compounds, including certain proteins and peptides, through the lungs for respiratory and non-respiratory indications as an alternative to current invasive delivery techniques. DURA'S CURRENT PRODUCTS Dura currently markets 31 prescription products, including 25 that are off-patent, in the following therapeutic categories: respiratory infection (five products); allergy, cough and cold (24 products); and asthma and COPD (two products). The following is a list of Dura's principal prescription pharmaceuticals: RIGHTS OBTAINED FROM OR PRODUCTS DEVELOPED BY -------- ---------------- Respiratory Infection Ceclor-Registered Trademark- CD Tablets (anhydrous Lilly cefaclor) Keftab-Registered Trademark- (cephalexin Lilly hydrochloride) Allergy, Cough and Cold Nasarel-Registered Trademark- (flunisolide) Nasal Syntex Solution Nasalide-Registered Trademark- (flunisolide) Nasal Syntex Solution Entex-Registered Trademark- Products Procter & Gamble Dura-Vent-Registered Trademark- Products Dura Rondec-Registered Trademark- Products Abbott Laboratories, Dura Asthma and COPD Tornalate-Registered Trademark- Products Sanofi-Winthrop, Inc. 7 In September 1996, Dura acquired the exclusive U.S. rights to the cephalosporin antibiotics Keftab and Ceclor CD from Lilly. The U.S. antibiotic market was $4.8 billion in 1997, of which $1.4 billion was accounted for by cephalosporin antibiotics. Dura believes that this acquisition complements its existing strategy because approximately 60% of antibiotics are prescribed for respiratory infections. Keftab is an antibiotic indicated for respiratory tract, skin and soft tissue infections. Ceclor CD is a twice-a-day dosage form of cefaclor typically taken for seven days. Ceclor, Lilly's currently marketed cefaclor, is normally taken three times a day for 10 days. Dura believes these product acquisitions further its strategy of acquiring prescription pharmaceuticals to be marketed by its sales force to its targeted physicians. In May 1997, Dura acquired from Syntex the exclusive U.S. rights to the intranasal steroid products Nasarel and Nasalide. The U.S. market for intranasal steroids for the treatment of perennial and allergic rhinitis was approximately $750 million in 1997, and has averaged 19% growth over the last three years. Dura believes that this acquisition complements its existing strategy because the products fit within Dura's respiratory focus while adding a new respiratory category, nasal steroids, to its product portfolio. In addition, Dura believes that it will be able to further leverage its field sales force by offering these new products acquired from Lilly and Syntex to high-prescribing physicians during sales calls. Keftab and Ceclor CD and the two Tornalate-Registered Trademark- products are the subject of approved NDAs. Dura also markets Capastat-Registered Trademark- Sulfate and Seromycin-Registered Trademark- which are also the subject of approved NDAs and Crolom-TM-,_which is the subject of an approved Abbreviated New Drug Application ("ANDA"). The remaining products are branded pharmaceuticals which are not the subject of NDAs or ANDAs. SPIROS Spiros is a proprietary pulmonary drug delivery system that is designed to aerosolize pharmaceuticals in dry powder formulations for delivery to the lungs while providing certain advantages over traditional pulmonary delivery systems. The Company believes new inhalation systems will gradually replace metered dose inhalers ("MDIs") as the leading pulmonary delivery systems, due primarily to the phasing out of chloroflurocarbon ("CFCs") and coordination problems associated with many MDIs. Many companies are studying alternative propellants, such as hydrofluorocarbons ("HFAs"), for use in MDIs, and the first albuterol MDI using an HFA propellant has obtained FDA approval and is being marketed by Schering-Plough. However, the Company believes that any product utilizing alternative propellants 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. There are two types of dry powder inhalers ("DPI") currently in commercial use worldwide, individual dose and multiple dose. Individual dose DPIs currently marketed in the U.S. include the Rotohaler-TM-(developed and marketed by Glaxo Wellcome ("Glaxo")) and the Spinhaler-Registered Trademark- (developed and marketed by Fisons Limited). The Turbuhaler-Registered Trademark- (developed and marketed by Astra Pharmaceuticals ("Astra")), a multiple dose DPI, is the leading DPI in worldwide sales. In June 1997, the FDA approved the first Turbuhaler product, the Pulmicort Turbuhaler, for marketing in the U.S., which Astra launched in early 1998. Recently the FDA also approved two multiple dose DPIs developed by Glaxo. POTENTIAL ADVANTAGES OF SPIROS. The Company believes Spiros may have certain advantages over other currently used methods of pulmonary drug delivery including: INSPIRATORY FLOW RATE INDEPENDENCE. 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, effort or physical abilities. Tests of Spiros on human subjects have shown a relatively consistent and significant level of drug deposition throughout the clinically relevant inspiratory range. Existing DPIs can vary significantly in their level of drug deposition depending on the patient's inspiratory flow rate and can deliver significantly less drug at the lower flow rates typically associated with asthma attacks. 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 the user to 8 coordinate their breathing with actuation 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. REDUCED SIDE EFFECTS. Spiros is designed to efficiently deliver drugs to the lungs, thereby reducing drug deposition to the mouth and throat which could reduce the possibility of unwanted side effects of certain pharmaceutical agents, such as coughing and local irritation. With MDIs, a significant portion of the dose is delivered to the mouth and throat and is swallowed. PATIENT CONVENIENCE. Spiros is designed to be convenient for patients, with features such as breath actuation (Spiros is triggered by inhalation), portability (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 provides a warning of the need to replace Spiros prior to the end of its useful life. FREE OF CHLOROFLUOROCARBON PROPELLANTS. CFC propellants have ozone destructive characteristics and are subject to worldwide regulations aimed at eliminating their usage within the decade. Spiros does not use CFCs while most MDIs, currently the most popular form of aerosol drug delivery, use CFCs. 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, the Company believes that DPIs will become a leading method for pulmonary drug delivery. CORE SPIROS TECHNOLOGY. The core technology contained in Spiros which gives rise to the flow rate independent delivery 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 provides a zero-velocity 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. Two separate Spiros systems are currently under development, both utilizing the same core technology with distinct powder storage systems ("PSS"). 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, the Company believes that its cassette and blisterdisk systems will provide flexibility for delivery of many different types of drugs. DEVELOPMENT PROGRAM FOR SPIROS. The Company has a three-level development program for Spiros. The first level entails developing for use in Spiros, on behalf of Spiros Corp. II, certain drug applications which are currently used to treat respiratory conditions, including: beta-agonist (albuterol), two steroids (beclomethasone and budesonide), an anticholinergic (ipratropium) and a combination of a beta-agonist and an anticholinergic (albuterol-ipratropium). Dura currently conducts the development efforts and will conduct marketing efforts following regulatory approval, if any, for the products listed below on behalf of Spiros Corp. II under agreements entered into in connection with the Offering. There can be no assurance that the pharmaceutical products currently in development by Spiros Corp. II or that any products that may be developed in the future will be approved by the FDA. In addition, there can be no assurance that FDA review or other actions will not involve delays that could adversely affect the time to market and the sale of the products. ALBUTEROL. Albuterol, a beta-agonist, provides rapid symptomatic relief of reversible bronchospasm. When administered by inhalation, it produces significant bronchodilation promptly and its effects are demonstrable for a number of hours. Albuterol is the most widely accepted asthma medication in the world. In 1997, U.S. sales of albuterol were approximately $700 million as measured by average wholesale prices. 9 In 1994, an Investigational New Drug ("IND") application was filed with the FDA to begin clinical testing of an albuterol dry powder formulation with the Spiros cassette system. In April 1996, dosing of subjects in a clinical trial focusing on dose selection using a formulation of powdered albuterol with Spiros was completed. In March 1997, patient dosing was completed in long-term and short-term pivotal clinical trials. In November 1997, Dura, on behalf of Spiros Corp., submitted an NDA with the FDA for albuterol in the Spiros cassette system. In January 1998, the FDA informed Dura that the application was accepted for filing. The NDA includes the results of clinical trials that were designed to demonstrate comparability of the Spiros delivery system to a leading branded albuterol MDI product. Three pivotal studies in addition to a number of dose finding and performance verification studies were conducted for the submission. An open label study of albuterol in the Spiros cassette system is currently in progress. Interim results of this study were provided to the FDA in the NDA and results of the full study must be submitted to and reviewed by the FDA prior to product approval, if any. Dura, on behalf of Spiros Corp. II, is planning market launch of albuterol in the Spiros cassette system in late 1998 or early 1999, pending FDA approval. There can be no assurance of receipt of FDA approval in a timely manner, if at all. BECLOMETHASONE. Beclomethasone is a steroid used to treat the inflammatory component of asthma and certain symptoms of COPD. Systemic side effects resulting from the inhalation of beclomethasone are less than those that occur with steroids taken in capsule, tablet or liquid form. Beclomethasone was first launched in MDI form as Vanceril by Schering-Plough and later as Beclovent by Glaxo. In 1997, U.S. sales of beclomethasone were approximately $180 million as measured by average wholesale prices. In the first quarter of 1997, Dura completed dose ranging studies of a one dosage strength of beclomethasone in the Spiros cassette system under an IND, and Dura commenced a Phase III pivotal 12- week clinical trial to demonstrate safety and efficacy in the fourth quarter of 1997. Enrollment of patients is currently scheduled to be completed by the second quarter of 1998. Dura plans to submit an NDA for beclomethasone in early 1999, on behalf of Spiros Corp. II. IPRATROPIUM. Ipratropium is an anticholinergic bronchodilator. Ipratropium is most commonly prescribed for the long term management of COPD (including chronic bronchitis and emphysema) and for the treatment of asthmatic patients who are poorly controlled by, or who experience troublesome side effects from, beta-agonists such as albuterol. Ipratropium acts at a site that is different from the site where beta-agonists act and thus affords an alternative approach to the treatment of airway obstruction. In 1997, U.S. sales of ipratropium were approximately $230 million as measured by average wholesale prices. Dura has conducted initial preclinical formulation studies using ipratropium in order to demonstrate that delivery via Spiros is feasible. The Company currently anticipates that ipratropium will be the first compound formulated for delivery through the Spiros blisterdisk system. The Company, on behalf of Spiros Corp. II, has been in product development for a formulation of ipratropium to be delivered using Spiros and is preparing an IND under which initial dose ranging clinical trials will be conducted. Such trials are scheduled to begin in the second half of 1998. ALBUTEROL-IPRATROPIUM COMBINATION. Albuterol and ipratropium are frequently prescribed in combination for patients with COPD or asthma. Boehringer Ingelheim has marketed an albuterol-ipratropium combination product, Combivent, outside of the U.S. for a number of years. Combivent was approved for marketing in the U.S. in early 1997 and has recently been launched in MDI form. Based on the substantial work performed with albuterol and the feasibility study conducted with ipratropium, Dura believes that developing an albuterol-ipratropium formulation for delivery using Spiros will be feasible and intends, on behalf of Spiros Corp. II, to commence the development of this formulation in 1998. BUDESONIDE. Budesonide is a new generation steroid used to treat the inflammatory component of asthma. Budesonide has been marketed in several dosage forms outside of the U.S., but to date, has only been available in the U.S. in nasal spray form. However, in June 1997, the FDA approved for marketing in the U.S. a dry powder formulation of budesonide for delivery through Astra's Pulmicort Turbuhaler. In 1997, worldwide sales of budesonide were estimated to be greater than $600 million as measured by average 10 wholesale prices. Dura, on behalf of Spiros Corp. II, has begun formulation of budesonide for delivery through Spiros. The second level of Spiros development consists of licensing Spiros primarily to pharmaceutical companies for use with certain of their proprietary respiratory products. Dura is currently conducting feasibility studies for pharmaceutical companies to assess the suitability of certain compounds to be delivered using Spiros. There can be no assurance that any of the feasibility studies will prove successful, or even if successful, that the pharmaceutical companies will proceed to license Spiros for use with these compounds. The third level of Spiros development is to develop Spiros, in collaboration with other companies, for the systematic delivery of compounds through the lungs for respiratory and nonrespiratory indications as an alternative to current invasive delivery techniques. The Company commenced development efforts on the use of Spiros with peptides and proteins in 1995. In 1996, Dura entered into a collaborative agreement with Trega Biosciences, Inc. ("Trega") to develop inhalation formulations of new compounds discovered and developed by Trega. Dura is also performing feasibility studies for pharmaceutical companies that desire to develop Spiros for use with both respiratory drugs and drugs for systemic pulmonary delivery now being developed by those companies. SALES AND MARKETING FIELD SALES FORCE. Dura's specialized sales and marketing organization targets a physician base that includes approximately 90,000 U.S. allergists, ENTs, pulmonologists, and a selected subset of pediatricians and generalist physicians who treat a large number of allergy and asthma patients. Dura believes this relatively small group of physicians writes a significant portion of respiratory pharmaceutical prescriptions. This concentration allows for effective market penetration by a specialized sales and marketing organization. As of December 31, 1997, Dura had 277 pharmaceutical sales representatives nationwide, supervised by 25 district managers, 4 area recruiter-trainers and two regional directors. Dura believes its focused sales force currently calls on approximately one-half of its target physician base. On February 22, 1998, the Company announced that it planned to begin expanding its sales force immediately from approximately 270 representatives to over 450 representatives by the end of 1998 to increase the promotional activity of its current products and to prepare for the launch, subject to regulatory approval, of Abuterol Spiros. The Company expects that the rapid expansion of its sales force will result in an increase in 1998 in its selling, general and administrative expenses, both in total and as a percentage of revenues, as compared to 1997. Dura believes that the personal relationships of Dura's sales representatives with their physician customers are essential to Dura's business. Dura's sales representatives differentiate themselves from the competition by focusing primarily on respiratory infections, allergy, cough and cold, and asthma and COPD, and by promoting pharmaceuticals used by respiratory specialists in treating patients. With a relatively small target audience, promotional spending by Dura on advertising and direct mail is generally inexpensive and efficient. Dura regularly participates in local, regional and national medical meetings of the key specialty groups. Dura believes that it has established a national awareness of the Dura name within the U.S. respiratory market. MANAGED CARE SALES AND MARKETING AND NATIONAL ACCOUNTS GROUPS. To implement Dura's marketing strategy, Dura established dedicated managed care sales and marketing and national accounts groups, which concentrate on sales to large regional and national managed care organizations and retail pharmacy chains. These organizations include health maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"), large drug merchandising chains, nursing home providers and mail order pharmacies. A primary goal of the managed care sales and marketing group is to place Dura's products on approved formulary lists of HMOs and PPOs. 11 HEALTH SCRIPT In March 1995, Dura acquired Health Script, located in Denver, Colorado. Health Script is a mail service pharmacy which dispenses respiratory pharmaceuticals. Mail order services are particularly well-suited for respiratory patients who are long-term, chronic users of certain pharmaceuticals and to whom the convenience and cost efficiency of mail order is appealing. Health Script was formed in 1990 to supply value-priced respiratory pharmaceutical products to patients through the mail. Health Script currently dispenses to its approximately 30,000 patients nationwide over 100 respiratory products manufactured by third parties. Health Script is focused on working with home healthcare providers and patients to coordinate respiratory medication services and patients' management programs. Health Script markets its services through specialty field sales representatives and telemarketing. The existing patient base is maintained by telephone contact with patients to monitor compliance with their doctors' prescriptions. COMPETITION Dura directly competes with at least 25 other companies in the U.S. which are currently engaged in developing, marketing and selling respiratory pharmaceuticals. Additionally, there are at least 10 companies currently involved in the development, marketing or sales of dry powder pulmonary drug delivery systems. There are two types of DPIs currently in commercial use worldwide, individual dose and multiple dose. Individual dose DPIs currently marketed in the U.S. include the Rotohaler (developed and marketed by Glaxo) and the Spinhaler (developed and marketed by Fisons Limited). The Turbuhaler (developed and marketed by Astra), a multiple dose DPI, is the leading DPI in worldwide sales. In June 1997, the FDA approved the first Turbuhaler product, the Pulmicort Turbuhaler, for marketing in the U.S., which Astra launched in early 1998. Recently the FDA also approved two multiple dose DPIs developed by Glaxo. Many of these companies, including large pharmaceutical firms with financial and marketing resources and development capabilities substantially greater than those of Dura, are engaged in developing, marketing and selling products that compete with those offered by Dura. The selling prices of such products typically decline as competition increases. Furthermore, other products now in use or under development by others may be more effective than Dura's current or future products. The industry is characterized by rapid technological change, and competitors may develop their products more rapidly than Dura. Competitors may also be able to complete the regulatory process sooner and, therefore, may begin to market their products in advance of Dura's products. Dura believes that competition among both prescription pharmaceuticals and pulmonary drug delivery systems aimed at the respiratory infection, allergy, cough and cold and asthma and COPD markets will be based on, among other things, product efficacy, safety, reliability, availability and price. CLINICAL, DEVELOPMENT AND REGULATORY Dura's clinical, development and regulatory expenses relate primarily to product development and regulatory compliance activities. Clinical, development and regulatory expenses were $8,408,000, $18,540,000, and $24,391,000 for the years ended December 31, 1995, 1996 and 1997, respectively. The clinical, development and regulatory expenses associated with Spiros development, for which Dura recorded contract revenues from Dura Delivery Systems, Inc., Spiros Corp. and Spiros Corp. II, were $6,428,000, $15,932,000 and $20,605,000 for the years ended December 31, 1995, 1996, and 1997, respectively. See "Risks and Uncertainties--Patents and Proprietary Rights." PATENTS AND PROPRIETARY RIGHTS The Company presently holds five U.S. patents and four U.S. patent applications relating to the Spiros technology to be further developed by Spiros Corp. II. 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. The Company has also filed certain 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 12 Corp. II pursuant to the Technology License Agreement. Until the expiration or termination of the Purchase Option, the Company is required to file patent applications, at Spiros Corp. II's expense, with respect to inventions included in the program technology. The Company will be the owner and Spiros Corp. II will be the exclusive licensee for use with the Spiros products of any patents included in the program technology. The Company considers the protection of discoveries in connection with its development activities important to its business. The Company intends to seek patent protection in the U.S. and selected foreign countries where deemed appropriate. There can be no assurance that issued patents or subsequent patents, if issued, will adequately protect the Company or that such patents will provide protection against infringement claims by competitors. The Company has also filed certain foreign patent applications relating to Spiros technology. There can be no assurance that additional patents, U.S. or foreign, will be obtained covering the Company's products or that, if issued or licensed, the patents covering such products will provide substantial protection or be of commercial benefit. Federal court decisions establishing legal standards for determining the validity and scope of patents in the field are in transition. There can be no assurance that the historical legal standards surrounding questions of validity and scope will continue to be applied or that current defenses as to issued patents in the field will offer protection in the future. The Company also relies upon trade secrets, unpatented proprietary know-how and continuing technological innovation to develop its competitive position. The Company enters into confidentiality agreements with certain of its employees pursuant to which such employees agree to assign to the Company any inventions relating to the Company's business made by them while in the Company's employ. There can be no assurance, however, that others may not acquire or independently develop similar technology or, if patents are not issued with respect to products arising from research, that the Company will be able to maintain information pertinent to such research as proprietary technology or trade secrets. In connection with one of the patents described above, in 1993, the Company entered into an agreement with the principal inventor thereof 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 compensation of $6 million. Tornalate Inhalation Solution and Tornalate MDI are covered by patents filed by Sanofi-Winthrop, Inc. which expire in the near-term. The Keftab, Ceclor CD, Nasarel and Nasalide products or processes to make such products are covered by patents which expire between 2003 and 2007. Dura's other pharmaceutical products are not protected by patents. GOVERNMENT REGULATION The manufacturing and marketing of Dura's products are subject to regulation by Federal and state government authorities, including the FDA, the Environmental Protection Agency and the Occupational Safety and Health Administration, in the U.S. and other countries. 