<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ____________
COMMISSION FILE NUMBER 0-12900
ALLIANCE PHARMACEUTICAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
NEW YORK 14-1644018
- ------------------------------------ ----------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3040 SCIENCE PARK ROAD
SAN DIEGO, CALIFORNIA 92121
- ------------------------------------ ----------------------
(ADDRESS OF PRINCIPAL ZIP CODE
EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE: 619-558-4300
----------------------
</TABLE>
INDICATE BY A CHECK 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 FILING REQUIREMENTS
FOR THE PAST 90 DAYS.
YES [X] NO [_]
AS OF NOVEMBER 8, 1995, REGISTRANT HAD 24,874,905 SHARES OF ITS COMMON STOCK,
$.01 PAR VALUE, OUTSTANDING.
1
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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
----------------------------------------------
INDEX
-----
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Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
</TABLE>
2
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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
- ----------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, June 30,
1995 1995
------------- -------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 11,340,000 $ 12,519,000
Short-term investments 7,601,000 10,964,000
Research revenue receivable 2,030,000 2,060,000
Inventories and other current assets 1,693,000 1,913,000
------------- -------------
Total current assets 22,664,000 27,456,000
PROPERTY, PLANT AND EQUIPMENT - NET 9,901,000 9,946,000
PURCHASED TECHNOLOGY - NET 17,106,000 17,371,000
OTHER ASSETS - NET 1,130,000 1,257,000
------------- -------------
$ 50,801,000 $ 56,030,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,631,000 $ 2,509,000
Accrued expenses 2,548,000 2,601,000
Current portion of long-term debt 664,000
------------- ------------
Total current liabilities 4,843,000 5,110,000
LONG-TERM DEBT 1,492,000
OTHER 1,033,000 843,000
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value; 5,000,000
shares authorized; 1,500,000 outstanding at
September 30, 1995 and June 30, 1995 15,000 15,000
Common stock - $.01 par value; 50,000,000
shares authorized; 24,851,935 and 24,759,150
outstanding at September 30, 1995 and June
30, 1995, respectively 249,000 248,000
Additional paid-in capital 239,801,000 238,874,000
Accumulated deficit (196,632,000) (189,060,000)
------------- ------------
Total stockholders' equity 43,433,000 50,077,000
------------- ------------
$ 50,801,000 $ 56,030,000
============= ============
</TABLE>
Note: The balance sheet at June 30, 1995 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See Notes to Consolidated Financial Statements
3
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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
- --------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended
September 30,
1995 1994
------------ ------------
(Unaudited)
<S> <C> <C>
REVENUES:
License and research revenue $ 2,090,000 $ 5,125,000
Product revenue 56,000 58,000
----------- -----------
2,146,000 5,183,000
OPERATING EXPENSES:
Research and development 8,211,000 11,653,000
General and administrative 1,572,000 1,965,000
----------- -----------
9,783,000 13,618,000
----------- -----------
LOSS FROM OPERATIONS (7,637,000) (8,435,000)
INVESTMENT INCOME AND OTHER - NET 252,000 303,000
----------- -----------
NET LOSS (7,385,000) (8,132,000)
DIVIDENDS ON PREFERRED STOCK (187,000)
----------- -----------
NET LOSS APPLICABLE TO COMMON SHARES $(7,572,000) $(8,132,000)
=========== ===========
NET LOSS PER COMMON SHARE $ (0.31) $ (0.38)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 24,817,000 21,373,000
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
4
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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
- ----------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended
September 30,
1995 1994
----------- -----------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(7,385,000) $(8,132,000)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization 777,000 748,000
Acquired research and development 757,000 1,686,000
Changes in operating assets and liabilities:
Inventories and other 264,000 (553,000)
Accounts payable and accrued expenses
and other (931,000) 887,000
----------- -----------
Net cash used in operating activities (6,518,000) (5,364,000)
----------- -----------
FINANCING ACTIVITIES:
Issuance of common stock and preferred stock 236,000 14,580,000
Proceeds from long-term debt 2,208,000
Principal payments on long-term debt (52,000)
----------- -----------
Net cash provided by financing activities 2,392,000 14,580,000
----------- -----------
INVESTING ACTIVITIES:
Short-term investments 3,298,000 (6,517,000)
Property, plant and equipment (351,000) (257,000)
----------- -----------
Net cash provided by (used in) investing activities 2,947,000 (6,774,000)
----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,179,000) 2,442,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,519,000 1,902,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $11,340,000 $ 4,344,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of common stock and warrants in connection
with acquisition of patent rights and related
documents $ 757,000
Preferred stock dividends $ 187,000
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
- ----------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
- ------------
Alliance Pharmaceutical Corp. ("Alliance") and its subsidiaries
(collectively, the "Company") are engaged in identifying, designing, and
developing novel medical and pharmaceutical products.
