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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended JUNE 30, 1997
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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
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ALLIANCE PHARMACEUTICAL CORP.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
New York 14-1644018
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3040 Science Park Road, San Diego, CA 92121
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 619-558-4300
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
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NONE
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Securities registered pursuant to Section 12(g) of the Act:
common stock, par value $0.01.
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(TITLE OF CLASS)
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(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
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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. [ ]
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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 29, 1997, was $315.4 million.
The number of shares of the Registrant's common stock, $.01 par value,
outstanding at August 29, 1997 was 31,432,314.
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
1997 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.
[COVER PAGE 2 OF 2 PAGES]
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PART I
EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS SET FORTH IN THIS REPORT ARE
FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH HEREIN.
THE COMPANY REFERS YOU TO CAUTIONARY INFORMATION CONTAINED ELSEWHERE HEREIN, IN
OTHER DOCUMENTS THE COMPANY FILES WITH THE SECURITIES AND EXCHANGE COMMISSION
FROM TIME TO TIME, AND THOSE RISK FACTORS SET FORTH IN THE RECENT REGISTRATION
STATEMENT ON FORM S-3 (REGISTRATION NUMBER 333-06739).
ITEM 1. BUSINESS
Alliance Pharmaceutical Corp. (the "Company" or "Alliance") is a
pharmaceutical research and development company that focuses on developing
scientific discoveries into potential medical products and licensing these
products to multinational pharmaceutical companies in exchange for fixed
payments and royalties. To date, the Company has developed three innovative
products through initial clinical (human) trials, and has entered into
collaborative relationships for such products with multinational pharmaceutical
companies for the final stages of development and worldwide marketing. These
products are OXYGENT-TM-, an intravascular oxygen carrier to temporarily augment
oxygen delivery in surgical and other patients at risk of acute tissue hypoxia
(oxygen deficiency), which is licensed to affiliates of Johnson & Johnson;
LIQUIVENT-Registered Trademark-, an intrapulmonary agent for use in reducing a
patient's exposure to the harmful effects of conventional mechanical
ventilation, which is licensed to Hoechst Marion Roussel, Inc., an affiliate of
Hoechst AG; and IMAGENT-Registered Trademark-US, an intravenous contrast agent
for enhancement of ultrasound images to assess cardiac function and myocardial
perfusion and to detect blood flow abnormalities (perfusion defects), which is
licensed to Schering AG, Germany.
The Company's strategy is to identify potential new medical products
through scientific collaborations with researchers and clinicians in
universities and medical centers where many of the basic causes of disease and
potential targets for new therapies are discovered. Using its experience in
defining pharmaceutical formulations, designing manufacturing processes,
conducting preclinical pharmacology and toxicology studies, and conducting
early-phase human testing, Alliance endeavors to advance such discoveries into
clinical development. The Company seeks collaborative relationships for the
final stages of product development, including completing late-phase human
testing, obtaining worldwide regulatory approvals, building large-scale
manufacturing capacities, and marketing.
The Company was incorporated in New York in 1983. Its principal executive
offices are located at 3040 Science Park Road, San Diego, California 92121, and
its telephone number is (619) 558-4300.
PRODUCTS IN CLINICAL DEVELOPMENT
Three of Alliance's products currently in clinical development - OXYGENT,
LIQUIVENT, and IMAGENT US - are based upon perfluorochemical ("PFC") and
emulsion technologies. PFCs are biochemically inert compounds and may be
employed in a variety of therapeutic and diagnostic applications. The Company's
primary drug substance is perflubron, a brominated PFC that has a high
solubility for respiratory gases and can be used to transport these gases safely
throughout the body.
OXYGENT. OXYGENT (perflubron emulsion) is an intravascular oxygen delivery
system to temporarily augment oxygen delivery in surgical and other patients at
risk of acute tissue oxygen deficit. It will be used as a temporary oxygen
carrier to provide oxygen to tissues during elective surgeries where substantial
blood loss is anticipated. It is estimated that in excess of three million
patients annually in the United States may receive one or more units of blood
during elective surgeries, including, for example, cardiovascular, orthopedic,
and general surgical procedures. An oxygen carrier could be used instead of
blood for a portion of these patients. The OXYGENT dose for surgical
applications is expected to provide the equivalent oxygen delivery of at least
two units of red blood cells.
OXYGENT has several potential advantages over the use of allogeneic (donor)
blood: there is no risk of infectious disease transmission; it is compatible
with all blood types; it has a shelf-life of approximately two years; and it can
be sterilized. According to the 1995 estimates in the American Journal of
Surgery, the risks per unit of blood transfused in the
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United States are 1:2,500 for bacterial infections, 1:5,000 for hepatitis,
1:600,000 for fatal hemolytic reactions, primarily due to clerical error, and
1:420,000 for HIV infection (AIDS). To minimize the use of allogeneic blood and
to avoid these risks, certain techniques can be employed that allow use of the
patient's own (autologous) blood during surgery. These techniques include
(i) predonation, in which the patient donates several units of his or her blood
in the six weeks preceding surgery, (ii) perioperative hemodilution, in which
several units of the patient's blood are removed just prior to surgery and are
replaced with a plasma expander, and (iii) blood salvage, wherein a device (cell
saver) is used to collect blood lost during the surgical procedure. OXYGENT can
be used with any of these autologous blood collection techniques to enhance
safety, by reducing the need for allogeneic blood. When a blood transfusion is
indicated during surgery, one or more doses of OXYGENT would be used in place of
allogeneic blood to maintain an adequate level of oxygen delivery despite a
lower red blood cell concentration. This use of OXYGENT delays or reduces the
need for the transfusion of donor blood, thereby avoiding its associated risks.
OXYGENT may also be advantageous during emergency situations such as trauma,
acute myocardial infarctions (heart attacks), or transient ischemia (oxygen
deprivation) in specific organs where there is an immediate need to augment
oxygen delivery to the tissues.
In fiscal 1997, two Phase II clinical studies of OXYGENT were completed in
surgical patients in the United States and Europe. Additional Phase II studies
in which OXYGENT is administered to patients undergoing cardiopulmonary bypass
procedures are nearing completion. Phase III clinical trials are expected to
begin before the end of 1997.
In August 1994, the Company entered into a license agreement (the "Ortho
License Agreement"), with Ortho Biotech, Inc. and The R.W. Johnson
Pharmaceutical Research Institute, a division of Ortho Pharmaceutical
Corporation, both affiliates of Johnson & Johnson (collectively referred to as
"Ortho"), which provides Ortho with worldwide marketing rights to the Company's
injectable PFC emulsions capable of transporting oxygen for therapeutic use,
including OXYGENT. The product is being developed jointly by Alliance and
Ortho. In December 1996, Alliance received a $15 million milestone payment when
Ortho decided that it would conduct Phase III clinical studies of OXYGENT.
LIQUIVENT. LIQUIVENT (neat perflubron) is an intrapulmonary agent for use in
reducing a patient's exposure to the harmful effects of conventional mechanical
ventilation. Each year, more than 200,000 patients in the United States are
placed on mechanical gas ventilators for at least four days for treatment of
lung dysfunction. Many of these patients suffer from acute respiratory failure,
a disorder that can result from many causes, including serious infections,
traumatic shock, severe burns, or inhalation of toxic substances. Acute
respiratory failure is generally characterized by an excessive inflammatory
response, which leads to blockage of the small airways and collapse of alveoli,
resulting in inadequate gas exchange and impairment of normal lung function.
The most urgent need for these patients is to improve their blood oxygenation.
However, the prolonged use of high ventilatory pressures or high continuous
concentrations of inspired oxygen can further damage the patient's lungs. Some
of these patients may benefit from treatment with LIQUIVENT.
LIQUIVENT is intended to be used in a technique called partial liquid
ventilation ("PLV"). In this procedure, the drug is administered through an
endotracheal tube into the lungs of a patient being supported by a mechanical
ventilator. The initial goal of LIQUIVENT/PLV therapy is to open collapsed
alveoli to improve gas exchange. Once this has been accomplished, ventilator
pressure and oxygen concentration may be lowered to minimize ventilator-induced
lung trauma. Published results from initial clinical trials have indicated that
LIQUIVENT improved lung oxygenation, without clinically significant side
effects. In clinical studies, LIQUIVENT has also been observed to promote the
migration of mucus and alveolar debris to the central airways, where suctioning
is easier. The ability to remove such debris may significantly reduce the
excessive inflammatory response associated with acute respiratory failure and
enhance the effectiveness of other therapeutic interventions, all serving
potentially to reduce patient recovery time. In addition, preclinical studies
indicate LIQUIVENT may mitigate inflammation and oxygen toxicity. The U.S. Food
and Drug Administration ("FDA") has granted Subpart E status (expedited review)
for the product.
In February 1997, the Company reported that a Phase II clinical trial of
LIQUIVENT in adults with acute hypoxemic respiratory failure demonstrated that,
compared to conventional mechanical ventilation, PLV with LIQUIVENT resulted in
an increase in survival and a significant improvement in "ventilator-free-days"
for patients who were 55 years of age or younger. In April 1997, the Company
temporarily suspended enrollment in its ongoing Phase III LIQUIVENT trial in
pediatric patients to analyze an unexplained, substantial decrease in the
mortality rate for the control group which occurred after a protocol amendment
in December 1996. The decision was not prompted by any LIQUIVENT-related
adverse events. In August 1997, the Company completed its analysis, and
clinical trials are expected to be re-initiated before the end of the
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year. The Company found that after the protocol amendment, patients in the
post-amendment control group were younger and had different disease etiologies
compared to the pre-amendment control group. Additionally, post-amendment
control group patients received additional therapies such as extracorporeal
membrane oxygenation, high frequency oscillatory ventilation, nitric oxide or
surfactants more frequently, earlier, and for a longer duration compared to both
the pre-amendment control group and the LIQUIVENT-treated patients. The study
analysis also supported previous reports that PLV therapy with LIQUIVENT is a
safe procedure. Based on the results of the Phase II adult trial and the
analysis of the suspended Phase III clinical trial, the Company intends to
initiate a clinical study in adult patients before the end of the year.
In February 1996, the Company entered into a license agreement (the "HMRI
License Agreement") with Hoechst Marion Roussel, Inc. ("HMRI"), which provides
HMRI with worldwide marketing and manufacturing rights to the intratracheal
administration of liquids, including LIQUIVENT, which perform bronchoalveolar
lavage or liquid ventilation. The product is being developed jointly by
Alliance and HMRI. In June 1997, HMRI made a $2.5 million milestone payment to
the Company. Alliance also announced in June 1997 that the parties have agreed
in principle to adjust certain milestone payments and to temporarily revise the
method for reimbursing expenses of the development work, in conjunction with the
April 1997 temporary interruption of the clinical development program.
IMAGENT US. IMAGENT US is an intravenous contrast agent for enhancement of
ultrasound images to assess cardiac function and myocardial perfusion, and to
detect solid organ lesions and blood flow abnormalities. More than 30 million
scans of the heart, vasculature, and abdominal organs are performed annually in
the United States, some of which may potentially benefit from a cost-effective
contrast agent. To be successful in the marketplace, ultrasound contrast agents
should provide enhanced diagnostic images during several minutes of scanning, be
easy to use, be stable during transportation, and have a long shelf-life.
IMAGENT US is being developed to meet these requirements.
IMAGENT US is a powder comprising hollow microspheres containing a mixture
of PFC vapor and gas and water-soluble components that are known to be
acceptable for parenteral use. Prior to use, IMAGENT US is reconstituted with a
sterile aqueous solution to form microbubbles that are then injected into the
patient. The gas microbubbles are highly echogenic and, when delivered
intravenously, reflect signals that enhance ultrasound images. In preclinical
studies, IMAGENT US has been found to enhance the ultrasound signal from
perfused tissues and blood vessels using traditional gray-scale and color
Doppler technologies, as well as emerging harmonic ultrasound imaging
techniques. In early clinical trials with IMAGENT US gray-scale contrast
enhancement of cardiac, abdominal, and vascular structures has been observed
with no serious adverse events.
A Phase II clinical trial was completed in 1997 in adult patients
undergoing diagnostic procedures for the evaluation of myocardial perfusion
abnormalities (subsequent to myocardial infarction). A second Phase II clinical
trial is ongoing in adults undergoing diagnostic procedures for evaluation of
space-occupying lesions of the liver (or other organs), and vascular flow
abnormalities. In these studies, each subject serves as his/her own control
through the blinded evaluation of non-contrast and contrast ultrasound images.
In addition, the diagnostic utility of the contrast ultrasound evaluation with
IMAGENT US is compared to that of other technologies used to diagnose anatomic,
functional, and flow abnormalities (e.g., nuclear perfusion scintigraphy,
angiography, computed tomography, and magnetic resonance imaging). The Company
intends to initiate a Phase III clinical trial before the end of 1997.
In September 1997, the Company entered into a license agreement (the
"Schering License Agreement") with Schering AG, Germany ("Schering"), which
provides Schering with worldwide exclusive marketing and manufacturing rights to
Alliance's drug compounds, drug compositions and medical devices and systems
related to perfluorocarbon ultrasound imaging products, including IMAGENT US.
The product will be developed jointly by Alliance and Schering.
RODA-TM-. In July 1997, the Company entered into a development agreement (the
"VIA Development Agreement") with Via Medical Corporation ("VIA") for the joint
development of RODA (Real-time Oxygen Dynamics Analyzer). RODA is an EX VIVO
device intended to measure cardiovascular and oxygenation status of patients by
minimally invasive means. The device is intended to provide on-line information
pertaining to oxygenation and other physiological parameters which could assist
physicians in their decisions regarding transfusions and other interventions.
RODA will combine oxygen dynamics software designed by the Company with VIA's
EX VIVO blood gas and chemistry measurement device and other VIA technology.
The Company has conducted a pilot clinical study in Europe to assess its oxygen
dynamics software and is currently conducting a clinical trial in the U.S.
Alliance and VIA are currently negotiating an agreement whereby VIA will
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market RODA and the parties will share revenues on the sale of products. The
agreement is expected to be executed in the near future; however, there can be
no assurance that the parties will be able to negotiate an agreement on
acceptable terms.
OTHER PRODUCTS
In November 1996, Alliance acquired all of the stock of MDV Technologies,
Inc. ("MDV") for initial payments of $15.5 million over a one-year period, with
additional payments and royalties to the former MDV shareholders upon the
occurrence of certain clinical development, licensing, or commercialization
events. MDV is developing a thermo-reversible gel, FLOGEL-Registered
Trademark-, intended for use as an anti-adhesion treatment for persons
undergoing abdominal or pelvic surgeries. FLOGEL is applied in a cold liquid
form and becomes a gel at body temperature, forming a barrier between tissues.