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 Dura's 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, each of the following steps and possibly others must be conducted: (i) preclinical testing (laboratory and possibly animal tests), (ii) the submission to the FDA of an IND application, which must become effective before human clinical trials may commence, (iii) adequate and well-controlled human clinical trials to establish safety and efficacy, (iv) the submission of an NDA to the FDA for marketing approval, and (v) FDA approval of the NDA prior to any commercial sale or shipment. The NDA must include, in addition to a compilation of preclinical and clinical data, complete information 13 about product performance and manufacturing facilities and processes. Prior to completion of the NDA review process, the FDA may conduct an inspection of the facility, manufacturing procedures, operating systems and personnel qualifications. In addition to obtaining FDA approval for each product, each domestic drug and/or device manufacturing facility must be registered with and approved by the FDA. Domestic manufacturing facilities are subject to biennial inspections by the FDA and inspections by other jurisdictions and must comply with Good Manufacturing Practice ("cGMPs") for both drugs and devices. To supply products for use in the U.S., foreign manufacturing establishments must comply with cGMP and other requirements and are subject to periodic inspection by the FDA or by regulatory authorities in such countries under reciprocal agreements with the FDA. Preclinical testing includes laboratory evaluation of product chemistry and animal studies, if appropriate, to assess the safety and efficacy of the product and its formulation. The results of the preclinical tests are submitted to the FDA as part of an IND application, and unless the FDA objects, the IND application will become effective 30 days following its receipt by the FDA, thus allowing the product to be tested in humans. Clinical trials involve the administration of the pharmaceutical product to healthy volunteers or to patients identified as having the condition for which the pharmaceutical agent is being tested. The pharmaceutical product is administered under the supervision of a qualified principal investigator. Clinical trials are conducted in accordance with Good Clinical Practice and protocols previously submitted to the FDA (as part of the IND application) that detail the objectives of the study, the parameters used to monitor safety and the efficacy criteria evaluated. Each clinical study is conducted under the auspices of an independent Institutional Review Board ("IRB") at the institution at which the study is conducted. The IRB considers, among other things, the design of the study, ethical factors, the safety of the human subjects and the possible liability risk for the institution. Clinical trials for new products are typically conducted in three sequential phases that may overlap. In Phase I, the initial introduction of the pharmaceutical into healthy human volunteers, the emphasis is on testing for safety (adverse effects), dosage tolerance, metabolism, distribution, excretion and clinical pharmacology. Phase II involves studies in a limited patient population to determine the initial efficacy of the pharmaceutical for specific targeted indications, to determine dosage tolerance and optimal dosage and to identify possible adverse side effect and safety risks. Once a compound is found to be effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to more fully evaluate clinical outcomes. The FDA reviews both the clinical plans and the results of the trials and may require the study to be discontinued at any time if there are significant safety issues. The results of the preclinical and clinical trials for pharmaceutical drug products such as those currently marketed by Dura or being developed by Dura are submitted to the FDA in the form of an NDA for marketing approval. FDA approval can take several months to several years, or approval may be denied. The approval process can be affected by a number of factors, including the severity of the side effects, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials. Additional animal studies or clinical trials may be requested during the FDA review process and may delay marketing approval. After FDA approval for the initial indication, further clinical trials are necessary to gain approval for the use of the product for any additional indications. The FDA may also 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, Dura believes, 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. Dura believes that the approval process for each drug/delivery combination now under development may be shorter than the full NDA process described above because the safety and efficacy of the compounds being developed on behalf of Spiros Corp. II have already been established in currently marketed formulations and delivery mechanisms. 14 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 Dura. Since completion of the pivotal trials, Dura has made a number of modifications to the Spiros system, some of which address problems encountered with the mechanical features of the Spiros delivery system during the pivotal trials. These changes are intended to improve the reliability, performance, manufacturability, and customer acceptance of the mechanical features of the Spiros delivery system. Dura expects that it will be required to complete testing and validation pursuant to cGMP requirements of the Spiros system as modified for commercial distribution, which could be costly and time-consuming. There can be no assurance that the FDA will not require Dura to undertake further laboratory testing, field testing and/or clinical studies in order to insure the safety and effectiveness of the Albuterol Spiros intended to be commercialized by Dura, on behalf of Spiros Corp. II, and to insure that it can be reliably manufactured. If a proposed change is deemed to be a major modification by the FDA, Dura, on behalf of Spiros Corp. II, could be required to repeat one or more of the clinical studies. Moreover, because of the time necessary to validate the changes to the Spiros system, there can be no assurance that Dura will be prepared for any FDA preapproval inspection of Dura's manufacturing facilities in a timely manner. Spiros Corp. II has contracted with Dura to have Dura manufacture Albuterol Spiros. If Dura is required to undertake additional laboratory testing and/or clinical studies or to postpone the preapproval inspection, or if Dura fails to complete the open label study in a timely manner, Dura, on behalf of Spiros Corp. II, could receive a non-approvable letter and, in any event, there could be a substantial delay in completion of the approval process. The Federal Food, Drug, and Cosmetic Act requires that any "new drug" must be approved pursuant to an NDA. The term "new drug" is defined as any drug which is not generally recognized among qualified experts as safe and effective for its labeled intended uses. Certain exemptions from this definition exist for products marketed without change since prior to 1938 (the date of enactment of the Federal Food, Drug, and Cosmetic Act) or, with respect to the need to show effectiveness, for drug products marketed prior to October 10, 1962 (the date of enactment of the "Drug Amendments of 1962"). Dura presently markets 21 drug products for which the FDA has not yet made a determination as to their status as new drugs under the Federal Food, Drug, and Cosmetic Act. The FDA is continuing an evaluation of the effectiveness of all products containing ingredients marketed prior to 1962 that are not the subject of an approved NDA as part of its Drug Efficacy Study Implementation ("DESI") program and will determine which are new drugs requiring approval through an NDA for marketing. The existence of currently-marketed prescription pharmaceuticals that contain one or more active ingredients first introduced in the marketplace before 1962 and that are marketed based on their manufacturers' belief that such products are not subject to the new drug provisions of the Act is recognized in paragraph B of the Food and Drug Administration's Compliance Policy Guide, 440.100. This Policy Guide indicates that the FDA will implement procedures to determine whether the new drug provisions are or are not applicable to these products. The Policy Guide requires that products covered by paragraph B not be similar or related to any drug included in the DESI program, or have a different formulation or conditions for use than products marketed before November 13, 1984. If a product is not covered by paragraph B, the FDA could make a determination as to whether or not the new drug provisions are applicable to it without first implementing the procedures called for by the Policy Guide. Dura believes that nine of its prescription pharmaceutical products may be covered by paragraph B of the Policy Guide and it is aware that one of its products may be considered to be similar or related to a DESI drug. Also, it is not aware of evidence to substantiate that three of its products have the same formulation or conditions for use as products marketed before November 13, 1984. These products could be subject at any time to an FDA determination that an NDA is required. If a final determination is made that a particular drug requires an approved NDA, such approval will be required for marketing to continue. If such a determination is made, the FDA might impose various requirements: for example, it might require that the current product be the subject of an approved NDA, that the product be reformulated and NDA approval obtained, that the product must be sold on an over-the-counter basis rather than as a prescription drug, or that the product must be removed from the market. There can be no assurance as to which of these courses the FDA will require or whether Dura will be able to 15 obtain any approvals which the FDA may deem necessary. If any of these actions are taken by the FDA, such actions could have a material adverse effect on Dura's business. In April 1996, the export provisions of the Federal Food, Drug, and Cosmetic Act were relaxed to permit the export of unapproved drugs to a foreign country, provided the product complies with the laws of that country and has valid marketing authorization in at least one of a list of designated "Tier 1" countries. Once a product is exported to a qualified foreign country, Dura will be subject to the applicable foreign regulatory requirements governing human clinical trials and marketing approval in that country. The requirements relating to the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country and there can be no assurance that Dura or any of its collaborators will be able to meet and fulfill the statutory requirements in a particular country. Health Script is subject to regulation by state regulatory authorities, principally state boards of pharmacy. In addition, Health Script is subject to regulation by other state and Federal agencies with respect to reimbursement for prescription drug benefits provided to individuals covered primarily by publicly funded programs. MANUFACTURING Dura's principal manufacturing facility is located near its headquarters in San Diego, California. The facility initially is intended to be used to formulate, mill, blend and manufacture drugs to be used with Spiros, pending regulatory approval. Equipment purchases and validation are currently scheduled through 1998. Dura's manufacturing facility must be registered with and licensed by various regulatory authorities and must comply with cGMP requirements prescribed by the FDA and the State of California. Dura is currently expanding its facilities to provide additional manufacturing capabilities. Dura will need to significantly scale up its current manufacturing operations from clinical supply scale to commercial scale and comply with cGMPs and other regulations prescribed by various regulatory agencies in the U.S. and other countries to achieve the prescribed quality and required levels of production of such products and to obtain marketing approval. The initial scale-up of Dura's manufacturing operations and completion of the regulatory compliance review process are scheduled to be completed during the first half of 1998. Dura expects that the cost to complete these tasks will not exceed $3 million. 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 the ability of Dura to manufacture products in connection with Spiros. Dura has limited experience manufacturing products for commercial purposes and currently does not have the capability to manufacture its pharmaceutical products and therefore is dependent on contract manufacturers for the production of such products for development and commercial purposes. Dura's current dependence upon others for the manufacture of its products may adversely affect the future profit margin, if any, on the sale of those products and Dura's ability to develop and deliver products on a timely and competitive basis. HUMAN RESOURCES Dura employed 644 employees (of which 618 are full-time) as of December 31, 1997, consisting of 349 people in sales and marketing (of which 319 constitute the field sales force and the managed care group), 62 in administration and finance, 90 in clinical, regulatory and research and development, 44 in operations and 99 at Health Script. None of Dura's employees are represented by a labor union and Dura believes it maintains positive relations with both field and corporate personnel. RISKS AND UNCERTAINTIES REDUCTION IN GROSS MARGINS. There is no proprietary protection for most of the products sold by Dura and substitutes for such products are sold by other pharmaceutical companies. Dura expects average selling prices for many of its products to decline over time due to competitive and reimbursement pressures. 16 While Dura will seek to mitigate the effect of this decline in average selling prices, there can be no assurance that Dura will be successful in these efforts. THIRD-PARTY REIMBURSEMENT; PRICING PRESSURES. The Company's commercial success will depend in part on the availability of adequate reimbursement from third-party healthcare payors, such as government and private health insurers and managed care organizations. Third-party payors are increasingly challenging the pricing of medical products and services. There can be no assurance that reimbursement will be available to enable the Company to achieve market acceptance of its products or to maintain price levels sufficient to realize an appropriate return on the Company's investment in product acquisition, in-licensing and development. The market for the Company's products may be limited by actions of third-party payors. For example, many managed healthcare organizations are now controlling the pharmaceuticals that are on their formulary lists. The resulting competition among pharmaceutical companies to place their products on these formulary lists has created a trend of downward pricing pressure in the industry. In addition, many managed care organizations are pursuing various ways to reduce pharmaceutical costs and are considering formulary contracts primarily with those pharmaceutical companies that can offer a full line of products for a given therapy sector or disease state. There can be no assurance that the Company's products will be included on the formulary lists of managed care organizations or that downward pricing pressure in the industry generally will not negatively impact the Company's operations. DEPENDENCE ON ACQUISITION OF RIGHTS TO PHARMACEUTICAL PRODUCTS. Dura's strategy for growth is dependent, in part, upon acquiring, in-licensing and co-promoting pharmaceuticals to targeted physicians. Other companies, including those with substantially greater resources, are competing with Dura for the rights to such products. There can be no assurance that Dura will be able to acquire, in-license or co-promote additional pharmaceuticals on acceptable terms, if at all. The failure to acquire, in-license, co-promote, develop or market commercially successful pharmaceuticals would have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, there can be no assurance that Dura, once it has obtained rights to a pharmaceutical product and committed to payment terms, will be able to generate sales sufficient to create a profit or otherwise avoid a loss on such product. DEVELOPMENT RISKS ASSOCIATED WITH SPIROS-Registered Trademark-. Spiros will require significant additional development efforts. There can be no assurance that development of Spiros will be completed successfully, that Spiros will not encounter problems in clinical trials that will cause the delay or suspension of such trials, that current or future testing will show any Spiros product to be safe or efficacious or that any Spiros product will receive regulatory approval in a timely manner, if at all. In addition, regulatory approvals will have to be obtained for each drug to be delivered through the use of Spiros prior to commercialization. Moreover, even if Spiros does receive regulatory approval, there can be no assurance that Spiros will be commercially successful, have all of the patent and other protections necessary to prevent competitors from producing similar products and not infringe on patent or other proprietary rights of third parties. The failure of any Spiros product to receive timely regulatory approval and achieve commercial success would have a material adverse effect on the Company's business, financial condition or results of operations. CUSTOMER CONCENTRATION; CONSOLIDATION OF DISTRIBUTION NETWORK. The distribution network for pharmaceutical products has in recent years been subject to increasing consolidation. As a result, a few large wholesale distributors control a significant share of the market and the number of independent drug stores and small chains has decreased. Further consolidation among, or any financial difficulties of, distributors or retailers could result in the combination or elimination of warehouses thereby stimulating product returns to Dura. Further consolidation or financial difficulties could also cause customers to reduce their inventory levels or otherwise reduce purchases of Dura's products which could result in a material adverse effect on Dura's business, financial condition or results of operations. Dura's principal customers are wholesale drug distributors and major drug store chains. For 1997, two wholesale customers (McKesson Corporation and Cardinal Health, Inc.) each individually accounted for 11% of sales. For 1996, three wholesale customers individually accounted for 17% (McKesson Corporation), 14% (Bergen Brunswig Corporation) and 13% (Cardinal Health, Inc.) of sales. For 1995, 17 two wholesale customers individually accounted for 16% (McKesson Corporation) and 11% (Cardinal Health, Inc.) of sales. The loss of any of these customers could have a material adverse effect upon Dura's business, financial condition or results of operations. SEASONALITY AND FLUCTUATING QUARTERLY RESULTS. Historically, as a result of the winter cold and flu season, industry-wide demand for respiratory products has been stronger in the first and fourth quarters than in the second and third quarters of the year. In addition, variations in the timing and severity of the winter cold and flu season have influenced Dura's results of operations in the past. While the growth and productivity of Dura's sales force and the introduction by Dura of new products have historically mitigated the impact of seasonality on Dura's results of operations, recent product acquisitions by Dura, especially Keftab-Registered Trademark- and Ceclor-Registered Trademark- CD, which are used to treat respiratory infections, increase the impact of seasonality on Dura's results of operations. No assurances can be given that Dura's results of operations will not be materially adversely affected by the seasonality of product sales. COMPETITION. Many companies, including large pharmaceutical firms with financial and marketing resources and development capabilities substantially greater than those of Dura, are engaged in developing, marketing and selling products that compete with those offered or planned to be offered by Dura. The selling prices of such products typically decline as competition increases. Further, other products now in use or under development by others may be more effective than Dura's current or future products. The industry is characterized by rapid technological change, and competitors may develop their products more rapidly than Dura. Competitors may also be able to complete the regulatory process sooner, and therefore, may begin to market their products in advance of Dura's products. Dura believes that competition among both prescription pharmaceuticals and pulmonary drug delivery systems aimed at the respiratory infection, allergy, cough and cold, and asthma and COPD markets will be based on, among other things, product efficacy, safety, reliability, availability and price. There are at least 25 other companies in the U.S. that are currently engaged in developing, marketing and selling respiratory pharmaceuticals. Additionally, there are at least 10 companies currently involved in the development, marketing or sales of dry powder pulmonary drug delivery systems. There are two types of DPIs currently in commercial use worldwide, individual dose and multiple dose. Individual dose DPIs currently marketed in the U.S. include the Rotohaler-TM- (developed and marketed by Glaxo) and the Spinhaler-Registered Trademark- (developed and marketed by Fisons Limited). The Turbuhaler-Registered Trademark- (developed and marketed by Astra), a multiple dose DPI, is the leading DPI in worldwide sales. In June 1997, the FDA approved the first Turbuhaler product, the Pulmicort Turbuhaler, for marketing in the U.S., which Astra launched in early 1998. Recently the FDA also approved two multiple dose DPIs developed by Glaxo. DEPENDENCE ON THIRD PARTIES. Dura's strategy for development and commercialization of certain of its products is dependent upon entering into various arrangements with corporate partners, licensors and others and upon the subsequent success of these partners, licensors and others in performing their obligations. There can be no assurance that Dura will be able to negotiate acceptable arrangements in the future or that such arrangements or its existing arrangements will be successful. In addition, partners, licensors and others may pursue alternative technologies or develop alternative compounds or drug delivery systems either on their own or in collaboration with others, including Dura's competitors. Dura has limited experience manufacturing products for commercial purposes and currently does not have the capability to manufacture its pharmaceutical products and therefore is dependent on contract manufacturers for the production of such products for development and commercial purposes. The manufacture of Dura's products is subject to Good Manufacturing Practice ("cGMP") regulations prescribed by the FDA. Dura relies on a single manufacturer for each of its products. There can be no assurance that Dura will be able to continue to obtain adequate supplies of such products in a timely fashion at acceptable quality and prices. Also, there can be no assurance that Dura will be able to enter into agreements for the manufacture of future products with manufacturers whose facilities and procedures comply with cGMP and other regulatory requirements. In the event that Dura is unable to obtain or retain third-party manufacturing, it may not be able to commercialize its products as planned. Dura's current dependence upon others for the 18 manufacture of its products may adversely affect future profit margins on the sale of those products and Dura's ability to develop and deliver products on a timely and competitive basis. LIMITED MANUFACTURING EXPERIENCE. Dura's principal manufacturing facility is intended to be used to formulate, mill, blend and manufacture drugs to be used with Spiros, pending regulatory approval. Equipment purchases and validation are currently scheduled through 1998. Dura's manufacturing facility must be registered with and licensed by various regulatory authorities and must comply with current cGMP requirements prescribed by the FDA and the State of California. Dura will need to significantly scale up its current manufacturing operations and comply with cGMPs and other regulations prescribed by various regulatory agencies in the U.S. and other countries to achieve the prescribed quality and required levels of production of such products to obtain marketing approval. Any failure or significant delay in the validation of or obtaining a satisfactory regulatory inspection of the new facility or failure to successfully scale up could have a material adverse effect on the ability of Dura to manufacture products in connection with Spiros. Dura intends to utilize third parties to produce components of and assemble the Spiros aerosol generator. Such third parties have only produced limited quantities of components and assembled limited numbers of generators and will be required to significantly scale up their activities and to produce components on a timely and consistent basis and which meet applicable specifications. There can be no assurance that such third parties will be successful in attaining acceptable service levels or meeting cGMP requirements. Any failure or delay in the scale up of aerosol generator manufacturing would have a material adverse effect on the ability of Dura to commercialize Spiros products. MANAGING GROWTH OF BUSINESS. Dura has experienced significant growth as total revenues increased 58% in 1995, 102% in 1996, and 74% in 1997, as compared to prior periods, primarily as a result of the acquisition or in-licensing of additional respiratory pharmaceutical