<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended JUNE 30, 1994
-------------------------------------------------------
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 0-12900
-------
ALLIANCE PHARMACEUTICAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 14-1644018
- ---------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3040 Science Park Road, San Diego, CA 92121
- ---------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 619-558-4300
----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None
- ------------------------- -----------------------------------------
- ------------------------- -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01.
- --------------------------------------------------------------------------------
(Title of Class)
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closing price of such stock on the
NASDAQ National Market System on August 31, 1994, was $213,727,870.
The number of shares of the Registrant's common stock, $.01 par value,
outstanding at August 31, 1994 was 21,372,787.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report on Form 10-K is
incorporated by reference to the definitive Proxy Statement with respect to the
1994 Annual Meeting of Shareholders, which the Registrant intends to file with
the Securities and Exchange Commission no later than 120 days after the end of
the fiscal year covered by this report.
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Part II, Item 7 is hereby amended in its entirety to read as follows:
(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
product and process research and development, preclinical testing and clinical
trials, regulatory activities, commercial manufacturing start-up, and the
establishment of a sales and marketing organization and/or arrangements
therefor. The amount of net losses and the time requred 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.
In January 1994, the Company regained from Boehringer Ingelheim
International GmbH ("BII") all marketing and manufacturing rights to Imagent(R)
(diagnostic imaging agents) and Oxygent(TM) (temporary blood substitute)
products outside of North America. In August 1994, Ortho and the Company entered
into the License Agreement for injectable PFC emulsions capable of transporting
oxygen for therapeutic use, including Oxygent. Under the terms of the License
Agreement and related agreements, the Company will receive
<PAGE>
equity, milestone and research and development payments. In addition, the
Company will receive royalties upon commercialization of Oxygent or other such
PFC emulsions.
Liquidity and Capital Resources
Through 1994, Alliance financed its activities primarily from public and
private sales of equity and funding from the marketing and related agreements
with BII ("BII Agreements"). In January 1994, the Company completed a private
placement of 2.2 million shares of common stock, resulting in net proceeds to
the Company of $15.2 million. In November 1991, the Company raised $66.9 million
in net proceeds from a public offering of its common stock. 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 $19.4 million at June 30, 1994
compared to $39.7 million at June 30, 1993. The Company's cash, cash
equivalents, and short-term investments declined to $21.1 million at June 30,
1994 from $39.5 million at June 30, 1993. The decrease resulted primarily from
net cash used in operations of $32.0 million together with property, plant, and
equipment additions of $1.9 million related to the expansion of facilities used
for research, development, and pilot manufacturing. These decreases were
partially offset by the net proceeds received from the sale of common stock as
described above. Capital expenditures for 1995 are expected to be comparable to
those incurred during 1994. The Company's operations to date have consumed
substantial amounts of cash, and are expected to continue to do so over the
foreseeable future.
Pursuant to the License Agreement, license and research revenues are
expected to increase in 1995. Under the License Agreement, Ortho agreed to pay
to Alliance an initial fee and other payments upon the achievement of certain
milestones. Ortho will be responsible for the remaining costs of developing the
products and will pay Alliance a royalty based upon sales of products after
commercialization. Concurrent with execution of the License Agreement, Johnson &
Johnson Development Corp. agreed to purchase 1.5 million shares of Alliance
convertible preferred stock for $15.0 million and obtain a warrant to purchase
300,000 shares of Alliance common stock at $15 per share during the next three
years.
In September 1993, Alliance's previously inactive subsidiary, Astral,
entered into licensing and research agreements with the University of
Pennsylvania ("Penn"), whereby Astral agreed to make certain payments to Penn,
and Penn and certain investigators received an initial 15% ownership interest in
Astral. Alliance also sublicensed to Astral certain technology for which it had
previously funded research. During 1994, Alliance provided approximately $1.1
million to Astral for its research activities. The Company intends to consider
related technologies that may be available for licensing and research agreements
with other research institutions. Astral intends to seek outside sources of
funding for its operations. There can be no assurance that such funding will be
available on terms favorable to Astral, if at all. If new license and research
agreements are added and Astral is not able to obtain outside sources of
funding, research support to Astral is expected to increase significantly.
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 as well as anticipated health care reforms, 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
<PAGE>
or changes in products being pursued can substantially and rapidly change the
Company's funding requirements.
