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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 December 31, 1997
or
_________ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-12900
ALLIANCE PHARMACEUTICAL CORP.
(Exact name of Registrant as specified in its charter)
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 February 3, 1998, Registrant had 31,934,345 shares of its Common Stock,
$.01 par value, outstanding.
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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
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INDEX 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 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
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2
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PART I FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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DECEMBER 31, JUNE 30,
1997 1997
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ASSETS (UNAUDITED) (NOTE)
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CURRENT ASSETS:
Cash and cash equivalents $ 15,461,000 $ 15,368,000
Short-term investments 53,024,000 57,041,000
Research revenue receivable 4,213,000 7,250,000
Other current assets 1,200,000 1,147,000
------------ ------------
Total current assets 73,898,000 80,806,000
PROPERTY, PLANT AND EQUIPMENT - NET 17,664,000 16,574,000
PURCHASED TECHNOLOGY - NET 13,640,000 14,400,000
OTHER ASSETS - NET 253,000 233,000
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$105,455,000 $112,013,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,671,000 $ 2,807,000
Accrued expenses 2,785,000 3,439,000
Deferred revenue 2,286,000 2,500,000
Payable for acquired in-process technology - 7,557,000
Current portion of long-term debt 1,626,000 1,508,000
------------ ------------
Total current liabilities 8,368,000 17,811,000
LONG-TERM DEBT 2,080,000 2,742,000
OTHER 85,000 129,000
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value; 5,000,000 shares authorized;
500,000 and 0 shares of Series D issued and outstanding at
December 31, 1997 and June 30, 1997, respectively 5,000 -
Common stock - $.01 par value; 50,000,000 shares authorized;
31,934,345 and 31,164,935 shares issued and outstanding at
December 31, 1997 and June 30, 1997, respectively 319,000 311,000
Additional paid-in capital 339,660,000 322,268,000
Accumulated deficit (245,062,000) (231,248,000)
------------ ------------
Total stockholders' equity 94,922,000 91,331,000
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$105,455,000 $ 112,013,000
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Note: The balance sheet at June 30, 1997 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
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THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
License and research revenue $ 5,274,000 $ 22,126,000 $ 11,813,000 $ 27,876,000
OPERATING EXPENSES:
Research and development 11,778,000 10,469,000 23,824,000 19,720,000
General and administrative 1,868,000 1,923,000 3,680,000 3,869,000
Acquired in-process technology - 16,020,000 - 16,020,000
----------- ----------- ------------ ------------
13,646,000 28,412,000 27,504,000 39,609,000
----------- ----------- ------------ ------------
LOSS FROM OPERATIONS (8,372,000) (6,286,000) (15,691,000) (11,733,000)
INVESTMENT INCOME AND OTHER - NET 908,000 938,000 1,877,000 1,972,000
----------- ----------- ------------ ------------
NET LOSS $(7,464,000) $ (5,348,000) $(13,814,000) $(9,761,000)
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
NET LOSS PER COMMON SHARE:
BASIC AND DILUTED $ (0.24) $ (0.18) $ (0.44) $ (0.32)
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
WEIGHTED AVERAGE SHARES OUSTANDING:
BASIC AND DILUTED 31,458,000 30,168,000 31,387,000 30,103,000
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
</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
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<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1997 1996
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(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (13,814,000) $ (9,761,000)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization 2,488,000 1,829,000
Charge for acquired in-process technology - 16,020,000
Changes in operating assets and liabilities:
Research revenue receivable 3,037,000 (1,250,000)
Deferred revenue (214,000) -
Other assets (73,000) (273,000)
Accounts payable and accrued expenses and other (1,833,000) 500,000
-------------- --------------
Net cash provided by (used in) operating activities (10,409,000) 7,065,000
-------------- --------------
INVESTING ACTIVITIES:
Short-term investments 3,929,000 6,157,000
Property, plant and equipment (2,818,000) (2,603,000)
Payment for acquired in-process technology (57,000) (467,000)
-------------- --------------
Net cash provided by investing activities 1,054,000 3,087,000
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FINANCING ACTIVITIES:
Issuance of common stock 394,000 350,000
Issuance of convertible preferred stock 9,600,000 -
Principal payments on long-term debt (546,000) (351,000)
-------------- --------------
Net cash provided by (used in) financing activities 9,448,000 (1,000)
-------------- --------------
INCREASE IN CASH AND CASH EQUIVALENTS 93,000 10,151,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15,368,000 10,258,000
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,461,000 $ 20,409,000
-------------- --------------
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Payable for acquired in-process technology $ 12,878,000
Issuance of common stock in connection with
acquired in-process technology $ 7,500,000 $ 2,675,000
</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., the accounts of 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 fiscal 1997 have
been reclassified to conform to the current year's presentation.