products. Due to Dura's emphasis on acquiring and in-licensing respiratory pharmaceutical products, Dura anticipates that the integration of the recently acquired products, as well as any future acquisitions, will require significant management attention and expansion of its sales force. On February 22, 1998, the Company announced that it planned to begin expanding its sales force immediately from approximately 270 representatives to over 450 representatives by the end of 1998 to increase the promotional activity of its current products and to prepare for the launch, subject to receiving regulatory approval, of Albuterol Spiros. Dura's ability to achieve and maintain profitability is based on management's ability to manage its changing business effectively. UNCERTAINTY OF PROFITABILITY; NEED FOR ADDITIONAL FUNDS. Dura has experienced significant operating losses in the past and at December 31, 1997, Dura's accumulated deficit was $163.7 million. The acquisition and in-licensing of products, the expansion and maintenance of Dura's sales force in response to acquisition, in-licensing, and enhanced promotion of products and planned introduction of Spiros products, the upgrade and expansion of its facilities, continued pricing pressure, or the exercise of the Stock Purchase Option or the Product Options (defined below) will require the commitment of substantial capital resources and may also result in significant impairment of profits, or losses. Depending upon, among other things, the acquisition and in-licensing opportunities available, Dura may need to raise additional funds for these purposes. Adequate funds for these purposes may not be available when needed or on terms acceptable to Dura. Insufficient funds may require Dura to delay, scale back or suspend some or all of its product acquisition, in-licensing and promotional programs, the upgrade and expansion of its facilities, or the potential exercise of the Stock Purchase Option, and/or the Product Options. Dura anticipates that its existing capital resources, together with cash expected to be generated from operations and available bank borrowings, should be sufficient to finance its current operations and working capital requirements through at least the next 12 months. EFFECT OF EXERCISE OF THE STOCK PURCHASE OPTION AND THE PRODUCT OPTIONS; DILUTION. Dura's Purchase Option with respect to the outstanding shares of callable common stock of Spiros Corp. II expires on December 31, 2002. If Dura exercises the Purchase Option, it will be required to make a substantial cash payment or to issue shares of Dura common stock, or both. A payment in cash could reduce Dura's capital resources. A payment in shares of Dura common stock would result in a decrease in the percentage ownership of Dura's shareholders at that time. The exercise of the 19 Purchase Option will likely require Dura to record a significant charge to earnings and may adversely impact future operating results. If Dura does not exercise the Stock Purchase Option prior to its expiration, Dura's rights in and to Spiros Corp. II with respect to certain compounds will terminate. As part of Dura's contractual relationship with Spiros Corp. II, Dura received the Product Options to purchase certain rights to the use of Spiros with albuterol and with an additional product other that albuterol. If Dura exercises either of the Product Options, it will be required to make a significant cash payment which could have an adverse effect on its capital resources. Dura may not have sufficient capital resources to exercise the Product Options, which may result in Dura's loss of valuable rights. GOVERNMENT REGULATION; NO ASSURANCE OF FDA APPROVAL. Development, testing, manufacturing and marketing of pharmaceutical products including drug delivery systems are subject to extensive regulation by numerous governmental authorities in the U.S. and other countries. The process of obtaining FDA approval of pharmaceutical products and drug delivery systems is costly and time consuming. Any new pharmaceutical product must undergo rigorous preclinical and clinical testing and an extensive regulatory approval process mandated by the FDA. Such regulatory review includes the determination of manufacturing capability and product performance. Marketing of drug delivery systems also requires FDA approval, which can be costly and time consuming to obtain. A separate regulatory approval will need to be obtained for each Spiros drug delivery system. There can be no assurance that the pharmaceutical products currently in development by Dura or those products acquired or in-licensed will be approved by the FDA. In addition, there can be no assurance that all necessary approvals will be granted for future products or that FDA review or actions will not involve delays caused by the FDA's request for additional information or testing that could adversely affect the time to market and sale of the products. For both currently marketed products and future products of Dura, failure to comply with applicable regulatory requirements can, among other things, result in the suspension of regulatory approval, as well as possible civil and criminal sanctions. The FDA is continuing an evaluation of the effectiveness of all drug products containing ingredients marketed prior to 1962 (the year of enactment of the "Drug Amendments of 1962" to the Federal Food, Drug and Cosmetic Act) as part of its DESI program and will determine which drugs are considered "new drugs" requiring approval through a NDA for marketing. A Policy Guide (CPG 440.100) issued by the FDA indicates that the FDA will implement procedures to determine whether the new drug provisions are applicable to existing products. This Policy Guide requires that products covered by paragraph B not be similar or related to any drug included in the DESI program or have a different formulation or conditions for use than products marketed before November 13, 1984. If a final determination is made that a particular drug required an approved NDA, such approval will be required for marketing to continue. If such a determination is made, the FDA might impose various requirements; for example, it might require that the current product be the subject of an approved NDA, that the product be reformulated and an NDA approval be obtained, that the product must be sold on an over-the-counter basis rather than as a prescription drug or that the products must be removed from the market. Dura believes that nine of its prescription pharmaceutical products may be covered by paragraph B of the Policy Guide and is aware that one of its products may be considered to be similar or related to a DESI drug. Also, Dura is not aware of evidence to substantiate that three of its products have the same formulation or conditions for use as products marketed before November 13, 1984. There can be no assurance as to which regulatory course the FDA will follow, if any, with respect to many of Dura's pharmaceutical products or whether Dura will be able to obtain any approvals that the FDA may deem necessary. If any negative actions are taken by the FDA, such actions could have a material adverse effect on business of Dura. Dura's Health Script subsidiary is subject to regulation by state regulatory authorities, principally state boards of pharmacy. In addition, Health Script is subject to regulation by other state and federal agencies with respect to reimbursement for prescription drug benefits provided to individuals covered primarily by publicly funded programs. PATENTS AND PROPRIETARY RIGHTS. Dura's success will depend in part on its ability to obtain patents on current or future products or formulations, defend its patents, maintain trade secrets and operate without 20 infringing upon the proprietary rights of others both in the U.S. and abroad. However, only six of the pharmaceuticals currently marketed by Dura are covered by patents. Dura also has licenses or license rights to certain other U.S. and foreign patent and patent applications. There can be no assurance that patents, U.S. or foreign, will be obtained, or that, if issued or licensed to Dura, they will be enforceable or will provide substantial protection from competition or be of commercial benefit to Dura or that Dura will possess the financial resources necessary to enforce or defend any of its patent rights. Federal court decisions establishing legal standards for determining the validity and scope of patents in the field are in transition. There can be no assurance that the historical legal standards surrounding questions of validity and scope will continue to be applied or that current defenses as to issued patents in the field will offer protection in the future. The commercial success of Dura will also depend upon avoiding the infringement of patents issued to competitors and upon maintaining the technology licenses upon which certain of Dura's current products are, or any future products under development might be, based. Litigation, which could result in substantial cost to Dura, may be necessary to enforce Dura's patent and license rights or to determine the scope and validity of proprietary rights of third parties. If any of Dura's products are found to infringe upon patents or other rights owned by third parties, Dura could be required to obtain a license to continue to manufacture or market such products. There can be no assurance that licenses to such patent rights would be made available to Dura on commercially reasonable terms, if at all. If Dura does not obtain such licenses, it could encounter delays in marketing affected products while it attempts to design around such patents or it could find that the development, manufacture or sale of products requiring such licenses is not possible. Dura currently has certain licenses from third parties and in the future may require additional licenses from other parties to develop, manufacture and market commercially viable products effectively. There can be no assurance that such licenses will be obtainable on commercially reasonable terms, if at all, or that the patents underlying such licenses will be valid and enforceable. PRODUCT LIABILITY AND RECALL. Dura faces an inherent business risk of exposure to product liability claims in the event that the use of its technologies or products is alleged to have resulted in adverse effects. Such risks will exist even with respect to those products that receive regulatory approval for commercial sale. While Dura has taken, and will continue to take, what it believes are appropriate precautions, there can be no assurance that it will avoid significant product liability exposure. Dura currently has product liability insurance; however, there can be no assurance that the level or breadth of any insurance coverage will be sufficient to fully cover potential claims. There can be no assurance that adequate insurance coverage will be available in the future at acceptable costs, if at all, or that a product liability claim or recall would not materially and adversely affect the business or financial condition of Dura. ATTRACTION AND RETENTION OF KEY PERSONNEL. The Company is highly dependent on the principal members of its management staff, the loss of whose services might impede the achievement of corporate objectives. Although the Company believes that it is adequately staffed in key positions and that it will be successful in retaining skilled and experienced management, operational and scientific personnel, there can be no assurance that the Company will be able to attract and retain such personnel on acceptable terms. The loss of the services of key scientific, technical and management personnel could have a material adverse effect on the Company, especially in light of the Company's recent significant growth. TERMINATION OF MERGER AGREEMENT WITH SCANDIPHARM, INC. On December 1, 1997, the Company terminated a merger agreement with Scandipharm, Inc. ("Scandipharm") entered into on October 20, 1997. On January 16, 1998, Scandipharm filed suit against the Company for breach of contract. On January 19, 1998, the Company filed suit against Scandipharm seeking a declaratory judgment that Dura's termination of the merger did not breach the merger agreement, and for damages against Scandipharm. The Company believes that it had the right to terminate the merger agreement and that Scandipharm's claims for specific performance under the agreement or for unspecified damages are without merit, and that outcome of this matter will not have a material adverse effect on the Company's financial position or results of operations. CHANGE IN CONTROL. Certain provisions of Dura's charter documents and terms relating to the acceleration of the exercisability of certain warrants and options relating to the purchase of such securities by Dura in the event of a change in control may have the effect of delaying, deferring or preventing a change in 21 control of Dura, thereby possibly depriving shareholders of receiving a premium for their shares of the Dura common stock. In addition, upon a Change in Control (as defined), Dura will be required to offer to purchase for cash all of the outstanding 3 1/2% Convertible Subordinated Notes (the "Notes") at a purchase price of 100% of the principal amount thereof, plus accrued but unpaid interest through the Change in Control Purchase Date (as defined). The Change in Control purchase features of the Notes may in certain circumstances have an anti-takeover effect. If a Change in Control were to occur, there can be no assurance that Dura would have sufficient funds to pay the Change in Control Purchase Price (as defined) for all Notes tendered by the holders thereof and to repay other indebtedness that may become due as a result of any Change in Control. VOLATILITY OF DURA STOCK PRICE. The market prices for securities of emerging companies, including Dura, have historically been highly volatile. Future announcements concerning Dura or its competitors may have a significant impact on the market price of the Dura common stock. Such announcements might include financial results, the results of testing, technological innovations, new commercial products, changes to government regulations, government decisions on commercialization of products, developments concerning proprietary rights, litigation or public concern as to safety of Dura's products. ABSENCE OF DIVIDENDS. The Company has never paid any cash dividends on its common stock. In accordance with a bank loan agreement, Dura is prohibited from paying cash dividends without prior bank approval. Dura currently anticipates that it will retain all available funds for use in its business and does not expect to pay any cash dividends in the foreseeable future. YEAR 2000 COMPLIANCE CONSIDERATIONS. The Company recognizes the need to ensure its operations will not be adversely impacted by the inability of the Company's systems to process data having dates on or after January 1, 2000 ("Year 2000"). Processing errors due to software failure arising from calculations using the Year 2000 date are a recognized risk. The Company is currently addressing the risk, with respect to the availability and integrity of its financial systems and the reliability of its operating systems, and is in the process of communicating with suppliers, customers, financial institutions and others with whom it conducts business to assess whether they are or will be Year 2000 compliant. While the Company believes its planning efforts are adequate to address the Year 2000 concerns, there can be no assurance that the systems of other companies on which the Company's systems and operations rely will be converted on a timely basis and will not have a material effect on the Company. In addition, the potential impact of the Year 2000 on others with whom the Company does business and any resulting effects on the Company cannot be reasonably estimated at this time. The cost of the Company's Year 2000 initiatives is not expected to be material to the Company's results of operations or financial position. ITEM 2. PROPERTIES The Company owns and occupies a new 77,000 square foot headquarters facility in San Diego, California, on a parcel of land that it purchased in 1996. Dura commenced construction of a 125,000 square foot to be used initially for research and development purposes. In addition, Dura owns two buildings that are situated on another parcel of land near its headquarters. One building, consisting of approximately 31,000 square feet, is currently vacant, but is expected to be used for research and development and manufacturing purposes. The second building, consisting of approximately 49,000 square feet, contains Dura's manufacturing facility that will be used to formulate, mill, blend and fill drugs to be used with Spiros, laboratory and research facilities and warehouse space. Dura also occupies an additional 34,000 square feet of office and laboratory space pursuant to a short-term lease. The Company also leases approximately 16,660 square feet of space in Denver, Colorado, which houses the operations of Health Script's mail service pharmacy. The lease term expires in January 2001 with one five-year renewal option. 22 The Company considers its facilities adequate for its current needs and believes that additional space can be obtained in the future, if necessary. ITEM 3. LEGAL PROCEEDINGS On December 1, 1997, the Company terminated a merger agreement with Scandipharm entered into on October 20, 1997. On January 16, 1998, Scandipharm filed suit against the Company in the state court in Alabama for breach of contract, seeking specific performance of the merger agreement and money damages. On January 19, 1998, the Company filed suit against Scandipharm in the Chancery Court in Delaware seeking a declaratory judgment that the Company had the right to terminate the merger agreement and for damages against Scandipharm. The Company believes that it had the right to terminate the merger agreement and that Scandipharm's claims for specific performance and for unspecified damages are without merit, and that the outcome of this matter will not have a material adverse effect on its financial position or results of operations. One member of the Company's Board of Directors is also on the Board of Directors of Scandipharm. 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 The information required by Item 5 of Form 10-K is incorporated herein by reference from the information contained in the sections captioned "Market Information on Common Stock," "Shareholders," and "Dividends" in the Annual Report, extracts of which are attached hereto as Exhibit 13. On December 19, 1997, the Company issued 896,606 shares of its common stock which were not registered pursuant to the Securities Act of 1933, as amended (the "Act"). The shares were issued to the shareholders of Spiros Corp., primarily venture capital investors, in connection with the Company's acquisition of all of the outstanding securities of Spiros Corp., a separate, private company. The purchase price of $45,707,000 consisted of the shares of Dura common stock, valued at $43,755,000, and a cash payment of $1,952,000. The shares of common stock were exempt from registration pursuant to section 4(2) of the Act. On December 31, 1997, the Company issued a warrant to a separate, unaffiliated company which was an existing security holder of the Company, to purchase 200,000 shares of its common stock. Neither the warrant nor the underlying shares of the Company's common stock were registered pursuant to the Act. The warrant is exercisable through December 31, 2002 at an exercise of $45.12 per share of common stock. The warrant was issued as part of the consideration paid by the Company to terminate a ten-year royalty agreement which the Company entered into in 1994, in exchange for the security holder's prior rights to receive certain warrants. No commission or renumeration was paid for soliciting such exchange. The warrant was exempt from registration pursuant to section 3(a)(9) of the Act. ITEM 6. SELECTED FINANCIAL DATA The information required by Item 6 of Form 10-K is incorporated herein by reference from the information contained in the section captioned "Selected Financial Data" in the Annual Report, extracts of which are attached hereto as Exhibit 13. 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by Item 7 of Form 10-K is incorporated herein by reference from the information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report, extracts of which are attached hereto as Exhibit 13. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Item 8 of Form 10-K is incorporated herein by reference from the information contained in the section captioned "Financials" in the Annual Report, extracts of which are attached hereto as Exhibit 13. 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 on or about April 16, 1998, 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 on or about April 16, 1998, 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 on or about April 16, 1998, 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 on or about April 16, 1998, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the headings "Principal Stockholders" and "Common Stock Ownership of Management," appearing in the Proxy Statement to be filed on or about April 16, 1998, is incorporated herein by reference. 24 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 on or about April 16, 1998, 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 Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Independent Auditors' Report (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 thereto. (a) 3. EXHIBITS Exhibit No. Description ------- ----------- 13) 2.1 Agreement and Plan of Merger dated July 1, 1997 of Dura Pharmaceuticals, Inc. (a Delaware corporation) and Dura Pharmaceuticals, Inc. (a California corporation). 15) 2.2 Agreement and Plan of Merger dated December 18, 1997 between the Company, Spiros Development Corporation and SDC Acquisition Corp. 13) 3.1 Certificate of Incorporation. 13) 3.2 Bylaws. 17) 4.1 Specimen Common Stock Certificate. 14) 4.2 Indenture, including form of Note, dated July 30, 1997, between the Company and Chase Trust Company of California, as trustee, with respect to the 3 1/2% Convertible Subordinated Notes due 2002. 25 14) 4.3 Form of 3 1/2% Convertible Subordinated Note (included in Exhibit 4.2). 15) 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. 15) 4.5 Form of SDCII Warrant (included in Exhibit 4.4). 15) 4.8 Specimen Unit Certificate. 3) 4.9 Form of Series W Warrant. 1) 4.10 Form of Series S Warrant. 1) 10.1 License Agreement between the Company and Sterling Drug Inc. currently known as Sterling Winthrop, Inc., dated June 26, 1991 (with certain confidential portions omitted). 1) 10.2 License Agreement dated June 1, 1990 between the Company and Mark B. Mecikalski, M.D., (with certain confidential portions omitted). 14) + 10.3 Form of Indemnification Agreement between the Company and each of its directors. 14) + 10.4 Form of Indemnification Agreement between the Company and each of its officers. 2) 10.5 Bitolterol Mesylate 0.2% Inhalation Solution and Tornalate-Registered Trademark- (Bitolterol Mesylate) Metered Dose Inhaler License Agreement dated June 24, 1992 between Sanofi Winthrop, Inc., as successor, and the Company (with certain confidential portions omitted). 14) + 10.6 1992 Stock Option Plan, as amended. 16) + 10.7 Form of Notice of Grant of Stock Option. 16) + 10.8 Form of Stock Option Agreement. 2) + 10.9 Employment Agreement dated May 7, 1990 between the Company and Cam L. Garner. 4) 10.10 Assignment Agreement dated March 12, 1993 between the Company and Mark B. Mecikalski, M.D., (with certain confidential portions omitted). 5) 10.11 Registration Rights Agreement dated April 17, 1996 between the Company and Elan International Services Limited, as successor in interest. 11) 10.12 Letter Agreements between the Company and Elan International Services Limited, dated March 1, 1995 and September 3, 1996. 6) 10.13 Technology Access License and Royalty Agreement dated September 5, 1994 between Elan Corporation, plc and the Company (with certain confidential portions omitted). 26 7) 10.14 Purchase Agreement dated June 14, 1995 between the Company and Abbott Laboratories, Ross Products Division, including list of Schedules and Exhibits thereto (with certain confidential portions omitted). 8) 10.15 Investors' Rights Agreement dated December 29, 1995 between the Company and the investors listed on Schedule A thereto. 9) 10.16 Agreement for Purchase and Sale of Assets dated June 17, 1996 between the Company and Procter & Gamble Pharmaceuticals, Inc. (with certain confidential portions omitted). 10) 10.17 Licensing Agreement dated August 21, 1996 between the Company and Eli Lilly and Company (with certain confidential portions omitted). 11) 10.18 Manufacturing Agreement dated August 21, 1996 between the Company and Eli Lilly and Company (with certain confidential portions omitted). 13) 10.19 Business Loan Agreement dated April 14, 1997 between the Company and Bank of America National Trust and Savings Association. 12) 10.20 Syntex Asset Purchase Agreement dated March 27, 1997 between the Company and Syntex (USA), Inc. 12) 10.21 SPIL Asset Purchase Agreement dated March 27, 1997 between the Company and Syntex Pharmaceuticals International Limited. 