In December 1993, the Company entered into an agreement with its primary
supplier of raw material for certain products. Under the terms of the agreement,
the Company is obligated to fund the supplier at defined minimum levels. All
costs associated with the contract are charged to expense as incurred.
The Company expects to incur substantial additional expenditures associated
with product development. The Company may 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 would be available on favorable terms, if at all. The
public has recently focused significant attention on issues of health care
reform. If some of the health care reform proposals under consideration become
law, potential financial returns from the Company's products could be reduced.
The Company's ability to raise additional funds through sales of its securities
at attractive prices depends in part on investor perception of the eventual
successful commercialization of the Company's products. Consequently, health
care reforms which are currently being considered could, if adopted, have an
adverse effect on the Company's ability to secure adequate funds and the extent
to which the Company may be able to recognize profit from product sales;
however, the impact is difficult to predict at this time. 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, including expected
revenues from the License Agreement, its investments, and product sales, will be
adequate to satisfy its capital requirements and fund current and planned
operations through 1995. The Company's future capital requirements will depend
on many factors, including continued scientific progress in its product and
process research and development programs, progress with preclinical testing and
clinical trials, the time and costs involved in obtaining regulatory approvals,
the costs involved in filing patents, competing technological and market
developments, changes in existing collaborative relationships, the ability of
the Company to establish development arrangements, the cost of manufacturing
scale-up, and the establishment of an effective sales and marketing organization
and/or arrangements therefor.
While the Company believes that is can produce materials for the initial
market launch of its emulsion products at its existing San Diego facility, it
may need to expand its commercial manufacturing capability for all of 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 nor obtained any regulatory
approvals for construction of a commercial production facility for all 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 conforms 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
<PAGE>
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, or 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.
The Company and certain of its officers and directors are named as
defendants in a lawsuit filed by certain shareholders in September 1992. The
Company believes it has meritorious defenses and intends to defend vigorously
against the claims brought by the shareholders in the action. The Company
believes the eventual outcome of the litigation will not have a material adverse
effect on the Company's financial condition.
RESULTS OF OPERATIONS
<PAGE>
1994 as Compared with 1993
The Company had net product revenue of $246,000 for 1994 compared to
$50,000 for 1993. In August 1993, the Company received FDA approval to
market Imagent/(R)/ GI. The increase in net product revenue from 1993 to
1994 was primarily attributable to sales of Imagent GI and Sat Pad /TM/,
both products developed and marketed by the Company. Sales of Imagent GI
and Sat Pad have not been expected to provide significant revenue to the
Company, and substantial increases are not anticipated. In September 1994,
the Company discontinued promotional activities for Imagent GI. The
majority of the Company's products are in development stage and there can
be no assurance as to whether or when it will be able to increase its
revenues significantly.
License and research revenue decreased to $163,000 for 1994 compared to
$2.3 million for 1993. The Company's 1993 license and research revenue was
primarily derived from the BII Agreements. In July 1993, the BII Agreements
were modified, which resulted in BII discontinuing all contract payments.
Research and development expenses increased by 28% to $31.6 million for
1994 compared to $24.8 million for 1993. The growth in expenses reflects
increases in staffing, costs of preclinical testing and clinical trials,
and additional laboratory supplies and equipment associated with the growth
of the Company's research and development efforts. Due to the Company's
discontinuance of Imagent GI promotional activities, the Company reduced
its perflubron inventories to the estimated net realizable value from sales
of Imagent GI, resulting in a charge of $2.1 million. The Company expects
that research and development expenses for 1995 will increase at a rate
comparable to that for 1994.
General and administrative expenses increased by 14% to $7.3 million for
1994 compared to $6.4 million for 1993. The increases were principally due
to increases in staffing to support the
<PAGE>
growth of product research and development efforts and professional
fees. General and administrative expenses for 1995 are expected to increase
at a rate comparable to that experienced for 1994.
Investment and other income was $1.6 million for 1994 compared to $2.4
million for 1993. The decline in investment revenue was primarily a
result of lower average cash and short-term investment balances.
1993 AS COMPARED WITH 1992
The Company's revenues increased by 31% to $2.4 million for 1993
compared to $1.8 million in 1992. The Company's revenues were primarily
derived from the BII Agreements. License and research revenue, including
reimbursement of clinical trial costs primarily from BII totaled, $2.3
million for 1993 compared to $1.8 million in 1992.