Preliminary human safety data with the product's current formulation has been
obtained and pre-clinical studies have been performed on additional
formulations. In addition to the anti-adhesion product, MDV also has patents
covering the use of gels for drug delivery and ophthalmic indications.
Alliance is also supporting internal research efforts to expand the
applicability of its core technologies. The Company has patented fluorinated
surfactants that are potentially useful in the preparation of therapeutic or
diagnostic emulsions and other formulations.
Alliance is investigating the use of PFC-containing reverse emulsions,
microemulsions, gels, foams, and other compositions as drug delivery agents.
These compositions are either aqueous or oil-based, and may be administered via
oral, intravenous, intrapulmonary, or topical routes to distribute antibiotics,
chemotherapy agents, gene therapies, or other medicaments systemically or to
selected areas of the body.
The Company has certain agreements with research institutions to develop
discoveries that the Company believes may be the basis of new products.
Antigenized antibodies that could potentially stimulate or down-regulate
antibody production are being developed in conjunction with Mt. Sinai Medical
Center in New York City. A prototype vaccine for infectious disease and a
prototype tolerogen for an autoimmune disease are also under development. In
addition, Alliance is working with researchers at Temple University to develop
an apoptotic factor for regulating the death of certain cancer cells.
Alliance has developed and is marketing SAT PAD-Registered Trademark-, a
re-usable magnetic resonance ("MR") imaging accessory that improves the quality
of images obtained by certain MR imaging techniques. SAT PAD is distributed by
dealers specializing in radiology products. Sales of SAT PAD were approximately
$14,000 for fiscal 1997. Alliance expects that the sales volume of SAT PAD will
be limited and does not anticipate significant revenue from the product.
The Company intends to consider other technologies that may be available
for licensing and research agreements with other institutions or inventors.
Alliance intends, where appropriate, to seek outside sources of funding. If new
license and research agreements are added and the Company is not able to obtain
outside sources of funding, the Company's losses from research and development
activities are expected to increase significantly.
The Company's products require substantial development efforts. The
Company may encounter unforeseen technical and other problems which may force
delay, abandonment, or substantial change in the development of a specific
product or process, or technological change, or product development by others,
any of which may have a material adverse effect on the Company. The Company
expends substantial amounts of money on research and development and expects to
do so for the foreseeable future. In fiscal 1997, 1996, and 1995 the Company
incurred research and development expenses of $43.3 million, $33.7 million, and
$35.3 million, respectively.
COLLABORATIVE RELATIONSHIPS
SCHERING AG . In September 1997, the Company entered into the Schering License
Agreement, which provides Schering with worldwide exclusive marketing and
manufacturing rights to Alliance's drug compounds, drug compositions and medical
devices and systems related to perfluorocarbon ultrasound imaging products,
including IMAGENT US. The product will be developed jointly by Alliance and
Schering. Under the Schering License Agreement, Schering paid to Alliance an
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initial license fee and agreed to pay further milestone payments and royalties
on product sales. Schering also agreed to provide funding to Alliance for some
of its development expenses. In conjunction with the Schering License
Agreement, Schering Berlin Venture Corp., an affiliate of Schering, purchased
500,000 shares of the Company's convertible Series D Preferred Stock for $10
million.
HOECHST MARION ROUSSEL, INC. In February 1996, the Company entered into the
HMRI License Agreement, which provides HMRI with worldwide exclusive
marketing and manufacturing rights to the intratracheal administration of
liquids, including LIQUIVENT, which perform bronchoalveolar lavage or liquid
ventilation. The product is being developed jointly by Alliance and HMRI,
with HMRI responsible for most of the costs of development and marketing. In
conjunction with the HMRI License Agreement, HMRI purchased 750,000 shares of
the Company's convertible Series B Preferred Stock and 200,000 shares of its
convertible Series C Preferred Stock for an aggregate of $22 million. In
addition, HMRI paid Alliance an initial license fee of $5 million and agreed
to pay milestone payments and royalties on product sales. HMRI also received
a five-year warrant to acquire 300,000 shares of common stock at $20 per
share. On June 6, 1996, the Series B Preferred Stock and accrued dividends
thereon were converted into 759,375 shares of the Company's common stock. On
June 30, 1997, the Series C Preferred Stock converted into 345,327 shares of
common stock of the Company. On June 30, 1997, HMRI paid the Company a $2.5
million milestone payment and $2.5 million for the purchase of clinical trial
supplies. In June 1997, the Company also announced that the parties have
agreed in principle to modify the HMRI License Agreement to (i) adjust
certain milestone payments and (ii) temporarily revise the method for
reimbursing the expenses for portions of the development work, in conjunction
with the temporary interruption of the LIQUIVENT clinical development program
in April 1997. The modification is being formalized by an amendment which is
expected to be executed in the near future. Prior to the modification, the
HMRI License Agreement required HMRI to reimburse Alliance for approved
worldwide development expenses incurred by Alliance on a quarterly basis.
Under the modified agreement, from July 1997 Alliance will conduct and be
responsible for funding development activities in North America through
December 1997. HMRI will reimburse Alliance for approved expenses for such
activities in the form of payments which will be made upon the occurrence of
specified events subsequent to December 1997. HMRI will continue to be
responsible for conducting and funding any activities outside of North
America. Beginning in January 1998, HMRI will resume funding for
substantially all LIQUIVENT development expenses worldwide. The agreement in
principle also provides for the establishment of a mechanism for HMRI to
recoup from Alliance certain reimbursed development expenses if HMRI
terminates the License Agreement prior to January 1998.
ORTHO BIOTECH, INC. In August 1994, the Company entered into the Ortho License
Agreement which provides Ortho with worldwide exclusive marketing and
manufacturing rights to injectable PFC emulsions capable of transporting oxygen
for therapeutic use, including OXYGENT. The product is being developed jointly
by Alliance and Ortho, with Ortho responsible for substantially all of the costs
of developing and marketing the product. Under the Ortho License Agreement,
Ortho paid to Alliance an initial license fee of $4 million and, in
December 1996, paid the Company a $15 million milestone payment due upon a
decision by Ortho to conduct a Phase III trial with OXYGENT. Ortho will make
other payments upon the achievement of certain milestones and will pay Alliance
a royalty based upon sales of products after commercialization. In conjunction
with the Ortho License Agreement, Johnson & Johnson Development Corp. ("J&JDC")
purchased 1.5 million shares of the Company's convertible Series A Preferred
Stock for $15 million and acquired a three-year warrant to purchase 300,000
shares of common stock. On June 6, 1996, the Series A Preferred Stock and
accrued dividends thereon were converted into 815,625 shares of common stock of
the Company and Ortho exercised its warrant to purchase 300,000 shares of common
stock.
VIA MEDICAL CORPORATION. In July 1997, the Company entered into the VIA
Development Agreement for the joint development of RODA, an EX VIVO device
intended to measure cardiovascular and oxygenation status of patients by
minimally invasive means. Pursuant to the VIA Development Agreement, VIA will
combine Alliance's oxygen dynamics software with VIA's EX VIVO blood gas and
chemistry measurement device and other technology. Alliance will reimburse VIA
for substantially all of its development costs and will be responsible for
obtaining regulatory approval of the product. Alliance and VIA are currently
negotiating an agreement whereby VIA will market RODA and the parties will share
revenues on the sale of products. The agreement is expected to be executed in
the near future; however, there can be no assurances that the parties will be
able to negotiate an agreement on acceptable terms.
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There can be no assurances that the Company will be able to enter into
future collaborative relationships on acceptable terms. The termination of any
collaborative relationship or failure to enter into such relationships may limit
the ability of the Company to develop its technology and may have a material
adverse effect on the Company's business.
MARKETING
Under the terms of the Ortho License Agreement, Ortho has exclusive
worldwide marketing rights to OXYGENT and any other injectable PFC emulsion
products capable of transporting oxygen for therapeutic use. Under the terms of
the HMRI License Agreement, HMRI has exclusive worldwide marketing rights to the
intratracheal administration of liquids, including LIQUIVENT, which perform
bronchoalveolar lavage or liquid ventilation. Under the terms of the Schering
License Agreement, Schering has exclusive worldwide marketing rights to
IMAGENT US and drug compounds, drug compositions and medical devices and systems
relating to perfluorocarbon-containing ultrasound imaging products. The
Company's only commercialized product, SAT PAD, is currently distributed through
certain distributors of MR imaging equipment and supplies.
MANUFACTURING
The Company manufactures all of its products for preclinical testing and
clinical trials. OXYGENT is produced in Alliance's San Diego facility, which
includes both a pilot plant and a production-scale manufacturing facility. The
Company believes that this production facility will provide sufficient capacity
for future clinical trials and market launch of OXYGENT, if and when it is
approved by the FDA. However, a larger commercial-scale facility will be
required in the future. Under the terms of the Ortho License Agreement, Ortho
has the right to elect to manufacture OXYGENT itself or have the Company
continue to do so, which election must be made at or prior to the filing of a
new drug application ("NDA"). If Alliance manufactures OXYGENT for Ortho, the
transfer price, which will not be less than Alliance's fully burdened cost, will
be determined by Ortho's net sales price for the product. The Company has not
selected a site for the commercial-scale facility or obtained any regulatory
approvals. Construction of such a facility will depend upon Ortho's decision
regarding manufacturing, product development, capital resources, and regulatory
approvals, among other things.
LIQUIVENT is manufactured for clinical trials at the Company's Otisville,
New York facility. LIQUIVENT is the same drug substance as IMAGENT GI, for
which Alliance obtained FDA approval in August 1993 as an oral contrast agent
for MR imaging. As a result, certain chemistry, manufacturing, and control
requirements have been accepted by the FDA, which may benefit the Company in the
regulatory review process. The HMRI License Agreement requires the Company to
manufacture LIQUIVENT at its Otisville facility for a period of time after
market launch at a negotiated price. HMRI will be responsible for establishing
production capacity beyond the maximum capacity of the Otisville facility.
IMAGENT US is manufactured for clinical studies at the San Diego facility,
using a proprietary process to form dry, PFC vapor-containing spheres which are
reconstituted with an aqueous solution to form microbubbles just prior to use.
The Schering License Agreement requires the Company to manufacture products at
its San Diego facility for a period of time after market launch at a negotiated
price. Schering will be responsible for establishing production capacity beyond
the maximum capacity of the San Diego facility. Alliance is in the process of
expanding its market launch production capacity in San Diego for IMAGENT US.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company has obtained a sufficient inventory of perflubron, the
principal raw material utilized in OXYGENT and LIQUIVENT, for clinical trials.
HMRI and Ortho are currently negotiating with a potential supplier to secure a
long-term supply of perflubron. The Company also believes it has a sufficient
supply of raw materials for IMAGENT US for clinical trials. Although some raw
materials for its products are available from only one source, the Company has
attempted to acquire a long-term supply of materials in inventory. The Company
believes it will not have any raw material supply issues; however, the Company's
business could be materially and adversely affected if it or its collaborative
partners are unable to obtain necessary raw materials on a timely basis and at a
cost-effective price.
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PATENTS
The Company seeks proprietary protection for its products, processes,
technologies, and ongoing improvements. The Company is pursuing patent
protection in the United States and in foreign countries that it regards as
important for future endeavors. Numerous patent applications have been filed in
the European Patent Office, Australia, Canada, Israel, Japan, Norway, and South
Africa, and patents have been granted in many of these countries.
Alliance has eighteen issued U.S. patents related to or covering PFC
emulsions with corresponding patents and applications in Europe and Japan. Such
emulsions are the basis of the Company's OXYGENT products. The issued patents
and pending patent applications cover specific details of emulsified PFCs
through product-by-process claims, composition claims, and method claims
describing their manufacture and use. In addition to the specific OXYGENT
formulation, issued patents broadly cover concentrated PFC emulsions, as well as
methods for their manufacture and use.
In September 1994, Alliance received a U.S. patent for its preferred method
of using blood substitutes to facilitate oxygen delivery. A related U.S. patent
was issued in September 1995. Corresponding patents are pending in Europe,
Japan, and other countries. The issued claims cover methods for facilitating
autologous blood use in conjunction with administering oxygen-enriched gas and
oxygen carriers that contain fluorochemicals, as well as those derived from
human, animal, plant, or recombinant hemoglobin, in order to reduce or eliminate
the need for allogeneic blood transfusions during surgery.
The Company has filed U.S. and foreign patent applications on its method of
using oxygen-carrying PFCs to enhance respiratory gas exchange utilizing
conventional gas ventilators. In August 1995, a U.S. patent licensed to the
Company issued covering methods of administering liquids, including
LIQUIVENT, to patients. Other U.S. patents, covering additional methods of
enhancing respiratory gas exchange by administering liquids to patients,
including LIQUIVENT, have subsequently issued. The Company also has issued
patents and pending patent applications which seek to cover the use of PFCs to
deliver drugs to the lungs and to wash debris from, and open, collapsed lungs.
In November 1995, the Company received a U.S. patent covering the use of
fluorochemicals to treat localized and systemic inflammation. Additionally, the
Company has issued patents and pending applications that cover apparatus for
liquid ventilation using PFCs.
Alliance has three issued U.S. patents and several U.S. patent applications
related to IMAGENT US. The issued patents and pending applications contain
claims directed to the manufacture and use of novel stabilized microbubble
compositions based on the discovery that PFC gases, in combination with
appropriate surfactants or other non-PFC gases, can stabilize microbubbles for
use in ultrasonic imaging. The patents further contain claims directed to
formulations and compositions that cover IMAGENT US. International applications
directed to the same subject matter have also been filed. In July 1996, the
Company received another U.S. patent covering the use of various contrast
agents, including IMAGENT US, in harmonic imaging.
The Company also has issued patents and pending patent applications
covering its novel fluorinated surfactants. These compounds may be useful in
oxygen-carrying or drug transport compositions, and in liposomal formulations
that have therapeutic and diagnostic applications. Additionally, the
fluorinated compounds may be employed in cosmetics, protective creams, and
lubricating agents, as well as being incorporated in emulsions, microemulsions,
and gels that may be useful as drug delivery vehicles or contrast agents. The
Company also has pending applications relating to various types of emulsions and
microstructures (tubules, helixes, fibers) that may have uses in the fields of
medicine, biomolecular engineering, microelectronics, and electro-optics.
The Company, through its wholly owned subsidiary, MDV, has eighteen issued
U.S. patents and several pending applications related to the use, manufacture
and composition of FLOGEL. Corresponding patents have issued, or applications
have been filed, in Europe, Japan and certain other foreign countries. MDV also
has issued claims in the United States and Europe covering the use of poloxamer
gels for the prevention of adhesion formation, delivery of drugs and ophthalmic
applications.
Aside from the issued patents and allowed applications referred to above,
however, no assurance can be given that any of these applications will result in
issued U.S. or foreign patents. Although patents are issued with a presumption
of validity and require a challenge with a high degree of proof to establish
invalidity, no assurance can be given that any issued patents would survive such
a challenge and would be valid and enforceable.