14) 10.22 Amendment No. 1 to Business Loan Agreement dated May 8, 1997 between the Company and Bank of America National Trust and Savings Association. 14) 10.23 Amendment No. 2 to Business Loan Agreement dated July 30, 1997 between the Company and Bank of America National Trust and Savings Association. 10.24 Amendment No. 3 to Business Loan Agreement dated October 28, 1997 between the Company and Bank of America National Trust and Savings Association. + 10.25 Deferred Compensation Plan. 15) 10.26 Technology License Agreement dated December 22, 1997 between the Company, Dura Delivery Systems, Inc., Spiros Development Corporation and Spiros Development Corporation II, Inc. 15) 10.27 Development Agreement dated December 22, 1997 between the Company and Spiros Development Corporation II, Inc. 15) 10.28 Albuterol and Product Option Agreement dated December 22, 1997 between the Company and Spiros Development Corporation II, Inc. 15) 10.29 Manufacturing and Marketing Agreement dated December 22, 1997 between the Company and Spiros Development Corporation II, Inc. 15) 10.30 Services Agreement dated December 22, 1997 between the Company and Spiros Development Corporation II, Inc. +10.31 Employment Agreement dated May 1, 1996 between the Company and David S. Kabakoff. 27 11 Statements Re Computations of Net Income (Loss) Per Share. 13 1997 Annual Report to Shareholders (including only those items incorporated by reference). 23 Independent Auditors' Consent. 24 Power of Attorney (See Signature page). 27.1 Financial Data Schedule for the year ended December 31, 1997. 27.2 Financial Data Schedule for the years ended December 31, 1995 and December 31, 1996. 27.3 Financial Data Schedule for the quarters ended March 31, 1997, June 30, 1997, and September 30, 1997. 27.4 Financial Data Schedule for the quarters ended March 31, 1996, June 30, 1996, and September 30, 1996. 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 June 30, 1994. 6) Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 1994, as amended. 7) Incorporated by reference to the Company's Form 8-K, dated June 14, 1995, as amended. 8) Incorporated by reference to the Company's Form 8-K, dated December 29, 1995, as amended. 9) Incorporated by reference to the Company's Form 8-K, dated July 3, 1996. 10) Incorporated by reference to the Company's Form 8-K, dated September 5, 1996, as amended. 11) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1996. 12) Incorporated by reference to the Company's Form 8-K, dated May 7, 1997, as amended. 13) Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 1997. 14) Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 1997. 15) Incorporated by reference to the Company's Form 8-K, dated December 19, 1997. 16) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-34551), filed August 28, 1997. 17) Incorporated by reference to the Company's Registration Statement on Form 8-A, filed December 11, 1997. + Management contract or compensation plan or arrangement. 28 (b) REPORTS ON FORM 8-K. On October 10, 1997, the Company filed a current Report on Form 8-K dated October 10, 1997, as amended on October 21, 1997 and November 26, 1997. On October 24, 1997, the Company filed a current Report on Form 8-K dated October 21, 1997. On December 1, 1997, the Company filed a current Report on Form 8-K dated December 1, 1997. On January 5, 1998, the Company filed a current Report on Form 8-K dated December 19, 1997. 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. 29 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 27, 1998 DURA PHARMACEUTICALS, INC. By: /s/ Cam L. Garner ----------------- Cam L. Garner, Chairman, President 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 James W. Newman, 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, President and March 27, 1998 - -------------------------- Chief Executive Officer (Cam L.Garner) (Principal Executive Officer) /s/ David S. Kabakoff Executive Vice President March 27, 1998 - -------------------------- and Director (David S. Kabakoff) /s/ James W. Newman Senior Vice President, March 27, 1998 - -------------------------- Finance and Administration, (James W. Newman) and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Walter F. Spath Senior Vice President, March 27, 1998 - -------------------------- Sales and Marketing and (Walter F. Spath) Director /s/ James C. Blair Director March 27, 1998 - -------------------------- (James C. Blair) /s/ Herbert J. Conrad Director March 27, 1998 - -------------------------- (Herbert J. Conrad) /s/ Joseph C. Cook, Jr. Director March 27, 1998 - -------------------------- (Joseph C. Cook, Jr.) /s/ David F. Hale Director March 27, 1998 - -------------------------- (David F. Hale) /s/ Gordon V. Ramseier Director March 27, 1998 - -------------------------- (Gordon V. Ramseier) /s/ Charles G. Smith Director March 27, 1998 - -------------------------- (Charles G. Smith) 30 EXHIBIT INDEX TO FORM 10-K DURA PHARMACEUTICALS, INC. Exhibit No. Description ------- ----------- 13) 2.1 Agreement and Plan of Merger dated July 1, 1997 of Dura Pharmaceuticals, Inc. (a Delaware corporation) and Dura Pharmaceuticals, Inc. (a California corporation). 15) 2.2 Agreement and Plan of Merger dated December 18, 1997 between the Company, Spiros Development Corporation and SDC Acquisition Corp. 13) 3.1 Certificate of Incorporation. 13) 3.2 Bylaws. 17) 4.1 Specimen Common Stock Certificate. 14) 4.2 Indenture, including form of Note, dated July 30, 1997, between the Company and Chase Trust Company of California, as trustee, with respect to the 3 1/2% Convertible Subordinated Notes due 2002. 14) 4.3 Form of 3 1/2% Convertible Subordinated Note (included in Exhibit 4.2). 15) 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. 15) 4.5 Form of SDCII Warrant (included in Exhibit 4.4). 15) 4.8 Specimen Unit Certificate. 3) 4.9 Form of Series W Warrant. 1) 4.10 Form of Series S Warrant. 1) 10.1 License Agreement between the Company and Sterling Drug Inc. currently known as Sterling Winthrop, Inc., dated June 26, 1991 (with certain confidential portions omitted). 1) 10.2 License Agreement dated June 1, 1990 between the Company and Mark B. Mecikalski, M.D., (with certain confidential portions omitted). 14) + 10.3 Form of Indemnification Agreement between the Company and each of its directors. 14) + 10.4 Form of Indemnification Agreement between the Company and each of its officers. 31 2) 10.5 Bitolterol Mesylate 0.2% Inhalation Solution and Tornalate-Registered Trademark- (Bitolterol Mesylate) Metered Dose Inhaler License Agreement dated June 24, 1992 between Sanofi Winthrop, Inc., as successor, and the Company (with certain confidential portions omitted). 14) + 10.6 1992 Stock Option Plan, as amended. 16) + 10.7 Form of Notice of Grant of Stock Option. 16) + 10.8 Form of Stock Option Agreement. 2) + 10.9 Employment Agreement dated May 7, 1990 between the Company and Cam L. Garner. 4) 10.10 Assignment Agreement dated March 12, 1993 between the Company and Mark B. Mecikalski, M.D., (with certain confidential portions omitted). 5) 10.11 Registration Rights Agreement dated April 17, 1996 between the Company and Elan International Services Limited, as successor in interest. 11) 10.12 Letter Agreements between the Company and Elan International Services Limited, dated March 1, 1995 and September 3, 1996. 6) 10.13 Technology Access License and Royalty Agreement dated September 5, 1994 between Elan Corporation, plc and the Company (with certain confidential portions omitted). 7) 10.14 Purchase Agreement dated June 14, 1995 between the Company and Abbott Laboratories, Ross Products Division, including list of Schedules and Exhibits thereto (with certain confidential portions omitted). 8) 10.15 Investors' Rights Agreement dated December 29, 1995 between the Company and the investors listed on Schedule A thereto. 9) 10.16 Agreement for Purchase and Sale of Assets dated June 17, 1996 between the Company and Procter & Gamble Pharmaceuticals, Inc. (with certain confidential portions omitted). 10) 10.17 Licensing Agreement dated August 21, 1996 between the Company and Eli Lilly and Company (with certain confidential portions omitted). 11) 10.18 Manufacturing Agreement dated August 21, 1996 between the Company and Eli Lilly and Company (with certain confidential portions omitted). 13) 10.19 Business Loan Agreement dated April 14, 1997 between the Company and Bank of America National Trust and Savings Association. 12) 10.20 Syntex Asset Purchase Agreement dated March 27, 1997 between the Company and Syntex (USA), Inc. 12) 10.21 SPIL Asset Purchase Agreement dated March 27, 1997 between the Company and Syntex Pharmaceuticals International Limited. 32 14) 10.22 Amendment No. 1 to Business Loan Agreement dated May 8, 1997 between the Company and Bank of America National Trust and Savings Association. 14) 10.23 Amendment No. 2 to Business Loan Agreement dated July 30, 1997 between the Company and Bank of America National Trust and Savings Association. 10.24 Amendment No. 3 to Business Loan Agreement dated October 28, 1997 between the Company and Bank of America National Trust and Savings Association. + 10.25 Deferred Compensation Plan. 15) 10.26 Technology License Agreement dated December 22, 1997 between the Company, Dura Delivery Systems, Inc., Spiros Development Corporation and Spiros Development Corporation II, Inc. 15) 10.27 Development Agreement dated December 22, 1997 between the Company and Spiros Development Corporation II, Inc. 15) 10.28 Albuterol and Product Option Agreement dated December 22, 1997 between the Company and Spiros Development Corporation II, Inc. 15) 10.29 Manufacturing and Marketing Agreement dated December 22, 1997 between the Company and Spiros Development Corporation II, Inc. 15) 10.30 Services Agreement dated December 22, 1997 between the Company and Spiros Development Corporation II, Inc. + 10.31 Employment Agreement dated May 1, 1996 between the Company and David S. Kabakoff. 11 Statements Re Computations of Net Income (Loss) Per Share. 13 1997 Annual Report to Shareholders (including only those items incorporated by reference). 23 Independent Auditors' Consent. 24 Power of Attorney (See Signature page). 27.1 Financial Data Schedule for the year ended December 31, 1997. 27.2 Financial Data Schedule for the years ended December 31, 1995 and December 31, 1996. 27.3 Financial Data Schedule for the quarters ended March 31, 1997, June 30, 1997, and September 30, 1997. 27.4 Financial Data Schedule for the quarters ended March 31, 1996, June 30, 1996, and September 30, 1996. 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. 33 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 June 30, 1994. 6) Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 1994, as amended. 7) Incorporated by reference to the Company's Form 8-K, dated June 14, 1995, as amended. 8) Incorporated by reference to the Company's Form 8-K, dated December 29, 1995, as amended. 9) Incorporated by reference to the Company's Form 8-K, dated July 3, 1996. 10) Incorporated by reference to the Company's Form 8-K, dated September 5, 1996, as amended. 11) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1996. 12) Incorporated by reference to the Company's Form 8-K, dated May 7, 1997, as amended. 13) Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 1997. 14) Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 1997. 15) Incorporated by reference to the Company's Form 8-K, dated December 19, 1997. 16) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-34551), filed August 28, 1997. 17) Incorporated by reference to the Company's Registration Statement on Form 8-A, filed December 11, 1997. + Management contract or compensation plan or arrangement. 34 EX-10.24 2 EXHIBIT 10.24 EXHIBIT 10.24 AMENDMENT NO. 3 TO BUSINESS LOAN AGREEMENT This Amendment No. 3 (the "Amendment) dated as of October 28, 1997 is between Dura Pharmaceuticals, Inc. (the "Borrower") and Bank of America National Trust and Savings Association (the "Bank"). RECITALS A. The Bank and the Borrower entered into that certain Business Loan Agreement dated as of April 14, 1997, as amended as of May 8, 1997 and July 30, 1997 (the "Agreement"). B. The Bank and the Borrower desire to amend the Agreement to permit the Borrower to restructure its business in certain respects. 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 CONSOLIDATED FINANCIALS. Paragraph 6.2(b) is amended to read as follows: "(b) Within 45 days of the period's end, the Borrower's quarterly financial statements, including the fourth quarter. These financial statements are to include year-to-date financial reporting and may be Borrower prepared. The statements shall be prepared on (i) a consolidated basis, (ii) on a consolidating basis by division, including, without limitation, the Healthscript division, the HealthCo division, and any other division of the Borrower, and (iii) on a combined basis for the Borrower and its Domestic Subsidiaries (as hereafter defined)." 2.2 COMPLIANCE CERTIFICATE. The form of compliance certificated appearing as Exhibit A to Amendment No. 2 to the Agreement as referenced in Paragraph 6.2(d) is amended to read as set forth on Exhibit A to this Amendment. 2.3 NET WORTH. Paragraph 6.3 is amended and restated in its entirety to read as follows: "6.3 NET WORTH. To maintain on a consolidated basis for the Borrower and its Domestic Subsidiaries for each quarterly accounting period Net Worth equal to, on a cumulative basis, at least the sum of: (a) Four Hundred Fifty Million Dollars ($450,000,000); PLUS 1 (b) The sum of 50% of the net income after income taxes (without subtracting losses) earned in each quarterly accounting period commencing with the quarter ended June 30, 1997; PLUS (c) the net proceeds from any equity securities (including shares issued upon the exercise of stock options) issued in each quarterly accounting period commencing with the quarter ended June 30, 1997; PLUS (d) any increase in stockholders' equity resulting from the conversion of debt securities to equity securities issued in each quarterly accounting period commencing with the quarter ended June 30, 1997; PLUS (e) any increase in stockholders' equity resulting from the transactions described in the Form S-3 Registration Statement filed under the Securities Act of 1933 as filed by the Borrower with the Securities and Exchange Commission on October 10, 1997 (the "Form S-3"); MINUS (f) cash and noncash charges for in-process technology purchased from Spiros Development Corporation and for any contribution to Spiros Development Corporation II, Inc., as described in the Form S-3 (the "Spiros Charges") incurred in such quarterly accounting period commencing with the quarter ended June 30, 1997, up to a maximum of One Hundred and Twenty Five Million Dollars ($125,000,000) in the aggregate; MINUS (g) any decrease in stockholders' equity resulting from the acquisition by the Borrower of Spiros Development Corporation or a cash contribution from the Borrower to Spiros Development Corporation II, Inc., as described in the Form S-3. "Net Worth" means the gross book value of the Borrower's assets less total liabilities, including but not limited to accrued and deferred income taxes, and any reserves against assets. "Domestic Subsidiary" means any subsidiary (except Dura USA Holdings, Inc.) which is organized under the laws of the United States or any state thereof." 2.4 MAXIMUM ADJUSTED FUNDED DEBT TO ADJUSTED EBITDA. Paragraph 6.4 is amended and restated in its entirety to read as follows: "6.4 MAXIMUM ADJUSTED FUNDED DEBT TO ADJUSTED EBITDA. To maintain on a consolidated basis for the Borrower and its Domestic Subsidiaries, a ratio of (i) funded debt, including all interest bearing obligations but excluding obligations owing to Procter & Gamble Pharmaceuticals, Inc. for the Entex Products up to a maximum of Twenty Million Dollars ($20,000,000) LESS domestic cash and domestic cash equivalents up to an amount equal to the face amount of the Notes issued pursuant to and as defined in the Indenture TO (ii) EBITDA of not greater than the ratio indicated for each period specified below: 2 Period Ratio ------ ----- From and including the date of this 2.00 to 1.00 Agreement to and including August 31, 1997 From and including September 1, 1997 1.75 to 1.00 and thereafter Upon the Bank's request, from time to time, the Borrower shall provide evidence acceptable to the Bank of cash equivalents. For purposes of this Agreement, cash equivalents means: (a) domestic certificates of deposit or domestic time deposits; (b) U.S. treasury bills and other direct obligations of the federal government; (c) shares in domestic money market funds; (d) readily marketable obligations of an agency of the United States of America that are generally considered in the securities industry to be implicit obligations of the federal government; (e) prime bankers' acceptances and commercial paper issued by financial institutions rated at least A1 by Standard & Poors Ratings Group or at least P-1 by Moody's Investors Service, Inc.; and (f) repurchase agreements covering U.S. government securities. For purposes of this Agreement, "EBITDA" means net income for such period, LESS, to the extent added in determining such net income, interest income, PLUS, to the extent deducted in determining such net income, (i) interest expense, (ii) depreciation, (iii) depletion, (iv) amortization, (v) all federal, state, local and foreign income taxes and (vi) the Spiros Charges up to a maximum of One Hundred and Twenty Five Million Dollars ($125,000,000) in the aggregate. This ratio will be calculated at the end of each fiscal quarter using the results of that quarter and each of the three immediately preceding quarters." 2.5 MINIMUM EBIT. Paragraph 6.5 is amended and restated in its entirety to read as follows: "6.5 MINIMUM EBIT. To maintain on a consolidated basis for the Borrower and its Domestic Subsidiaries EBIT of at least $0 for each quarterly accounting period. For purposes of this Agreement "EBIT" means net income for such period, LESS, to the extent added in determining such net income, interest income, 3 PLUS, to the extent deducted in determining such net income, (i) interest expense, (ii) all federal, state, local and foreign income taxes and (iii) the Spiros Charges up to a maximum of One Hundred and Twenty Five Million Dollars ($125,000,000) in the aggregate." 2.6 SIGNIFICANT SUBSIDIARIES. Paragraph 6.6 is amended to add the following at the end thereof: "Notwithstanding the foregoing, "Significant Subsidiary" shall not include any Foreign Subsidiary. "Foreign Subsidiary" means a subsidiary which is not a Domestic Subsidiary. 2.7 DEBTS. Paragraph 6.7 is amended and restated in its entirety to read as follows: "6.7 OTHER DEBTS. Not, and not permit its subsidiaries, to have outstanding or incur any direct or contingent debts (other than those to the Bank), or become liable for the debts of others without the Bank's written consent. This does not prohibit: (a) Acquiring goods, supplies, or merchandise on normal trade credit. (b) Endorsing negotiable instruments received in the usual course of business. (c) Obtaining surety bonds in the usual course of business. (d) Debts in existence on the date of this Agreement disclosed in writing to the Bank. (e) Additional debts for the acquisition of fixed or capital assets which do not exceed a total principal amount of Five Million Dollars ($5,000,000) in any single fiscal year. (f) Debt pursuant to that certain Indenture to be dated as of July 30, 1997 between the Borrower and Chase Trust Company of California as trustee ("Indenture")." 2.8 LIENS. Paragraph 6.8 is amended and restated in its entirety to read as follows: "6.8 OTHER LIENS. Not, and not permit its subsidiaries; to create, assume, or allow any security interest or lien (including judicial liens) on property the Borrower now or later owns, except: (a) Deeds of trust and security agreements in favor of the Bank. (b) Liens for taxes not yet due. 4 (c) Liens outstanding on the date of this agreement disclosed in writing to the Bank. Additional purchase money security interests in personal property acquired after the date of this Agreement if the total principal amount of debts secured by such liens does not exceed Five Million Dollars ($5,000,000) in any single fiscal year." 2.9 CAPITAL EXPENDITURES. Paragraph 6.9 is amended and restated in its entirety to read as follows: "6.9 CAPITAL EXPENDITURES. Not, and not permit its subsidiaries, to spend more than an aggregate amount of Thirty Million Dollars ($30,000,000) during 1997 fiscal year or Fifteen Million Dollars ($15,000,000) during 1998 fiscal year to acquire fixed or capital assets." 2.10 LEASES. Paragraph 6.10 is amended and restated in its entirety to read as follows: "6.10 LEASES. Not to permit the aggregate payments due in any fiscal year under all leases for itself and its subsidiaries (including capital and operating leases for real or personal property) to exceed Two Million Dollars ($2,000,000)." 2.10 LOANS TO AFFILIATED COMPANIES. Paragraph 6.12 is amended to read as follows: "6.12 LOANS TO AFFILIATED COMPANIES. Not, and not permit any Domestic Subsidiary, to make any loans, advances, or other extensions of credit or investments in or to any of the Borrower's affiliated companies (including, without limitation, subsidiaries of the Borrower) in excess of an aggregate of Ten Million Dollars ($10,000,000). Notwithstanding the foregoing, the Borrower may make (i) investments in Foreign Subsidiaries of the Borrower in an aggregate book amount of not in excess of $90,000,000 and (ii) loans in an aggregate amount not to exceed $180,000,000 to Dura (Bermuda) Trading Company, Ltd evidenced by three Secured Promissory Notes dated as of October 28, 1997." 2.11 COMPLIANCE WITH LAWS. Paragraph 6.16 is amended and restated in its entirety to read as follows: "6.16 COMPLIANCE WITH LAWS. To comply with the laws (including any fictitious name statute), regulations, and orders of any government body with authority over the Borrower's and its subsidiaries' business." 2.12 PRESERVATION OF RIGHTS. Paragraph 6.17 is amended and restated in its entirety to read as follows: 5 "6.17 PRESERVATION OF RIGHTS. To maintain and preserve all rights, privileges, and franchises the Borrower and its subsidiaries now have." 2.13 MAINTENANCE OF PROPERTIES. Paragraph 6.18 is amended to read as follows: "6.17 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or replacements to keep the Borrower's and its subsidiaries' properties in good working condition." 2.14 DEFAULTS. Paragraph 8 is amended to replace the word "guarantor" with "subsidiary" each time such word appears. 3. CONSENT. Notwithstanding anything in the Agreement to the contrary, the Bank hereby consents to (i) the consummation, on or before March 31, 1998, of the transactions described in a writing from the Borrower to the Bank referencing this Amendment delivered to the Bank on or prior to the date of this Amendment and (ii) on or before March 31, 1998, the acquisition by the Borrower of Spiros Development Corporation and a cash contribution from the Borrower to Spiros Development Corporation II, Inc. as described in the Form S-3. 4. 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 (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. 5. FEES. On or before close of business on October 29, 1997, the Borrower will pay to the Bank an amendment fee of Five Thousand Dollars ($5,000). To facilitate such payment, the Borrower hereby authorizes the Bank to cause account number 14507-07440 of the Borrower maintained with the Bank to be debited in the amount of Five Thousand Dollars ($5,000) in satisfaction of the Borrower's obligation under the preceding sentence. On demand, the Borrower will reimburse the Bank for legal costs, fees and expenses (including, without limitation, the allocable cost of inside counsel) incurred by the Bank in the preparation of this Amendment. 6. CONDITIONS. This Amendment will be effective when (i) this Amendment is duly executed by the parties and (ii) the Bank receives evidence satisfactory to it of due execution and delivery by the Borrower of this Amendment and the transactions contemplated hereby. 7. 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. 6 This Amendment is executed as of the date stated at the beginning of the Amendment. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /s/ Susan J. Pepping ------------------------------- Name: Susan J. Pepping Title: Vice President DURA PHARMACEUTICALS, INC. By: /s/ James W. Newman ------------------------------- Name: James W. Newman Title: Senior Vice President Finance and Administration 7 EX-10.25 3 EXHIBIT 10.25 EXHIBIT 10.25 DEFERRED COMPENSATION PLAN THIS AGREEMENT is made on the Effective Date of the Adoption Agreement attached hereto, by and between Dura Pharmaceuticals, Inc., a corporation organized under the laws of the State of California (the "Employer"), and the Employee named in the attached Adoption Agreement. WITNESSETH THAT: In consideration of the agreements hereinafter contained the parties hereto agree as follows: Article I -- Introduction and Purpose of Plan 1.1 ESTABLISHMENT OF PLAN. The Employer, by execution of the Adoption Agreement, hereby establishes this Deferred Compensation Plan which shall become effective as of the date selected by the Employer in the Adoption Agreement. The Plan shall be maintained for the exclusive benefit of covered employees and is intended to comply with all applicable provisions of the Internal Revenue Code of 1986, as amended, and regulations thereunder, and other applicable law. 1.2 PURPOSE OF PLAN. The purpose of this Plan is to enable Employees who become covered under the Plan to enhance their retirement security by permitting them to enter into agreements with the Employer to defer a portion of their Compensation and receive benefits at retirement, separation from service, death, or upon the occurrence of other events as provided elsewhere in this Plan. Article II -- Definitions Whenever used in the Plan, the following terms shall have the meanings as set forth in this Article II unless a different meaning is clearly required by the context. 