<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
------- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 0-12950
ALLIANCE PHARMACEUTICAL CORP.
(Exact name of Registrant as specified in its charter)
NEW YORK 14-1644018
- ------------------------------------ ------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
3040 Science Park Road
SAN DIEGO, CALIFORNIA 92121
- ------------------------------------ ------------------------------------
(Address of principal Zip Code
executive offices)
Registrant's telephone number,
including area code: 619-558-4300
------------------------------------
Indicate by a check whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes X No
------------------- -------------------
As of November 4, 1998, Registrant had 32,042,482 shares of its Common Stock,
$.01 par value, outstanding.
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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
2
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PART I FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
------------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,354,000 $ 11,809,000
Short-term investments 23,916,000 38,046,000
Research revenue receivable 6,039,000 6,847,000
Other current assets 677,000 694,000
------------- ------------
Total current assets 49,986,000 57,396,000
PROPERTY, PLANT AND EQUIPMENT - NET 24,320,000 23,087,000
PURCHASED TECHNOLOGY--NET 12,500,000 12,880,000
OTHER ASSETS--NET 310,000 314,000
------------- ------------
$ 87,116,000 $ 93,677,000
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,373,000 $ 2,191,000
Accrued expenses 2,119,000 3,121,000
Deferred revenue 2,286,000 2,286,000
Current portion of long-term debt 1,281,000 1,068,000
------------- ------------
Total current liabilities 7,059,000 8,666,000
LONG-TERM DEBT 8,527,000 8,882,000
OTHER 24,000 39,000
STOCKHOLDERS' EQUITY:
Preferred stock--$.01 par value; 5,000,000 shares authorized;
500,000 and 500,000 shares of Series D issued and outstanding at
September 30, 1998 and June 30, 1998, respectively 5,000 5,000
100,000 and 0 shares of Series E-1 issued and outstanding at
September 30, 1998 and June 30, 1998, respectively 1,000 --
Common stock--$.01 par value; 50,000,000 shares authorized;
32,042,482 and 31,164,935 shares issued and outstanding at
September 30, 1998 and June 30, 1998, respectively 320,000 320,000
Additional paid-in capital 346,102,000 340,016,000
Accumulated deficit (274,922,000) (264,251,000)
------------- ------------
Total stockholders' equity 71,506,000 76,090,000
------------- ------------
$87,116,000 $93,677,000
------------- ------------
------------- ------------
</TABLE>
Note: The balance sheet at June 30, 1998 has been derived from the
audited financial statements at that date but does not include
all of the information and footnotes required by generally
accepted accounting principles for complete financial
statements.
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
REVENUES:
License and research revenue $ 5,100,000 $ 6,539,000
OPERATING EXPENSES:
Research and development 13,546,000 12,046,000
General and administrative 2,185,000 1,812,000
------------ ------------
15,731,000 13,858,000
------------ ------------
LOSS FROM OPERATIONS (10,631,000) (7,319,000)
INVESTMENT INCOME AND OTHER - NET 442,000 969,000
------------ ------------
NET LOSS (10,189,000) (6,350,000)
IMPUTED DIVIDEND ON SERIES E-1 PREFERRED STOCK (483,000) -
------------ ------------
NET LOSS APPLICABLE TO COMMON SHARES $(10,672,000) $(6,350,000)
------------ ------------
------------ ------------
NET LOSS PER COMMON SHARE:
BASIC AND DILUTED $(0.33) $(0.20)
------------ ------------
------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC AND DILUTED 32,021,000 31,316,000
------------ ------------
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</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(10,189,000) $ (6,350,000)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization 1,360,000 1,213,000
Changes in operating assets and liabilities:
Research revenue receivable 808,000 5,000,000
Deferred revenue - (154,000)
Other assets 21,000 35,000
Accounts payable and accrued expenses and other (1,834,000) (2,025,000)
------------ ------------
Net cash used in operating activities (9,834,000) (2,281,000)
------------ ------------
INVESTING ACTIVITIES:
Purchases of short-term investments (13,955,000) (28,590,000)
Sales and maturities of short-term investments 28,069,000 32,203,000
Property, plant and equipment (2,213,000) (1,044,000)
------------ ------------
Net cash provided by investing activities 11,901,000 2,569,000
------------ ------------
FINANCING ACTIVITIES:
Issuance of common stock - 294,000
Issuance of convertible preferred stock 5,621,000 9,750,000
Principal payments on long-term debt (143,000) (254,000)
------------ ------------
Net cash provided by financing activities 5,478,000 9,790,000
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 7,545,000 10,078,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,809,000 14,590,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $19,354,000 $ 24,668,000
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of common stock in connection with
acquired in-process technology $ - $ 2,500,000
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED 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 wholly
owned 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 Avancees ("ATTA"). ATTA was
dissolved in 1997. All significant intercompany accounts and transactions
have been eliminated. Certain amounts in 1998 have been reclassified to
conform to the current year's presentation.