For 1993, the Company had net product revenue of $50,000 compared to
$9,000 in 1992. The increase in net product revenue from 1992 to 1993 was
primarily attributable to revenue from Sat Pad sales which commenced in
March 1993.
Research and development expenses increased by 18% to $24.8 million for
1993 compared to $20.9 million for 1992. The growth in expenses reflects
increases in staffing, costs of clinical trials and preclinical testing,
additional laboratory supplies and equipment, and expansion of the
Company's facilities associated with the growth of its research and
development efforts. In addition, the Company incurred a one-time charge of
$1.7 million in 1992 related to the acquisition of BioPulmonics, Inc.
General and administrative expenses increased by 23% to $6.4 million for
1993 compared to $5.2 million for 1992. The increases were principally due
to increases in staffing and the expansion of the Company's facilities to
support the growth in product research and development efforts.
Interest income was $2.4 million for 1993 compared to $2.9 million for
1992. The decline in interest revenue was primarily a result of lower
average cash balances and decreases in available market interest rates.
Interest expense was $6,000 for 1993 compared to $349,000 for 1992. The
decrease in interest expense was primarily a result of the conversion of
the $8.0 million of subordinated notes to shares of the Company's common
stock in November 1991.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Part II, item 8 is hereby amended in its entirety to read as follows:
See Table of Contents to Consolidated Financial Statements on page F-1
below for a list of the Financial Statements being filed herein.
<PAGE>
INDEX TO FINANCIAL STATEMENT
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors F-2
Report of Deloitte & Touche LLP F-3
Consolidated Balance Sheets at June 30, 1993 and 1994 F-4
Consolidated Statements of Operations for each of the three years
in the period ended June 30, 1994 F-5
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended June 30, 1994 F-6
Consolidated Statements of Cash Flows for each of the three years
in the period ended June 30, 1994 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Alliance Pharmaceutical Corp.
We have audited the accompanying consolidated balance sheet of Alliance
Pharmaceutical Corp. and subsidiaries as of June 30, 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. 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 audit. Our audit also included the financial
statement schedule for 1994 listed in the Index at Item 14(a).
We conducted our audit 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 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 1994 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Alliance
Pharmaceutical Corp. and subsidiaries at June 30, 1994, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Ernst & Young LLP
San Diego, California
August 16, 1994
F-2
<PAGE>
Independent Auditors' Report
- ----------------------------
The Board of Directors of
Alliance Pharmaceutical Corp.:
We have audited the accompanying consolidated balance sheet of Alliance
Pharmaceutical Corp. and Subsidiaries (the "Company") as of June 30, 1993, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended June 30, 1993. 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
misstatements. 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 the Company at June 30, 1993, and
the results of its operations and its cash flows for each of the two years in
the period ended June 30, 1993 in conformity with generally accepted accounting
principles.
Deloitte & Touch LLP
New York, New York
July 27, 1993
F-3
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
June 30,
-------------------------------
Notes 1994 1993
----- ------------- -------------
<S> <C> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 1,902,000 $ 5,316,000
Short-term investments 19,154,000 34,226,000
Research revenue receivable 4 -- 501,000
Inventories and other current assets 2 1,349,000 2,648,000
------------- -------------
Total current assets 22,405,000 42,691,000
Property, plant and equipment-net 2 10,165,000 9,620,000
Purchased technology-net 1 17,033,000 18,194,000
Other assets-net 2 3,529,000 2,032,000
------------- -------------
$ 53,132,000 $ 72,537,000
============= =============
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable 1,074,000 $ 1,664,000
Accrued expenses 1,885,000 1,079,000
Current portion of long-term debt -- 203,000
------------- -------------
Total current liabilities 2,959,000 2,946,000
Other 6 348,000 447,000
Stockholders' Equity: 3, 4
Preferred stock-$.01 par value; authorized 5,000,000
shares; no shares issued or outstanding -- --
Common stock-$.01 par value; 30,000,000 shares
authorized; 21,372,054 shares and 19,000,120 shares
issued and outstanding at June 30, 1994 and 1993,
respectively 214,000 190,000
Additional paid-in capital 208,954,000 190,671,000
Capital arising from acquisition of subsidiary -- 800,000
Deferred compensation -- (120,000)
Accumulated deficit (159,343,000) (122,397,000)
------------- -------------
Total stockholders' equity 49,825,000 69,144,000