2.1 ADMINISTRATOR means the individual or committee appointed by the Employer (and designated in the Adoption Agreement) to administer the Plan. If the Employer fails to make such appointment, the Employer shall be the Administrator. 2.2 ADOPTION AGREEMENT means the form used by the Employer to establish or amend this Plan. The terms of and information included in the Adoption Agreement are incorporated by reference as part of the Plan. 2.3 BENEFICIARY means the person, persons, or legal entity entitled to receive benefits under this Plan which become payable in the event of the Participant's death. 2.4 CODE means the Internal Revenue Code of 1986, as amended, and includes any regulations thereunder. 2.5 COMPENSATION means the total amount of remuneration earned by an Employee for personal services rendered to the Employer for the calendar year including amounts deferred under this Plan and any other deferred compensation plan the employer may have in existence. 2.6 DEFERRAL means the annual amount of Compensation that a participant elects to defer pursuant to a properly executed Voluntary Salary Deferral Agreement. 2.7 EMPLOYEE means any person who performs services for the Employer, either as an employee or as an independent contractor, to whom compensation is paid on a regular basis. 2.8 EMPLOYER means the entity which has adopted this Plan by completing the Adoption Agreement. 2.9 NORMAL RETIREMENT AGE means age 65 or other earlier age elected by the Participant in writing. In no event shall Normal Retirement Age be the earlier than the earliest date on which a Participant may retire under the Employer's basic qualified retirement plan, (if any), without the Employer's consent and receive immediate retirement benefits without incurring an actuarial or similar reduction in benefits. 2.10 PARTICIPANT means an Employee or former Employee who has enrolled in this Plan and who retains the rights to benefits under the Plan. 2.11 PLAN means the Model Deferred Compensation Plan as set forth herein and the Adoption Agreement as it may be amended from time to time. 2.12 PLAN YEAR means the twelve consecutive month period ending on December 31. 2.13 TRUST means a trust established solely for the benefit of employees under the terms of this agreement, the Trust terms of which are provided in the Trust document attached. 2.14 VOLUNTARY SALARY DEFERRAL AGREEMENT means the agreement between a Participant and the Employer to defer receipt by the Participant of Compensation not yet earned. In the case of bonuses or other non-periodic payments, such compensation shall be treated as earned no later that the day prior to the day in which the amount payable has been determined. Such agreement shall state the Deferral amount to be withheld from a Participant's pay or bonus and shall become effective no earlier than the first day of the month following the execution of such agreement. Article III -- Participation in the Plan 3.1 ELIGIBILITY. Each Employee who is eligible to participate pursuant to the Employer's election in the Adoption Agreement may become a Participant in this Plan on the first day of the month next following commencement of employment as an eligible Employee and enrollment pursuant to Article III. Any person elected or appointed to a term of office with the Employer shall be deemed to commence employment at the time such person assumes office. 2 3.2 ENROLLMENT. Eligible employees may enroll in the Plan by completing a Voluntary Salary Deferral Agreement and submitting it to the Administrator. Enrollment shall be effective on or after the first day of the month following the date the enrollment form is properly completed by the Employee and accepted by the Administrator. Article IV -- Deferral of Compensation and Funding 4.1 DEFERRAL AMOUNT. There shall be no stated maximum or minimum deferral amount under the Plan. 4.2 MODIFICATIONS TO AMOUNT DEFERRED. A Participant may change Deferrals with respect to Compensation not yet earned by submitting a new properly executed Voluntary Salary Deferral Agreement to the Administrator. Such change shall take effect as soon as administratively practicable, but not earlier that the first pay period commencing with or during the first month following receipt by the Administrator of such Voluntary Salary Deferral Agreement. Modifications (other than a revocation of participation as provided in Article 4.3) are subject to the limitations specified in the Adoption Agreement (if any). 4.3 REVOCATION OF DEFERRAL. Any Participant may revoke his or her election to have Compensation deferred by so notifying the Administrator in writing. The Participant's full Compensation on a non-deferred basis will than be restored as soon as administratively practicable, but no earlier than the first pay period commencing with or during the first month following receipt of written notice of such revocation by the Administrator. Notwithstanding this Article 4.3, the Participant's deferred compensation account shall be paid only as provided in Article V of this Plan. 4.4 FUNDING. Amounts deferred under this Article IV shall be placed in the Trust by Employer no later than 7 business days after a proper deferral has been made by a Plan Participant. Employer will transfer the appropriate funds to the Administrator within the specified period stated herein. To the extent cumulative investments by the Trust at the end of any Plan Year are not equal to the aggregate deferrals placed into the Trust together with interest credited pursuant to Article 8.5 (the "Shortfall"), Employer shall within 30 days of the end of any such Plan Year, contribute an amount equal to the Shortfall. Article V -- Distribution of Benefits 5.1 ELIGIBILITY FOR PAYMENT. Distribution of benefits from the Plan shall be made no earlier than Separation from Service, the calendar year in which the Participant attains age 65 or in the event of an approved financial hardship due to an Unforeseeable Emergency. (a) "Separation from Service" means the severance of a Participant's employment with the Employer for any reason, including death, retirement and disability. 3 (b)"Unforeseeable Emergency" means a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The circumstances that will constitute an "Unforeseeable Emergency" would depend on the facts of each case, but, in any case, payment may not be made in the event that such hardship is or may be relieved: (1) Through reimbursement or compensation by insurance or otherwise, (2) through loans from other qualified pension plans such as 401(k) plans, (3) by liquidation of the Participant's assets, to the extent that liquidation of such assets would not itself cause severe financial hardship, or (4) by cessation of Deferrals under the plan. The need to send a Participant's child to college or the desire to purchase a home shall not be an Unforeseeable Emergency. 5.2 DISTRIBUTION DUE TO UNFORESEEABLE EMERGENCY. A Participant may request a distribution due to Unforeseeable Emergency by submitting a written request to the Administrator accompanied by evidence to demonstrate that the circumstances being experienced qualify as an Unforeseeable Emergency. The Administrator shall have the authority to require such evidence as it deems necessary to determine if a distribution is warranted, and approval of such request shall be granted if consent to the request is rendered by a majority of the committee constituting the Administrator. If an application for a hardship distribution due to an Unforeseeable Emergency is approved, the distribution is limited to an amount sufficient to meet the emergency. The allowed distribution shall be payable in a method determined by the Administrator as soon as possible after approval of such distribution. No member of the committee constituting the Administrator shall be allowed to consider or vote on any request for hardship distribution submitted by such member. A Participant who has commenced receiving installment payments under the Plan may request acceleration of such payments in the event of an Unforeseeable Emergency. The Administrator may permit accelerated payments to the extent payment does not exceed the amount necessary to meet the emergency. 5.3 COMMENCEMENT OF DISTRIBUTIONS. Distribution of benefits to a Participant under the Plan shall commence 60 days after the Participant separates from service, unless the Participant makes a one-time irrevocable written election to defer commencement of benefits to a specified later date and such election is made at least 30 days before the date benefits commence. Such election is subject to approval by the Board of Directors of Employer. Notwithstanding anything in this Article 5.3 to the contrary, if the total amounts held under this Plan for a Participant total $3,500 or less, the Participant has separated from service and the Participant may not defer additional amounts under the Plan, the Participant may at any time 4 elect a lump sum distribution of his or her benefits which distribution shall occur no later than 60 days after Participant files a written request for such distribution with the Administrator. 5.4 DISTRIBUTION REQUIREMENTS. (a) Limits on Settlement Options. Distributions must be made over one of the following periods: (1) One lump sum; (2) the life of the Participant; (3) the life of the Participant and his or her Beneficiary; (4) a period certain not extending beyond the life expectancy of the Participant, as determined on or about the date such distribution commences; or (5) a period certain not extending beyond the joint and last survivor life expectancy of the Participant and his or her Beneficiary, as determined on or about the date such distribution commences. (b) Death Distribution Provisions. (1) Death After Distributions Begin. If the Participant dies after distribution of his or her interest has commenced, the remaining portion of such interest would be distributed at least as rapidly as the method of distribution being used before the Participant's death. (2) Death Before Distributions Begin. If the Participant dies before distribution of his or her interest commences, any benefits payable after the Participant's death will be distributed no later than the December 31 coinciding with or immediately following the fifth anniversary of the Participant's death, except to the extent that the recipient of such benefits elects to receive distribution in accordance with the following paragraphs: (A) Any portion of the Participant's interest which is payable to his or her Beneficiary may be distributed in substantially equal annual installments over the life of the Beneficiary, or over a period not extending beyond the life expectancy of the Beneficiary, commencing no later than the December 31 coinciding with or immediately following the first anniversary of the Participant's death; provided, however, that if the Beneficiary is not the Participant's surviving spouse, payment of the Participant's entire account must be paid to such Beneficiary during a period not to exceed 15 years. For the purposes hereof and of (3) below, the life expectancy of the Beneficiary shall not be recalculated once benefits commence; provided, however, that if the Beneficiary is the Participant's surviving spouse, the surviving spouse may give written notice to the Administrator no later than 30 days before the date benefits commence that life expectancy of the surviving spouse shall be recalculated (but no more frequently than annually). 5 (B) Notwithstanding (A) above, if the Beneficiary is the Participant's surviving spouse, the spouse may elect to defer distributions no later than the December 31 that coincides with or immediately follows the later of the date on which the Participant would have attained the age of 65, or the first anniversary of the Participant's death, and, if the spouse dies before payments begin, subsequent distributions shall be made as if the spouse has been the Participant. (C) Any election made by a Beneficiary hereunder must be made no later than 30 days before the December 31 that coincides with or immediately follows the first anniversary of the Participant's death and must be irrevocable as of such date; provided, however, that if the Beneficiary is the Participant's surviving spouse, the spouse may defer making such election no later than 30 days before the earlier of the December 31 that coincides with or immediately follows the first anniversary of the Participant's death or the last date on which the spouse could defer commencement of benefits under paragraph (B). (3) Payments to a Minor Child of the Participant. For purposes of Article 5.4(d), any amount paid to a minor child of the Participant will be treated as if it had been paid to the surviving spouse of the Participant if the amount becomes payable to the Participant's surviving spouse when the child reaches the age of majority. 5.5 PAYMENT ACCELERATION. In addition to the options provided in Article 5.1, the Participant shall have the right at anytime to request and receive a payment of all or part of the Participant's account balance. Such payments will be made as soon as practicable after such election is made, but in no event will payments be delayed more than 60 days from the date the election is made. If such election is made, any amount subject to this election shall be reduced by a nonrefundable payment acceleration penalty equal to 10% of the elected amounts. This penalty is absolute and not be rescinded, reduced, or otherwise modified by the Employer. Article VI -- Form of Benefit Distribution 6.1 ELECTION. A Participant or Beneficiary may elect the form, subject to the Administrator's approval, of distribution of his or her benefits and may revoke that election (with or without a new election) at any time at least 30 days before his or her benefits begin, by notifying the Administrator in writing of his or her election. 6.2 FORMS OF DISTRIBUTION. A Participant or Beneficiary may elect distributions of benefits under any of the Settlement Options provided for on Article 5.4(a). 6.3 FAILURE TO MAKE ELECTION. If a Participant or Beneficiary fails to elect a form of distribution before 30 days preceding the distribution commencement date, benefits shall be paid in substantially equal installments over 5 years. 6 Article VII -- Beneficiary Information 7.1 DESIGNATION. A Participant shall have the right to designate a Beneficiary, and amend or revoke such designation at any time, in writing. Such designation, amendment, or revocation shall be effective upon receipt by the Administrator. Notwithstanding the foregoing, a Participant who elects a joint and survivor annuity form of payment may not elect a non-spouse joint annuitant, may not change his or her joint and survivor annuity form of payment and may not elect a non-spouse joint annuitant after payments commence. 7.2 FAILURE TO DESIGNATE A BENEFICIARY. If no designated Beneficiary survives the Participant and benefits are payable following the Participant's death, the Administrator shall direct that payment of benefits be made to the person or persons in the first of the following classes of successive preference Beneficiaries. The Participant's: (a) spouse, (b) children, per stirpes, (c) estate, (d) parents, (e) brothers and sisters. Article VIII -- Plan Administration 8.1 PLAN ADMINISTRATION. The Employer shall be responsible for appointing an Administrator to administer the Plan. Such Administrator may be an individual or a committee authorized to act collectively on behalf of the Plan. The Administrator shall have sole discretionary responsibility for the operation, interpretation, and administration of the Plan and for determining eligibility for Plan benefits. Any action taken on any matter within the discretion of the Administrator shall be final, conclusive, and binding on all parties. In order to discharge its duties hereunder, the Administrator shall have the power and authority to adopt, interpret, alter, amend, or revoke rules and regulations necessary to administer the Plan, to delegate ministerial duties and to employ such outside professionals as may be required for prudent administration of the Plan. The Administrator shall also have authority to enter into agreements on behalf of the employer necessary to implement the Plan. Any individual Administrator who is otherwise eligible may participate in the Plan, but shall not be entitled to make decisions solely with respect to his or her own participation and benefits under the Plan. 8.2 OWNERSHIP OF ASSETS. All amounts of compensation deferred under the Plan, all property and rights purchased with such amounts and all income attributable to such amounts, property or rights, either held by the Company or in Trust for the Beneficiary of Plan Participant, shall remain (until made available to the Participant or Beneficiary) solely the property and rights of the Employer (without being restricted to the provisions of benefits under the Plan) and shall be subject to the claims of the Employer's general creditors. 7 8.3 PLAN-TO-PLAN TRANSFERS. Notwithstanding any other provisions of the Plan, all or any part of the account balance(s) of a former Participant in the Plan shall, instead of being distributed in accordance with Article 5.3, be transferred to another eligible deferred compensation plan administered by the Employer in which the former Participant has become a participant, if: (a) the plan receiving such amounts provides for acceptance of such transfers; and (b) the Participant gives written direction to the Administrator to make such transfer. This Plan also shall accept the transfer of amounts previously deferred by a Participant under another eligible deferred compensation plan administered by the Employer. 8.4 ACCOUNTS AND EXPENSES. The Employer shall establish and maintain accounts on behalf of each Participant as held in the Trust. Such Participant accounts shall be valued at fair market value as of the last day of the Plan Year and such other dates as are necessary for the proper administration of the Plan, and each Participant shall receive a written accounting of his or her account balance(s) following such valuation. Each Participant's account balance shall reflect his or her aggregate Deferral (and/or transfer) amount(s) and any earnings attributable to such amounts, and shall be reduced by administrative, investment, and other fees necessary for the administration which are not paid by the Employer. 8.5 EARNINGS. Interest shall be paid by the Employer on deferrals at an annual rate equal to the greater of twelve percent (12%), compounded on a monthly basis, or the actual return realized on Plan investments as allocated to individual Plan participants. Realized returns will include unrealized appreciation/depreciation of investments if the underlying investments could be sold on the date of measurement and the unrealized appreciation/depreciation of the investments realized. Article IX -- Amendment or Termination of Plan 9.1 AMENDMENT OF PLAN. The Employer shall have the right to amend the Plan, at any time and from time to time, in whole or in part. The Employer shall notify each Participant in writing of any Plan amendment. 9.2 TERMINATION. Although the Employer has established this Plan with the intention and expectation to maintain the Plan indefinitely, the Employer 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 Deferrals shall cease. The Employer shall retain each Participant's Deferrals (and earnings and losses thereon) until distribution of benefits commences under Article 5.2 or 5.3 in the form determined under Article VI. Article X -- Miscellaneous 10.1 LIMITATION OF RIGHTS: EMPLOYMENT RELATIONSHIP. Neither the establishment of this Plan nor any modification thereof, nor the creation of any fund or account, nor the payment of any benefits, shall be construed as giving a Participant or other person any legal or equitable right 8 against the Employer except as provided in the Plan. In no event shall the terms of employment of any employee be modified or in any way be affected by the Plan. 10.2 LIMITATION ON ASSIGNMENT. Benefits under this plan may not be assigned, sold, transferred, or encumbered, and any attempt to do so shall be void. A Participant's or Beneficiary's interest in benefits under the Plan shall not be subject to debts or liabilities of any kind and shall not be subject to attachment, garnishment or other legal process. 10.3 PRONOUNS. Whenever used in this Agreement, the masculine pronoun is to be deemed to include the feminine. The singular form, whenever used herein, shall mean or include the plural form where applicable, and vice versa. 10.4 REPRESENTATIONS. The Employer does not represent or guarantee that any particular federal or state income, payroll, personal property or other tax consequence will result from participation in this Plan. A Participant should consult with professional tax advisors to determine the tax consequences of his or her participation. Furthermore, the Employer does not represent or guarantee successful investments of Deferrals. 10.5 SEVERABILITY. If a court of competent jurisdiction holds any provision of this Plan to be invalid or unenforceable, the remaining provisions of the Plan shall continue to be fully effective. 10.6 APPLICABLE LAW. This Plan shall be construed in accordance with applicable federal law and, to the extent otherwise applicable, the laws of the State in which the Employer is located. 