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The consolidated financial statements include the accounts of Alliance, its
wholly owned subsidiaries, BioPulmonics, Inc. ("BioPulmonics")and Rosanin
Corporation, and its majority-owned subsidiaries, Astral, Inc., Talco
Pharmaceutical, Inc., and Applications et Transferts de Technologies Avancees.
All significant intercompany accounts and transactions have been eliminated.
Certain amounts in 1995 have been reclassified to conform to the current year's
presentation.
INTERIM CONDENSED FINANCIAL STATEMENTS
- --------------------------------------
The condensed consolidated balance sheet as of September 30, 1995, the
condensed consolidated statements of operations for the three months ended
September 30, 1995 and 1994, the condensed consolidated statements of cash flows
for the three months ended September 30, 1995 and 1994 are unaudited. In the
opinion of management, such unaudited financial statements include all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the results for the periods presented. Interim results are not
necessarily indicative of the results to be expected for the full year. The
financial statements should be read in conjunction with the Company's
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended June 30, 1995.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
- -------------------------------------------------
Cash, cash equivalents, and short-term investments consist of highly liquid
debt instruments. Management has classified the Company's cash equivalents and
short-term investments as available-for-sale securities in the accompanying
financial statements. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity.
PURCHASED TECHNOLOGY
- --------------------
The purchased technology was primarily acquired as a result of the merger
of Fluoromed Pharmaceutical, Inc. into a subsidiary of the Company in fiscal
1989. The technology acquired is the Company's core perfluorochemical ("PFC")
technology and was valued based on an analysis of the present value of future
earnings anticipated from this technology at that time. The Company identified
alternative future uses for the PFC technology, including Oxygent(TM) (temporary
blood substitute) and LiquiVent(R) (intrapulmonary oxygen carrier) products.
Purchased technology also includes $2.0 million for technology capitalized as a
result of the acquisition of BioPulmonics in December 1991. Since the
acquisition, an alternative future use of the acquired technology has been
pursued by the Company. An intrapulmonary drug delivery system using the PFC-
based liquid as a carrier (or dispersing agent) is being developed by Alliance
from the liquid ventilation technology.
The PFC technology is the basis for the Company's main drug development
programs and is being amortized over a 20-year life. Accumulated amortization
for this PFC technology was $7,355,000 and $7,645,000 at June 30, 1995 and
September 30, 1995, respectively. The technology acquired from BioPulmonics is
being amortized over five to seven years, and accumulated amortization was
$500,000 and $586,000 at June 30, 1995 and September 30, 1995, respectively.
Amortization of purchased technology is included in research and development
expense.
The carrying value of purchased technology is reviewed periodically based
on the projected cash flows to be received from license fees, milestone
payments, royalties and other product revenues. If such cash flows are less than
the carrying value of the purchased technology, the difference will be charged
to expense.
LONG-TERM DEBT
- --------------
The Company entered into a loan and security agreement in August 1995 under
which the Company received $2.2 million. Amounts borrowed under the agreement
are secured by fixed assets, and will be repaid over three years commencing in
September 1995. If certain financial covenants are not satisfied, the note may
become due and payable.
6
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NET LOSS PER COMMON SHARE
- -------------------------
Net loss per common share is based on the weighted average number of shares
outstanding during the respective periods and does not include common stock
equivalents since their effect on the net loss per common share would be anti-
dilutive.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(References to years are to the Company's fiscal years ended June 30.)
Alliance has devoted substantial resources to research and development
related to its pharmaceutical products based upon PFC and emulsion technologies.
The Company has been unprofitable since inception and expects to incur operating
losses for at least the next several years due to continued requirements for
research and development, preclinical testing and clinical trials, regulatory
activities, and commercial manufacturing start-up. The amount of net losses and
the time required by the Company to achieve profitability are highly uncertain.
There can be no assurance that the Company will be able to achieve profitability
at all or on a sustained basis.