------------- -------------
$ 53,132,000 $ 72,537,000
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
---------------------------------------------
Notes 1994 1993 1992
----- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product revenue - net $ 246,000 $ 50,000 $ 9,000
License and research revenue 4,7 163,000 2,320,000 1,796,000
------------ ------------ ------------
409,000 2,370,000 1,805,000
Operating expenses:
Research and development 31,605,000 24,767,000 20,922,000
General and administrative 7,312,000 6,405,000 5,187,000
------------ ------------ ------------
38,917,000 31,172,000 26,109,000
------------ ------------ ------------
Loss from operations (38,508,000) (28,802,000) (24,304,000)
Other income - net 1,562,000 2,422,000 2,538,000
------------ ------------ ------------
Net loss $(36,946,000) $(26,380,000) $(21,766,000)
============ ============ ============
Net loss per share $ (1.83) $ (1.39) $ (1.25)
============ ============ ============
Weighted average number of shares
outstanding 20,226,000 18,946,000 17,344,000
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
Capital
Additional arising from
Common stock paid-in acquisition of Accumulated Deferred
Shares Amount capital subsidiary deficit compensation
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1991 14,512,000 $145,000 $108,847,000 $ $ (74,251,000) $(886,000)
Sale of common stock -
public offering 3,151,000 32,000 66,946,000
Exercise of stock options
and warrants 608,000 6,000 4,990,000
Acquisition of
BioPulmonics, Inc. 13,000 316,000 1,544,000
Issuance of common stock
in connection with
subordinated debentures 533,000 5,000 7,736,000
Issuance of stock options
below fair market value 450,000 (225,000)
Amortization of deferred
compensation 664,000
Net loss (21,766,000)
---------- -------- ------------ ------------ ------------- ---------
Balances at June 30, 1992 18,817,000 188,000 189,285,000 1,544,000 (96,017,000) (447,000)
Exercise of stock options
and warrants 109,000 1,000 449,000
Installment payment
related to acquisition
of BioPulmonics, Inc. 69,000 1,000 876,000 (744,000)
Issuance of stock in
satisfaction of
employer matching
contribution to 401(k)
savings plan 5,000 61,000
Amortization of deferred
compensation 327,000
Net loss (26,380,000)
---------- -------- ------------ ------------ ------------- ---------
Balances at June 30, 1993 19,000,000 190,000 190,671,000 800,000 (122,397,000) (120,000)
Sale of common stock -
private placement 2,180,000 22,000 15,228,000
Exercise of stock options
and warrants 75,000 1,000 199,000
Installment payment
related to acquisition
of BioPulmonics, Inc. 105,000 1,000 921,000 (800,000)
Issuance of warrants in
connection with
acquisition of product
rights 1,840,000
Issuance of stock in
satisfaction of employer
matching contribution
to 401(k) savings plan 12,000 95,000
Amortization of deferred
compensation 120,000
Net loss (36,946,000)
---------- -------- ------------ ----------- ------------- --------
Balances at June 30, 1994 21,372,000 $214,000 $208,954,000 $ -- $(159,343,000) $ --
========== ======== ============ =========== ============= ========
</TABLE>
See Notes Consolidated Financial Statements
F-6
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
--------------------------------------------
1994 1993 1992
------------- ------------- ------------
<S> <C> <C> <C>
Operating activities:
Net loss $(36,946,000) $(26,380,000) $(21,766,000)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization 3,073,000 2,633,000 2,123,000
Non-cash compensation - net 215,000 388,000 889,000
Acquired research and development 1,744,000
Changes in assets and liabilities:
Inventories and other 1,331,000 (1,628,000) (1,259,000)
Accounts payable and accrued expenses
and other 285,000 330,000 195,000
------------ ------------ ------------
Net adjustments 4,904,000 1,723,000 3,692,000
------------ ------------ ------------
Net cash used in operating activities (32,042,000) (24,657,000) (18,074,000)
------------ ------------ ------------
Financing Activities:
Payments of long-term debt (3,000) (149,000) (339,000)
Issuance of common stock, warrants and
convertible notes 15,450,000 450,000 71,974,000
Restricted cash 17,000 (323,000)
------------ ------------ ------------
Net cash provided by financing activities 15,447,000 318,000 71,312,000
------------ ------------ ------------
Investing activities:
Short-term investments 15,072,000 16,727,000 (41,888,000)
Property, plant and equipment (1,891,000) (2,539,000) (3,630,000)
------------ ------------ ------------
Net cash provided by (used in) investing
activities 13,181,000 14,188,000 (45,518,000)
------------ ------------ ------------
(Decrease) increase in cash and cash
equivalents (3,414,000) (10,151,000) 7,720,000
Cash and cash equivalents at beginning
of year 5,316,000 15,467,000 7,747,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,902,000 $ 5,316,000 $ 15,467,000
============ ============ ============
Supplemental disclosure of cash flow
information:
Interest paid $ - $ 13,000 $ 343,000
============ ============
Supplemental disclosure of non-cash investing
and financing activities:
Common stock issued for BioPulmonics, Inc.