INTERIM CONDENSED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of December 31, 1997, the
condensed consolidated statements of operations for the three and six months
ended December 31, 1997 and 1996, and the condensed consolidated statements
of cash flows for the six months ended December 31, 1997 and 1996 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, 1997.
PURCHASED TECHNOLOGY
The purchased technology was primarily acquired as a result of the
merger of Fluoromed Pharmaceutical, Inc. into a subsidiary of the Company in
fiscal 1989. The technology acquired is the Company's core perfluorochemical
("PFC") technology and was valued based on an analysis of the present value
of future earnings anticipated from this technology at that time. The
Company identified alternative future uses for the PFC technology, including
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. Accumulated
amortization for this PFC technology was $10.3 million and $9.7 million at
December 31, 1997 and June 30, 1997, respectively. The technology acquired
from BioPulmonics is being amortized over five to seven years and
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accumulated amortization was $1.4 million and $1.2 million at December 31,
1997 and June 30, 1997, 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,
payable in common stock or cash, of which $8 million was paid during fiscal
1997, and $7.5 million was paid during fiscal 1998. The $8 million payments
made in fiscal 1997 and the $7.5 million payments made in fiscal 1998 were
made through the delivery of 703,093 and 706,100 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.
NET INCOME (LOSS) PER SHARE
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. All
potential dilutive common shares have been excluded from the calculation of
diluted earnings per share as their inclusion would be anti-dilutive.
7
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2. LICENSE AGREEMENT
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 of $4 million 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.
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 and clinical trials, regulatory activities, and commercial
manufacturing start-up. The amount of net losses and the time required by the
Company to achieve profitability are highly uncertain due to differences in
the timing of revenues earned and expenses incurred. The Company has entered
into collaborative research and development agreements with companies for
OXYGENT, IMAGENT US, and RODA-TM-. The arrangements with its existing
partners for OXYGENT and IMAGENT US require them to reimburse the Company for
certain approved development expenses incurred for the respective products.
Both partners for such products will make milestone payments to the Company
upon the achievement of certain product development events, and pay royalties
on sales at commercialization. With respect to RODA, the Company has agreed
to reimburse VIA Medical Corporation for substantially all of its development
expenses and to share revenues on the sale of products. 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 December 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. In December 1997,
the Company restructured the agreement and increased the amount available under
the loan to $15.2 million. Amounts borrowed under the agreement are secured by
certain financial assets and are to be repaid over five years. On December
31, 1997, the balance outstanding on this loan was $3.2 million. In January
1998, the Company borrowed an additional $5 million under the agreement. The
Company has another loan from a financing company with an outstanding balance
of $554,000 on December 31, 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.
8
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In September 1997, the Company entered into the Schering License
Agreement with Schering. See Note 2 to the Condensed Consolidated Financial
Statements for information related to the license agreement. In December
1997, Schering paid the Company a $1 million milestone payment under the
Schering License Agreement.
See Note 1 to the Condensed Consolidated Financial Statements for
information related to the November 1996 acquisition of MDV by the Company.
In February 1996, the Company entered into a license agreement (the
"HMRI License Agreement") with Hoechst Marion Roussel, Inc. ("HMRI"), which
provided HMRI with worldwide marketing and manufacturing rights to the
intratracheal administration of liquids, including LIQUIVENT, which perform
bronchoalveolar lavage or liquid ventilation. Under the agreement, HMRI was
responsible for most of the costs of development and marketing of LIQUIVENT.
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 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. On December 5, 1997, HMRI gave written notice of
termination of the HMRI License Agreement. 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 approximately $2.3
million of clinical trial supplies from HMRI. Because of the termination of
the arrangement with HMRI, Alliance will incur a substantial increase in
development expenses related to LIQUIVENT and a substantial decrease in
research revenue.
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 has agreed to pay
milestone payments and royalties on product sales. 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.