INTERIM CONDENSED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of September 30, 1998, the
condensed consolidated statements of operations for the three months ended
September 30, 1998 and 1997, and the condensed consolidated statements of
cash flows for the three months ended September 30, 1998 and 1997 are
unaudited. In the opinion of management, such unaudited financial statements
include all adjustments, consisting only of normal recurring accruals,
necessary for a fair presentation of the results for the periods presented.
Interim results are not necessarily indicative of the results to be expected
for the full year. The financial statements should be read in conjunction
with the Company's consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended
June 30, 1998.
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.
The PFC technology is the basis for the Company's main drug development
programs and is being amortized over a 20-year life. The PFC technology has
a book value of $12.1 million and $12.4 million, net of accumulated
amortization of $11.1 million and $10.8 million at
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September 30 and June 30, 1998, respectively. The technology acquired from
BioPulmonics has a book value of approximately $386,000 and $471,000, and is
being amortized over five to seven years and is net of accumulated
amortization of $1.6 million and $1.5 million at September 30 and June 30,
1998, 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.
NEW ACCOUNTING STANDARDS
Effective July 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement No. 130, Comprehensive Income ("SFAS No. 130")
and Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information ("SFAS No. 131"). SFAS No. 130 establishes new rules for
the reporting and display of comprehensive income and its components;
however, the adoption of SFAS No. 130 had no impact on the Company's net loss
or stockholder's equity. SFAS No. 130 requires unrealized gains and losses
on the Company's available-for-sale securities to be included in
comprehensive income. During the three months ended September 30, 1998 and
1997, the total comprehensive loss, which includes the unrealized loss on
available-for-sale securities, was $10,206,000 and $6,439,000, respectively.
SFAS No. 131 amends the requirements for public enterprises to report
financial and descriptive information about its reportable operating
segments. Operating segments, as defined in SFAS No. 131, are components of
an enterprise for which separate financial information is available regularly
by the Company in deciding how to allocate resources in assessing
performance. The financial information is required to be reported on the
basis that is used internally for evaluating the segment performance. The
Company believes it operates in one business and operating segment. The
adoption of SFAS No. 131 did not affect results of operations or financial
position of the Company.
NET INCOME (LOSS) PER SHARE
The Company computes net loss per common share in accordance with
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 common shares underlying options,
warrants, and convertible securities, and contingently issuable shares. All
potential dilutive common shares have been excluded from the calculation of
diluted earnings per share as their inclusion would be anti-dilutive.
2. PREFERRED STOCK
In August 1998, the Company sold 100,000 shares of its convertible
Series E-1 Preferred Stock to certain investors for $6 million and obtained
the right to sell similar preferred stock periodically through early 1999 in
an amount not to exceed an additional $14 million. The preferred shares are
convertible at the option of the holder into common stock at $6 per share
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through January 3, 1999, and thereafter certain adjustments may apply based
on the market price. These adjustments to the market price could potentially
result in a conversion price below the then trading market price of the
stock. As a result of this beneficial conversion feature, the Company has
recognized an imputed dividend of approximately $483,000 on these preferred
shares. At the option of the Company, beginning in 2003, the Company can
either force the conversion of any remaining unconverted shares into common
stock or can redeem the stock at the then prevailing conversion price. The
Company may be liable for penalties if certain conditions are not met. The
Series E-1 Preferred Stock has ten votes per share and votes with the holders
of common stock, except where otherwise required by law. The Series E-1
Preferred Stock has a liquidation preference of $60 per share ($6.0 million).