installment payment $ 922,000 $ 877,000
Issuance of warrants in connection with
acquisition of product rights $ 1,840,000
Conversion of subordinated notes to equity,
net $ 7,741,000
Net assets of BioPulmonics, Inc. acquired $ 311,000
BioPulmonics, Inc. liabilities satisfied
with common stock $ 216,000
Deferred compensation resulting from stock
options granted $ 225,000
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
- ----------------------------------------------
NOTES TO 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 the development, manufacturing, and
early-stage marketing of medical and pharmaceutical products.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Alliance and
its wholly owned subsidiaries, BioPulmonics, Inc. ("BioPulmonics") and Rosanin
Corporation, and its majority-owned subsidiaries, Astral, Inc. (formerly known
as Advax Pharmaceutical, Inc.) and Applications et Transferts de Technologies
Avancees. All significant intercompany accounts and transactions have been
eliminated. Certain amounts in 1992 and 1993 have been reclassified to conform
to the 1994 presentation.
Cash, Cash Equivalents, and Short-Term Investments
- --------------------------------------------------
Cash and cash equivalents consist of cash and highly liquid investments,
primarily U.S. government securities and corporate obligations, with original
maturities of less than 90 days when purchased. Short-term investments are
carried at amortized cost which approximates market.
Accounting For Investments In Debt and Equity Securities
- --------------------------------------------------------
In July 1994, the Company adopted Statement of Financial Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company's management has classified its investment securities
as available-for-sale and records holding gains or losses as a separate
component of stockholders' equity. The cumulative effect of the change resulted
in an adjustment to stockholders' equity of $127,000 at July 1, 1994.
Concentration of Credit Risk
- ----------------------------
Cash, cash equivalents, and short-term investments are financial
instruments which potentially subject the Company to concentration of credit
risk. The Company invests its excess cash primarily in U.S. government
securities and marketable debt securities of financial institutions and
corporations with strong credit ratings. The Company has established guidelines
relative to diversification and maturities that 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
material losses in its investments.
Property, Plant, Equipment, and Other Assets
- --------------------------------------------
Buildings, furniture, and equipment are stated at cost and depreciation is
computed using the straight-line method over the estimated useful lives of 4 to
25 years. Leasehold improvements are amortized using the straight-line method
over the shorter of the estimated useful lives of the assets or the lease term.
Patent, product, and technology rights are amortized using the straight-line
method over 5 to 15 years.
Purchased Technology
- --------------------
The purchased technology was acquired by virtue 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 the Oxygent (temporary
blood substitute) and LiquiVent (intrapulmonary oxygen carrier) products.
The PFC technology is the basis for the Company's main drug development
programs and is being amortized over a 20 year life. Amortization of purchased
technology is included in research and development expense. Accumulated
amortization was $5,032,000 and $6,193,000 at June 30, 1993 and 1994,
respectively.
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.
Research and Development Expenses
- ---------------------------------
Research and development expenditures are charged to expense as
incurred.
F-8
<PAGE>
Income Taxes
- ------------
The Company adopted Financial Accounting Standards Board Statement No.
109, Accounting for Income Taxes ("Statement 109"), as of July 1, 1993.
Statement 109 is an asset and liability approach that requires the recognition
of deferred assets and liabilities for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. Prior years' financial statements have not been restated and the
adoption of Statement 109 had no impact on the results of operations for the
year ended June 30, 1994.
Net Loss Per Share
- ------------------
Net loss per share is based on the weighted average number of shares
outstanding during the respective years and does not include common stock
equivalents since their effect on the net loss per share would be anti-dilutive.