The Company had net working capital of $65.5 million at December 31,
1997, compared to $63 million at June 30, 1997. The Company's cash, cash
equivalents, and short-term investments decreased to $68.5 million at
December 31, 1997 from $72.4 million at June 30, 1997. The decrease resulted
primarily from cash used in operations of $10.4 million and property, plant,
and equipment additions of $2.8 million, partially offset by net proceeds
from the sale of convertible preferred stock of $9.6 million in conjunction
with the Schering License Agreement. 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
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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 LIQUIVENT. 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 believes that its current capital resources, expected revenues
from the Ortho 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.
The Company anticipates that capital expenditures for facilities will
increase over the next twelve to eighteen months, some or all of which will
be financed by third parties. 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 has leased an additional facility and is
currently expanding its market launch production capacity in San Diego for
IMAGENT US. 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 U.S. Food and Drug Administration 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 Schering License
Agreement requires the Company to
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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 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
SIX MONTHS ENDED DECEMBER 31, 1997 AS COMPARED WITH SIX MONTHS ENDED
DECEMBER 31, 1996
The Company's license and research revenue decreased by $16.1 million to
$11.8 million for the six months ended December 31, 1997, compared to $27.9
million for the six months ended December 31, 1996. The six months ended
December 31, 1996 included a $15 million milestone payment from Ortho under
the Ortho License Agreement. The Company expects research revenue to
continue to decrease in 1998 compared to 1997, due to the termination of the
HMRI License Agreement, and also expects milestone payments to diminish.
Research and development expenses increased by 21% to $23.8 million for
the six months ended December 31, 1997, compared to $19.7 million for the six
months ended December 31, 1996. The increase in expenses was primarily due
to a $1.3 million increase in payments to outside researchers for preclinical
and clinical trials and other product development work, a $1.8 million
increase in staffing costs, a $463,000 increase in rent and lease expense, a
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$456,000 increase in depreciation expense, as well as other increases related
to the Company's research and development activities.
General and administrative expenses decreased by 5% to $3.7 million for
the six months ended December 31, 1997, compared to $3.9 million for the six
months ended December 31, 1996. The decrease in general and administrative
expenses was primarily due to a decrease in professional fees.
The Company accounted for the acquisition of MDV as a purchase, and
recorded a one-time charge in the six months ended December 31, 1996 of $16
million, including the $15.5 million scheduled payments and related
transaction costs.
Investment income and other was $1.9 million for the six months ended
December 31, 1997, compared to $2 million for the six months ended
December 31, 1996.
THREE MONTHS ENDED DECEMBER 31, 1997 AS COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 1996
The Company's license and research revenue decreased by $16.8 million to
$5.3 million for the three months ended December 31, 1997, compared to $22.1
million for the three months ended December 31, 1996. The three months ended
December 31, 1996 included a $15 million milestone payment from Ortho under
the Ortho License Agreement. The Company expects research revenue to
continue to decrease in 1998 compared to 1997, due to the termination of the
HMRI License Agreement, and also expects milestone payments to diminish.
Research and development expenses increased by approximately 13% to
$11.8 million for the three months ended December 31, 1997, compared to $10.5
million for the three months ended December 31, 1996. The increase in
expenses was primarily due to a $1 million increase in staffing costs, and a
$245,000 increase in depreciation expense, as well as other increases related
to the Company's research and development activities.
General and administrative expenses were $1.9 million for the three
months ended December 31, 1997, compared to $1.9 million for the three months
ended December 31, 1996.
The Company accounted for the acquisition of MDV as a purchase, and
recorded a one-time charge in the three months ended December 31, 1996 of $16
million, including the $15.5 million scheduled payments and related
transaction costs.
Investment income and other was $908,000 for the three months ended
December 31, 1997, compared to $938,000 for the three months ended December 31,
1996.
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.