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The Company also attempts to protect its proprietary products, processes,
and other information by relying on trade secret laws and non disclosure and
confidentiality agreements with its employees, consultants, and certain other
persons who have access to such products, processes, and information. The
agreements affirm that all inventions conceived by employees are the exclusive
property of the Company, with the exception of inventions unrelated to the
Company's business and developed entirely on the employee's own time.
Nevertheless, there can be no assurance that these agreements will afford
significant protection against or adequate compensation for misappropriation or
unauthorized disclosure of the Company's trade secrets.
COMPETITION
Biotechnology and pharmaceutical companies are highly competitive. There
are many pharmaceutical companies, biotechnology companies, public and private
universities, and research organizations actively engaged in research and
development of products that may be similar to Alliance's products. Many of the
Company's existing or potential competitors have substantially greater
financial, technical, and human resources than the Company and may be better
equipped to develop, manufacture, and market products. These companies may
develop and introduce products and processes competitive with or superior to
those of the Company. In addition, other technologies or products may be
developed that have an entirely different approach or means of accomplishing the
intended purposes of the Company's products, which might render the Company's
technology and products uncompetitive or obsolete. There can be no assurance
that the Company will be able to compete successfully.
Well-publicized side effects associated with the transfusion of human donor
blood have spurred efforts to develop a blood substitute. Two primary
approaches have shown promise as temporary oxygen carriers: PFC emulsions and
hemoglobin solutions. Hemoglobin development efforts include chemically
modified, stroma-free hemoglobin from human or bovine red blood cells, and the
use of genetic engineering to produce recombinant hemoglobin. There are several
companies working on hemoglobin solutions as a temporary oxygen carrier "blood
substitute", two of which are in Phase III clinical trials. The Company
believes that the relatively low cost and ease of production of OXYGENT provide
advantages over hemoglobin-based products. Alliance is aware of two other
companies developing PFC-based temporary oxygen carriers, one of which has
entered Phase I clinical trials.
Although liquid ventilation therapy has been in the research phase for the
last two decades, the Company is unaware of any potential competitor that has
reached the clinical trial stage; however, other companies may be evaluating
compounds with the possibility of entering this field. If major manufacturers
of PFCs entered the field, the Company could face competition from companies
with substantially greater resources. The Company believes that its patent
position and stage of research and development give it an advantage over
potential competitors. Other companies are attempting to develop alternative
types of therapies for treatment of acute respiratory failure.
Competition in the development of ultrasound imaging contrast agents is
intense and is expected to increase. There is currently only one commercially
available ultrasound contrast agent for certain cardiology applications in the
U.S. and another has been approved in Europe. However, there are two other
products that have had applications submitted for approval for certain
ultrasound contrast agent indications. In addition, certain companies are in
advanced clinical trials for the use of ultrasound contrast agents for assessing
certain organs and vascular structures. The Company expects that competition in
the ultrasound contrast imaging agent field will be based primarily on each
product's safety profile, efficacy, stability, ease of administration, breadth
of approved indications, and physician, healthcare payor and patient acceptance.
The Company believes if and when IMAGENT US is approved for commercial sale,
that it will be well positioned to compete successfully, although there can be
no assurance that the product will be able to do so.
PRODUCT LIABILITY CLAIMS AND UNINSURED RISKS
The sale or use of the Company's present products and any other products or
processes that may be developed or sold by the Company may expose the Company to
potential liability from claims by end-users of such products or by
manufacturers or others selling such products, either directly or as a component
of other products. While the Company has product liability insurance, there can
be no assurance that the Company will continue to maintain such insurance or
that it will provide adequate coverage. If the Company is held responsible for
damages in a product liability suit, the Company's financial condition could be
materially and adversely affected.
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GOVERNMENT REGULATION
The Company's products require governmental approval before production and
marketing can commence. The regulatory approval process is administered by the
FDA in the United States and by similar agencies in foreign countries. The
process of obtaining regulatory clearances or approvals is costly and time
consuming. The Company cannot predict how long the necessary clearances or
approvals will take or whether it will be successful in obtaining them.
Generally, all potential pharmaceutical products must successfully complete
two major stages of development (preclinical and clinical testing) prior to
receiving marketing approval by the governing regulatory agency. In preclinical
testing, potential compounds are tested both IN VITRO and in animals to gain
safety information prior to administration in humans. Knowledge is obtained
regarding the effects of the compound on bodily functions as well as its
absorption, distribution, metabolism, and elimination.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, which frequently begins with the
initial introduction of the drug into healthy human subjects prior to
introduction into patients, the compound will be tested for safety and dosage
tolerance. Phase II typically involves studies in a larger patient population
to identify possible adverse effects and safety risks, to begin gathering
preliminary efficacy data, and to investigate potential dose sizes and
schedules. Phase III trials are undertaken to further evaluate clinical
efficacy and to further test for safety within an expanded patient population.
Each trial is conducted in accordance with certain standards under protocols
that detail the objectives of the study, the parameters to be used to monitor
safety, and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the investigational new drug application.
Further, each clinical study must be evaluated by an independent review board at
the institution at which the study will be conducted. The review board will
consider, among other things, ethical factors, the safety of human subjects, and
the possible liability of the institution.
Following completion of these studies, a NDA must be submitted to and
approved by the FDA in order to market the product in the United States.
Similar applications are required in foreign countries. There can be no
assurance that, upon completion of the foregoing trials, the results will be
considered adequate for government approval. If and when approval is obtained
to market a product, the FDA's (or applicable foreign agency's) regulations will
govern manufacturing and marketing activities.
The FDA has established a designation to speed the availability of new
therapies for life-threatening or severely debilitating diseases. This
designation, defined in Subpart E of the FDA's investigational new drug
regulations, may expedite clinical evaluation and regulatory review of some new
drugs, such as LIQUIVENT, which has been so designated.
Perflubron is an eight-carbon halogenated fluorocarbon liquid. Certain
halogenated fluorocarbons (primarily the gaseous chlorofluorocarbons) have been
implicated in stratospheric ozone depletion. The FDA issued a Finding of No
Significant Impact under the National Environmental Protection Act in connection
with the approval for marketing of IMAGENT GI, a perflubron-based drug
previously developed by the Company. However, all materials contained in the
Company's products remain subject to regulation by governmental agencies.
In addition to FDA regulation, the Company is subject to regulation by
various governmental agencies including, without limitation, the Drug
Enforcement Administration, the U.S. Department of Agriculture, the
Environmental Protection Agency, the Occupational Safety and Health
Administration, and the California State Department of Health Services, Food and
Drug Branch. Such regulation, by governmental authorities in the United States
and other countries, may impede or limit the Company's ability to develop and
market its products.
EMPLOYEES
As of August 29, 1997, the Company had 213 full-time employees, of whom 176
were engaged in research and development, production and associated support, 5
in business development, sales and marketing, and 32 in general administration.
There can be no assurance that the Company will be able to continue attracting
and retaining sufficient qualified personnel in order to meet its needs. None
of the Company's employees is represented by a labor union. The Company
believes that its employee relations are satisfactory.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the executive officers of the Company:
DUANE J. ROTH. Mr. Roth, who is 47, has been President and Chief Executive
Officer since 1985 and Chairman since October 1989. Prior to joining Alliance,
Mr. Roth served as President of Analytab Products, Inc., an American Home
Products company involved in manufacturing and marketing medical diagnostics,
pharmaceuticals and devices. For the previous ten years he was employed in
various sales, marketing, and general management capacities by Ortho Diagnostic
Systems, Inc., a Johnson & Johnson company, which is a manufacturer of
diagnostic and pharmaceutical products. Mr. Roth's brother, Theodore D. Roth,
is an Executive Vice President of the Company.
HAROLD W. DELONG. Mr. DeLong, who is 49, has been Executive Vice President,
Business Development for the Company since February 1989. Mr. DeLong has been
employed for more than 20 years in the medical diagnostics and pharmaceutical
industry in various sales, marketing, and management positions. Prior to
joining Alliance, Mr. DeLong was Vice President, Sales and Marketing for Murex
Corporation, a company participating in the infectious disease diagnostics
market. He previously served as Director, Sales and Marketing for Becton
Dickinson's Immunocytometry Systems division. Mr. DeLong was also employed
previously by Ortho Diagnostic Systems, Inc. for over ten years, where his last
position was Director of the Hemostasis and Chemistry Products business units.
THEODORE D. ROTH. Mr. Roth, who is 46, has been Executive Vice President and
Chief Financial Officer of the Company since November 1987, and Secretary since
1990. For more than ten years prior to joining the Company, he was General
Counsel of SAI Corporation, a company in the business of operating manufacturing
concerns, and General Manager of Holland Industries, Inc., a manufacturing
company. Mr. Roth received his J.D. from Washburn University and an LL.M. in
Corporate and Commercial Law from the University of Missouri in Kansas City. He
is the brother of Duane J. Roth, the Chairman of the Company.
KEITH W. CHAPMAN. Mr. Chapman, who is 47, was appointed Vice President
Operations in July 1997, having joined the Company in 1992 as Director, Transfer
Operations. For 14 years prior to joining Alliance, he was responsible for
scale-up development and production of modified hemoglobins for the Army's Blood
Substitute Program. He received training as a research associate in
dermatology, tropical medicine, and blood cell preservation at the Letterman
Army Institute of Research, Presidio of San Francisco, California.
B. JACK DEFRANCO. Mr. DeFranco, who is 52, has been Vice President, Market
Planning for Alliance since January 1991. He has more than 20 years experience
in sales and marketing in the medical products industry. He was President of
Orthoconcept Inc., a private firm marketing orthopedic and urological devices
from 1986 through 1990. Prior to 1986, he was Director of Marketing and New
Business Development for Smith and Nephew Inc., which markets orthopedic and
general wound-care products, and he served in various sales and marketing
positions with Ortho Diagnostic Systems, Inc. Mr. DeFranco received his M.B.A.
from Fairleigh Dickinson University.
N. SIMON FAITHFULL, M.D., PH.D. Dr. Faithfull, who is 57, has been Vice
President, Medical Research for the Company since September 1990. Dr. Faithfull
joined Alliance after serving as Director of Medical Research for Delta
Biotechnology Ltd. from 1989 to 1990. He has also served as Senior Lecturer in
Anesthesia at the University of Manchester (UK), and has held various academic
appointments and clinical anesthesia positions at Erasmus University
(Netherlands), Tulane University and the University of Alabama (Birmingham) for
more than 15 years. He has served as Secretary of the International Society on
Oxygen Transport to Tissue. He received his Ph.D. from Erasmus University,
Rotterdam and his M.D. from London University.
STEPHEN F. FLAIM, PH.D. Dr. Flaim, who is 49, was appointed Vice President,
Biological Sciences in May 1996, having joined the Company in 1990 as Division
Director of Pharmacology and Toxicology. Prior to joining Alliance, he was the
Associate Director of Pharmacology at The Bristol-Meyers Squibb Institute for
Medical Research. Dr. Flaim was also employed for five years at McNeil
Pharmaceutical, an affiliate of Johnson & Johnson, where he directed an
antianginal drug discovery program. Dr. Flaim was also on the faculty of
Pennsylvania State University College of Medicine for seven years. He received
his Ph.D. from the University of California at Davis.
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HENRY A. GRAHAM, PH.D. Dr. Graham, who is 54, is Vice President, Quality
Assurance. Prior to joining Alliance in January 1990, he worked for Johnson &
Johnson for 17 years on a broad range of projects including injectable human
biologicals, immunohematology reagents, immunoassay reagents and instrument
systems. Dr. Graham was Director of Product Development for Ortho Diagnostic
Systems, Inc. for over five years prior to 1990. During his tenure at Johnson &
Johnson, he was the recipient of several awards, including the Corporate Medal
for Outstanding Research. Dr. Graham received his Ph.D. in immunology from
Rutgers University.
RONALD M. HOPKINS, PH.D. Dr. Hopkins, who is 55, is Vice President, Project
Planning and Development. Prior to joining Alliance in May 1990, Dr. Hopkins
spent 20 years with Mallinckrodt Medical, Inc. As Vice President at
Mallinckrodt his responsibilities primarily involved identification and
development of various diagnostic x-ray, magnetic resonance, ultrasound and
radiopharmaceutical imaging agents, as well as angiographic catheters. In
addition to product and business development experience, Dr. Hopkins has an
extensive background in cardiovascular pharmacology and toxicology research, as
well as sterile pharmaceutical formulation and production. Dr. Hopkins received
his Ph.D. in pharmacology from the University of Maryland.
JOERG LIMMER, DVM. Dr. Limmer, who is 56, was appointed Vice President, New
Technology Assessment in September 1996. Prior to joining Alliance, Dr. Limmer
worked six years for Boehringer Ingelheim Pharma as Regional Director and Vice
President where he was responsible for medical and marketing affairs for 26
Eastern European countries. For the previous 20 years he was Director of
Clinical Research at Dr. Karl Thomae GmbH, a subsidiary of Boehringer Ingelheim
GmbH in Germany. His primary focus was in the area of diabetes mellitus, fat
metabolism, atherosclerosis, and intensive care products. Dr. Limmer received
his DVM from the Freie Universitaet of Berlin, Germany.
GORDON L. SCHOOLEY, PH.D. Dr. Schooley, who is 50, has been Vice President,
Clinical Research and Regulatory Affairs since January 1989. Dr. Schooley has
been employed for over 20 years in research and development in the
pharmaceutical industry. Prior to joining Alliance in 1989, Dr. Schooley was
Vice President of Clinical Research and Regulatory Affairs for Newport
Pharmaceuticals, a company developing antiviral drugs. For the previous eight
years he was Director of Clinical Research and Biostatistics for Allergan
Pharmaceuticals, a division of SmithKline Beecham, developing ophthalmologic and
dermatologic drugs and devices. He was also employed by McGaw Laboratories as
Manager of Biostatistics for parenteral products and by The Upjohn Company as a
senior biostatistician for analgesic and CNS drugs. Dr. Schooley received his
Ph.D. from the University of Michigan School of Public Health.
ITEM 2. PROPERTIES
FACILITIES
The Company has principal facilities in two locations: San Diego,
California and Otisville, New York. In San Diego, California, where the Company
has approximately 100,000 square feet in three leased facilities, the Company
maintains its principal executive offices, performs research and development on
its PFC-based products, and has its emulsion products manufacturing facility.
The third San Diego facility was leased in 1996 and consists of general office
space. The Otisville site, where the Company has established the LIQUIVENT and
SAT PAD production facility, also includes laboratories and administrative
offices. The Company is considering additional facilities in San Diego to meet
its projected needs for the next several years.