LIQUIDITY AND CAPITAL RESOURCES
Through September 1995, the Company financed its activities primarily from
public and private sales of equity and funding from collaborations with
corporate partners. In April 1995, the Company completed offerings of 3.2
million shares of newly issued common stock, resulting in net proceeds to the
Company of approximately $14.3 million. In August 1994, the Company entered into
a license agreement (the "License Agreement") with Ortho Biotech, Inc. and The
R.W. Johnson Pharmaceutical Research Institute, a division of Ortho
Pharmaceutical Corporation, subsidiaries of Johnson & Johnson (collectively
referred to as "Ortho") for injectable PFC emulsions capable of transporting
oxygen for therapeutic use, including Oxygent. Under the License Agreement,
Ortho paid to Alliance an initial fee of $4.0 million and will make other
payments upon the achievement of certain milestones. Ortho is responsible for
substantially all the remaining costs of developing the products and will pay
Alliance a royalty based upon sales of products after commercialization. From
August 1994 through September 30, 1995, the Company had received research
revenue payments of $7.1 million from Ortho, and as of September 30, 1995, had
recorded a receivable of $2.0 million, representing funding due from Ortho for
development costs incurred during the quarter. In conjunction with the License
Agreement, Johnson & Johnson Development Corp. ("J&JDC") purchased 1.5 million
shares of Alliance convertible preferred stock for $15.0 million and obtained a
three-year warrant to purchase 300,000 shares of Alliance common stock at $15
per share.
In August 1995, the Company entered into a loan and security agreement
under which the Company received $2.2 million, and the Company may borrow up to
an additional $800,000 if certain conditions are met. Amounts borrowed under the
agreement are secured by fixed assets, and will be repaid over three years
commencing in September 1995. If certain financial covenants are not satisfied,
the debt may become due and payable. The Company has financed substantially all
of its office and research facilities and related leasehold improvements under
operating lease arrangements.
The Company had net working capital of $17.8 million at September 30, 1995
compared to $22.3 million at June 30, 1995. The Company's cash, cash
equivalents, and short-term investments decreased to $18.9 million at September
30, 1995 from $23.5 million at June 30, 1995. The decrease resulted primarily
from net cash used in operations of $6.5 million, and property, plant, and
equipment additions of $351,000 related to the expansion of facilities used for
research, development, and pilot manufacturing. These decreases were partially
offset by $2.2 million received under the August 1995 loan and security
agreement, and $236,000 from the issuance of common stock upon exercise of
options. Capital expenditures for 1996 are expected to increase compared to
1995. The Company's operations to date have consumed substantial amounts of
cash, and are expected to continue to do so for the foreseeable future.
The Company continually reviews its product development activities in an
effort to allocate its resources to those product candidates that the Company
believes have the greatest commercial potential. Factors considered by the
Company in determining the products to pursue include projected markets and
need, potential for regulatory approval and reimbursement under the existing
health care system, technical feasibility, expected and known product
attributes, and estimated costs to bring the product to market. Based on these
and other factors, the Company may from time to time reallocate its resources
among its product development activities. Additions to products under
development or changes in products being pursued can substantially and rapidly
change the Company's funding requirements.
7
<PAGE>
In December 1993, in order to obtain a commitment for a long-term supply of
raw material for both clinical trials and anticipated future production
requirements, the Company entered into an agreement with a supplier under which
the Company was obligated to make payments to the vendor through May 1997 based,
in part, upon the achievement of certain milestones. Some or all of the
payments may be reimbursed to the Company by existing and future collaborative
partners.
The Company expects to incur substantial additional expenditures associated
with product development. The Company will seek additional collaborative
research and development relationships with suitable corporate partners for its
non-licensed products. There can be no assurance that such relationships, if
any, will successfully reduce the Company's funding requirements. Additional
equity or debt financing may be required, and there can be no assurance that
funds from these sources will be available on favorable terms, if at all. If
adequate funds are not available, the Company may be required to delay, scale
back, or eliminate one or more of its product development programs, or obtain
funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies, product
candidates, or products that the Company would not otherwise relinquish.
Alliance anticipates that its current capital resources, expected revenues
from the License Agreement, cash proceeds from the loan and security agreement,
its investments, and product sales, will be adequate to satisfy its capital
requirements and fund current and planned operations through 1996. The
Company's future capital requirements will depend on many factors, including
continued scientific progress in its research and development programs, progress
with preclinical testing and clinical trials, the time and cost involved in
obtaining regulatory approvals, patent costs, competing technological and market
developments, changes in existing collaborative relationships, the ability of
the Company to establish additional collaborative relationships, and the cost of
manufacturing scale-up.
While the Company believes that it can produce materials for clinical
trials and the initial market launch for its emulsion products at its existing
San Diego facility and for LiquiVent at its Otisville facility, it may need to
expand its commercial manufacturing capabilities for its products in the future.
This expansion may occur in stages, each of which would require regulatory
approval, and product demand could at times exceed supply capacity. The Company
has not selected a site or obtained any regulatory approvals for construction of
a commercial production facility for its products. The projected location and
completion date of any production facility will depend upon regulatory and
development activities and other factors. The Company cannot predict the amount
that it will expend for the construction of such a production facility, and
there can be no assurance as to when or whether the FDA will determine that such
facility complies with Good Manufacturing Practices. The License Agreement
provides an option to Ortho to elect to manufacture the emulsion products
referred to therein, or to require the Company to manufacture such products at a
negotiated price.