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<PAGE>
PART II OTHER INFORMATION:
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of shareholders was held on November 12, 1997. The
following directors were re-elected for the following year and until the
election and qualification of their respective successors:
<TABLE>
<CAPTION>
Broker
Director For Against Withheld Non-Votes
<S> <C> <C> <C> <C>
Pedro Cuatrecasas, M.D. 24,563,139 0 575,452 0
Carroll O. Johnson 24,567,519 0 571,072 0
Stephen M. McGrath 24,567,519 0 571,072 0
Donald E. O'Neill 24,567,019 0 571,572 0
Helen M. Ranney, M.D. 24,566,919 0 571,672 0
Jean G. Riess, Ph.D. 24,567,419 0 571,172 0
Duane J. Roth 24,566,798 0 571,793 0
Thomas F. Zuck, M.D. 24,567,519 0 571,072 0
</TABLE>
The shareholders of the Company voted to amend the 1991 Stock Option
Plan of the Company to increase the number of shares available for issuance
thereunder in accordance with the following vote:
21,367,005 For 3,647,824 Against 123,762 Withheld 0 Broker Non-Votes
The shareholders of the Company voted to ratify the appointment of Ernst
& Young LLP as independent auditors of the Company for its fiscal year ending
June 30, 1998 in accordance with the following vote:
25,052,600 For 42,427 Against 43,564 Withheld 0 Broker Non-Votes
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10(a) Credit Agreement dated as of December 5, 1997 between the
Company and Imperial Bank.
10(b) Promissory Note dated December 5, 1997 executed by the Company
in favor of Imperial Bank.
(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\ Theodore D. Roth
-----------------------------
Theodore D. Roth
Executive Vice President
and Chief Financial Officer
Date: February 11, 1998
14
<PAGE>
Alliance Pharmaceutical Corp.
Form 10-Q
EXHIBIT INDEX
The following exhibits are being filed herewith:
<TABLE>
<CAPTION>
Number Document
- ------ -----------------------------------------------------
<S> <C>
10(a) Credit Agreement dated as of December 5, 1997 between
the Company and Imperial Bank.
10(b) Promissory Note dated December 5, 1997 executed by the
Company in favor of Imperial Bank.
</TABLE>
15
<PAGE>
EXHIBIT 10(a)
CREDIT AGREEMENT
This Agreement is made by and between Alliance Pharmaceutical, Corp.
("Borrower") and Imperial Bank, a California banking corporation, ("Bank").
In consideration of mutual covenants and conditions hereof, the parties
hereto agree as follows:
1. REPRESENTATIONS OF BORROWER
Borrower represents and warrants that:
1.01 EXISTENCE AND RIGHTS. Borrower is a corporation duly organized and
existing and in good standing under the laws of New York, without limit as to
the duration of its existence and is authorized and in good standing to do
business in the State of California; Borrower has corporate powers and adequate
authority, rights and franchises to own its property and to carry on its
business as now conducted, and is duly qualified and in good standing in each
State in which the character of the properties owned by it therein or the
conduct of its business makes such qualification necessary; and Borrower has the
power and adequate authority to make and carry out this Agreement
1.02 AGREEMENT AUTHORIZED. The execution, delivery and performance of this
Agreement are duly authorized and do not require the consent or approval of any
governmental body or other regulatory authority; are not in contravention of or
in conflict with any law or regulation or any term or provision of Borrower's
articles of incorporation, by-laws, as the case may be, and this Agreement is
the valid, binding and legally enforceable obligation of Borrower in accordance
with its terms; subject only to bankruptcy, insolvency or similar laws affecting
creditors rights generally.
1.03 NO CONFLICT. The execution, delivery and performance of this
Agreement are not in contravention of or in conflict with any agreement,
indenture or undertaking to which Borrower is a party or by which it or any of
its property may be bound or affected, and do not cause any lien, charge or
other encumbrance to be created or imposed upon any such property by reason
thereof.
1.04 LITIGATION. There is no litigation or other proceeding pending or
threatened against or affecting Borrower which if determined adversely to
Borrower or its interest would have a material adverse effect on the financial
condition of Borrower, and Borrower is not in default with respect to any order,
writ, injunction, decree or demand of any court or other governmental or
regulatory authority.
1.05 FINANCIAL CONDITION. The balance sheet of Borrower as of September
30, 1997, a copy of which has heretofore been delivered to Bank by Borrower, and
all other statements and data submitted in writing by Borrower to Bank in
connection with this request for credit are true and correct, and said balance
sheet truly presents the financial condition of Borrower as of the date thereof,
and has been
<PAGE>
CREDIT AGREEMENT
DECEMBER 5, 1997
prepared in accordance with generally accepted accounting principles on a basis
consistently maintained. Since such date, there have been no material adverse
changes in the financial condition or business of Borrower. Borrower has no
knowledge of any liabilities, contingent or otherwise, at such date not
reflected in said balance sheet, and Borrower has not entered into any special
commitments or substantial contracts which are not reflected in said balance
sheet, other than in the ordinary and normal course of its business, which may
have a materially adverse effect upon its financial condition, operations or
business as now conducted.