No dividends will accrue to the holders of the preferred stock; however, the
investors obtained a right to receive a royalty on future sales of one of the
Company's products under development, provided that the product is approved
by the U.S. Food and Drug Administration by December 2003. The royalty
amount will be between 0.4% and 1.6%, subject to adjustments downward, of net
sales of the product for a period of three years. The Company has certain
rights to repurchase the royalty right. Because the Company's common stock
traded below $3.00 for ten consecutive days in October 1998, under the terms
of the purchase agreement, the Company may not require the investors to
purchase the additional $14 million in preferred stock; however, the
investors have agreed to discuss a waiver of the trading limitation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(References to years are to the Company's fiscal years ended June 30.)
Alliance has devoted substantial resources to research and development
related to its medical products. The Company has been unprofitable since
inception and expects to incur operating losses for at least the next several
years due to substantial spending on research and development, preclinical
testing, clinical trials, regulatory activities, and commercial manufacturing
start-up. The Company has collaborative research and development agreements
with Schering AG, Germany ("Schering") for IMAGENT-Registered Trademark- and
VIA Medical Corporation ("VIA") for RODA-TM-. Under the arrangement for
IMAGENT, Schering has agreed to reimburse the Company for some of its
development expenses. Schering will also 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 from the sale of products. Due to the
termination of the license agreement (the "HMRI License Agreement") with
Hoechst Marion Roussel, Inc. ("HMRI") in December 1997, and the restructuring
of the 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") in May 1998, Alliance expects
to incur a substantial increase in development expenses related to LIQUIVENT
and OXYGENT and a substantial decrease in related research revenue relative
to prior years. There can be no assurance that the Company will be able to
achieve profitability at all or on a sustained basis.
8
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LIQUIDITY AND CAPITAL RESOURCES
Through September 1998, 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 and in December
1997, the amount available under the loan was increased to $15.2 million. In
June 1998, the Company restructured the loan to provide for up to $15 million.
Amounts borrowed are secured by certain fixed assets and are to be repaid
over 4.5 years. If certain financial covenants are not satisfied, the
outstanding balance may become due and payable. On September 30, 1998, the
balance outstanding on this loan was $9.8 million. The Company also has a
$1.5 million line of credit available with another bank. 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 September 1997, the Company entered into a license agreement (the
"Schering License Agreement") with 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. The product
is being developed jointly by Alliance and Schering. Under the Schering
License Agreement, Schering paid to Alliance in 1998 an initial license fee
of $4 million, and agreed to pay further milestone payments and royalties on
product sales. Schering is also providing funding to Alliance for some of
its development expenses related to IMAGENT. 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.
From February 1996 through June 1997, HMRI was responsible for most of
the costs of development and marketing of LIQUIVENT. The Company announced
in June 1997 that the parties agreed in principle to modify the HMRI License
Agreement to (i) adjust certain milestone payments, (ii) temporarily revise
the method for reimbursing the expenses for portions of the development work,
and (iii) provide for the Company to repurchase any unused clinical trial
supplies if the license agreement is terminated before January 1, 1998. The
Company sold $2.5 million in clinical trial supplies to HMRI and recorded it
as deferred revenue. At September 30, 1998, the unused supplies were
approximately $2.3 million. In December 1997, the HMRI License Agreement was
terminated. Therefore, Alliance has not been reimbursed for its LIQUIVENT
development expenses since July 1, 1997, and it will be responsible for all
future LIQUIVENT development expenses worldwide. HMRI has no continuing
rights to the development or marketing of LIQUIVENT. The parties are
considering a repurchase by Alliance of clinical trial supplies from HMRI.