2. FINANCIAL STATEMENT DETAILS
Property, Plant, and Equipment - Net
- ------------------------------------
Property, plant, and equipment consist of the following:
<TABLE>
<CAPTION>
June 30,
1994 1993
------------ -----------
<S> <C> <C>
Land $ 225,000 $ 225,000
Buildings 300,000 300,000
Building improvements 1,561,000 1,344,000
Furniture, fixtures, and
equipment 9,467,000 7,866,000
Leasehold improvements 3,356,000 3,293,000
----------- -----------
14,909,000 13,028,000
Less accumulated depreciation
and amortization (4,744,000) (3,408,000)
----------- -----------
$10,165,000 $ 9,620,000
=========== ===========
</TABLE>
Inventories and Other Current Assets
- ----------------------------------------
Inventories and other current assets consist of the following:
<TABLE>
<CAPTION>
June 30,
1994 1993
----------- -----------
<S> <C> <C>
Inventories $ 384,000 $ 1,828,000
Loan receivable 197,000 135,000
Interest receivable 362,000 433,000
Deferred financing costs 126,000
Other 280,000 252,000
----------- -----------
$ 1,349,000 $ 2,648,000
=========== ===========
</TABLE>
In fiscal 1995, the Company discontinued the promotion of Imagent(R) GI.
Accordingly, the Company established a reserve as of June 30, 1994 to reduce its
inventories of perflubron to the estimated net realizable value from sales of
Imagent GI.
F-9
<PAGE>
Other Assets - Net
- ------------------
Other assets consist of the following:
<TABLE>
<CAPTION>
June 30,
1994 1993
----------- -----------
<S> <C> <C>
Product, technology, and patent rights (see Note 4)
(net of accumulated amortization of $1,387,000 and $935,000
at June 30, 1994 and 1993, respectively) $2,494,000 $ 895,000
Other 1,035,000 1,137,000
---------- ----------
$3,529,000 $2,032,000
========== ==========
</TABLE>
3. STOCKHOLDERS' EQUITY
Stock Option Plans
- ------------------
The Company has an Incentive Stock Option Plan (the "1983 Plan") which
provides for the granting of options to purchase up to an aggregate of 500,000
shares of the Company's common stock to employees of the Company. All such
options have been granted. Options granted under the 1983 Plan generally vest
in installments of 30 percent, 25 percent, 20 percent, 15 percent, and 10
percent of the number of shares initially subject to the options, commencing 12,
24, 36, 48, and 59 months, respectively, from the date of grant and are
exercisable for a period of five years from the date of grant.
The Company also has two Non-Qualified Stock Option Programs (the "1983
Program" and the "1991 Plan"). These programs provide for the granting of
options to purchase shares of the Company's common stock (up to an aggregate of
2,500,000 shares and 1,000,000 shares for the 1983 Program and the 1991 Plan,
respectively) to directors, officers, and other employees and consultants. The
optionees, dates of grant, option price (which for the 1991 Plan cannot be less
than 80 percent of the fair market value of the common stock on the date of
grant), and terms of the options, which cannot exceed ten years for both the
1983 Program and 1991 Plan, are determined by the Board of Directors. In May
1994, the Board of Directors amended and restated the 1991 Plan, subject to
stockholder approval, to, among other things, increase the number of shares
available under the 1991 Plan by 1,000,000 shares and to allow the issuance of
incentive stock options.
F-10
<PAGE>
The following table summarizes stock option activity through June 30,
1994:
<TABLE>
<CAPTION>
Weighted
Shares Average Price
--------- -------------
<S> <C> <C>
Balance at June 30, 1991 1,225,432
Granted 511,000 $21.06
Exercised (181,966) $ 6.75
Terminated/Expired (5,492) $ 9.68
---------
Balance at June 30, 1992 1,548,974
Granted 408,210 $12.04
Exercised (102,941) $ 5.50
Terminated/Expired (44,340) $22.77
---------
Balance at June 30, 1993 1,809,903
Granted 564,550 $ 9.42
Exercised (74,666) $ 2.81
Terminated/Expired (51,215) $11.57
---------
Balance at June 30, 1994 2,248,572
=========
Available for future grant under the
1983 Program 16,985
=========
Available for future grant under the
1991 Plan, as amended and restated,
subject to stockholder approval 963,600
=========
</TABLE>
At June 30, 1994, 1,406,235 options were vested and exercisable.