1.06 TITLE TO ASSETS. Borrower has good title to its assets, and the same
are not subject to any liens or encumbrances other than those permitted by
Section 3.03 hereof.
1.07 TAX STATUS. Borrower has no liability for any delinquent state, local
or federal taxes, and, if Borrower has contracted with any government agency,
Borrower has no liability for renegotiation of profits.
1.08 TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with the valid trademarks, trade names, copyrights, patents and license rights
of others.
1.09 REGULATION U. None of the proceeds of any loan from the Bank to
Borrower shall be used to purchase or carry margin stock (as defined within
Regulation U of the Board of Governors of the Federal Reserve system).
2. AFFIRMATIVE COVENANTS OF BORROWER
Borrower agrees that so long as it is indebted to Bank, under
borrowings, or other indebtedness, it will, unless Bank shall otherwise consent
in writing:
2.01 RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises
and other authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in good order and repair; conduct its
business in an orderly manner without voluntary interruption and, if a
corporation or partnership, maintain and preserve its existence.
2.02 INSURANCE. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses and/or in the exercise of good business
judgment.
2.03 TAXES AND OTHER LIABILITIES. Pay and discharge, before the same
become delinquent and before penalties accrue thereon, all taxes, assessments
and governmental charges upon or against it or any of its properties, and all
its other liabilities at any time existing, except to the extent and so long as:
2
<PAGE>
CREDIT AGREEMENT
DECEMBER 5, 1997
a. The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause any materially adverse
effect upon its financial condition or the loss of any right of
redemption from any sale thereunder; and
b. It shall have set aside on its books reserves (segregated to the
extent required by generally accepted accounting practice) deemed by
it adequate with respect thereto.
All financial information referenced herein shall be interpreted and
prepared in accordance with generally accepted accounting principals
applied on a basis consistent with previous years.
2.04 RECORDS AND REPORTS. Maintain a standard and modern system of
accounting in accordance with generally accepted accounting principles on a
basis consistently maintained; permit Bank's representatives to have access to,
and to examine its properties, books and records at all reasonable times and
upon reasonable notice during normal business hours; and furnish Bank:
a. QUARTERLY FINANCIAL STATEMENT. Within forty five (45) days after
the close of each quarter of each fiscal year of Borrower, commencing
with the quarter next ending, Borrower to submit 10-Q as of the close
of such period and covering operations for the portion of Borrower's
fiscal year ending on the last day of such period, all in reasonable
detail, prepared in accordance with generally accepted accounting
principles on a basis consistently maintained by Borrower and
certified by an appropriate officer of Borrower;
b. ANNUAL FINANCIAL STATEMENT. As soon as available, and in any
event within one hundred twenty (120) days after the close of each
fiscal year of Borrower, a report of Company as of the close of and
for each fiscal year, all in reasonable detail, prepared on a audited
basis by an independent certified public accountant selected by
Borrower and reasonably acceptable to Bank, in accordance with
generally accepted accounting principles on a basis consistently
maintained by Borrower and certified by an appropriate officer of
Borrower;
c. OTHER INFORMATION. Such other information relating to the
affairs of Borrower as the Bank reasonably may request from time to
time;
d. MANAGEMENT LETTER. In connection with each fiscal year end
financial statement furnished to Bank hereunder, any management letter
of Borrower's independent certified public accountant.
3
<PAGE>
CREDIT AGREEMENT
DECEMBER 5, 1997
2.05 NOTICE OF DEFAULT. Promptly notify Bank in writing of the occurrence
of any Event of Default hereunder or any event which upon notice and lapse of
time would be an Event of Default.
2.06 OPERATING ACCOUNTS. Maintain most operating accounts with Bank during
the term of any loans from Bank to Borrower. Borrower shall maintain, or cause
to be maintained, on deposit with Imperial Bank, non-interest bearing demand
deposit balances sufficient to compensate Bank for all services provided by
Bank. Balances shall be calculated after reduction for the reserve requirement
of the Federal Reserve Board and uncollected funds. Any deficiencies shall be
charged directly to the Borrower on a monthly basis.