In May 1998, HMRI asserted a claim for an amount up to $7.5 million, payable
in 2002 in cash or common stock, at the Company's election. In September
1998, HMRI increased the demand to $16.8 million, plus interest and punitive
damages, and filed a demand for arbitration. The Company does not believe
that the claim is meritorious, intends to vigorously contest such claim, and
has filed a counterclaim for unspecified damages. The Company believes that
the ultimate resolution will not have a material adverse effect on the
Company's financial condition, results of operations or liquidity. However,
no assurances can be given that the
9
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Company will prevail on the claim or that an adverse result will not have a
material adverse effect on the Company.
From September 1994 until May 1998, under the Ortho License Agreement,
Ortho was responsible for substantially all the costs of developing and
marketing OXYGENT. In May 1998, Ortho and the Company restructured the Ortho
License Agreement and Alliance assumed responsibility for worldwide
development of OXYGENT at its expense. Under the restructured agreement,
Ortho retained certain rights to be the exclusive marketing agent for the
product. In 1998, Ortho reimbursed the Company $10.2 million for research and
development expenses. As a result of the restructuring, Alliance expects to
incur a substantial increase in development expenses related to OXYGENT and a
substantial decrease in related research revenue over prior years.
The Company had net working capital of $42.9 million at September 30,
1998, compared to $48.7 million at June 30, 1998. The Company's cash, cash
equivalents, and short-term investments decreased to $43.3 million at
September 30, 1998 from $49.9 million at June 30, 1998. The decrease
resulted primarily from cash used in operations of $9.8 million and property,
plant and equipment additions of $2.2 million, offset by net proceeds from
the sale of convertible Series E-1 Preferred Stock of $5.6 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 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, particularly for LIQUIVENT and OXYGENT
as they move into pivotal clinical trials. 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 such financing 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
revenue from the Schering License Agreement and investments, will be adequate
to satisfy its capital requirements through fiscal 1999. 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,
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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 OXYGENT and IMAGENT at its existing
San Diego facilities and for LIQUIVENT at its Otisville, New York facility,
it may need to expand its commercial manufacturing capabilities for its
products in the future. 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
for such expanded facilities and cannot predict the amount it will expend for
the construction of such facilities. There can be no assurance as to when or
whether the FDA will determine that such facilities comply with Good
Manufacturing Practices. The projected location and construction of such
facilities will depend on regulatory approvals, product development, and
capital resources, among other factors. The Company has not obtained any
regulatory approvals for its production facilities for these products, nor
can there be any assurance that it will be able to do so. 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.
YEAR 2000
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field. Beginning in
the year 2000, these date code fields will need to accept four-digit entries
to distinguish the 21st century dates from 20th century dates. As a result,
in less than two years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000"
requirements. Management has initiated its Year 2000 program, which has
already identified several systems that are not yet Year 2000 compliant. The
Company expects to complete its initial assessment by the end of the year.
The assessment will include critical third-party confirmations with respect
to their computers, software and systems, and a listing of all equipment
subject to Year 2000 concerns. The Company has already initiated the removal
and exchange of some non-compliant systems and expects to continue such
replacement or other remedial programs to assure that its computers,
software, and other systems will continue to operate in the Year 2000. While
the Company has begun evaluating potential strategies for resolving its Year
2000 problems, the dollar amount the Company will spend to remediate such
issues remains uncertain. The Company believes such costs will not have a
material effect on the Company's consolidated financial position or results
of operations. There can be no assurance, however, that the Company's
computer systems and applications of other companies on which the Company's
operations rely, will be timely converted, or that any such failure to
convert by another company will not have a material adverse effect on the
Company systems. Moreover, a failure of (i) the Company's scientific,
manufacturing and other equipment to operate at all or operate accurately,
(ii) clinical trial site medical equipment to perform properly, (iii)
necessary materials or supplies to be available to the Company when needed,
or (iv) other equipment, software, or systems as a result of Year 2000
problems could have a material adverse effect on the Company's business or
financial condition.