The Company purchased the Otisville site from the New York City Public
Development Corporation ("PDC") in June 1983. In connection with the
acquisition, the Company entered into a land use agreement (the "Land Use
Agreement") with New York City and the PDC. The Company estimates that the cost
of complying with the Land Use Agreement for fiscal 1997 was approximately
$100,000. The provisions of the Land Use Agreement are "covenants running with
the land," which may bind the Company and subsequent owners of the Otisville
site for a substantial period of time.
While the Company believes that it can produce materials for clinical
trials and initial market launch for its emulsion products at its existing San
Diego facility and for LIQUIVENT at its Otisville, New York facility, it may
need to expand its commercial manufacturing capabilities for its products in the
future. The Company's existing San Diego facility currently produces material
for clinical trials for IMAGENT US. The Company is in the process of expanding
its market launch production capacity in San Diego for IMAGENT US and is
determining whether to expand within existing or additional
11
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facilities. Any expansion for any of its products 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 Company cannot predict the amount that it will expend for the
construction of such 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 projected location and construction of any
production facility will depend upon regulatory and development activities and
other factors. The Ortho License Agreement grants 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 HMRI License
Agreement requires the Company to manufacture LIQUIVENT at its Otisville
facility for a period of time after market launch and to sell the product to
HMRI at a negotiated price. HMRI will be responsible for establishing
production capacity beyond the maximum capacity of the Otisville facility. The
Schering License Agreement requires the Company to manufacture products at its
San Diego facility for a period of time after market launch at a negotiated
price. Schering will be responsible for establishing production capacity beyond
the maximum capacity of the San Diego facility.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the last quarter of Alliance's fiscal year ended June 30, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock is traded in the over-the-counter market, and prices
therefor are quoted on the NASDAQ National Market System under the symbol ALLP.
The following table sets forth, for the periods indicated, the high and low
sale prices of the common stock as reported on NASDAQ, without retail mark-up,
markdown or commission.
High Low
---- ---
Fiscal 1997
Quarter ended September 30, 1996 $ 18.125 $ 12.25
Quarter ended December 31, 1996 $ 17.375 $ 10.50
Quarter ended March 31, 1997 $ 15.75 $ 11.875
Quarter ended June 30, 1997 $ 12.00 $ 5.875
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High Low
---- ---
Fiscal 1996
Quarter ended September 30, 1995 $ 12.625 $ 7.875
Quarter ended December 31, 1995 $ 14.25 $ 10.50
Quarter ended March 31, 1996 $ 19.75 $ 12.625
Quarter ended June 30, 1996 $ 22.875 $ 15.25
On August 29, 1997, the closing price of the Company's common stock was
$10.188.
The Company has not paid dividends on its common stock and the Board of
Directors does not anticipate paying cash dividends in the foreseeable future.
On August 29, 1997, the approximate number of record holders of the
Company's common stock was 1,670. The Company believes that, in addition, there
are in excess of 14,000 beneficial owners of its common stock whose shares are
held in street name and, consequently, the Company is unable to determine the
actual number of beneficial holders thereof.
ITEM 6. SELECTED FINANCIAL DATA
The following information has been summarized from the financial statements
included elsewhere herein and should be read in conjunction with such financial
statements and the related notes thereto (in thousands except per share
amounts):
<TABLE>
<CAPTION>
Years ended June 30,
1997 1996 1995 1994 1993
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Total revenues $ 44,580 $ 17,323 $ 11,816 $ 409 $ 2,370
Net loss $ (19,016) $ (23,172) $ (29,717) $ (36,946) $ (26,380)
Net loss per common share $ (.63) $ (.91) $ (1.35) $ (1.83) $ (1.39)
<CAPTION>
June 30,
1997 1996 1995 1994 1993
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working capital $ 62,217 $ 73,244 $ 22,346 $ 19,446 $ 39,745
Total assets $ 112,013 $ 108,343 $ 56,030 $ 53,132 $ 72,537
Long-term debt and other $ 2,871 $ 1,166 $ 843 $ 348 $ 447
Stockholders' equity $ 91,331 $ 101,467 $ 50,077 $ 49,825 $ 69,144
</TABLE>
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ITEM 7. 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 medical products. The Company has been unprofitable since
inception and expects to continue to spend substantial amounts on research and
development, preclinical testing and clinical trials, regulatory activities, and
commercial manufacturing start-up. The Company has entered into collaborative
research and development agreements with companies for OXYGENT, LIQUIVENT,
IMAGENT US, and RODA. The arrangements with its existing partners for OXYGENT,
LIQUIVENT, AND IMAGENT US require them to reimburse the Company for certain
approved development expenses incurred for the respective products. All three
partners for such products will make milestone payments to the Company upon the
achievement of certain product development events, followed by royalties on
sales at commercialization. With respect to RODA, the Company has agreed to
reimburse VIA for substantially all of its development expenses and to share
revenues on the sale of products. If some of the development events under its
existing agreements are achieved and the relevant payments made by partners, the
Company could become profitable on a periodic basis over the next two years,
prior to the commercialization of products. However, the timing and amounts of
such payments, if any, cannot be predicted with certainty and may not occur if
product development events are not achieved. 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 June 1997, the Company financed its activities primarily from
public and private sales of equity and funding from collaborations with
corporate partners. To date, the Company's revenue from the sale of products
has not been significant.
In January 1997, the Company entered into a loan and security agreement
with a bank under which the Company received $3.5 million. Amounts borrowed
under the agreement are secured by certain fixed assets, and pursuant to two
promissory notes are to be repaid over three and four years, respectively. If
certain financial covenants are not satisfied, the outstanding balance may
become due and payable. On June 30, 1997, the balance outstanding on these
loans was $3.3 million. The Company has another loan with an outstanding
balance of $944,000 on June 30, 1997. The Company has financed substantially
all of its office and research facilities and related leasehold improvements
under operating lease arrangements and loan and security agreements.
In November 1996, the Company acquired MDV by a merger (the "MDV Merger")
of a wholly owned subsidiary of the Company into MDV. MDV is engaged in the
development of a thermo-reversible gel, FLOGEL, intended for use as an
anti-adhesion treatment for persons undergoing abdominal or pelvic surgeries.
FLOGEL is applied in a cold, liquid form and becomes a gel at body temperature.
MDV has obtained preliminary human safety data with the product's current
formulation, and has performed preclinical studies on additional formulations.
The consideration payable in the MDV Merger consists of $15.5 million,
payable in common stock or cash, of which $8 million was paid during fiscal
1997, $2.5 million was paid on August 13, 1997, and $5 million will be paid on
November 13, 1997. The $8 million payments made in fiscal 1997 and the
$2.5 million payment made in August of 1997 were made through the delivery of
703,093 and 248,879 shares of the Company's common stock, respectively.
Additionally, the Company will pay up to $20 million if advanced clinical
development or licensing milestones are achieved in connection with MDV's
technology. The Company will also make certain royalty payments on the sales of
products, if any, developed from such technology. The Company may buy out its
royalty obligation for $10 million at any time prior to the first anniversary of
the approval by U.S. regulatory authorities of any products based upon the MDV
technology (the amount increasing thereafter over time). All of such payments
to the former MDV shareholders may be made in cash or, at the Company's option,
shares of the Company's common stock, except for the royalty obligations which
will be payable only in cash. The Company has not determined whether subsequent
payments (other than royalties) will be made in cash or in common stock or, if
made in cash, the source of such payments. There can be no assurance that any
of the contingent payments will be made, because they are dependent on future
developments which are inherently uncertain.
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The Company has accounted for the MDV Merger as a purchase, and recorded a
one-time charge in fiscal 1997 of $16.5 million, including the $15.5 million
scheduled payments described above and related transaction costs.
Under the Ortho License Agreement, Ortho paid to Alliance in 1995 an
initial fee of $4 million and agreed to make other payments upon the achievement
of certain milestones. Ortho is responsible for substantially all the remaining
costs of developing and marketing the products and will pay Alliance a royalty
based upon sales of products after commercialization. In June 1996, the
convertible Series A Preferred Stock and accrued dividends thereon were
converted into 815,625 shares of common stock of the Company. In June 1996,
Johnson & Johnson Development Corp. also exercised its warrant for 300,000
shares, resulting in proceeds to the Company of $4.5 million. In December 1996,
Ortho paid to Alliance a $15 million milestone payment pursuant to the Ortho
License Agreement.
In February 1996, the Company entered into the HMRI License Agreement,
which provides HMRI with worldwide marketing and manufacturing rights to the
intratracheal administration of liquids, including LIQUIVENT, which perform
bronchoalveolar lavage or liquid ventilation. The product is being developed
jointly by Alliance and HMRI, with HMRI responsible for most of the costs of
development and marketing. In conjunction with the HMRI License Agreement,
HMRI purchased shares of convertible Series B Preferred Stock and shares of
convertible Series C Preferred Stock for an aggregate of $22 million. In
addition, HMRI paid Alliance an initial license fee of $5 million and agreed
to pay milestone payments and royalties on product sales. HMRI also received
a five-year warrant to acquire 300,000 shares of common stock at $20 per
share. On June 6, 1996, the Series B Preferred Stock and accrued dividends
thereon were converted into 759,375 shares of common stock of the Company.
On June 30, 1997, the Series C Preferred Stock was converted into 345,327
shares of common stock of the Company. On June 30, 1997, HMRI paid the
Company a $2.5 million milestone payment and $2.5 million for the purchase of
clinical trial supplies. The Company also announced in June 1997 that the
parties have agreed in principle to modify the HMRI License Agreement to (i)
adjust certain milestone payments and (ii) temporarily revise the method for
reimbursing the expenses for portions of the development work, in conjunction
with the temporary interruption of the LIQUIVENT clinical development program
in April 1997. The modification is being formalized by an amendment which is
expected to be executed in the near future. Prior to the modification, the
HMRI License Agreement required HMRI to reimburse Alliance for approved
worldwide development expenses incurred by Alliance on a quarterly basis.
Under the modified agreement, from July 1997 Alliance will conduct and be
responsible for funding development activities in North America through
December 1997. HMRI will reimburse Alliance for approved expenses for such
activities in the form of payments which will be made upon the occurrence of
specified events subsequent to December 1997. HMRI will continue to be
responsible for conducting and funding any activities outside of North
America. Beginning in January 1998, HMRI will resume funding for
substantially all LIQUIVENT development expenses worldwide. The agreement in
principle provides for the establishment of a mechanism for HMRI to recoup
from Alliance certain reimbursed development expenses if HMRI terminates the
HMRI License Agreement prior to January 1998.
In September 1997, the Company entered into the Schering License Agreement,
which provides Schering with worldwide exclusive marketing and manufacturing
rights to Alliance's drug compounds, drug compositions, and medical devices and
systems related to perfluorocarbon ultrasound imaging products, including
IMAGENT US. The product will be developed jointly by Alliance and Schering.
Under the Schering License Agreement, Schering paid to Alliance an initial
license fee and agreed to pay further milestone payments and royalties on
product sales. Schering also agreed to provide funding to Alliance for some of
its development expenses. In conjunction with the Schering License Agreement,
Schering Berlin Venture Corp., an affiliate of Schering, purchased 500,000
shares of the Company's convertible Series D Preferred Stock for $10 million.
The Company had net working capital of $62.2 million at June 30, 1997
compared to $73.2 million at June 30, 1996. The Company's cash, cash
equivalents, and short-term investments increased to $71.6 million at
June 30, 1997 from $71.4 million at June 30, 1996. The increase resulted
primarily from cash provided by operations of $4.6 million and proceeds under
the January 1997 loan and security agreement of $3.5 million, net of property
additions of $6.8 million and payments for acquired in-process technology of
$1 million. 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
healthcare system, status of its proprietary rights, technical feasibility,
expected and
15
<PAGE>
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.
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 reasonable 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 Ortho License Agreement, HMRI License Agreement, and Schering License
Agreement and investments, will be adequate to satisfy its capital requirements
for at least the next 24 months. The Company's future capital requirements will
depend on many factors, including, but not limited to, 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, New York facility, it may
need to expand its commercial manufacturing capabilities for its products in the
future. The Company's existing San Diego facility currently produces material
for clinical trials for IMAGENT US. The Company is in the process of expanding
its market launch production capacity in San Diego for IMAGENT US and is
determining whether to expand within existing or additional facilities. Any
expansion for any of its products 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,
nor can there be any assurance that it will be able to do so. 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 projected location and construction of a facility will depend on regulatory
approvals, product development, and capital resources, among other things. The
Ortho License Agreement provides an option for 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 HMRI License Agreement requires the
Company to manufacture LIQUIVENT at its Otisville facility for a period of time
after market launch and to sell the product to HMRI at a negotiated price. HMRI
will be responsible for establishing production capacity beyond the maximum
capacity of the Otisville facility. The Schering License Agreement requires the
Company to manufacture products at its San Diego facility for a period of time
after market launch at a negotiated price. Schering will be responsible for
establishing production capacity beyond the maximum capacity of the San Diego
facility.
Except for historical information, the statements made herein and elsewhere
are forward-looking. The Company wishes to caution readers that these
statements are only predictions and that the Company's business is subject to
significant risks. The factors discussed herein and other important factors, in
some cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results for 1998, and
beyond, to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. These risks include the
inability to enter into collaborative relationships to further develop and
commercialize the Company's products; changes in any such relationships, or the
inability of any collaborative partner to adequately commercialize any of the
Company's products; the uncertainties associated with the lengthy regulatory
approval process; obtaining and enforcing patents important to the Company's
business; and possible competition from other products. Furthermore, even if
the Company's products appear promising at an early stage of development, they
may not reach the market for a number of important 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
16
<PAGE>
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, 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 healthcare costs and potential legislation or regulation of
healthcare pricing.
RESULTS OF OPERATIONS
1997 AS COMPARED WITH 1996
- --------------------------
The Company's license and research revenue was $44.6 million for 1997,
compared to $17.3 million for 1996. The increase was primarily a result of the
$15 million milestone payment from Ortho under the Ortho License Agreement, and
the $2.5 million milestone payment and increased research revenue from HMRI
under the HMRI License Agreement. The Company expects research revenue to
continue at comparable levels in 1998 compared to 1997, but expects milestone
payments to diminish.
Research and development expenses increased by 28% to $43.3 million for
1997, compared to $33.7 million for 1996. The increase in expenses was
primarily due to a $4.7 million increase in payments to universities and outside
consultants for preclinical and clinical trials and other product development
work, a $2.3 million increase in staffing costs, a $1 million increase in
depreciation expense, a $414,000 increase in rent and lease expense, and a
$369,000 increase in repairs and maintenance expense, as well as other increases
related to the Company's research and development activities. The expenses for
1996 included a $757,000 charge arising from the acquisition of certain PFC
patents, patent rights, and related documents.
General and administrative expenses increased by 10% to $7.9 million for
1997, compared to $7.2 million for 1996. The increase in general and
administrative expenses was primarily due to increased professional fees.