10.7 RESPONSIBILITY FOR TAXES. The Participants in this Plan are responsible for all Federal, State or other taxes assessed on amounts deferred under this Plan. The Employer shall have the right to withhold or reduce Plan benefits to satisfy such withholding obligations as it may deem necessary to ensure proper withholding procedures. [END] 9 EX-10.31 4 EXHIBIT 10.31 EXHIBIT 10.31 David S. Kabakoff May 1, 1996 Page May 1, 1996 Mr. David S. Kabakoff P.O. Box 9151 16957 Circa Del Sur Rancho Santa Fe, CA 92067 Dear David: This letter will serve as the basis by which you will be employed by Dura Pharmaceuticals, Inc. (the "Company") as its Executive Vice President and President of Spiros Development Corporation, a separate newly-formed corporation ("Spiros Corp."). During your employment beginning May 1, 1996, you will devote your time, attention and energy to the Company and Spiros Corp. Such service will become full time on or after June 1, 1996. In your capacity as Executive Vice President of the Company and President of Spiros Corp. you will perform such executive duties as are from time to time prescribed by the President and the Board of Directors of the Company and the Board of Directors of Spiros Corp. Except for certain interim consultant services to be provided to, and serving on the Board of, Corvas International, Inc., you will not, without the prior written consent of the Company's Board of Directors, directly or indirectly, during the term of your employment: (A) render significant services of a business, professional or commercial nature to any other person or entity, either for compensation or otherwise; or (B) engage in any business activity competitive with or adverse to the Company's business or welfare, whether alone, as a partner or member, or as an officer, director, employee or shareholder of another business entity. Your beginning compensation has been separately established by prior communication from the Company. Thereafter, for each fiscal year beginning January 1, 1997, your base salary will be annually reviewed and set by the Board of Directors and may be increased at the sole discretion of the Board based upon your performance and other factors. All base salary will be payable in equal biweekly installments. The Company will pay you a minimum bonus of $50,000 for 1996, to be paid the first pay period of January 1997. In subsequent years, the Board of Directors, in its sole discretion, may pay you a cash bonus based on your performance during that particular year, and other factors. In addition to the annual compensation provided for above, you will receive such fringe benefits as are made available generally to executive employees of the Company. You have been nominated for election as a Director of the Company at the Annual Meeting of Shareholders to be held May 29, 1996. You agree to serve without additional compensation as a Director or if you are elected or appointed as an officer of the Company or any subsidiary of the Company. You also agree to serve without additional compensation as a David S. Kabakoff May 1, 1996 Page 2 Director and President of Spiros Corp. The Company will require you to execute its standard form of employee confidentiality agreement. The term of your employment will end on April 30, 1997, unless extended by mutual agreement; provided, however, that unless the Company notifies you at least nine (9) calendar months prior to any relevant expiration date of its intention not to renew your employment, your employment will be, at your option and unless we mutually agree on a larger extension, automatically extended for additional successive one-year periods. However, your employment shall terminate earlier upon (1) your death, (2) in the event you become physically or mentally disabled so as to become unable, for a period of more than 120 consecutive working days or for more than 120 working days in the aggregate during any 12-month period, to perform your duties hereunder on substantially a full-time basis, in which case the Company may, at its option, terminate your employment hereunder upon not less than thirty (30) days' written notice, (3) for Cause, and (4) without Cause upon not less than sixty (60) days' written notice. For the purposes of this letter agreement, the Company shall have "Cause" to terminate your employment hereunder upon (A) your indictment for a felony, or (B) the engaging by you in misconduct which is injurious to the Company or any parent, subsidiary or affiliate of the Company, or (C) the violation by you of any of the material provisions of this letter agreement. If the Company terminates your employment without Cause, you will be entitled to six (6) months' base salary at the then current annual rate as severance pay unless there has been a Change in Control as defined below. In the event that there has been a Change of Control of the Company during the period in which you serve as Executive Vice President pursuant to this letter agreement, if the Company terminates your employment without Cause or if there is an Involuntary Termination (as defined below), you will be entitled to nine (9) months' base salary at the then current annual rate as severance pay. In the event of payment of severance under this agreement, stock option vesting shall continue during the severance period. Other than the benefits described in this letter, you will not be entitled to any other salary, benefits or bonus subsequent to termination. The term "Change of Control" shall mean (i) any transaction or series of related transactions (including but not limited to, any merger or other reorganization) in which the ownership of more than 50% of the voting power of the Company is transferred; (ii) a sale, transfer or other disposition of all or substantially all of the assets of the Company; (iii) the successful acquisition of thirty percent (30%) or more of the Company's outstanding voting stock pursuant to a third-party tender or exchange offer; or (iv) a change in composition of the Board which occurs because the individuals nominated for election or re-election by majority vote of those members of the Board elected at the last shareholder meeting at which there were not contested elections for Board membership fail to be elected or re-elected by the shareholders. The term "Involuntary Termination" shall mean the termination of your employment with the Company: (i) involuntarily by your dismissal without cause; or (ii) voluntarily or involuntarily following (a) a change in your position with the Company which materially reduces David S. Kabakoff May 1, 1996 Page 3 your level of responsibility; (b) a reduction of ten percent (10%) or more in your level of compensation (including base salary, bonuses or fringe benefits); or (c) a change in your place of employment which is more than twenty (20) miles from your place of employment prior to the Change in Control, PROVIDED AND ONLY IF such change or reduction is effected without your written concurrence. If a Change in Control of the Company occurs and the Company does not survive the transaction as an entity, the Company will require the purchaser to assume the Company's obligations hereunder, and if the purchaser is a subsidiary of a parent entity, the Company will require the parent entity to guarantee the performance of the obligations hereunder or to assume directly the obligations hereunder. You also agree that for a period ending three (3) years after a termination of your employment with the Company, you will not (a) divert, directly or indirectly, any business of the Company to any other person or entity; (b) disrupt, damage, impair or interfere with the Company's relationships with its employees, customers, agents or vendors; (c) directly or indirectly, solicit or otherwise induce any person to leave his or her employment with the company; or (d) attempt to do any of the foregoing. No provisions of this letter agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the parties hereto. No waiver by any party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this letter agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or considerations at the same or at any prior or subsequent time. This letter agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns and you and your heirs, executors, administrators and legal representatives. The validity, interpretation, construction and performance of this letter agreement shall be governed by the laws of the State of California without reference to conflict of laws. This letter agreement shall supersede all prior agreements and understandings between us, oral or written, with respect to your employment. David S. Kabakoff May 1, 1996 Page 4 Should this letter reflect your understanding, please sign below and return one signed copy to me as soon as possible. Very truly yours, DURA PHARMACEUTICALS, INC. /s/ Cam L. Garner ------------------ By: Cam L. Garner Chairman, President and Chief Executive Officer ACCEPTED: /s/ David S. Kabakoff - --------------------- David S. Kabakoff Date: May 1, 1997 --------------- EX-11 5 EXHIBIT 11 EXHIBIT 11 DURA PHARMACEUTICALS, INC. STATEMENTS RE COMPUTATIONS OF NET INCOME (LOSS) PER SHARE
YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 1995 1996 1997 ---- ---- ---- NET INCOME (LOSS) PER SHARE - BASIC Net Income (Loss) ($35,778,000) $24,328,000 ($84,692,000) ------------ ----------- ------------ ------------ ----------- ------------ Weighted Average Number of Common and Common Equivalent Shares: Common Stock Outstanding 23,440,754 35,834,714 43,828,208 ------------ ----------- ------------ ------------ ----------- ------------ Net Income (Loss) Per Share - Basic ($1.53) $0.68 ($1.93) ------------ ----------- ------------ ------------ ----------- ------------ NET INCOME (LOSS) PER SHARE - DILUTED Net Income (Loss) ($35,778,000) $24,328,000 ($84,692,000) ------------ ----------- ------------ ------------ ----------- ------------ Weighted Average Number of Common and Common Equivalent Shares Assuming Issuance of All Dilutive Contingent Shares: Common Stock Outstanding 23,440,754 35,834,714 43,828,208 Stock Options -- 1,772,250 -- Warrants -- 2,872,044 -- ------------ ----------- ------------ Total 23,440,754 40,479,008 43,828,208 ------------ ----------- ------------ ------------ ----------- ------------ Net Income (Loss) Per Share - Diluted ($1.53) $0.60 ($1.93) ------------ ----------- ------------ ------------ ----------- ------------
EX-13 6 EXHIBIT 13 EXHIBIT 13 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
- ---------------------------------------------------------------------------------------------------------------------------------- Fiscal Year Ended December 31, - ---------------------------------------------------------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Statement of Operations Data: (1) - ---------------------------------------------------------------------------------------------------------------------------------- Total Revenues $ 18,113 $ 32,680 $ 51,502 $104,119 $ 181,323 - ---------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) (2) $ (8,173) $ 1,936 $(35,778) $ 24,328 $ (84,692) - ---------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) Per Share (2,3): - ---------------------------------------------------------------------------------------------------------------------------------- Basic $ (0.55) $ 0.12 $ (1.53) $ 0.68 $(1.93) - ---------------------------------------------------------------------------------------------------------------------------------- Diluted $ (0.55) $ 0.10 $ (1.53) $ 0.60 $(1.93) - ---------------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data: (1) - ---------------------------------------------------------------------------------------------------------------------------------- Cash, Cash Equivalents and - ---------------------------------------------------------------------------------------------------------------------------------- Short-Term Investments $ 6,541 $ 36,026 $ 67,820 $240,345 $385,221 - ----------------------------------------------------------------------------------------------------------------------------- Working Capital $ 6,830 $ 36,506 $ 59,105 $219,864 $392,870 - ----------------------------------------------------------------------------------------------------------------------------- Total Assets $ 20,048 $ 56,072 $143,997 $504,670 $774,880 - ----------------------------------------------------------------------------------------------------------------------------- Long-Term Obligations $ 4,719 $ 2,780 $ 15,427 $ 6,670 $297,064 - ----------------------------------------------------------------------------------------------------------------------------- Shareholders' Equity $ 12,571 $ 48,537 $109,097 $443,577 $429,277 - -----------------------------------------------------------------------------------------------------------------------------
(1) Selected Financial Data include Health Script subsequent to its acquisition on March 22, 1995, DDSI subsequent to its acquisition on December 29, 1995, Spiros Corp. subsequent to its acquisition on December 19, 1997, the Rondec-Registered Trademark- product line subsequent to its acquisition on June 30, 1995, the Entex-Registered Trademark- product line subsequent to its acquisition on July 3, 1996, the Ceclor-Registered Trademark- CD and Keftab-Registered Trademark- products subsequent to their acquisition on September 5, 1996, and the Nasarel-Registered Trademark- and Nasalide-Registered Trademark- products subsequent to their acquisition on May 7, 1997 (see Notes 4 and 12 of the Notes to Consolidated Financial Statements). (2) In 1993, 1995 and 1997, the Company incurred charges for acquired in-process technology, purchase options and other nonrecurring items totaling $2.3 million, $43.8 million and $137.7 million, respectively. If these charges were excluded, Dura would have reported a net loss of $5.9 million, or $0.39 per share (basic and diluted), for 1993, net income of $8.0 million, or $0.34 per share (basic) and $0.28 per share (diluted) for 1995, and net income of $47.4 million, or $1.08 per share (basic) and $0.99 per share (diluted) for 1997. (3) No cash dividends were declared or paid during the periods presented. -1- 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 therein. See "Risks and Uncertainties" for trends and uncertainties known to the Company that could cause reported financial information not to be necessarily indicative of future results, including discussion of the effects of seasonality on the Company. RECENT DEVELOPMENTS During the second half of 1996 and the first half of 1997, the Company made significant acquisitions of product rights and licenses. In July 1996, the Company acquired the worldwide rights to the Entex-Registered Trademark-products, consisting of four prescription upper respiratory drugs. In September 1996, the Company acquired the U.S. marketing rights to the patented antibiotics Ceclor-Registered Trademark- CD and Keftab-Registered Trademark-. In May 1997, the Company acquired the U.S. rights to the intranasal steroid products Nasarel-Registered Trademark- and Nasalide-Registered Trademark-. The acquisition of rights to these products has had a material impact on the Company's financial position and results of operations. In the third quarter of 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. Proceeds from the offering of the Notes are expected to be used for general corporate purposes, including (i) to acquire, in-license, co-promote, develop and commercialize pharmaceuticals targeted at Dura's physician base or in areas related or otherwise complementary to Dura's existing business; (ii) to fund product development programs, including Spiros-Registered Trademark- products; and (iii) for working capital and facilities expansion. To date, no proceeds from the Notes have been used. The Notes are convertible, at the option of the holder, into shares of Dura's common stock at any time prior to maturity or redemption at a conversion price of $50.635 per share. On December 19, 1997, the Company acquired all of the outstanding callable common stock and options to purchase callable common stock of Spiros Development Corporation ("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 approximately $2 million. The acquisition resulted in a nonrecurring charge of $46 million for acquired in-process technology. On December 22, 1997, Spiros Development Corporation II, Inc. ("Spiros Corp. II"), a separate, newly formed Delaware corporation, completed a $101 million public offering of units (the "Offering"). Under agreements with the Company, Spiros Corp. II will use the net proceeds of $94 million from the Offering and a $75 million contribution from Dura to develop Spiros and Spiros applications for designated drugs and compounds. Each unit consisted of one share of Spiros Corp. II callable common stock and a warrant (the "SDCII warrants") to purchase one-fourth of one share of Dura's common stock. The SDCII warrants will be exercisable from January 1, 2000 -2- through December 31, 2002 at an exercise price of $54.84 per share of Dura common stock. In consideration of the SDCII warrants and the contribution of $75 million to Spiros Corp. II, the Company has the right 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. Such purchase price may be paid, at the Company's option, in cash, shares of Dura's common stock, or a combination thereof. 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 December 1997. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 ("1997") AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 ("1996") Total revenues in 1997 increased $77.2 million, up 74%, as compared to 1996. However, the Company incurred a net loss in 1997 of $84.7 million, or $1.93 per share (basic and diluted), due to nonrecurring charges in the fourth quarter totaling $137.6 million, of which $121 million related to the Company's Spiros development program consisting of a $46 million noncash charge for in-process technology acquired in connection with Dura's acquisition of Spiros Corp. and Dura's $75 million purchase option charge resulting from the cash contribution to Spiros Corp. II. In December 1997, the Company terminated a ten-year royalty agreement, which the Company entered into in 1994, resulting in an additional nonrecurring charge of $13.8 million for the consideration paid by the Company to terminate the agreement. Finally, in the fourth quarter of 1997, the Company concluded that the value of a long-term investment was impaired and, accordingly, wrote down the investment to its estimated fair value, resulting in a nonrecurring charge of $2.8 million. If these nonrecurring charges were excluded, the Company would have reported net income in 1997 of $47.4 million, or $1.08 per share (basic) and $0.99 per share (diluted). Pharmaceutical sales in 1997 increased by $70.9 million, or 89%, as compared to 1996. This increase is due primarily to the acquisition of the Entex products, Ceclor CD, and Keftab in 1996 and Nasarel and Nasalide in 1997, which resulted in an increase in pharmaceutical sales of $65.1 million, and the expansion of the Company's sales force. Gross profit (pharmaceutical sales less cost of sales) for 1997 increased by $60.1 million, or 103%, as compared to 1996. Gross profit as a percentage of sales for 1997 was 79%, as compared to 73% for 1996. These increases are due primarily to higher average gross margins earned on sales of the Entex products, Ceclor CD, Keftab, Nasarel and Nasalide, as compared to the average gross margins earned on the Company's other products. Contract revenues in 1997 increased by $6.3 million, or 26%, as compared to 1996. The Company, under agreements with several companies, conducts feasibility testing and development work on various compounds for -3- use with Spiros. Contract revenues from Spiros-related development and feasibility agreements generated $29.5 million, including $25.9 million from Spiros Corp. and Spiros Corp. II, in 1997, as compared to $21.2 million, including $19.1 million from Spiros Corp., in 1996. The Company also earns contract revenues under various agreements for the co-promotion of certain pharmaceutical products. Contract revenues from such agreements were $1.4 million in 1997 as compared to $3.4 million for 1996. Clinical, development and regulatory expenses for 1997 increased by $5.9 million, or 32%, as compared to 1996. The increase reflects additional expenses incurred by the Company under feasibility and development agreements covering the use of various compounds with Spiros. Selling, general and administrative expenses in 1997 increased by $22.6 million, or 53%, as compared to 1996, but decreased as a percentage of total revenues to 36% in 1997 from 41% in 1996. The dollar increase is primarily due to increased costs incurred to support the Company's sales and contract revenue growth, including increased selling expenses primarily associated with expansion of the Company's sales force (increase of $12.2 million), higher marketing costs relating to the newly acquired products (increase of $1.6 million), and amortization of newly-acquired product rights (increase of $6.2 million). The decrease as a percentage of revenues reflects the growth of pharmaceutical sales due to new product acquisitions and the growth of contract revenues. On February 22, 1998, the Company announced that it planned to begin expanding its sales force immediately from approximately 270 representatives to over 450 representatives by the end of 1998 to increase the promotional activity of its current products and to prepare for the launch, subject to receiving regulatory approval, of Albuterol Spiros. The Company expects that the rapid expansion of its sales force will result in an increase in 1998 in its selling, general and administrative expenses, both in total and as a percentage of revenues, as compared to 1997. Interest income for 1997 increased $11.1 million to $18.0 million as compared to 1996. The increase is due primarily to higher balances of cash and short-term investments during 1997 resulting from public stock offerings completed in May and November 1996 and the Notes offering completed in the third quarter of 1997, partially offset by decreases in cash used for product acquisitions and capital expenditures. Interest expense for 1997 was $5.8 million as compared to $674,000 for 1996. The increase in interest expense is primarily due to interest accrued on the Notes issued by the Company in the third quarter of 1997. The Company's effective tax rate was 34% for 1997 as compared to 13% for 1996. This increase is primarily due to the utilization of net operating loss carryforwards in 1996. Net operating loss carryforwards available in 1997 relate primarily to tax deductions for stock options exercised and, as such, the related benefit from their utilization has been credited directly to shareholders' equity. -4- YEAR ENDED DECEMBER 31, 1996 ("1996") AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1995 ("1995") Total revenues in 1996 increased $52.6 million, up 102%, as compared to 1995. Net income for 1996 was $24.3 million as compared with a net loss of $35.8 million for 1995, a change of $60.1 million or $2.21 per share (basic) and $2.13 per share (diluted). The 1995 net loss of $35.8 million was due to charges totaling $43.8 million relating to the Spiros development program, consisting of a $30.8 million nonrecurring charge for in-process technology acquired in connection with the Company's acquisition of Dura Delivery Systems, Inc. ("DDSI") and a $13 million purchase option charge resulting from the cash contribution to Spiros Corp. Pharmaceutical sales in 1996 increased by $40.3 million, or 102%, as compared to 1995 due primarily to sales of products acquired in 1996, which resulted in an increase in pharmaceutical sales of $30.7 million, as well as a $6.4 million increase in sales at Health Script Pharmacy Services, Inc. ("Health Script"), acquired in March 1995. Gross profit for 1996 increased by $29.6 million, or 103%, as compared to 1995 due to the increase in pharmaceutical sales. Gross profit as a percentage of sales remained steady at 73%. Contract revenues in 1996 increased by $12.4 million, or 101%, as compared to 1995. Contract revenues from Spiros-related development and feasibility agreements generated $21.2 million in 1996, including $19.1 million from Spiros Corp., compared to $9.5 million, including $8 million from DDSI, in 1995. Contract revenues under various agreements for the co-promotion of pharmaceutical products were $3.4 million in 1996 as compared to $2.6 million for 1995. Clinical, development and regulatory expenses for 1996 increased by $10.1 million, or 121%, to $18.5 million as compared to 1995. The increase reflects additional expenses incurred by the Company under feasibility and development agreements covering the use of various compounds with Spiros. Selling, general and administrative expenses in 1996 increased $16.7 million, or 64%, to $42.6 million as compared to 1995, but decreased as a percent of total revenues to 41% in 1996 from 50% in 1995. The dollar increase results primarily from marketing and amortization costs related to newly acquired products (increase of $4.9 million and $3.7 million, respectively) as well as higher costs at Health Script (increase of $2.6 million) to support its increased sales. The decrease as a percentage of revenues reflects increased productivity of the sales force, the growth of pharmaceutical sales due to product acquisitions, and the growth of contract revenues. Interest income for 1996 increased $4.1 million to $6.9 million as compared to 1995. The increase is due primarily to higher balances of cash and short-term investments during 1996 resulting from public stock offerings completed in August 1995 and May and November 1996, as well as cash generated from operations. -5- Interest expense for 1996 was $674,000 as compared to $906,000 for 1995. The decrease in interest expense is primarily due to lower average balances of obligations during 1996. The Company recorded an income tax provision of $3.5 million for 1996 as compared to $406,000 for 1995. The increased provision is due to the increase in income before income taxes in 1996. The 1996 provision reflects the expected combined federal and state tax rate of approximately 40% largely offset by the benefit from the utilization of net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and short-term investments increased by $144.9 million to $385.2 million at December 31, 1997 from $240.3 million at December 31, 1996. The increase resulted primarily from the net proceeds of the offering of the Notes, as well as from cash generated from operations, partially offset by the Company's December 1997 contribution of $75 million to Spiros Corp. II, the acquisition of the intranasal steroid products Nasarel and Nasalide for $75 million, and capital expenditures of $24.1 million. Working capital increased by $173 million to $392.9 million at December 31, 1997 from $219.9 million at December 31, 1996. At December 31, 1997, the Company had $287.5 million in Notes outstanding and an aggregate of $12.4 million in other current and long-term obligations, of which $2.8 million is to be paid during the next 12 months. As of December 31, 1997, additional future contingent obligations totaling $93 million relating to product acquisitions are due through 2004, including $10 million due in 1998. The Company has entered into a loan agreement which provides for the borrowing of up to $50 million on an unsecured basis through May 1, 1999. As of December 31, 1997, no borrowings were outstanding under this agreement. The Company anticipates that its existing capital resources, together with cash expected to be generated from operations and available bank borrowings, will be sufficient to finance its operations through at least the next 12 months. Significant additional resources, however, may be required in connection with product or company acquisitions or in-licensing opportunities. At present, the Company is actively pursuing the acquisition of rights to products and/or companies which may require the use of substantial capital resources; however, there are no present agreements or commitments with respect to such acquisitions. The Company recognizes the need to ensure its operations will not be adversely impacted by the inability of the Company's systems to process data having dates on or after January 1, 2000 ("Year 2000"). Processing errors due to software failure arising from calculations using the Year 2000 date are a recognized risk. The Company is currently addressing the risk, with respect to the availability and integrity of its financial systems and the reliability of its -6- operating systems, and is in the process of communicating with suppliers, customers, financial institutions and others with whom it conducts business to assess whether they are or will be Year 2000 compliant. While the Company believes its planning efforts are adequate to address its Year 2000 concerns, there can be no assurance that the systems of other companies on which the Company's systems and operations rely will be converted on a timely basis and will not have a material effect on the Company. In addition, the potential impact of the Year 2000 on others with whom the Company does business and any resulting effects on the Company cannot be reasonably estimated at this time. The cost of the Company's Year 2000 initiatives is not expected to be material to the Company's results of operations or financial position. -7-