Certain of the options granted from July 1, 1990 through June 30, 1992
were granted with exercise prices below fair market value at the date of the
grant. The Company has recorded such difference as deferred compensation, which
was amortized as compensation expense ratably over the vesting period of each
option.
Warrants
- --------
In December 1993, the Company issued a warrant to purchase 500,000 shares
of common stock through December 2000 at an exercise price of $12 per share (see
Note 4). At June 30, 1994, the Company had warrants outstanding to purchase
736,813 shares of common stock at prices ranging from $6.95 to $15.96 per share.
The warrants expire on various dates from July 1994 through December 2000. The
cash proceeds that would be received upon the exercise of all outstanding
warrants at June 30, 1994 would be $8,290,000.
Acquisition of Biopulmonics, Inc.
- ---------------------------------
In December 1991, the Company purchased all the outstanding stock of
BioPulmonics in a transaction recorded using the purchase method of accounting.
The total purchase price was $3,055,000, payable in four installments, of which
at least 80 percent of the consideration was to be paid in the Company's common
stock. Accordingly, the minimum amount of the aggregate purchase price to be
financed through the Company's common stock was recorded as capital arising from
the acquisition of a subsidiary and the remaining balance was recorded as debt.
In December 1993, the Company made its third installment payment (of
$1,000,000) to the former BioPulmonics' stockholders with substantially all of
such payment made in the Company's common stock. The Company will pay
BioPulmonics' stockholders additional consideration of $1,000,000 (at least 80%
of which must be in common stock) in or before June 1995.
F-11
<PAGE>
Should the Company elect not to continue development of the technology acquired
from BioPulmonics, the Company may transfer all the outstanding capital stock of
BioPulmonics back to the former BioPulmonics' stockholders in lieu of making the
final payment.
4. MARKETING AGREEMENT
In May 1989, the Company entered into a marketing agreement with
Boehringer Ingelheim International GmbH ("BII") (the "Marketing Agreement"),
which provided BII with marketing and manufacturing rights to certain of the
Company's products in all countries outside North America. In addition, the
Company and BII shared in the funding of research, development, and the conduct
of clinical trials of certain perfluorochemical products. The Company earned
license and research revenues of $2,200,000 and $1,753,000 under the agreement
during fiscal 1993 and 1992, respectively. In June 1993, the Company and BII
modified the Marketing Agreement and BII discontinued its research funding, and,
in January 1994, the Company regained all marketing and manufacturing rights
previously granted to BII in exchange for a warrant to purchase 500,000 shares
of the Company's common stock through December 2000 at $12 per share. The
Company has the right to call the warrant if its stock price achieves certain
levels. In conjunction with the acquisition of the marketing and manufacturing
rights from BII, the Company has recorded product rights of $1,840,000 (the
estimated fair value of the warrant). The cost of these rights was charged to
expense in the first quarter of fiscal 1995, when the Company licensed these
product rights to Ortho Biotech, Inc. (see Note 7).
5. INCOME TAXES
Significant components of the Company's deferred tax assets as of June 30,
1994 are shown below. A valuation allowance of $58,173,000, of which $16,160,000
is related to 1994, has been recognized to offset the deferred tax assets as
realization of such assets is uncertain.
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 48,686,000
Research and development credits 6,236,000
Capitalized research expense 3,372,000
Other - net (121,000)
------------
Total deferred tax assets 58,173,000
Valuation allowance for deferred tax
assets (58,173,000)
------------
Net deferred tax assets $ 0
============
</TABLE>
Approximately $1,698,000 of the valuation allowance for deferred tax
assets relates to stock option deductions which, when recognized, will be
allocated to contributed capital.
At June 30, 1994, the Company had federal and various state net operating
loss carryforwards of approximately $128,303,000 and $62,995,000, respectively.
The difference between the federal and state tax loss carryforwards is primarily
attributable to the capitalization of research and development expenses for
California tax purposes and the fifty percent limitation on California loss
carryforwards. The federal and various state tax loss carryforwards will begin
expiring in fiscal 1998 and 1996,
F-12
<PAGE>
respectively, unless previously utilized. The Company also has federal and state
research and development tax credit carryforwards of $5,431,000 and $1,239,000,
respectively, which will begin expiring in fiscal 1998 unless previously
utilized.