The Company has accounted for the acquisition of MDV as a purchase and has
recorded a one-time charge for 1997 of $16.5 million, including $15.5 million
scheduled payments and related transaction costs.
Investment income and other was $4.1 million for 1997, compared to
$1.4 million for 1996. The increase was primarily a result of higher average
cash balances as a result of the Ortho milestone payment received, the
February 1996 HMRI transaction and the April 1996 stock offering.
1996 AS COMPARED WITH 1995
- --------------------------
The Company's license and research revenue was $17.3 million for 1996,
compared to $11.8 million for 1995. License revenue included $5 million from
the HMRI License Agreement for 1996, compared to $4 million from the Ortho
License Agreement for 1995. Research revenue increased from $7.1 million to
$11.9 million in 1996 primarily as a result of amounts received from the HMRI
License Agreement.
Research and development expenses decreased by 4% to $33.7 million for
1996, compared to $35.3 million for 1995. The decrease in expenses was primarily
the result of a $4 million reduction in purchases of raw materials, and a
$929,000 net reduction in acquired research and development expense. These
reductions were partially offset by a $2.5 million increase in payments to
universities and outside consultants. The expenses for 1995 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 1996 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 increased by 4% to $7.2 million for
1996, compared to $6.9 million for 1995. The increase in general and
administrative expenses was primarily due to increased salaries and wages.
17
<PAGE>
Investment income and other was $1.4 million for 1996, compared to
$1.2 million for 1995. The increase was primarily a result of higher average
cash balances as a result of the February 1996 HMRI transaction and the
April 1996 stock offering.
Alliance expects to continue to incur substantial and increasing expenses
associated with its research and development programs. Operating results may
fluctuate from quarter to quarter as a result of the 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Table of Contents to Consolidated Financial Statements on page F-1
below for a list of the Financial Statements being filed herein.
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
Information concerning the executive officers of the Company is contained
in Part I of this Annual Report on Form 10-K under the caption "Executive
Officers of the Registrant." Information concerning the directors of the
Company is incorporated by reference to the section entitled "Election of
Directors" that the Company intends to include in its definitive proxy statement
for Alliance's November 1997 Annual Meeting of Shareholders (the "Proxy
Statement"). Copies of the Proxy Statement will be duly filed with the
commission pursuant to Rule 14a-6(c) promulgated under the Securities Exchange
Act of 1934, as amended, not later than 120 days after the end of the fiscal
year covered by its Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The sections labeled "Executive Compensation" and "Election of Directors"
to appear in the Company's Proxy Statement are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section labeled "Ownership of Voting Securities by Certain Beneficial
Owners and Management" to appear in the Company's Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The sections labeled "Election of Directors" and "Executive Compensation"
to appear in the Company's Proxy Statement are incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of the Report.
18
<PAGE>
1. See Table of Contents to Consolidated Financial Statements on
Page F-1 for a list of Financial Statements being filed herein.
2. See Page F-2 for the Report of Ernst & Young LLP, Independent
Auditors, being filed herein.
3. See Exhibits below for a list of all Exhibits being filed or
incorporated by reference herein.
(b) None.
(c) Exhibits.
(3) (a) Restated Certificate of Incorporation of the Company, as amended
through August 31, 1994. (Incorporated by reference to Exhibit 3(a) to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994
(the "1994 10-K").)
(b) Certificate of Amendment to the Certificate of Incorporation of
the Company filed on March 25, 1996. (Incorporated by reference to Exhibit 3 to
Amendment No. 1 of the S-3 Registration Statement of the Company filed on
March 28, 1996 (the "1996 S-3")).
(c) Certificate of Amendment of Certificate of Incorporation of
the Company filed on September 22, 1997.
(d) By-Laws of the Company, as amended. (Incorporated by reference
to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1989 (the "1989 10-K").)
(10) (a) Lease Agreement, as amended, between the Company and Hartford
Accident and Indemnity Company relating to the Company's San Diego, California
facilities. (Incorporated by reference to Exhibit 10(x) to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1993.)
(b) Loan Modification Agreement between the Company and Theodore
Roth, dated May 24, 1994 - Management contract or compensatory plan or
arrangement required to be filed. (Incorporated by reference to Exhibit 10(d)
to the 1994 10-K.)
(c) Formula Award of Stock Options for Non-employee Members of the
Board of Directors as approved by shareholders of the Company - Management
contract or compensatory plan or arrangement required to be filed.
(Incorporated by reference to Exhibit 10(e) to the 1994 10-K.)
(d) License Agreement dated August 16, 1994 among the Company, Ortho
Biotech, Inc. and The R.W. Johnson Pharmaceutical Research Institute.
(Incorporated by reference to Exhibit 10(f) to the 1994 10-K.)(1)
(e) Stock and Warrant Purchase Agreement dated August 16, 1994
between the Company and Johnson & Johnson Development Corporation.
(Incorporated by reference to Exhibit 10(g) to the 1994 10-K.)
(f) License Agreement dated February 28, 1996 between the Company and
Hoechst Marion Roussel, Inc. (Incorporated by reference to Exhibit 10 (a) to
the 1996 S-3). (1)
(g) Stock and Warrant Purchase Agreement dated February 28, 1996
between the Company and Hoechst Marion Roussel, Inc. (Incorporated by reference
to Exhibit 10 (b) to the 1996 S-3).
(h) Supply and Technology Transfer Agreement dated February 28, 1996
between the Company and Hoechst Marion Roussel, Inc. (Incorporated by reference
to Exhibit 10 (c) to the 1996 S-3). (1)
(i) Agreement and Plan of Merger by and among the Company, MDV
Acquisition Corp. and MDV Technologies, Inc. dated October 8, 1996.
(Incorporated by reference to Exhibit 1 to the Current Report on Form 8-K filed
on November 20, 1996)
19
<PAGE>
(23.1) Consent of Ernst & Young LLP, Independent Auditors
(1) Certain confidential portions of this exhibit have been deleted
pursuant to an order granted by the Securities and Exchange Commission under the
Securities Exchange Act of 1934.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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)
Date: September 23, 1997 By: \s\ Duane J. Roth
-----------------------------
Duane J. Roth
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
\s\ Duane J. Roth President, Chief Executive September 23, 1997
- ----------------------------
Duane J. Roth Officer and a Director
\s\ Theodore D. Roth Executive Vice President September 23, 1997
- ----------------------------
Theodore D. Roth and Chief Financial Officer
\s\ Tim T. Hart Controller and Chief September 23, 1997
- ----------------------------
Tim T. Hart Accounting Officer
\s\ Pedro Cuatrecasas, M.D. Director September 23, 1997
- ----------------------------
Pedro Cuatrecasas, M.D.
\s\ Carroll O. Johnson Director September 23, 1997
- ----------------------------
Carroll O. Johnson
\s\ Stephen M. McGrath Director September 23, 1997
- ----------------------------
20
<PAGE>
Stephen M. McGrath
\s\ Helen M. Ranney, M.D. Director September 23, 1997
- ----------------------------
Helen M. Ranney, M.D.
\s\ Donald E. O'Neill Director September 23, 1997
- ----------------------------
Donald E. O'Neill
\s\ Jean Riess, Ph.D. Director September 23, 1997
- ----------------------------
Jean Riess, Ph.D.
\s\ Thomas F. Zuck, M.D. Director September 23, 1997
- ----------------------------
Thomas F. Zuck, M.D.
21
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets at June 30, 1997 and 1996 F-3
Consolidated Statements of Operations for the Years
Ended June 30, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7 - F-14
No consolidated financial statement schedules are filed herewith because they
are not required or are not applicable, or because the required information is
included in the consolidated financial statements or notes thereto.
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 sheets of Alliance
Pharmaceutical Corp. and subsidiaries as of June 30, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Alliance
Pharmaceutical Corp. and subsidiaries at June 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
July 24, 1997, except for Note 8,
as to which the date is September 23, 1997
F - 2
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30,
1997 1996
--------------- --------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 14,590,000 $ 9,480,000
Short-term investments 57,041,000 61,921,000
Research revenue receivable 7,250,000 5,750,000
Other current assets 1,147,000 1,803,000
--------------- --------------
Total current assets 80,028,000 78,954,000
PROPERTY, PLANT AND EQUIPMENT - NET 16,574,000 12,390,000
PURCHASED TECHNOLOGY - NET 14,400,000 15,966,000
OTHER ASSETS - NET 1,011,000 1,033,000
--------------- --------------
$ 112,013,000 $ 108,343,000
--------------- --------------
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,807,000 $ 2,189,000
Accrued expenses 3,439,000 2,801,000
Deferred revenue 2,500,000 -
Payable for acquired in-process technology 7,557,000 -
Current portion of long-term debt 1,508,000 720,000
--------------- --------------
Total current liabilities 17,811,000 5,710,000
LONG-TERM DEBT 2,742,000 945,000
OTHER 129,000 221,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value; 5,000,000 shares authorized;
0 and 200,000 shares of Series C issued and outstanding at
June 30, 1997 and 1996, respectively - 2,000
Common stock - $.01 par value; 50,000,000 shares authorized;
31,164,935 and 30,001,918 shares issued and outstanding at
June 30, 1997 and 1996, respectively 311,000 300,000
Additional paid-in capital 322,268,000 313,397,000
Accumulated deficit (231,248,000) (212,232,000)
--------------- --------------
Total stockholders' equity 91,331,000 101,467,000
--------------- --------------
$ 112,013,000 $ 108,343,000
--------------- --------------
--------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F - 3
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUES:
License and research revenue $ 44,580,000 $ 17,323,000 $ 11,816,000
OPERATING EXPENSES:
Research and development 43,278,000 33,730,000 35,257,000
General and administrative 7,932,000 7,214,000 6,891,000
Acquired in-process technology 16,450,000 - -
-------------- -------------- --------------
67,660,000 40,944,000 42,148,000
-------------- -------------- --------------
LOSS FROM OPERATIONS (23,080,000) (23,621,000) (30,332,000)
INVESTMENT INCOME AND OTHER - NET 4,064,000 1,355,000 1,209,000
-------------- -------------- --------------
NET LOSS (19,016,000) (22,266,000) (29,123,000)
DIVIDENDS ON PREFERRED STOCK - (906,000) (594,000)
-------------- -------------- --------------
NET LOSS APPLICABLE TO COMMON SHARES $ (19,016,000) $ (23,172,000) $ (29,717,000)
-------------- -------------- --------------
-------------- -------------- --------------
NET LOSS PER COMMON SHARE $ (0.63) $ (0.91) $ (1.35)
-------------- -------------- --------------
-------------- -------------- --------------
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 30,302,000 25,504,000 21,959,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F - 4
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
- ----------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCES AT JUNE 30, 1994 21,372,000 $ 214,000
Sale of convertible Series A Preferred Stock 1,500,000 $ 15,000
Sale of common stock 3,175,000 32,000
Exercise of stock options and warrants 56,000 1,000
Installment payment related to acquisition of BioPulmonics, Inc. 131,000 1,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 25,000
Net unrealized loss on available-for-sale securities
Dividends on preferred stock
Net loss
-------------- ------------ ------------ ------------
BALANCES AT JUNE 30, 1995 1,500,000 15,000 24,759,000 248,000
Sale of convertible Series B and Series C Preferred Stock 950,000 9,500
Sale of common stock 2,865,000 29,000
Exercise of stock options and warrants 745,000 7,000
Conversion of convertible Series A Preferred
Stock to common shares (1,500,000) (15,000) 750,000 7,500
Conversion of convertible Series B Preferred
Stock to common shares (750,000) (7,500) 750,000 7,500
Conversion of convertible preferred
stock dividend to common shares 75,000 1,000
Payment related to acquisition of technology rights 50,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 8,000
Net unrealized gain on available-for-sale securities
Dividends on preferred stock
Net loss
-------------- ------------ ------------ ------------
BALANCES AT JUNE 30, 1996 200,000 2,000 30,002,000 300,000
Exercise of stock options and warrants 105,000 1,000
Conversion of convertible Series C Preferred
Stock to common shares (200,000) (2,000) 345,000 3,000
Payment related to acquired in-process technology 703,000 7,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 10,000
Net unrealized gain on available-for-sale securities
Net loss
-------------- ------------ ------------ ------------
BALANCES AT JUNE 30, 1997 - $ - 31,165,000 $ 311,000
-------------- ------------ ------------ ------------
-------------- ------------ ------------ ------------
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT
------------------ ------------------
<S> <C> <C>
BALANCES AT JUNE 30, 1994 $ 208,954,000 $ (159,343,000)
Sale of convertible Series A Preferred Stock 14,618,000
Sale of common stock 14,262,000
Exercise of stock options and warrants 36,000
Installment payment related to acquisition of BioPulmonics, Inc. 999,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 150,000
Net unrealized loss on available-for-sale securities (145,000)
Dividends on preferred stock (594,000)
Net loss (29,123,000)
------------------ ------------------
BALANCES AT JUNE 30, 1995 238,874,000 (189,060,000)
Sale of convertible Series B and Series C Preferred Stock 21,530,000
Sale of common stock 43,925,000
Exercise of stock options and warrants 6,548,000
Conversion of convertible Series A Preferred
Stock to common shares 8,000
Conversion of convertible Series B Preferred
Stock to common shares
Conversion of convertible preferred
stock dividend to common shares 1,499,000
Payment related to acquisition of technology rights 757,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 114,000
Net unrealized gain on available-for-sale securities 142,000
Dividends on preferred stock (906,000)
Net loss (22,266,000)
------------------ ------------------
BALANCES AT JUNE 30, 1996 313,397,000 (212,232,000)
Exercise of stock options and warrants 654,000
Conversion of convertible Series C Preferred
Stock to common shares (1,000)
Payment related to acquired in-process technology 7,840,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 133,000
Net unrealized gain on available-for-sale securities 245,000
Net loss (19,016,000)
------------------ ------------------
BALANCES AT JUNE 30, 1997 $ 322,268,000 $ (231,248,000)
------------------ ------------------
------------------ ------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F - 5
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
- ----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
1997 1996 1995
---------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (19,016,000) $ (22,266,000) $ (29,123,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operations:
Depreciation and amortization 3,997,000 3,086,000 2,859,000
Charge for acquired in-process technology 16,450,000 757,000 1,686,000
Non-cash compensation - net 133,000 277,000 150,000
Changes in operating assets and liabilities:
Research revenue receivable (1,500,000) (3,690,000) (2,060,000)
Other assets 888,000 219,000 (668,000)
Accounts payable and accrued
expenses and other 1,162,000 (263,000) 1,459,000
Deferred revenue 2,500,000 - -
---------------- --------------- ---------------
Net cash provided by (used in) operating activities 4,614,000 (21,880,000) (25,697,000)
---------------- --------------- ---------------
INVESTING ACTIVITIES:
Short-term investments 5,183,000 (50,815,000) 8,045,000
Property, plant and equipment (6,823,000) (4,010,000) (1,288,000)
Payment for acquired in-process technology (1,046,000) - -
---------------- --------------- ---------------
Net cash provided by (used in) investing activities (2,686,000) (54,825,000) 6,757,000
---------------- --------------- ---------------
FINANCING ACTIVITIES:
Issuance of common stock
and warrants 597,000 50,461,000 14,924,000
Issuance of convertible preferred stock - 21,540,000 14,633,000
Proceeds from long-term debt 3,493,000 2,208,000 -
Principal payments on long-term debt (908,000) (543,000) -
---------------- --------------- ---------------
Net cash provided by financing activities 3,182,000 73,666,000 29,557,000
---------------- --------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,110,000 (3,039,000) 10,617,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9,480,000 12,519,000 1,902,000
---------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 14,590,000 $ 9,480,000 $ 12,519,000
---------------- --------------- ---------------
---------------- --------------- ---------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Payable for acquired in-process technology $ 7,557,000
Issuance of common stock in connection with
acquired in-process technology $ 7,847,000
Issuance of common stock and warrants in connection with
acquisition of patent rights and related documents $ 757,000
Issuance of common stock for BioPulmonics, Inc.
installment payment $ 1,000,000
Preferred stock dividends $ 906,000 $ 594,000
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F - 6
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
- ----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Alliance Pharmaceutical Corp. and its subsidiaries (collectively, the
"Company" or "Alliance") are engaged in identifying, designing, and developing
novel medical products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Alliance
Pharmaceutical Corp., its wholly owned subsidiary Astral, Inc., its recently
acquired subsidiary MDV Technologies, Inc. ("MDV") from the acquisition date of
November 1996, and its majority-owned subsidiaries, Talco Pharmaceutical, Inc.
and Applications et Transferts de Technologies Avances ("ATTA"). ATTA was
dissolved in 1997. All significant intercompany accounts and transactions have
been eliminated. Certain amounts in 1996 and 1995 have been reclassified to
conform to the current year's presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the consolidated financial
statements. Actual results could differ from those estimates.