- ------------------------------------------------------------------------------- DURA PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - ------------------------------------------------------------------------------- DECEMBER 31, -------------------- 1996 1997 - ------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $131,101 $72,003 Short-term investments 109,244 313,218 Accounts and other receivables 24,092 40,987 Inventory 7,544 15,201 - ------------------------------------------------------------------------------- Total current assets 271,981 441,409 License agreements and product rights 186,750 250,781 Property 27,500 48,525 Other assets 18,439 34,165 - ------------------------------------------------------------------------------- Total $504,670 $774,880 ----------------------- ----------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $9,253 $8,142 Accrued liabilities 16,566 37,599 Current portion of long-term obligations 26,298 2,798 - ------------------------------------------------------------------------------- Total current liabilities 52,117 48,539 Convertible subordinated notes 287,500 Other long-term obligations 8,976 9,564 - ------------------------------------------------------------------------------- Total liabilities 61,093 345,603 Commitments and contingencies (Notes 4, 5 and 13) Shareholders' equity: Preferred stock, no par value (1996), par value $.001 (1997); shares authorized - 5,000,000; no shares issued or outstanding Common stock, no par value (1996), par value $.001 (1997); shares authorized - 100,000,000; issued and outstanding - 43,183,591 and 45,608,414, respectively 525,350 46 Additional paid-in capital 604,991 Unrealized gain (loss) on investments (38) 176 Warrant subscriptions receivable (2,743) (12,252) Accumulated deficit (78,992) (163,684) - ------------------------------------------------------------------------------- Total shareholders' equity 443,577 429,277 - ------------------------------------------------------------------------------- Total $504,670 $ 774,880 ----------------------- -----------------------
See accompanying notes to consolidated financial statements. -8-
- ------------------------------------------------------------------------------------------------ DURA PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - ------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, ----------------------- 1995 1996 1997 - ------------------------------------------------------------------------------------------------ Revenues: Sales $39,308 $79,563 $150,476 Contract 12,194 24,556 30,847 - ------------------------------------------------------------------------------------------------ Total revenues 51,502 104,119 181,323 - ------------------------------------------------------------------------------------------------ Operating costs and expenses: Cost of sales 10,618 21,301 32,081 Clinical, development and regulatory 8,408 18,540 24,391 Selling, general and administrative 25,955 42,631 65,229 Charges for acquired in-process technology, purchase options and other non recurring items (Note 11) 43,773 137,639 - ------------------------------------------------------------------------------------------------ Total operating costs and expenses 88,754 82,472 259,340 - ------------------------------------------------------------------------------------------------ Operating income (loss) (37,252) 21,647 (78,017) - ------------------------------------------------------------------------------------------------ Other: Interest income 2,768 6,897 17,960 Interest expense (906) (674) (5,816) Other - net 18 (3) (14) - ------------------------------------------------------------------------------------------------ Total other 1,880 6,220 12,130 - ------------------------------------------------------------------------------------------------ Income (loss) before income taxes (35,372) 27,867 (65,887) Provision for income taxes 406 3,539 18,805 - ------------------------------------------------------------------------------------------------ Net income (loss) $(35,778) $24,328 $(84,692) -------------------------------------------- -------------------------------------------- Net income (loss) per share: Basic $ (1.53) $ 0.68 $ (1.93) -------------------------------------------- -------------------------------------------- Diluted $ (1.53) $ 0.60 $ (1.93) -------------------------------------------- -------------------------------------------- Weighted average number of common shares: Basic 23,440 35,835 43,828 Diluted 23,440 40,479 43,828
See accompanying notes to consolidated financial statements. -9- DURA PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS IN THOUSANDS
YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1996 1997 --------- ------- --------- Operating activities: Net income (loss) $(35,778) $ 24,328 $ (84,692) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 1,962 6,317 15,209 Non-cash portion of charges for acquired in- process technology, purchase options and other 30,773 49,146 Changes in assets and liabilities: Accounts and other receivables (4,089) (17,135) (16,040) Inventory (1,110) (4,475) (7,739) Other assets (241) (1,023) (5,215) Accounts payable and accrued liabilities 4,055 22,590 35,574 --------- -------- -------- Net cash provided by (used for) operating activities (4,428) 30,602 (13,757) --------- -------- -------- Investing activities: Purchases of short-term investments (95,716) (178,901) (381,127) Sales and maturities of short-term investments 56,117 111,781 177,367 Purchases of long-term investments (494) (5,000) Capital expenditures (7,835) (12,846) (24,079) Company/product acquisitions, net of cash received 744 (128,621) (76,973) Other (60) (1,864) (1,514) --------- -------- -------- Net cash used for investing activities (47,244) (215,451) (306,326) --------- -------- -------- Financing activities: Issuance of common stock and warrants-net 61,606 307,503 9,310 Issuance of convertible subordinated notes-net 278,175 Issuance of notes payable 4,360 Principal payments on long-term obligations (22,203) (17,107) (26,500) --------- -------- -------- Net cash provided by financing activities 43,763 290,396 260,985 --------- -------- -------- Net increase (decrease) in cash and cash equivalents (7,909) 105,547 (59,098) Cash and cash equivalents at beginning of year 33,463 25,554 131,101 --------- -------- -------- Cash and cash equivalents at end of year $ 25,554 $131,101 $72,003 --------- -------- -------- --------- -------- -------- Supplemental disclosure of cash flow information: Cash paid during the year for: Interest (net of amounts capitalized) $ 68 $ 0 $ 0 Income taxes $ 44 $ 266 $6,578
See accompanying notes to consolidated financial statements. -10- DURA PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
UNREALIZED NOTE COMMON STOCK ADDITIONAL GAIN/(LOSS) WARRANT RECEIVABLE ------------------- PAID-IN ON SUBSCRIPTIONS FROM ACCUMULATED SHARES AMOUNT CAPITAL INVESTMENTS RECEIVABLE SHAREHOLDERS DEFICIT TOTAL -------- -------- ------- ----------- ---------- ----------- ---------- ----- Balance, January 1, 1995 20,906 $116,269 $ (190) $(67,542) $48,537 Sale Of Common Stock 4,494 53,815 53,815 Issuance Of Common Stock In Connection With The Purchase Of DDSI Callable Common Stock 2,286 33,489 33,489 Issuance Of Common Stock Warrants 5,040 $ (4,200) 840 Collections On Notes Receivable 177 177 Cancellation Of Restricted Stock And Related Notes Receivable (4) (13) 13 Exercise Of Stock Options And Warrants 3,397 7,679 7,679 Income Tax Benefit From Stock Options Exercised 235 235 Unrealized Gain On Available- For-Sale Short-Term Investments $ 103 103 Net Loss (35,778) (35,778) ------- ----- -------- ------ ---------- ---- --------- -------- Balance, December 31, 1995 31,079 216,514 103 (4,200) -0- (103,320) 109,097 Collections On Warrant Subscriptions Receivable 1,457 1,457 Sale Of Common Stock 10,225 302,893 302,893 Exercise Of Stock Options And Warrants 1,880 3,153 3,153 Income Tax Benefit From Stock Options Exercised 2,790 2,790 Unrealized Loss On Available- For-Sale Short-Term Investments (141) (141) Net Income 24,328 24,328 ------- ----- -------- ------ ---------- ---- --------- -------- Balance, December 31, 1996 43,184 525,350 (38) (2,743) -0- (78,992) 443,577 Exercise Of Stock Options And Warrants 1,527 6,028 $ 1,444 7,472 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 43,729 Collections On Warrant Subscriptions Receivable 3,141 3,141 Issuance Of Common Stock Warrants 15,130 (12,650) 2,480 Income Tax Benefit From Stock Options Exercised 13,356 13,356 Unrealized Gain On Available- For-Sale Short-Term Investments 214 214 Net Loss (84,692) (84,692) ------- ----- -------- ------ ---------- ---- --------- -------- Balance, December 31, 1997 45,608 $ 46 $604,991 $ 176 $(12,252) $-0- $(163,684)$429,277 ------- ----- -------- ------ ---------- ---- --------- -------- ------- ----- -------- ------ ---------- ---- --------- --------
See accompanying notes to consolidated financial statements. -11- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY AND ITS BUSINESS ORGANIZATION - Dura Pharmaceuticals, Inc. ("Dura" or the "Company") is a specialty respiratory pharmaceutical and pulmonary drug delivery company. The Company develops and markets prescription pharmaceutical products for the treatment of allergies, asthma, chronic obstructive pulmonary disease, the common cold and related respiratory ailments and is developing a pulmonary drug delivery system ("Spiros"). The Company also has a separate mail service pharmacy, Health Script Pharmacy Services, Inc. ("Health Script"), which dispenses respiratory pharmaceuticals. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Dura and its wholly owned subsidiaries. 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, 1997. 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 reported as a separate component of shareholders' equity. CONCENTRATION OF CREDIT RISK - The Company invests its excess cash in U.S. Government securities and debt instruments of financial institutions and corporations with strong credit ratings. The Company has established guidelines relative to diversification of its cash investments and their maturities which are designed to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. The Company has not experienced any significant losses on its cash equivalents or short-term investments. The Company extends credit on an uncollateralized basis primarily to wholesale drug distributors and retail pharmacies throughout the United States. Historically, the Company has not experienced significant credit losses on its customer accounts. Two wholesale customers individually accounted for 16% and 11% of 1995 sales, three -12- wholesale customers individually accounted for 17%, 14%, and 13% of 1996 sales and two wholesale customers each individually accounted for 11% of 1997 sales. INVENTORY - Inventory is stated at the lower of cost (first-in, first-out method) or market and is comprised 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 30 years Machinery and equipment 2-10 years Furniture and fixtures 5-7 years LICENSE AGREEMENTS AND PRODUCT RIGHTS - The cost of license fees and product rights are capitalized and amortized on a straight-line basis over the periods estimated to be benefited, ranging from 15 to 25 years. Amortization of capitalized license fees and product rights payments are included in selling, general and administrative expenses in the consolidated statements of operations. Amortization of license fees and product rights totaled $1,055,000, $4,435,000 and $10,608,000 in 1995, 1996 and 1997, respectively. GOODWILL - Other assets include goodwill with an unamortized balance of $6,630,000 and $8,327,000 at December 31, 1996 and 1997, respectively, which is stated at cost and amortized using the straight-line method over the periods estimated to be benefited, ranging from 10 to 20 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. 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 -13- have reached their expiration date for which it generally ships replacement merchandise. The Company has not historically experienced significant returns of expired pharmaceuticals. 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 - In December 1997, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which requires the presentation of 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 earnings per share data for 1995 and 1996 have been restated to conform to the requirements of SFAS No. 128. The Company incurred net losses in 1995 and 1997 and, as such, the weighted average number of shares used for basic and diluted earnings per share do not include potential dilutive common shares from outstanding stock options and warrants and convertible subordinated notes as their inclusion would be antidilutive. For 1996, the difference between the weighted average number of shares used for basic and diluted earnings per share is the inclusion of 1,772,250 and 2,872,044 dilutive contingent shares for stock options and warrants, respectively. ACCOUNTING FOR STOCK-BASED COMPENSATION - As permitted by 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," and, accordingly, 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. SEGMENT DISCLOSURES - In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued which revises reporting requirements and definitions for segments of business operations. The Company will begin reporting under SFAS No. 131 commencing with the 1998 fiscal year. -14- 3. SHORT-TERM INVESTMENTS The following is a summary of short-term investments as of December 31, 1996 and 1997 (in thousands):
Unrealized Estimated Cost gains/(losses) fair value ------- -------------- -------- December 31, 1996: U.S. government securities $ 38,408 $ 41 $ 38,449 U.S. corporate debt securities 70,874 (79) 70,795 -------- -------- -------- Total $109,282 $ (38) $109,244 -------- -------- -------- -------- -------- -------- December 31, 1997: U.S. government securities $154,126 $ 217 $154,343 U.S. corporate debt securities 158,916 (41) 158,875 -------- -------- -------- Total $313,042 $ 176 $313,218 -------- -------- -------- -------- -------- --------
The following is a summary of the amortized cost and estimated fair value of short-term investments by contractual maturity at December 31, 1997 (in thousands):
Estimated Cost fair value -------- --------- Due in one year or less $271,307 $ 271,333 Due after one year through two years 41,735 41,885 -------- --------- Total $313,042 $ 313,218 -------- --------- -------- ---------
-15- 4. LICENSE AGREEMENT AND PRODUCT RIGHTS The Company has entered into agreements to acquire, in-license or co-promote respiratory prescription pharmaceuticals. The following is a summary of license agreements and product rights as of December 31, 1996 and 1997 (in thousands):
Amortization 1996 1997 period -------- -------- -------- Products - at cost: Nasarel/Nasalide $ 75,298 25 years Keftab/Ceclor CD $100,065 100,065 25 years Entex products 45,055 44,655 15 years Rondec product line 32,613 32,613 25 years Other 15,011 14,752 20 years -------- -------- -------- 192,744 267,383 Less accumulated amortization (5,994) (16,602) -------- -------- License agreements and product rights $186,750 $250,781 -------- -------- -------- --------
NASAREL-REGISTERED TRADEMARK-/NASALIDE-REGISTERED TRADEMARK- - 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-Registered Trademark- and Nasalide-Registered Trademark- for $70 million, which was paid at closing. A $5 million contingent payment was made on December 31, 1997 and additional future contingent payments totaling $10 million are due through December 1998, subject to the products remaining without a competing nasal formulation of flunisolide. Keftab-Registered Trademark-/Ceclor-Registered Trademark- CD - On September 5, 1996, the Company acquired from Eli Lilly and Company exclusive U.S. marketing rights to the patented antibiotics Keftab-Registered Trademark- and Ceclor-Registered Trademark- CD (cefaclor extended release tablets). 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 2003 are subject to Ceclor CD remaining available by prescription only with no competitive products, as defined in the licensing agreement. ENTEX-REGISTERED TRADEMARK- PRODUCTS - On July 3, 1996, the Company acquired from Procter & Gamble Pharmaceuticals, Inc. the worldwide rights to the Entex-Registered Trademark- products, consisting of four prescription upper respiratory drugs. The purchase price of $45 million in cash consisted of $25 million paid at closing and $20 million paid on July 3, 1997. RONDEC-REGISTERED TRADEMARK- PRODUCT LINE - On June 30, 1995, the Company acquired from Ross Products Division of Abbott Laboratories the U.S. rights to the Rondec-Registered Trademark- product line of six prescription cough/cold drugs. Under the acquisition agreement, the Company received cash at closing of approximately $4.4 million, paid $20 million on July 14, 1995, $4 million on January 2, 1996, $4 million on December 31, 1996 and $3 million on December 31, 1997 and is -16- obligated to make additional future payments of up to $16 million, which are contingent principally on the acquired products remaining available by prescription only. Other long-term obligations include $4.4 million (net of current portion of $2.8 million) which relates to the acquisition of license agreements and product rights, but exclude $93 million in contingent payments due in years 1998 through 2004, including $10 million due in 1998. 5. PROPERTY The following is a summary of property as of December 31, 1996 and 1997 (in thousands):
1996 1997 ------- ------- Property - at cost: Land $4,833 $5,064 Buildings 3,665 13,434 Machinery and equipment 5,850 11,075 Furniture and fixtures 1,575 2,419 Construction in-progress 14,353 22,228 ------- ------- 30,276 54,220 Less accumulated depreciation and amortization (2,776) (5,695) ------- ------- Property $27,500 $48,525 ------- ------- ------- -------
The Company is constructing a manufacturing facility that will be used to formulate, mill, blend and fill drugs to be used with the Company's Spiros-Registered Trademark- pulmonary drug delivery system. Included in construction in-progress at December 31, 1997 are capital expenditures relating to the facility of approximately $16 million. At December 31, 1997, the Company had open purchase commitments relating to the construction of a new research and development facility totaling approximately $23.4 million. 6. DEVELOPMENT AGREEMENTS The Company has a worldwide license from a private inventor to the Spiros dry powder drug delivery technology. This technology 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 of this device. The development arrangements discussed below have been entered into regarding Spiros. DURA DELIVERY SYSTEMS, INC. ("DDSI") - In 1993, DDSI was formed and completed a $13 million private placement of callable common stock to fund the development of Spiros for use with certain compounds. In connection with the private placement, the Company acquired the right to purchase all the outstanding shares of DDSI callable common -17- stock. Pursuant to a development and management agreement, DDSI engaged the Company to develop DDSI's products and provide general management services to DDSI. Dura recorded contract revenues under the agreement with DDSI for the year ended December 31, 1995 of $8,016,000. On December 29, 1995, the Company exercised its option and purchased all of DDSI's outstanding callable common stock (Note 12). 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 at $30.00 per unit. Each unit consisted of one share of Spiros Corp. callable common stock and a Series S warrant (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 and to acquire the exclusive rights for the use of Spiros with the asthma drug albuterol. A purchase option expense of $13 million representing the cash contributed to Spiros Corp. was recorded in December 1995. The Company also recorded a warrant subscriptions receivable and a corresponding increase in common stock of $4.2 million representing the estimated fair market value of the Series S warrants. Pursuant to a development and management agreement, Spiros Corp. engaged the Company to develop the Spiros Corp. products and provide general management services to Spiros Corp. Dura recorded contract revenues from Spiros Corp. equal to the amounts due from Spiros Corp. for costs and fees, less a pro rata amount allocated to the Series S warrant subscriptions receivable. During 1996 and 1997, Dura recorded contract revenues under the agreement with Spiros Corp. of $19,138,000 and $19,277,000, respectively. On December 19, 1997, the Company purchased all of Spiros Corp.'s outstanding callable common stock (Note 12). SPIROS DEVELOPMENT CORPORATION II, INC. ("SPIROS CORP. II" ) - On December 22, 1997, Spiros Corp. II, a separate, newly-formed Delaware corporation, completed a $101 million public offering of units (the "Offering"). Under agreements described below, Spiros Corp. II will use 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, ipratropium, albuterol-ipratropium combination, budesonide and additional designated compounds (the "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 (the "SDCII warrants") to purchase one-fourth of one share of the Company's common stock. The SDCII warrants will be exercisable from January 1, 2000 through December 31, 2002 at an exercise price of $54.84 per share of Dura common stock. In consideration for the SDCII warrants and the contribution of $75 million to Spiros Corp. II, 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 is $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 -18- $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 a combination thereof. 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 December 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, 1997, the Company had a remaining SDCII warrant subscriptions receivable of $12.3 million. In connection with the December 22, 1997 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 or expiration of the Stock Purchase Option. Albuterol and Product Option Agreement - Under this agreement, the Company has the right to acquire 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 costs and fees less a pro rata amount allocated to the SDCII warrant subscriptions receivable. During 1997, Dura recorded contract revenues under the agreement with Spiros Corp. II of $6,626,000 for development services provided from October 10, 1997 through year-end. -19- At December 31, 1997 the Company had a receivable from Spiros Corp. II of $8,399,000 representing amounts for development costs incurred by the Company, as well as costs incurred on behalf of Spiros Corp. II in connection with the Offering. OTHER DEVELOPMENT AGREEMENTS - The Company has entered into other development agreements to provide contract research and development services, generally relating to the dry powder formulation of compounds and to pulmonary drug delivery technologies, including the use of Spiros. Pursuant to these agreements, the Company receives contract revenues for services provided and, in some cases, up-front and milestone payments. 7. CONVERTIBLE SUBORDINATED NOTES In the third quarter of 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, commencing January 15, 1998. 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. 8. CAPITAL STOCK COMMON STOCK - Effective July 2, 1997, the Company changed its state of incorporation from California to Delaware. In connection with this change, the outstanding shares of the Company's no par value common stock were converted into and exchanged for an equal number of shares of $.001 par value common stock of the Delaware entity. In August 1995, May 1996 and November 1996, the Company completed offerings of 4,494,000, 5,405,000 and 4,820,000 shares of common stock, respectively, resulting in net proceeds to the Company of $53.8 million, $150.5 million and $152.4 million, respectively. COMMON STOCK WARRANTS - In connection with the private placement completed by the Company and DDSI in September 1993 (Note 6), DDSI investors received Series W warrants to purchase an aggregate of 3,640,000 shares of the Company's common stock. The Series W warrants are exercisable at $2.38 per share, subject to adjustment upon the occurrence of certain events as defined, and are exercisable through September 27, 2000. In connection with the private placement completed by Spiros Corp. on December 29, 1995 (Note 6), Spiros Corp. investors received Series S warrants to purchase an aggregate of 2,240,000 shares of the Company's common stock. -20- The Series S warrants are exercisable at $19.47 per share, subject to adjustment upon the occurrence of certain events as defined, and are exercisable through December 29, 2000. In connection with the Offering completed by Spiros Corp. II on December 22, 1997 (Note 6), Spiros Corp. II investors received SDCII warrants to purchase an aggregate of 1,581,250 shares of the Company's common stock. The SDCII warrants are exercisable at $54.84 per share, subject to adjustment upon the occurrence of certain events as defined, and are exercisable through December 31, 2002. The following table summarizes common stock warrants outstanding at December 31, 1997 (in thousands, except per share amounts):