The Company's business is subject to significant risks, including the
uncertainties associated with the lengthy regulatory approval process and with
obtaining and enforcing patents important to the Company's business and possible
competition from other products. Even if the Company's products appear promising
at an early stage of development, they may not reach the market for a number of
reasons. Such reasons include, but are not limited to, the possibilities that
the potential products will be found ineffective during clinical trials, failure
to receive necessary regulatory approvals, difficulties in manufacturing on a
large scale, failure to obtain market acceptance, and the inability to
commercialize because of proprietary rights of third parties. The research,
development, and market introduction of new products will require the
application of considerable technical and financial resources by Alliance, while
revenues generated from such products, assuming they are developed successfully,
may not be realized for several years. Other material and unpredictable factors
which could affect operating results include, without limitation, the
uncertainty of the timing of product approvals and introductions and of sales
growth; the ability to obtain necessary raw materials at cost effective prices
or at all; the effect of possible technology and/or other business acquisitions
or transactions; and the increasing emphasis on controlling health care costs
and potential legislation or regulation of health care pricing.
During September 1992, the Company and certain of its officers and
directors were named as defendants in several lawsuits filed in the U.S.
District Court for the Southern District of California by certain shareholders.
The actions were consolidated into one class action lawsuit titled "In re
Alliance Pharmaceutical Securities Litigation." The complaint claimed, among
other things, that the defendants failed to disclose certain problems with two
of the Company's products under development, which conduct is alleged to have
portrayed falsely the Company's financial condition. On May 25, 1995, summary
judgment was granted in favor of the Company and its officers and directors.
Attorneys for the plaintiffs have appealed the decision. The Company believes
the eventual outcome of the litigation will not have a material adverse effect
on the Company's financial condition.
8
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 AS COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1994
The Company's license and research revenue decreased by 59% to $2.1 million
for the three months ended September 30, 1995, compared to $5.1 million for the
three months ended September 30, 1994. The three months ended September 30,
1994 included a $4.0 million non-recurring license fee under the license
agreement. Research revenue increased $1.0 million for the three months ended
September 1995 compared to the three months ended September 1994. The Company
expects research revenue for 1996 to be comparable to 1995.
Research and development expenses decreased by 30% to $8.2 million for the
three months ended September 30, 1995, compared to $11.7 million for the three
months ended September 30, 1994. The decrease in expenses was primarily the
result of a $2.2 million decrease in purchases of certain clinical trial raw
materials, a $929,000 net reduction in acquired research and development
expense, and reduced staffing costs. The expenses for the three months ended
September 30, 1994 included a one-time $1.7 million charge to research
and development expense which arose when the Company licensed product rights to
Ortho. The expenses for the three months ended September 30, 1995 included a
$757,000 charge arising from the acquisition of certain PFC patents, patent
rights, and related documents in exchange for 50,000 shares of the Company's
common stock and a five-year warrant to purchase up to an additional 100,000
shares of the Company's common stock at $10 per share.
General and administrative expenses decreased by 20% to $1.6 million for
the three months ended September 30, 1995, compared to $2.0 million for the
three months ended September 30, 1994. The decrease in general and
administrative expenses was primarily due to decreased staffing costs and
decreased professional fees.
Investment income and other was $252,000 for the three months ended
September 30, 1995, compared to $303,000 for the three months ended September
30, 1994. The decline in investment revenue was primarily a result of lower
average cash balances.
Alliance expects to incur substantial operating losses over the next
several years due to continuing expenses associated with its research and
development programs. Operating losses may fluctuate from quarter to quarter as
a result of differences in the timing of revenues earned and expenses incurred
and such fluctuations may be substantial. The Company's historical results are
not necessarily indicative of future results.
PART II OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K
(a) There were no exhibits.
(b) There were no reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLIANCE PHARMACEUTICAL CORP.
(Registrant)
\s\ Theodore D. Roth
------------------------------
Theodore D. Roth
Executive Vice President
and Chief Financial Officer
Date: November 9, 1995
9
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (IDENTIFY
SPECIFIC FINANCIAL STATEMENTS) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 11,340,000
<SECURITIES> 7,601,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,664,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 50,801,000
<CURRENT-LIABILITIES> 4,843,000
<BONDS> 0
<COMMON> 249,000
0
15,000
<OTHER-SE> 43,169,000
<TOTAL-LIABILITY-AND-EQUITY> 50,801,000
<SALES> 56,000
<TOTAL-REVENUES> 2,146,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,211,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,572,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,572,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,572,000)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> 0
</TABLE>