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
Short-term investments consist of highly liquid debt instruments.
Management has classified the Company's 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. The Company considers instruments purchased with an original maturity
of three months or less to be cash equivalents.
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 debt instruments of financial institutions and corporations with
strong credit ratings. The Company has established guidelines relative to
diversification and maturities to maintain safety and liquidity. These
guidelines are reviewed periodically and modified to take advantage of trends in
yields and interest rates. The Company has not experienced any material losses
on its short-term 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 3 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.
Technology and patent rights are amortized using the straight-line method over 5
to 20 years.
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 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-TM-
(temporary blood substitute) and LIQUIVENT-Registered Trademark- (intrapulmonary
oxygen carrier) products. Purchased technology also includes $2 million for
technology capitalized as a result of the acquisition of BioPulmonics, Inc.
("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.
F - 7
<PAGE>
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 $9.7 million and $8.5 million at June 30, 1997 and
1996, respectively. The technology acquired from BioPulmonics is being
amortized over five to seven years and accumulated amortization was $1.2 million
and $843,000 at June 30, 1997 and 1996, 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.
ACQUIRED IN-PROCESS TECHNOLOGY
In November 1996, the Company acquired MDV by a merger (the "MDV Merger")
of a wholly owned subsidiary of the Company into MDV. MDV is engaged in the
development of a thermo-reversible gel, FLOGEL-Registered Trademark-, intended
for use as an anti-adhesion treatment for persons undergoing abdominal or pelvic
surgeries. FLOGEL is applied in a cold, liquid form and becomes a gel at body
temperature. MDV has obtained preliminary human safety data with the product's
current formulation, and has performed preclinical studies on additional
formulations.
The consideration payable in the MDV Merger consists of $15.5 million, of
which $8 million was paid during fiscal 1997, $2.5 million was paid on
August 13, 1997, and $5 million which will be paid on November 13, 1997. The
$8 million payments made in fiscal 1997 and the $2.5 million payment made in
August of 1997 were made through the delivery of 703,093 and 248,879 shares of
the Company's common stock, respectively. Additionally, the Company will pay up
to $20 million if advanced clinical development or licensing milestones are
achieved in connection with MDV's technology. The Company will also make
certain royalty payments on the sales of products, if any, developed from such
technology. The Company may buy out its royalty obligation for $10 million at
any time prior to the first anniversary of the approval by U.S. regulatory
authorities of any products based upon the MDV technology (the amount increasing
thereafter over time). All of such payments to the former MDV shareholders may
be made in cash or, at the Company's option, shares of the Company's common
stock, except for the royalty obligations which will be payable only in cash.
The Company has not determined whether subsequent payments (other than
royalties) will be made in cash or in common stock or, if made in cash, the
source of such payments. There can be no assurance that any of the contingent
payments will be made because they are dependent on future developments which
are inherently uncertain.
The Company has accounted for the MDV Merger as a purchase, and recorded a
one-time charge in fiscal 1997 of $16.5 million, including the $15.5 million
scheduled payments described above and related transaction costs.
LONG-TERM DEBT
The Company entered into a loan and security agreement in August 1995 under
which the Company received $2.2 million at an interest rate of 10.84%. Amounts
borrowed under the agreement are secured by certain fixed assets, and are being
repaid over three years. If certain financial covenants are not satisfied, the
note may become due and payable. On June 30, 1997, the balance outstanding on
this loan was $944,000.
The Company entered into a loan and security agreement with a bank in
January 1997 under which the Company received $3.5 million at the bank's prime
rate plus 1.5% (10% at June 30, 1997). Amounts borrowed under the agreement are
secured by certain fixed assets, and pursuant to two promissory notes are to be
repaid over three and four years, respectively. If certain financial covenants
are not satisfied, the outstanding balance may become due and payable. On
June 30, 1997, the balance outstanding on these loans was $3.3 million.
The Company's principal payments for the long-term debt for the years
ending June 30, 1998, 1999, 2000 and 2001 are $1.5 million, $1.2 million,
$1 million and $520,000, respectively.
DEFERRED REVENUE
In fiscal 1997, the Company sold clinical trial supplies which had no
carrying value for $2.5 million to a collaborator. The Company may be required
to repurchase any unused supplies upon the occurrence of certain events, and has
recorded the $2.5 million as deferred revenue. Such amounts will be recognized
as income as the supplies are used or upon the expiration of any repurchase
obligation.
F - 8
<PAGE>
REVENUE RECOGNITION
Revenue under collaborative license and research agreements is recognized
as services are provided and milestone payments are recognized upon the
completion of the milestone event or requirement under such agreements. Revenue
from product sales is recognized as products are shipped.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenditures are charged to expense as incurred.
NET LOSS PER COMMON SHARE
Net loss per common 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.
ACCOUNTING FOR STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company has
elected to retain its current implicit value-based method and will disclose the
pro forma effect of using the fair value-based method to account for its
stock-based compensation in its financial statements.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). SFAS No. 128 requires the presentation of basic and diluted earnings per
share amounts. Basic earnings per share is calculated based upon the weighted
average number of common shares outstanding during the period while diluted
earnings per share also gives effect to all potential dilutive common shares
outstanding during the period such as options, warrants, convertible securities,
and contingently issuable shares. SFAS No. 128 is effective for periods ending
after December 15, 1997. The Company does not expect SFAS No. 128 to have a
material impact on its calculations of earnings per share.
2. FINANCIAL STATEMENT DETAILS
PROPERTY, PLANT AND EQUIPMENT - NET
Property, plant and equipment consist of the following:
June 30,
1997 1996
-------------- -------------
Land $ 225,000 $ 225,000
Buildings 300,000 300,000
Building improvements 4,286,000 1,574,000
Furniture, fixtures, and equipment 15,446,000 11,981,000
Leasehold improvements 6,773,000 6,126,000
-------------- -------------
27,030,000 20,206,000
Less accumulated depreciation and amortization (10,456,000) (7,816,000)
-------------- -------------
$ 16,574,000 $ 12,390,000
-------------- -------------
-------------- -------------
ACCRUED EXPENSES
Accrued expenses consist of the following:
June 30,
1997 1996
-------------- -------------
Payroll and related expenses $ 2,569,000 $ 2,173,000
Rent and related operating expenses 206,000 354,000
Other 664,000 274,000
-------------- -------------
$ 3,439,000 $ 2,801,000
-------------- -------------
-------------- -------------
F - 9
<PAGE>
3. INVESTMENTS
The Company classifies its investment securities as available-for-sale and
records holding gains or losses in stockholders' equity.
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
-------------------------------------------------- ---------------------------------------------
Gross Unrealized Estimated Gross Unrealized Estimated
Cost Gains (Losses) Fair Value Cost Gains (Losses) Fair Value
-------------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
Securities $ 32,700,000 $ 242,000 $ 32,942,000 $ 60,924,000 $ (3,000) $ 60,921,000
Corporate Securities 24,099,000 -- 24,099,000 5,364,000 -- 5,364,000
-------------------------------------------------- ---------------------------------------------
$ 56,799,000 $ 242,000 $ 57,041,000 $ 66,288,000 $ (3,000) $ 66,285,000
-------------------------------------------------- ---------------------------------------------
-------------------------------------------------- ---------------------------------------------
</TABLE>
The gross realized gains (losses) on sales of available-for-sale securities
totaled $65,000 and $(13,000), in 1997 and 1996, respectively. The gross
unrealized gains (losses) of $242,000 and $(3,000), in 1997 and 1996,
respectively (which reflect a net unrealized gain of $245,000 in 1997), are
recorded as components of additional paid-in capital. The unrealized gains
(losses) had no cash effect and therefore are not reflected in the consolidated
statements of cash flows.
The amortized cost and estimated fair value of available-for-sale debt
securities at June 30, 1997 and 1996, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because the issuers
of the securities may have the right to prepay obligations.
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
---------------------------- ----------------------------
Estimated Estimated
Cost Fair Value Cost Fair Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Due in one year or less $ 34,517,000 $ 34,759,000 $ 65,788,000 $ 65,785,000
Due in one year through three years 22,282,000 22,282,000 500,000 500,000
------------- ------------- ------------- -------------
$ 56,799,000 $ 57,041,000 $ 66,288,000 $ 66,285,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
As of June 30, 1997 and 1996, $0 and $4.4 million, respectively, of
available-for-sale securities were classified as cash equivalents.
4. STOCKHOLDERS' EQUITY
STOCK OPTION PLANS
The Company has a 1983 Incentive Stock Option Plan (the "1983 Plan"), a
1983 Non-Qualified Stock Option Program (the "1983 Program"), and a 1991 Stock
Option Plan which provides for both incentive and non-qualified stock options
(the "1991 Plan"). These plans provide for the granting of options to purchase
shares of the Company's common stock (up to an aggregate of 500,000, 2,500,000,
and 4,700,000 shares under the 1983 Plan, 1983 Program, and 1991 Plan,
respectively) to directors, officers, employees, and consultants. The
optionees, date of grant, option price (which cannot be less than 100% and 80%
of the fair market value of the common stock on the date of grant for incentive
stock options and non-qualified stock options, respectively), vesting schedule,
and term of options, which cannot exceed ten years (five years under the 1983
Plan), are determined by the Stock Option Committee of the Board of Directors.
The 1983 Plan has expired and no additional options may be granted under such
plan. In September 1997, the Board of Directors approved an amendment to the
1991 Plan, subject to stockholder approval, to increase the number of shares
authorized for issuance under the 1991 Plan from 4,700,000 to 6,200,000 shares.
F - 10
<PAGE>
The following table summarizes stock option activity through June 30, 1997:
Weighted
Shares Average Price
-----------------------------
Balance at June 30, 1994 2,248,572 $ 10.42
Granted 967,050 $ 5.50
Exercised (56,103) $ 3.98
Terminated/Expired (115,531) $ 11.14
--------------
Balance at June 30, 1995 3,043,988 $ 9.02
Granted 288,600 $ 13.62
Exercised (469,078) $ 7.73
Terminated/Expired (122,937) $ 13.47
--------------
Balance at June 30, 1996 2,740,573 $ 9.53
Granted 1,403,100 $ 13.07
Exercised (108,830) $ 6.67
Terminated/Expired (236,239) $ 13.65
--------------
Balance at June 30, 1997 3,798,604 $ 10.66
--------------
--------------
Available for future grant under the 1983
Program 26,485
--------------
--------------
Available for future grant under the 1991
Plan, as amended, subject to stockholder
approval 2,837,160
--------------
--------------
The following table summarizes information concerning outstanding and
exercisable stock options at June 30, 1997:
<TABLE>
<CAPTION>
Weighted
Weighted Average Weighted
Range of Exercise Number Average Remaining Number Average
Prices Outstanding Exercise Contractual Exercisable Exercise
Price Life Price
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.01 145,418 $.01 1.4 years 145,418 $.01
$ 5.25 - 7.00 974,745 $5.39 6.3 years 676,570 $5.39
$ 7.25 - 10.63 803,825 $8.93 5.5 years 557,915 $8.94
$ 10.75 - 14.00 1,234,330 $12.94 8.7 years 203,760 $12.49
$ 14.50 - 20.88 451,786 $15.90 6.8 years 225,496 $16.02
$ 21.13 - 28.00 188,500 $26.01 4.7 years 188,500 $26.01
-------------- ---------------
3,798,604 $10.66 6.7 years 1,997,659 $9.86
-------------- ---------------
-------------- ---------------
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123. In
accordance with its provisions, the Company applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its stock option
plans, and accordingly, no compensation cost has been recognized for stock
options in 1997 or 1996. If the Company had elected to recognize compensation
cost based on the fair value of the options granted at grant date amortized to
expense over their vesting period as prescribed by SFAS No. 123, the Company's
net loss and net loss per share would have been increased to the pro forma
amounts indicated below:
F - 11
<PAGE>
June 30,
1997 1996
--------------- ---------------
Net loss
As reported $ (19,016,000) $ (23,172,000)
Pro forma (21,453,000) (23,958,000)
Net loss per share
As reported $ (.63) $ (.91)
Pro forma (.71) (.94)
The impact of outstanding non-vested stock options granted prior to 1996
has been excluded from the pro forma calculations; accordingly, the 1997 and
1996 pro forma adjustments are not indicative of future period pro forma
adjustments when the calculation will reflect all applicable stock options. The
fair value of options at date of grant was estimated using the Black-Scholes
option-pricing model with the following assumptions for both 1997 and 1996:
risk-free interest rate range of 5.25% to 6.5%; dividend yield of 0%; volatility
factor of 63%; and a weighted-average expected term of 4 years. The estimated
weighted average fair value at grant date for the options granted during 1997
and 1996 was $6.90 and $7.02 per option, respectively.