Warrant description Warrants Shares covered Exercise price outstanding by warrants per share - ---------------------------------------------------------------------------------------------------------- Series W warrants 290 812 $ 2.38 - ---------------------------------------------------------------------------------------------------------- Series S warrants 933 2,240 $19.47 - ---------------------------------------------------------------------------------------------------------- SDCII warrants 6,325 1,581 $54.84 - ---------------------------------------------------------------------------------------------------------- Other 302 404 $0.25 - $45.12 - ---------------------------------------------------------------------------------------------------------- Total warrants outstanding 7,850 5,037 - ----------------------------------------------------------------------------------------------------------
COMMON SHARES RESERVED - As of December 31, 1996 and 1997, the Company has reserved shares of common stock for issuance as follows (in thousands):
1996 1997 - ------------------------------------------------------------------------------- Issuance under 1992 stock option plan 3,729 4,584 Exercise of common stock warrants 4,052 5,037 - ------------------------------------------------------------------------------- Total shares reserved 7,781 9,621 ------------------------ ------------------------
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 7,607,360 shares of the Company's common stock. The Plan provides for the automatic issuance of options to purchase 8,000 and 30,000 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 -21- 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, 1996 and 1997, options to purchase 176,000 and 212,000 shares of common stock, respectively, were outstanding with limited stock appreciation rights. -22- The following table summarizes stock option activity under the Plan:
Weighted average Shares exercise price per share ------------------------------------ Options Options available outstanding for grant - ---------------------------------------------------------------------------------------------------- Balance, January 1, 1995 3,125,718 150,672 $ 2.68 Options authorized 1,000,000 Options granted 1,100,606 (1,100,606) $10.29 Options exercised (1,093,848) $ 1.21 Options canceled (80,108) 80,108 $ 4.79 - ---------------------------------------------------------------------------------------------------- Balance, December 31, 1995 3,052,368 130,174 $ 5.89 Options authorized 1,500,000 Options granted 1,339,500 (1,339,500) $28.95 Options exercised (953,414) $ 3.20 Options canceled (53,944) 53,944 $21.48 - ---------------------------------------------------------------------------------------------------- Balance, December 31, 1996 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 ----------------------------------------------------- Exercisable, December 31, 1995 1,524,090 $ 3.91 --------------- Exercisable, December 31, 1996 1,327,622 $ 6.99 --------------- Exercisable, December 31, 1997 1,386,911 $12.61 ---------------
-23- The following table summarizes information concerning outstanding and exercisable options as of December 31, 1997:
Options outstanding Options exercisable ------------------------------------------------------------------------ Range of exercise Number Weighted Weighted Number Weighted prices outstanding average average exercisable average remaining exercise price exercise price contractual life (years) - ------------------------------------------------------------------------------------------------------------ $ 0.25 - $ 5.00 385,995 5.2 $ 3.12 375,474 $ 3.08 $ 5.01 - $10.00 619,467 7.2 $ 6.74 399,270 $ 6.79 $10.01 - $20.00 619,898 7.9 $14.49 258,395 $14.24 $20.01 - $30.00 1,207,015 9.0 $26.25 327,152 $27.13 $30.01 - $40.00 298,117 9.6 $36.25 13,459 $35.29 $40.01 - $52.88 638,695 9.9 $44.81 13,161 $44.41 - ------------------------------------------------------------------------------------------------------------ 3,769,187 8.3 $22.67 1,386,911 $12.61 ------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------
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 plan and, accordingly, no compensation cost has been recognized for stock options in 1995, 1996 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 loss for the year ended December 31, 1995 would have been increased by $351,000 ($0.01 per share, basic and diluted), the net income for the year ended December 31, 1996 would have been reduced by $2,707,000 ($0.08 and $0.07 per share, basic and diluted, respectively) and net loss for the year ended December 31, 1997 would have been increased by $5,932,000 ($0.14 per share, basic and diluted). Pro forma calculations exclude the effect of stock options granted prior to 1995. Accordingly, the 1995, 1996 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 1995, 1996 and 1997 were $4.54, $13.54 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:
1995 1996 1997 - ------------------------------------------------------------------------------ Expected dividend yield None None None Expected stock price volatility 40% 40% 40% Risk-free interest rate 6.2% 6.2% 6.1% Expected life of options 5 years 5 years 5 years
-24- 10. INCOME TAXES The provision for income taxes consisted of the following components (in thousands):
1995 1996 1997 --------- --------- --------- Current: Federal $235 $3,012 $21,617 State 171 527 2,833 --------- --------- --------- Total 406 3,539 24,450 --------- --------- --------- Deferred: Federal (5,424) State (221) --------- --------- --------- Total (5,645) --------- --------- --------- Provision for income taxes $406 $3,539 $18,805 --------- --------- --------- --------- --------- ---------
A reconciliation of the income tax provision (benefit) based on federal statutory rates and income (loss) before income taxes to the provision for income taxes as reported is as follows (in thousands):
1995 1996 1997 --------- --------- --------- Provision (benefit) at statutory rates $(12,027) $ 9,475 $(23,060) Charges not currently deductible or recognizable for tax purposes 14,883 43,351 State income taxes, net 171 361 1,779 NOL carryforwards utilized (2,946) (6,852) (1,015) Change in beginning-of-year deferred tax valuation allowance (1,545) Impact of foreign income taxed at different rates (364) Federal alternative minimum tax 235 234 Other 90 321 (341) -------- -------- -------- Provision for income taxes $ 406 $ 3,539 $ 18,805 -------- -------- -------- -------- -------- --------
-25- 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, 1996 and 1997 are as follows (in thousands):
1996 1997 --------- --------- Deferred tax assets: Net operating loss carryforwards $19,484 $25,422 Capitalized research and development 6,404 8,247 Research and development credits 1,670 2,549 Reserves and accruals not currently deductible 1,560 5,023 Other 341 --------- --------- Total deferred tax assets 29,118 41,582 Deferred tax liabilities: Depreciation and amortization (269) (650) Valuation allowance for deferred tax assets (28,849) (36,022) --------- --------- Net deferred tax assets $0 $4,910 --------- --------- --------- ---------
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, 1997, the balance of the beginning-of-year valuation allowance was reduced by approximately $1.5 million due to a change in management's judgment about the realizability of deferred tax assets relating to net operating loss carryforwards. At December 31, 1997, the Company had federal net operating loss ("NOL") carryforwards of approximately $65 million, which begin expiring in 2002. This amount includes NOL carryforwards totaling approximately $38 million acquired in connection with the Company's purchase of the callable common stock of Spiros Corp. The deferred tax asset relating to the Spiros Corp. NOL carryforwards has been fully reserved. 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. As such, approximately $5 million of the total federal NOL carryforwards will be available for use in 1998; the amount available will increase by approximately $5 million per year. While the Company believes the annual limitation is approximately $5 million, this amount is not certain. 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. During the -26- years ended December 31, 1995, 1996, and 1997 the Company recorded tax benefits from stock option exercises of $235,000, $2,790,000, and $13,356,000, respectively, which were credited to shareholders' equity. 11. CHARGES FOR ACQUIRED IN-PROCESS TECHNOLOGY, PURCHASE OPTIONS AND OTHER NONRECURRING ITEMS Charges for acquired in-process technology, purchase options and other nonrecurring items consisted of the following (in thousands): 1995 1996 1997 --------- --------- --------- Acquired in-process technology $30,773 $45,989 Acquired purchase options 13,000 75,000 Buy-out of royalty agreement 13,780 Impairment of long-term investment 2,870 --------- --------- --------- Total $43,773 $137,639 --------- --------- --------- --------- --------- ---------
ACQUIRED IN-PROCESS TECHNOLOGY - The charges for acquired in-process technology in 1995 and 1997 relate to the Company's acquisitions of DDSI and of Spiros Corp., respectively (Note 12). The Company concluded that due to the additional development, testing, and regulatory approvals required, the commercial viability of the technology acquired in these acquisitions had not yet been established. As such, charges to earnings were recorded in the periods in which the acquisitions occurred for the portion of the purchase price allocated to in-process technology. ACQUIRED PURCHASE OPTIONS - In connection with the formation of Spiros Corp. in 1995 and Spiros Corp. II in 1997, the Company contributed $13 million and $75 million, respectively, as consideration for the options to acquire the rights to certain products from those companies (Note 6). The Company concurrently recorded charges for these purchase options for the amounts of cash contributed to Spiros Corp. and Spiros Corp. II. 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 was $2,480,000 which, when combined with the cash payment, resulted in a nonrecurring charge of $13,780,000. IMPAIRMENT OF LONG-TERM INVESTMENT - The Company periodically evaluates its ability to recover the carrying value of its long-lived assets. In the fourth quarter of 1997, the Company concluded that the value of a long-term -27- investment was impaired and, accordingly, wrote down the investment to its estimated fair value, resulting in a nonrecurring charge of $2,870,000. 12. ACQUISITIONS The following acquisitions have been accounted for under the purchase method of accounting and, accordingly, the operating results of these acquisitions are included in the Company's consolidated results of operations from the date of acquisition. DDSI - On December 29, 1995, the Company acquired all of the outstanding callable common stock of DDSI (Note 6). The purchase price of approximately $33.5 million consisted of 2,285,108 shares of the Company's common stock. The net assets acquired included cash of $3.4 million, equipment valued at $380,000 and DDSI's payable to Dura for development and management services of $995,000. The excess of the purchase price over the fair value of the net assets acquired of approximately $30.8 million was allocated to 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, not requiring regulatory approval, had been established. As a result of this assessment, the acquired in-process technology was expensed as a nonrecurring charge in December 1995. SPIROS CORP. - On December 19, 1997, the Company acquired all of the outstanding callable common stock and options of Spiros Corp. (Note 6). 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. The excess of the purchase price over the fair value of the net assets acquired of $44.7 million was allocated to 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, not requiring regulatory approval, have been established. As a result of this assessment, the acquired in-process technology was expensed as a nonrecurring charge in December 1997. The following unaudited pro forma summary presents the consolidated results of operations as if the acquisition of Spiros Corp. had occurred on January 1, 1996, after giving effect to certain adjustments, including the issuance of Company common stock. The charge to earnings for acquired in-process technology is not reflected in the pro forma results as it is nonrecurring. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made on January 1, 1996, nor is it indicative of future results (in thousands, except per share amounts).
1996 1997 -------- -------- Total revenues $85,181 $162,444 Net income (loss) $9,801 $(49,917) Net income (loss) per share - basic $0.27 $(1.12) Net income (loss) per share - diluted $0.24 $(1.12)
-28- 13. COMMITMENTS AND CONTINGENCIES EMPLOYEE SAVINGS PLANS - The Company has a 401(k) plan that allows participating employees to contribute 1% 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 $224,000, $532,000 and $867,000 in 1995, 1996 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, 1997, $5,175,000 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, 1997 are 156,250 units of Spiros Corp. II (Note 6). LINE OF CREDIT - In April 1997, the Company entered into a loan agreement with a bank which provides for the borrowing of up to $50 million on an unsecured basis through May 1, 1999. Borrowings under the agreement bear interest at the bank's reference rate (8.5% at December 31, 1997) or an offshore rate plus 1.5% as selected by the Company. The agreement places restrictions on the payment of cash dividends and on the incurrence of additional indebtedness by the Company. As of December 31, 1997, no borrowings were outstanding under this agreement. TERMINATION OF MERGER AGREEMENT WITH SCANDIPHARM, INC. - On December 1, 1997, the Company terminated a merger agreement with Scandipharm, Inc. ("Scandipharm") entered into on October 20, 1997. On January 16, 1998, Scandipharm filed suit against the Company for breach of contract. On January 19, 1998, the Company filed suit against Scandipharm seeking a declaratory judgment that Dura's termination of the merger did not breach the merger agreement and for damages against Scandipharm. The Company believes that it had the right to terminate the merger agreement, and that Scandipharm's claims for specific performance under the agreement or for unspecified damages are without merit, and that outcome of this matter will not have a material adverse effect on the Company's financial position or results of operations. -29- 14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of unaudited quarterly results of operations for the years ended December 31, 1996 and 1997 (in thousands, except per share amounts).
First Second Third Fourth Quarter Quarter Quarter Quarter --------- --------- --------- -------- 1996 Total revenues $18,587 $18,800 $25,920 $40,812 Operating income 3,712 3,862 4,602 9,471 Net income 4,057 4,609 5,806 9,856 Net income per share - basic 0.13 0.14 0.15 0.24 Net income per share - diluted 0.11 0.12 0.14 0.22 1997 Total revenues $40,893 $43,631 $43,343 $53,456 Operating income (loss) 11,170 12,302 13,377 (114,866) Net income (loss) 8,787 9,282 11,325 (114,086) Net income (loss) per share - basic 0.20 0.21 0.26 (2.57) Net income (loss) per share - diluted 0.19 0.20 0.24 (2.57)
See Notes 4, 6, 11 and 12 for discussions of transactions which occurred during 1996 and 1997, affecting the comparability of the Company's quarterly results of operations. -30- INDEPENDENT AUDITORS' 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, 1996 and 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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, 1996 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP - ------------------------- San Diego, California January 20, 1998 CORPORATE INFORMATION DIRECTORS Cam L. Garner Chairman, President and Chief Executive Officer Dura Pharmaceuticals, Inc. James C. Blair, Ph.D. General Partner Domain Associates Herbert J. Conrad Senior Vice President Hoffmann-La Roche, retired Joseph C. Cook, Jr. Principal Life Science Advisors, LLC David F. Hale President and Chief Executive Officer Women First Health Care, Inc. David S. Kabakoff, Ph.D. Executive Vice President Dura Pharmaceuticals, Inc.; President and Chief Executive Officer Spiros Development Corp. II Gordon V. Ramseier Executive Director The Sage Group Charles G. Smith, Ph.D. Private Consultant Walter F. Spath Senior Vice President, Sales and Marketing Dura Pharmaceuticals, Inc. OFFICERS Cam L. Garner Chairman, President and Chief Executive Officer David S. Kabakoff, Ph.D. Executive Vice President Julia R. Brown Senior Vice President, Business Development James W. Newman Senior Vice President, Finance and Administration, and Chief Financial Officer Charles W. Prettyman Senior Vice President, Development and Regulatory Affairs Walter F. Spath Senior Vice President, Sales and Marketing Mitchell R. Woodbury Senior Vice President, General Counsel and Secretary Chester Damecki Vice President, Operations Malcolm R. Hill, Pharm.D. Vice President, Clinical Development Robert W. Keith Vice President, Managed Care Erle T. Mast Vice President, Finance David M. Preston Vice President, Marketing Robert K. Schultz, Ph.D. Vice President, Product Development Clyde L. Witham Vice President, Science and Technology Michael T. Borer General Manager, Health Script Corporate Headquarters 7475 Lusk Boulevard San Diego, California 92121 Telephone (619) 457-2553 AUDITORS Deloitte & Touche LLP San Diego, California SHAREHOLDERS At March 1, 1998, there were approximately 450 holders of record of Dura's common stock. DIVIDENDS No cash dividends were declared or paid in 1995, 1996 or 1997. TRANSFER AGENT AND REGISTRAR ChaseMellon Shareholder Services, LLC 400 S. Hope St., 4th Floor Los Angeles, California 90071 (213) 553-9719 REQUESTS FOR INFORMATION Copies of the Form 10-K filed with the Securities and Exchange Commission, financial communications and general information on the Company are available without charge upon request to Investor Relations, Dura Pharmaceuticals, 7475 Lusk Boulevard, San Diego, California 92121. ANNUAL MEETING The annual meeting of shareholders will be held at 10 a.m., Thursday, May 21, 1998 at the La Jolla Marriott, 4240 La Jolla Village Drive, La Jolla, California. MARKET INFORMATION ON COMMON STOCK Dura Pharmaceuticals' common stock is traded on the Nasdaq National Market under the symbol "DURA." The following table reflects the range of high and low trade prices of Dura's common stock by quarter for 1995, 1996, and 1997. This information is based upon prices reported by the Nasdaq National Market:
1995 HIGH LOW ------ ------ First Quarter $7 1/2 $5 3/4 Second Quarter $9 7/8 $6 1/2 Third Quarter $17 1/2 $9 1/8 Fourth Quarter $17 3/4 $13 1/4 1996 First Quarter $26 3/8 $16 3/4 Second Quarter $34 1/2 $23 11/16 Third Quarter $40 $21 3/8 Fourth Quarter $47 3/4 $31 1/2 1997 First Quarter $44 5/8 $33 5/8 Second Quarter $43 1/4 $25 Third Quarter $44 3/4 $33 3/8 Fourth Quarter $52 7/8 $43 1/4
-31- Dura-Tap-Registered Trademark-/PD, Furadantin-Registered Trademark- and Rondec- Registered Trademark- are registered trademarks of the Company. The Company claims common law trademark rights to Dura-Vent-Registered Trademark-/DA and D.A. Chewable. Entex-Registered Trademark-, Nasarel-Registered Trademark- and Nasalide-Registered Trademark- are registered trademarks of Dura (Bermuda) Trading Company Limited. Tornalate-Registered Trademark- is a registered trademark of Sanofi-Winthrop, Inc. Crolom is a trademark of Bausch & Lomb Pharmaceuticals, Inc. Capastat-Registered Trademark-, Seromycin-Registered Trademark-, Ceclor-Registered Trademark-, Ceclor-Registered Trademark- CD, Keftab-Registered Trademark- and Lorabid-Registered Trademark- are registered trademarks of Eli Lilly and Company. Ceftin-Registered Trademark- and Rotohaler are registered and common law trademarks of Glaxo Wellcome. Suprax-Registered Trademark- is a registered trademark of Lederle Laboratories. Vantin-Registered Trademark- is a registered trademark of Pharmacia & Upjohn. Cefzil-Registered Trademark- is a registered trademark of Bristol-Myers Squibb Co. Cedax-Registered Trademark- is a registered trademark of Schering Corporation. Turbuhaler-Registered Trademark- is a registered trademark of Astra Pharmaceuticals. Spinhaler- Registered Trademark- is a registered trademark of Fisons Limited. Internet web site: Dura Pharmaceuticals' web site at http://www.durapharm.com contains recent press releases, product summaries and company history. -32- EX-23 7 EXHIBIT 23 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-34551 on Form S-8 and Registration Statement Nos. 33-71798, 33-99722, 33-93914 and 333-37955 on Form S-3 of Dura Pharmaceuticals, Inc. of our report dated January 20, 1998, incorporated by reference in this Annual Report on Form 10-K of Dura Pharmaceuticals, Inc. for the year ended December 31, 1997. /s/ Deloitte & Touche LLP San Diego, California March 27, 1998 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Company's consolidated balance sheet as of December 31, 1997, and the related consolidated statements of operations for the year ended December 31, 1997 and the notes thereto, and is qualified in its entirety by reference to such consolidated financial statements and notes. 1,000 YEAR DEC-31-1997 DEC-31-1997 72,003 313,218 40,987 0 15,201 441,409 54,220 5,695 774,880 48,539 287,500 0 0 46 429,231 774,880 0 181,323 32,081 121,701 137,639 0 5,816 (65,887) 18,805 (84,692) 0 0 0 (84,692) (1.93) (1.93)
EX-27.2 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED BALANCE SHEETS AS OF 12-31-95 AND 1996, RESPECTIVELY & THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED 12-31-95 & 1996, RESPECTIVELY, & THE NOTES THERETO, & IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS & NOTES. 1,000 YEAR YEAR DEC-31-1995 DEC-31-1996 DEC-31-1995 DEC-31-1996 25,554 131,101 42,266 109,244 6,957 24,092 0 0 3,069 7,544 78,458 271,981 17,509 30,276 1,376 2,776 143,997 504,670 18,741 52,117 6,611 0 0 0 0 0 216,514 525,350 (107,417) (81,773) 143,997 504,670 0 0 51,502 104,119 10,618 21,301 44,981 82,472 43,773 0 0 0 906 674 (35,372) 27,867 406 3,539 (35,778) 24,328 0 0 0 0 0 0 (35,778) 24,328 (1.53) 0.68 (1.53) 0.60
EX-27.3 10 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Company's consolidated balance sheets as of 3/30/1997, 6/30/1997, and 9/30/1997, and the related consolidated statements of operations for the quarters ended 3/30/1997, 6/30/1997, and 9/30/1997 and the notes thereto, and is qualified in its entirety by reference to such consolidated financial statements and notes. 1,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 63,059 41,008 166,583 193,789 145,186 288,127 19,027 22,975 27,849 0 0 0 8,305 13,792 15,858 284,180 222,961 498,417 34,111 44,000 48,946 3,346 4,044 4,798 518,147 535,536 821,105 53,615 57,017 41,141 0 0 287,500 0 0 0 0 0 0 528,069 531,377 533,047 (73,036) (62,659) (50,750) 518,147 535,536 821,105 0 0 0 40,893 84,523 127,867 7,970 15,946 23,373 21,753 45,105 67,845 0 0 0 0 0 0 0 0 0 14,404 29,573 45,752 5,617 11,504 16,357 8,787 18,069 29,395 0 0 0 0 0 0 0 0 0 8,787 18,069 29,395 0.20 0.42 0.67 0.19 0.38 0.62
EX-27.4 11 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Company's consolidated balance sheets as of 3/30/1996, 6/30/1996, and 9/30/1996, and the related consolidated statements of operations for the quarters ended 3/30/1996, 6/30/1996, and 9/30/1996 and the notes thereto, and is qualified in its entirety by reference to such consolidated financial statements and notes. 1,000 3-MOS 6-MOS 9-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 21,008 107,003 33,849 40,972 100,595 53,389 9,227 9,397 15,523 0 0 0 3,540 3,294 7,743 75,274 220,706 111,423 19,253 20,822 22,907 1,630 1,908 2,283 146,973 300,198 334,556 16,568 19,208 44,872 6,471 0 0 0 0 0 0 0 0 217,354 369,219 371,406 (103,222) (98,257) (92,050) 146,973 300,198 334,556 0 0 0 18,587 37,386 63,307 3,623 7,422 12,553 14,762 29,813 38,581 113 0 0 0 0 0 294 518 (4,060) 4,327 9,465 16,233 270 800 1,762 4,057 8,665 14,471 0 0 0 0 0 0 0 0 0 4,057 8,665 14,471 0.13 0.27 0.42 0.11 0.23 0.37
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