Federal and California tax laws limit the utilization of income tax net
operating loss and credit carryforwards that arise prior to a change of control
of the Company. However, the Company believes that such limitations will not
have an impact on the utilization of the carryforwards.
6. COMMITMENTS AND CONTINGENCIES
The Company leases certain office and research facilities in San Diego and
certain equipment under operating leases. Provisions of the facilities lease
provide for abatement of rent during certain periods and escalating rent
payments during the lease terms based on changes in the Consumer Price Index.
Rent expense is recognized on a straight-line basis over the term of the leases.
Minimum annual commitments related to operating lease payments at June
30, 1994 are as follows:
<TABLE>
<CAPTION>
Years ending June 30,
- ------------------------
<S> <C>
1995 $ 1,839,000
1996 1,837,000
1997 1,863,000
1998 1,908,000
1999 1,962,000
Thereafter 2,471,000
-----------
Total $11,880,000
===========
</TABLE>
Rent expense for fiscal 1994, 1993, and 1992 was $2,286,000, $1,886,000,
and $1,168,000, respectively.
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 vendor under which the Company is obligated to
make payments to the vendor based, in part, upon the achievement of certain
milestones. The minimum payments are anticipated to commence during 1995 and
will continue for a 26-month period. The Company's total minimum future
commitment is estimated not to exceed $3.5 million.
During September 1992, the Company and certain of its officers and
directors were named as defendants in several lawsuits filed by certain
shareholders. The actions have been consolidated into one class action lawsuit.
The complaint claims, 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 falsely portrayed the Company's financial condition.
The complaint seeks unspecified damages and fees. The Company believes it has
meritorious defenses and intends to vigorously defend against the claims brought
by the shareholders in the action. The Company believes the eventual outcome of
the litigation will not have a material adverse effect on the Company's
financial condition.
F-13
<PAGE>
7. SUBSEQUENT EVENT
In August 1994, the Company executed a license agreement with Ortho
Biotech, Inc. and The R.W. Johnson Pharmaceutical Research Institute, a division
of Ortho Pharmaceutical Corporation (collectively referred to as "Ortho"), which
provides Ortho with worldwide marketing and, at its election, manufacturing
rights to the Company's injectable perfluorochemical ("PFC") emulsions capable
of transporting oxygen for therapeutic use. Ortho will pay to Alliance a
royalty based upon its sales of the product after commercialization. In
addition, Ortho will pay to Alliance an initial license fee and other payments
upon the achievement of certain milestones. Ortho will also be responsible for
the remaining costs of developing the products. Concurrent with execution of
the license agreement, Johnson & Johnson Development Corp. ("J&JDC") agreed to
purchase 1.5 million shares of Alliance convertible preferred stock for $15.0
million and obtain a warrant to purchase 300,000 shares of Alliance common stock
at $15 per share during the next three years. The preferred stock is
convertible into common shares upon the earlier of: 1) Alliance common stock
trading for an average price per share of at least $20 for twenty consecutive
days; 2) termination of the license agreement; or 3) June 30, 1998. Each share
of the preferred stock will be converted into a number of common shares based
upon the lower of the average price of Alliance common stock at the time of
conversion or $20 per share. Prior to conversion, each share of preferred stock
is entitled to one-half vote on matters on which shareholders are entitled to
vote. The preferred stock carries a cumulative annual dividend of $0.50 per
share. J&JDC will have certain registration rights for common stock obtained by
conversion of the preferred stock or exercise of the warrant.
F-14
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-3 and S-8) of Alliance Pharmaceutical Corp. of our report dated August
16, 1994, with respect to the consolidated financial statements and schedule of
Alliance Pharmaceutical Corp. included in the Annual Report (Form 10-K/A) for
the year ended June 30, 1994.
ERNST & YOUNG LLP
San Diego, California
March 6, 1995
<PAGE>
CONSENT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements on Form
S-3 (Nos. 033-55630, 033-55630 A, 033-73096, 033-73360, 033-31579, 033-42551,
033-42551 A, 033-44162, and 033-45247) and Form S-8 (Nos. 033-77172, 033-32354,
033-45683, 033-21091, and 033-12598) of Alliance Pharmaceutical Corp. of our
report dated July 27, 1993, appearing in this annual report on Form 10-K/A of
Alliance Pharmaceutical Corp. for the year ended June 30, 1994.
Deloitte & Touche, LLP
New York New York
March 6, 1995