WARRANTS
In July 1995, the Company issued a warrant to purchase 100,000 shares of
the Company's common stock through June 2000 at $10 per share. The warrant and
50,000 shares of common stock were issued in exchange for certain PFC patents,
patent rights, and related documents which resulted in a $757,000 charge in
fiscal 1996. In March 1996, the Company issued a warrant to purchase 300,000
shares of common stock through February 2001 at an exercise price of $20 per
share. The warrant was issued in conjunction with the license agreement and
sale of convertible preferred stock discussed in Note 5. At June 30, 1997, the
Company had warrants outstanding to purchase 576,414 shares of common stock at
prices ranging from $6.95 to $20 per share. The warrants expire on various
dates from August 1998 through February 2001.
PREFERRED STOCK
In fiscal 1996, in conjunction with a license agreement, Hoechst Marion
Roussel, Inc. ("HMRI") purchased 750,000 shares of the Company's convertible
Series B Preferred Stock and 200,000 shares of its convertible Series C
Preferred Stock for an aggregate of $22 million. In June 1996, all outstanding
shares of convertible Series A Preferred Stock (issued to Johnson & Johnson
Development Corp. ("J&JDC") in 1995) and Series B Preferred Stock and accrued
dividends thereon were converted into 815,625 and 759,375 shares of Alliance
common stock, respectively. In June 1997, all outstanding shares of Series C
Preferred Stock were converted into 345,327 shares of Alliance common stock (see
Note 5).
The Series A Preferred Stock carried a cumulative annual dividend of $0.50
per share. The Series B Preferred Stock carried a cumulative annual dividend of
$1.00 per share. The dividends were payable in cash or common stock. In
June 1996, these dividends were paid by issuing 75,000 shares of Alliance common
stock.
5. LICENSE AGREEMENTS
In August 1994, the Company executed a license agreement (the "Ortho
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
emulsions capable of transporting oxygen for therapeutic use, including OXYGENT.
Ortho agreed to pay to Alliance a royalty based upon sales of products after
commercialization. In addition, Ortho paid to Alliance an initial license fee
of $4 million and agreed to make other payments upon the achievement of certain
milestones. Ortho is responsible for substantially all of the costs of
developing and marketing the products. In December 1996, Ortho paid the Company
a $15 million milestone payment under the Ortho License Agreement. In
conjunction with the Ortho License Agreement, J&JDC purchased 1.5 million shares
of Alliance Series A Preferred Stock for $15 million and obtained
F - 12
<PAGE>
a three-year warrant to purchase 300,000 shares of Alliance common stock at $15
per share. In June 1996, the preferred stock and warrant were converted into
common stock (see Note 4).
In February 1996, the Company entered into a license agreement (the
"HMRI License Agreement") with HMRI, which provides HMRI with worldwide
exclusive marketing and manufacturing rights to the intratracheal
administration of liquids, including LIQUIVENT, which perform bronchoalveolar
lavage or liquid ventilation. The product is being developed jointly by
Alliance and HMRI, with HMRI responsible for most of the costs of development
and marketing. In conjunction with the HMRI License Agreement, HMRI
purchased 750,000 shares of the Company's convertible Series B Preferred
Stock and 200,000 shares of its convertible Series C Preferred Stock for an
aggregate of $22 million. In addition, HMRI paid Alliance an initial license
fee of $5 million and agreed to pay milestone payments and royalties on
product sales. HMRI also received a five-year warrant to acquire 300,000
shares of common stock at $20 per share. On June 6, 1996, the Series B
Preferred Stock and accrued dividends thereon were converted into 759,375
shares of the Company's common stock. On June 30, 1997, the Series C
Preferred Stock converted into 345,327 shares of common stock of the Company.
On June 30, 1997, HMRI paid the Company a $2.5 million milestone payment
and $2.5 million for the purchase of clinical trial supplies. In June 1997,
the Company also announced that the parties have agreed in principle to
modify the HMRI License Agreement to (i) adjust certain milestone payments
and (ii) temporarily revise the method for reimbursing the expenses for
portions of the development work, in conjunction with the temporary
interruption of the LIQUIVENT clinical development program in April 1997.
The modification is being formalized by an amendment which is expected to be
executed in the near future. Prior to the modification, the HMRI License
Agreement required HMRI to reimburse Alliance for approved worldwide
development expenses incurred by Alliance on a quarterly basis. Under the
modified agreement, from July 1997, Alliance will conduct and be responsible
for funding development activities in North America through December 1997.
HMRI will reimburse Alliance for approved expenses for such activities in the
form of payments which will be made upon the occurrence of specified events
subsequent to December 1997. HMRI will continue to be responsible for
conducting and funding any activities outside of North America. Beginning in
January 1998, HMRI will resume funding for substantially all LIQUIVENT
development expenses worldwide. The agreement in principle also provides for
the establishment of a mechanism for HMRI to recoup from Alliance certain
reimbursed development expenses if HMRI terminates the HMRI License Agreement
prior to January 1998.
6. INCOME TAXES
Significant components of the Company's deferred tax assets as of
June 30, 1997 are shown below. A valuation allowance of $87,091,000, of which
$6,124,000 is related to 1997, has been recognized to offset the deferred tax
assets as realization of such assets is uncertain.
Deferred tax assets consist of the following:
June 30,
1997 1996
------------- --------------
Net operating loss carryforwards $ 69,360,000 $ 64,706,000
Research and development credits 8,220,000 8,176,000
Capitalized research expense 7,286,000 6,040,000
Other - net 2,225,000 2,045,000
------------- --------------
Total deferred tax assets 87,091,000 80,967,000
Valuation allowance for deferred tax assets (87,091,000) (80,967,000)
------------- --------------
Net deferred tax assets $ -- $ --
------------- --------------
------------- --------------
Approximately $3,327,000 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, 1997, the Company had federal and various state net operating
loss carryforwards of approximately $187,474,000 and $62,406,000, 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 other state tax loss carryforwards will begin
expiring in fiscal 1998 unless previously utilized. The California tax loss
carryforward began expiring in fiscal 1995. The Company also has federal and
state research and development tax credit carryforwards of $6,594,000 and
$2,501,000, respectively, which will begin expiring in fiscal 1998 unless
previously utilized.
F - 13
<PAGE>
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use
of the Company's net operating loss and credit carryforwards may be limited
because of cumulative changes in ownership of more than 50% which have occurred;
however, the Company does not believe such limitation will have a material
impact upon the utilization of these carryforwards.
7. 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, 1997 are as follows:
Years ending June 30,
---------------------
1998 $ 2,667,000
1999 2,743,000
2000 1,749,000
2001 1,571,000
2002 1,616,000
Thereafter 1,303,000
-------------
Total $ 11,649,000
-------------
-------------
Rent expense for fiscal 1997, 1996, and 1995 was $2.6 million,
$2.1 million, and $2 million, respectively.
8. SUBSEQUENT EVENT
In September 1997, the Company entered into a license agreement (the
"Schering License Agreement") with Schering AG, Germany ("Schering"), which
provides Schering with worldwide exclusive marketing and manufacturing rights to
Alliance's drug compounds, drug compositions and medical devices and systems
related to perfluorocarbon ultrasound imaging products, including
IMAGENT-Registered Trademark-US. The product will be developed jointly by
Alliance and Schering. Under the Schering License Agreement, Schering paid to
Alliance an initial license fee and agreed to pay further milestone payments and
royalties on product sales. Schering also agreed to provide funding to Alliance
for some of its development expenses. In conjunction with the Schering License
Agreement, Schering Berlin Venture Corp., an affiliate of Schering, purchased
500,000 shares of the Company's convertible Series D Preferred Stock for $10
million.
F - 14
<PAGE>
EXHIBIT INDEX
Certain exhibits to this Report on Form 10-K have been incorporated by
reference. For a list of exhibits, see Item 14 hereof.
The following exhibits are being filed herewith:
Sequential
Page
Numbering
Number Document System
- ------ ---------------------------------------------- --------------
3(c) Certificate of Amendment of Certificate of
Incorporation of the Company filed September
22, 1997
(23.1) Consent of Ernst & Young LLP, Independent Auditors
<PAGE>
Exhibit 3(c)
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ALLIANCE PHARMACEUTICAL CORP.
Under Section 805 of the Business Corporation Law
We, the undersigned, Duane Roth and Theodore Roth, being respectively the
President and the Secretary of Alliance Pharmaceutical Corp., hereby certify:
1. The name of the corporation is Alliance Pharmaceutical Corp.
(hereinafter called the "Corporation"). The name under which the Corporation
was formed is Otisville Biologics, Inc.
2. The Certificate of Incorporation was filed in the office of the
Secretary of State on the 23rd day of February, 1983.
3. The Certificate of Incorporation of the Corporation was first restated
and the Restated Certificate was filed on November 10, 1993.
4. The Certificate of Incorporation of the Company, as amended
heretofore, is further amended by the addition of the following provisions that
designate the relative rights, preferences, and limitations of 500,000 shares of
the authorized 5,000,000 shares of preferred stock, $.01 par value, which
provisions establish an additional series of preferred stock of the Company
designated as "Series D Preferred Stock."
5. A new Section (e) is added to Article 4 thereof, which Section (e)
reads in its entirety as follows:
(e) Five Hundred Thousand (500,000) shares of the Corporation's preferred
stock, par value $.01 per share, are designated "Series D Preferred Stock"
(hereinafter referred to as the "Series D Preferred Stock"), and such Series D
Preferred Stock shall have the respective voting powers, designations,
preferences and relative, participating, optional or other rights, and the
qualifications, limitations or restrictions as follows:
1. SECTION REFERENCES AND DEFINITIONS. References to section numbers
contained in this Article 4(e) shall refer only to sections within this Article
4(e) unless otherwise specified. Capitalized terms in this Article 4(e) shall
have the following meanings:
<PAGE>
1.1. "Common Stock" shall mean the shares of the Common Stock of the
Corporation, par value $.01 per share, and any stock into which such Common
Stock may hereafter be changed.
1.2. "D Conversion Date" shall mean the date on which the Series D
Preferred Stock converts to Common Stock pursuant to Section 5.1.1.
1.3. "D Conversion Rate" shall mean the rate at which shares of Common
Stock are to be received upon conversion of one share of the Series D Preferred
Stock which is determined by dividing the D Current Market Price per share of
Common Stock into $20.00; provided that (i) in the event of a conversion
pursuant to Section 5.1.1(a) prior to September 23, 2001, the D Current Market
Price shall never be deemed to be less than $10.00, (ii) in the event of a
conversion pursuant to Section 5.1.1(b), the D Current Market Price per share
shall never be deemed to be less than $10.00, and (iii) in the event of a
conversion pursuant to Section 5.1.1(c) the D Current Market Price shall be
deemed to be $20.00. The D Conversion Rate, and the amounts specified in
clauses (i), (ii) and (iii) in the previous sentence shall be subject to
adjustment pursuant to Section 5.
1.4. "Convertible Securities" shall mean evidences of indebtedness,
shares of stock or other securities which are convertible into or exchangeable,
with or without payment of additional consideration in cash or property, for
Common Stock, either immediately or upon the arrival of a specified date or the
happening of a specified event.
1.5. "D Current Market Price" per share of Common Stock at any date
herein specified shall mean the average of the daily market prices for the
twenty (20) consecutive Trading Days ending one (1) day prior to such date;
provided that in the event conversion is pursuant to Section 5.1.1(b), the
foregoing twenty (20) day period shall end ten (10) Trading Days after (i) the
date the Corporation sends a press release to the public announcing the
termination of the D License Agreement, or (ii) if no press release is made
prior to the termination, the date of such termination. The market price for
each such Trading Day shall be the last reported sales price on the principal
exchange on which the Common Stock is listed, or, if it is not so listed, the
Nasdaq National Market or, if it is not so listed, on the over-the-counter
market.
1.6. "D Division Amounts" shall mean the $10.00 amount referred to in
clause (i) and (ii) of the proviso in Section 1.3 and the $20.00 amount referred
to in clause (iii) of such proviso.
1.7. "D Junior Stock" shall mean the Common Stock and any other class
or series of capital stock of the Corporation which at the time of issuance is
not declared to be senior to or on a parity with the Series D Preferred Stock as
to rights upon liquidation or dividends.
1.8. "D License Agreement" shall mean that certain License Agreement
dated as of September 23, 1997 by and among the Corporation and Schering
Aktiengesellschaft.
2
<PAGE>
1.9. "Person" shall mean any individual, corporation, association,
company, business trust, partnership, joint venture, joint-stock company, trust,
unincorporated organization or association or government or any agency or
political subdivision thereof.
1.10. "Series A Preferred Stock" shall mean the authorized Series
A Preferred Stock of the Corporation.
1.11. "Trading Day" shall mean any day on which trading takes
place (a) if the Common Stock is then listed or admitted to trading on a
national securities exchange, on the principal national securities exchange on
which the Common Stock is then listed or admitted to trading; or (b) if not, in
the over-the-counter-market and prices reflecting such trading are published by
the National Association of Securities Dealers Automated Quotation System.
2. DIVIDENDS. Whenever the Corporation pays dividends on its Common
Stock or any convertible securities, in cash or in kind, the holders of record
on the record date of outstanding Series D Preferred Stock shall be entitled to
receive dividends in such an amount as they would be entitled to receive if, as
of the record date, their shares of Series D Preferred Stock had been converted
into Shares of Common Stock pursuant to Section 5.1.1(c) hereof. No dividend
shall be paid or set aside for payment to the holders of any other class of
securities of the Corporation until and unless all dividends then payable to the
holders of the Series D Preferred Stock shall have been paid, or declared and
set aside for payment in full Dividends can only be declared jointly in
proportion to the relative liquidation preference of the respective shares
involved and paid on the Series D Preferred Stock.
3. LIQUIDATION OR DISSOLUTION.
3.1. RANK. The Series D Preferred Stock of the Corporation shall rank
on a parity with the Series A Preferred Stock as to distributions upon a
liquidation, dissolution or winding up of the Corporation.