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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 1999, and beyond, to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. These risks include, but are not limited to, the inability to
obtain adequate financing for the Company's development efforts; 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; possible competition from other products; and Year 2000
issues. 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 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
THREE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1997
The Company's license and research revenue decreased by approximately
22% to $5.1 million for the three months ended September 30, 1998, compared
to $6.5 million for the three months ended September 30, 1997. The decrease
is primarily a result of the lack of license revenue from the Schering
License Agreement and decreased development expense reimbursement from the
Ortho License Agreement, net of increased milestone payments received under
the Schering License Agreement. The Company expects research revenue to
significantly decrease in 1999 compared to 1998, due to the lack of revenue
from the Ortho License Agreement.
Research and development expenses increased by approximately 12% to
$13.5 million for the three months ended September 30, 1998, compared to
$12 million for the three months ended September 30, 1997. The increase in
expenses was primarily due to a $1 million increase in staffing costs for
employees engaged in research and development activities, a $218,000 increase
in rent and lease expense, and a $141,000 increase in depreciation expense,
as well as other increases related to the Company's research and development
activities.
12
<PAGE>
General and administrative expenses increased by approximately 21% to
$2.2 million for the three months ended September 30, 1998, compared to
$1.8 million for the three months ended September 30, 1997. The increase in
general and administrative expenses was primarily due to increased salaries
and wages and professional fees.
Investment income and other was $442,000 for the three months ended
September 30, 1998, compared to $969,000 for the three months ended
September 30, 1997. The decrease was primarily a result of lower average cash
and short-term investment balances.
Alliance expects to continue to incur substantial and increasing
expenses associated with its research and development programs. Operating
losses may fluctuate from quarter to quarter as a result of differences in
the timing of revenues earned and expenses incurred and such fluctuations may
be substantial. The Company's historical results are not necessarily
indicative of future results.
PART II OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS
In September 1998 HMRI delivered to the Company a demand for arbitration
("Demand") in connection with its termination of the HMRI License Agreement.
On October 8, 1998 HMRI filed the Demand with the American Arbitration
Association. The Demand seeks up to $16.8 million, plus interest and punitive
damages. The Demand alleges that the Company breached its agreement with
HMRI, did not act in good faith, and misrepresented that if the HMRI License
Agreement was terminated by December 31, 1997, the Company would pay certain
monies to HMRI. The Company does not believe the claim is meritorious,
intends to vigorously contest such claim, and has filed a counterclaim for
unspecified damages. The Company believes that the ultimate resolution will
not have a material adverse effect on the Company's financial condition,
results of operations or liquidity. However, no assurances can be given that
the Company will prevail on the claim or that an adverse result will not have
a material adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 14, 1998, the Company sold 100,000 shares of its convertible
Series E-1 Preferred Stock to certain institutional investors for $6 million.
The shares were sold in reliance on an exemption from registration
requirements provided by Section 4(2) of the Securities Act of 1933, as
amended. The purchasers were all "accredited investors," as defined
Regulation D promulgated thereunder. The preferred shares are convertible at
the option of the holder into common stock at $6 per share through January 3,
1999, and thereafter certain adjustments may apply based on the market price.
The Company paid a fee of 6% of gross proceeds to certain financial advisors
in connection with the transaction. At the option of the Company, beginning
in 2003, the Company can either force the conversion of any remaining
unconverted shares into common stock, or can redeem the stock at the then
prevailing conversion price.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) There were no exhibits.
(b) There was no report on Form 8-K.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLIANCE PHARMACEUTICAL CORP.
(Registrant)
\s\ Tim T Hart
-----------------------------
Tim T. Hart
Chief Financial Officer
and Treasurer
Date: November 11, 1998
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 19,354,000
<SECURITIES> 23,916,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 49,986,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 87,116,000
<CURRENT-LIABILITIES> 7,059,000
<BONDS> 0
0
6,000
<COMMON> 320,000
<OTHER-SE> 71,180,000
<TOTAL-LIABILITY-AND-EQUITY> 87,116,000
<SALES> 0
<TOTAL-REVENUES> 5,100,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,731,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,672,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,672,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,672,000)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.33)
</TABLE>