3.2. PREFERENCE. Subject to the prior rights of the Corporation's
creditors and holders of securities senior to the Series D Preferred Stock in
respect of distributions upon liquidation, dissolution or winding-up of the
Corporation, in the event of the voluntary or involuntary liquidation,
dissolution or winding-up of the Corporation, the holders of Series D Preferred
Stock shall be entitled to receive twenty dollars ($20.00) per share. If, upon
any such liquidation, dissolution or winding-up of the Corporation, the assets
distributable among the holders of Series D Preferred Stock (and any series of
preferred stock ranking in parity with the Series D Preferred Stock in respect
of distributions upon liquidation, dissolution or winding-up of the Corporation)
shall be insufficient to permit the payment in full to such holders of the
preferential amount payable to such holders determined as aforesaid, then the
holders of Series D Preferred Stock (and any such series) will share ratably in
any distribution of the Corporation's assets in proportion to the respective
preferential amounts that would have been payable if such assets were sufficient
to permit payment in full of all such amounts. After payment of the full amount
of the liquidating distribution to which the holders of Series D Preferred Stock
are entitled, holders of D Junior Stock (other than Common Stock) shall be paid
any preferential amounts payable to such holders. Thereafter, the holders of
Series D Preferred Stock will share
3
<PAGE>
PRO RATA with the holders of Common Stock (and the holders of Series A Preferred
Stock and any other preferred stock or D Junior Stock entitled to share PRO RATA
with Common Stock in liquidating distributions), based on the number of shares
of Common Stock into which the Series D Preferred Stock is then convertible, in
any further distribution of assets by the Corporation. Under this Section 3, a
distribution of assets in any dissolution, winding-up or liquidation shall not
include (a) any consolidation or merger of the Corporation with or into any
other corporation, (b) any dissolution, liquidation or winding-up of the
Corporation immediately followed by reincorporation of a successor corporation
or (c) a sale or other disposition of all or substantially all of the
Corporation's assets in consideration for the issuance of equity securities of
another corporation, provided that the consolidation, merger, dissolution,
liquidation, winding-up, sale or other disposition (i) does not amend, alter, or
change the preferences or rights of the Series D Preferred Stock or the
qualifications, limitations or restrictions thereof in a manner that adversely
affects the Series D Preferred Stock and (ii) is done in accordance with
Sections 5.4, 5.5 or 5.6 hereof.
4. VOTING RIGHTS. The holders of Series D Preferred Stock shall have the
right to vote, together with the holders of all the outstanding shares of Common
Stock (and the holders of every other class or series entitled to vote together
with such holders) and not by class, except as otherwise required by New York
law, on all matters on which holders of Common Stock shall have the right to
vote. Each holder of Series D Preferred Stock shall have the right to cast one
(1.0) vote for each share of Series D Preferred Stock held by such holder.
5. CONVERSION RIGHTS.
5.1. CONVERSION OF SERIES D PREFERRED STOCK. The Series D Preferred
Stock shall convert into fully paid and non-assessable shares of Common Stock on
the D Conversion Date at the D Conversion Rate as follows:
5.1.1. The Series D Preferred Stock shall convert into Common
Stock on the earlier of the following:
(a) Upon receipt of written notice from the holders of
fifty percent (50%) or more of Series D Preferred Stock, anytime after September
23, 1998;
(b) Termination of the D License Agreement by Schering
Aktiengesellschaft or, at Schering Aktiengesellschaft's written election,
termination by the Corporation (unless termination of the D License Agreement is
as a result of the liquidation of the Corporation, the appointment of a receiver
or trustee for substantially all of the property or assets of the Corporation,
or the Corporation makes an assignment for the benefit of creditors, in each
case, in accordance with the D License Agreement); or
(c) At such time as the D Current Market Price per share of
Common Stock is equal to or greater than $20.00, subject to adjustment pursuant
to Section 5.4.
5.2. CONVERSION NOTICE AND PROCEDURE. For a conversion of Series D
Preferred Stock pursuant to Section 5.1.1(a), written notice signed by holders
of fifty percent (50%) or
4
<PAGE>
more of Series D Preferred Stock of such election shall be delivered to the
Corporation. Upon conversion of the Series D Preferred Stock, the Corporation
shall send written notice to the holders of Series D Preferred Stock. Any
notice of conversion to a holder of Series D Preferred Stock shall state the D
Conversion Date, the D Conversion Rate and the number of shares into which the
holder's Series D Preferred Stock is converted. Upon conversion of Series D
Preferred Stock, the shares so converted shall have the status of authorized and
unissued preferred stock, and the number of shares of preferred stock which the
Corporation shall have authority to issue shall include the number of shares of
Series D Preferred Stock so converted. Upon any conversion, certificates
representing the Series D Preferred Stock shall thereafter be deemed to
represent the appropriate number of shares of Common Stock into which such stock
is converted. After conversion the holder of any shares of Series D Preferred
Stock so converted shall deliver to the Corporation during regular business
hours, at such place as may be designated by the Corporation, the certificate or
certificates for the shares to be converted, duly endorsed or assigned in blank,
or to the Corporation (if required by it), accompanied by written notice stating
the name or names (with address) in which the certificate or certificates for
the shares of Common Stock are to be issued.
5.3. FRACTIONAL SHARES. No fractional shares of Common Stock or scrip
shall be issued upon conversion of shares of Series D Preferred Stock. If more
than one share of Series D Preferred Stock shall be surrendered for conversion
at any one time by the same holder, the number of full shares of Common Stock
issuable upon conversion thereof shall be computed on the basis of the aggregate
number of shares so surrendered. Instead of any fractional shares of Common
Stock which would otherwise be issuable upon any such conversion, the
Corporation shall pay a cash adjustment in respect of such fractional interest
in an amount determined on the basis of the then current fair market value of a
share of Common Stock as determined by the Board of Directors of the
Corporation, in good faith. Fractional interests shall not be entitled to
dividends, and the holders thereof shall not be entitled to any rights as
stockholders of the Corporation in respect of such fractional interests.
5.4. ADJUSTMENTS FOR SUBDIVISIONS, STOCK DIVIDENDS, COMBINATIONS, OR
CONSOLIDATIONS OF COMMON STOCK. In the event the outstanding shares of Common
Stock shall be increased by way of stock issued as a dividend for no
consideration or subdivided (by stock split, or otherwise) into a greater number
of shares of Common Stock, the D Division Amounts then in effect shall,
concurrently with the effectiveness of such increase or subdivision, be
proportionately decreased. In the event the outstanding shares of Common Stock
shall be combined or consolidated, by reclassification or otherwise, into a
lesser number of shares of Common Stock, the D Division Amounts then in effect
shall, concurrently with the effectiveness of such combination or consolidation,
be proportionately increased.
5.5. OTHER DISTRIBUTIONS. If for any reason, including without
limitation a merger or sale of assets transaction, the Corporation shall declare
a distribution payable in securities of the Corporation, or in securities of
other persons, evidences of indebtedness issued by the Corporation or other
persons, or assets (excluding cash dividends) then, in each such case for the
purpose of this Section 5.5, the holders of the Series D Preferred Stock shall
be entitled to a proportionate share of such distribution as though they were
the holders of the number of shares of Common Stock of the Corporation into
which their shares of Series D Preferred Stock would
5
<PAGE>
be convertible as of the record date fixed for the determination of the holders
of Common Stock of the Corporation entitled to receive such distribution.
5.6. REORGANIZATIONS AND RECAPITALIZATIONS. If at any time or from
time to time there shall be a reorganization or recapitalization of the Common
Stock (other than a subdivision, combination or merger or sale of assets
transaction provided for in Section 5.4 or Section 5.5 above), then, as a
condition of such reorganization or recapitalization, provision shall be made so
that the holders of the Series D Preferred Stock shall thereafter be entitled to
receive upon conversion of the Series D Preferred Stock, the number of shares of
stock or other securities or property of the Corporation or otherwise to which a
holder of Common Stock deliverable upon conversion would have been entitled on
such reorganization or recapitalization. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Section 5
with respect to the rights of the holders of the Series D Preferred Stock after
the reorganization or recapitalization to the end that the provisions of this
Section 5 (including adjustment of the D Conversion Rate and the D Division
Amounts then in effect and the number of shares receivable upon conversion of
the Series D Preferred Stock) shall be applicable after that event in as nearly
an equivalent manner as may be practicable.
5.7. RESERVATION OF SHARES. The Corporation agrees that, so long as
any share of Series D Preferred Stock shall remain outstanding, the Corporation
shall at all times reserve and keep available, free from preemptive rights, out
of its authorized capital stock, for the purpose of issue upon conversion of the
Series D Preferred Stock, the full number of shares of Common Stock then
issuable upon conversion of all outstanding shares of Series D Preferred Stock.
If the Common Stock shall be listed on any national securities exchange, the
Corporation at its expense shall include in a listing application all of the
shares of Common Stock reserved for issuance upon conversion of the Series D
Preferred Stock, (subject to issuance or notice of issuance to the exchange) and
will similarly apply for and use its best efforts to procure the listing of any
further Common Stock reserved for issuance upon conversion of the Series D
Preferred Stock, at any subsequent time as a result of adjustments in the D
Conversion Rate or otherwise.
5.8. VALIDITY OF SHARES. The Corporation agrees that it will from
time to time take all such actions as may be requisite to assure that all shares
of Common Stock which may be issued upon conversion of any share of the Series D
Preferred Stock will, upon issuance, be legally and validly issued, fully paid
and non-assessable and free from all taxes, liens and charges with respect to
the issue thereof.
5.9. TAXES. The Corporation will pay all taxes and other governmental
charges that may be imposed in respect of the issue or delivery (but not
transfer) of shares of Common Stock upon conversion of the Series D Preferred
Stock.
5.10. ABANDONMENT OF ACTION. If the Corporation shall take a
record of the holders of its Common Stock for the purpose of entitling them to
receive a dividend or distribution requiring an adjustment pursuant to Section 5
and shall, thereafter and before the distribution to stockholders thereof,
legally abandon its plan to pay or deliver such dividend or distribution, then
thereafter no adjustment to the holders of Series D Preferred Stock shall be
6
<PAGE>
required by reason of the taking of such record and any such adjustment
previously made in respect thereof shall be rescinded and annulled.
5.11. NOTICE PROVISIONS.
5.11.1. Whenever an adjustment is required pursuant to Section
5 hereof, the Corporation shall forthwith deliver to the holders of Series D
Preferred Stock, a certificate signed by an officer of the Corporation, setting
forth, in reasonable detail, the event requiring the adjustment, the method by
which such adjustment was calculated and the adjustments made.
5.11.2. In case the Corporation shall propose (a) to pay any
dividend payable in stock of any class to the holders of D Junior Stock or to
make any other distribution to the holders of its Common Stock, (b) to offer to
the holders of its Common Stock rights to subscribe for or to purchase any
Convertible Securities, Common Stock or shares of stock of any class or any
other securities, rights or options, (c) to effect any reclassification of its
Common Stock (other than a reclassification involving only the subdivision or
combination of outstanding shares of Common Stock), (d) to effect any capital
reorganization, (e) to effect any consolidation, merger or sale, transfer or
other distribution of all or substantially all its property, assets or business,
or (f) to effect the liquidation, dissolution or winding-up of the Corporation,
then, in each such case, the Corporation shall give to each holder of Series D
Preferred Stock a notice of such proposed action, which shall specify the date
on which a record is to be taken for the purposes of such stock dividend,
distribution or rights, or the date on which such reclassification,
reorganization, consolidation, merger, sale, transfer, disposition, liquidation,
dissolution or winding-up is to take place and the date of participation therein
by the holders of Common Stock, if any such date is to be fixed, and shall also
set forth such facts with respect thereto as shall be reasonably necessary to
indicate the effect of such action on the Common Stock and the D Conversion
Rate, and the D Division Amounts after giving effect to any adjustment which
will be required as a result of such action. Such notice shall be so given in
the case of any action covered by (a) or (b) above at least ten (10) days prior
to the record date for determining holders of the Common Stock for purposes of
such action and, in the case of any other such action, at least ten (10) days
prior to the date of the taking of such proposed action or the date of
participation therein by the holders of Common Stock, whichever shall be the
earlier.
6. NO PRE-EMPTIVE RIGHTS. No holder of Series D Preferred Stock shall
have any pre-emptive or preferential right of subscription to any shares of
stock of the Corporation, or to options, warrants or other interests therein or
therefor, or to any obligations convertible into stock of the Corporation,
issued or sold, or any right of subscription to any thereof other than such, if
any, as the Board of Directors, in its discretion, from time to time may
determine and at such price or prices as the Board of Directors from time to
time may fix pursuant to the authority conferred by the Corporation's
Certificate of Incorporation.
7. COVENANTS. In addition to any other rights provided by law, so long
as any shares of Series D Preferred Stock are outstanding, this Corporation
shall not, without first obtaining the affirmative vote or written consent of
the holders of not less than sixty-six and two-thirds percent (66-2/3%) of the
Series D Preferred Stock:
7
<PAGE>
(a) Amend or repeal any provisions of the Corporation's Certificate
of Incorporation which action would adversely affect the rights, preferences, or
privileges of the Series D Preferred Stock; or
(b) Alter or change the designations, powers, rights, preferences or
privileges, or the qualification, limitations or restrictions of the Series D
Preferred Stock; or
(c) Increase the authorized number of shares of Series D Preferred
Stock or other preferred stock of the Corporation; or
(d) Authorize, create, or issue any Series A Preferred Stock, or any
new class or series of stock or any other securities convertible into equity
securities of the Corporation having a preference over, or being on a parity
with, the Series D Preferred Stock with respect to dividends, redemptions or
upon liquidation or dissolution of the Corporation; or
(e) Reclassify the shares of Common Stock or any other D Junior Stock
into shares of any class or series of capital stock (i) ranking either as to
payment of dividends, distribution of assets or redemptions, prior to or on
parity with the Series D Preferred Stock, or (ii) which in any manner adversely
affects the holders of Series D Preferred Stock.
6. The manner in which the foregoing Amendment of the Certificate of
Incorporation was authorized is as follows: The Board of Directors of the
Corporation authorized the Amendment under the authority vested in said Board
under the provisions of the Certificate of Incorporation and of Section 502 of
the Business Corporation Law.
IN WITNESS WHEREOF, we have subscribed this document on the date set
opposite each of our names below and do hereby affirm, under the penalties of
perjury, that the statements contained therein have been examined by us and are
true and correct.
Date: September 19, 1997
---------------------------------------
Name: Duane J. Roth
Title: President
---------------------------------------
Name: Theodore D. Roth
Title: Secretary
8
<PAGE>
EXHIBIT 23.1
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
July 24, 1997, except for Note 8, as to which the date is September 23, 1997,
with respect to the consolidated financial statements of Alliance Pharmaceutical
Corp. included in the Annual Report (Form 10-K) for the year ended
June 30, 1997.
ERNST & YOUNG LLP
San Diego, California
September 23, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 14,590,000
<SECURITIES> 57,041,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 80,028,000
<PP&E> 27,030,000
<DEPRECIATION> 10,456,000
<TOTAL-ASSETS> 112,013,000
<CURRENT-LIABILITIES> 17,811,000
<BONDS> 0
0
0
<COMMON> 311,000
<OTHER-SE> 91,020,000
<TOTAL-LIABILITY-AND-EQUITY> 112,013,000
<SALES> 0
<TOTAL-REVENUES> 44,580,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 67,660,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (19,016,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,016,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (19,016,000)
<EPS-PRIMARY> (.63)
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