4
<PAGE>
CREDIT AGREEMENT
DECEMBER 5, 1997
2.07 ATTORNEY'S FEES. Pay promptly to Bank without demand after notice,
with interest thereon from the date of expenditure at the rate applicable to any
loans from Bank to Borrower, reasonable attorneys' fees and all costs and
expenses paid or incurred by Bank in collecting or compromising any such loan
after the occurrence of an Event of Default, whether or not suit is filed. If
suit is brought to enforce any provision of this Agreement, the prevailing party
shall be entitled to recover its reasonable attorneys' fees and court costs in
addition to any other remedy or recovery awarded by the court.
2.08 FEES. A one time loan fee of $30,000 for the term loan facility shall
be due upon execution of this document.
2.09 DOCUMENTATION FEE. Pay to the Bank a $250.00 documentation fee per
facility at the time of execution of documents.
3. NEGATIVE COVENANTS OF BORROWER
Borrower agrees that so long as it is indebted to Bank, it will not,
without Bank's written consent:
3.01 TYPE OF BUSINESS. Make any substantial change in the character of
its business.
3.02 OUTSIDE INDEBTEDNESS. Other than in the ordinary course of business
and consistent with past practices, create, incur, assume or permit to exist
any indebtedness for borrowed moneys, other than loans from the Bank, except
obligations now existing as shown in the financial statement dated September 30,
1997, excluding those obligations being refinanced by Bank.
3.03 LIENS AND ENCUMBRANCES. Other than in the ordinary course of business
which includes obtaining collaboration agreements with corporate partners, and
consistent with past practices, create, incur, or assume any mortgage, pledge,
encumbrance, lien or charge of any kind upon any asset now owned and given as
security in connection with this agreement, other than liens for taxes not
delinquent and liens in Bank's favor, except for those already existing as of
September 30, 1996.
3.04 LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances
to any person or other entity other than in the ordinary and normal course of
its business and consistent with past practices or make any investment in the
securities of any person or other entity inconsistent with company investment
guidelines; or guarantee or otherwise become liable upon the obligation of any
person or other entity, except by endorsement of negotiable instruments for
deposit or collection in the ordinary and normal course of its business and
consistent with past practices. The foregoing will not restrict the Borrower
from issuing guarantees or otherwise becoming obligated to its landlords for
security deposits.
5
<PAGE>
CREDIT AGREEMENT
DECEMBER 5, 1997
3.05 ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Liquidate,
dissolve, merge or consolidate, or commence any proceedings therefor; or sell
any material assets except in the ordinary course of its business consistent
with past practices; or except in the ordinary course of business, sell, lease
assign or transfer any substantial part of its business or fixed assets, or any
property or other assets necessary for the continuance of its business as now
conducted, including without limitation the selling of any dividends, property
or other asset accompanied by the leasing back of the same.
3.06 COLLATERAL. Allow the total cumulative principal amount outstanding
under that certain term loan evidenced by a promissory note dated December 5,
1997, in the principal amount of $15,181,000 executed by Borrower in favor of
Bank (the "Term Loan") to exceed 90% of the market value of Borrower's U.S.
Fixed Income Portfolio maintained in Montgomery Asset Management Account #
____________ and assigned to Bank as collateral in support of the Term Loan (the
"Collateral"). Whenever the principal balance outstanding under the Term Loan
exceeds 90% of the market value of the Collateral, Borrower shall reduce the
principal amount outstanding or deliver to Bank, not later than three business
days following such notice by Bank, sufficient additional collateral to bring
the market value of the Collateral within foregoing percentage. If additional
Collateral is not received, Bank shall have the right, at its sole option, to
liquidate the Collateral, or any portion thereof, and reduce the Commitment and
any amount outstanding thereunder by the amount received from such liquidation.
The Collateral shall be marked to market quarterly. Upon Borrower's request,
Bank will allow Borrower, at any time, to reduce the market value of the
Collateral to no less than the Required Margin.
4. EVENTS OF DEFAULT
The occurrence of any of the following events (each an "Event of
Default") shall, at Bank's option, terminate Bank's commitment to lend and make
all sums of principal and interest then remaining unpaid on all Borrower's
indebtedness to Bank immediately due and payable, all without demand,
presentment or notice, all of which are hereby expressly waived:
4.01 FAILURE TO PAY. Failure to pay any installment of principal or
interest on any indebtedness of Borrower to Bank within 10 days of due date.
4.02 BREACH OF COVENANT. Failure to perform any other term or condition of
this Agreement binding upon Borrower within 20 days of notice from Bank.
4.03 BREACH OF WARRANTY. Any of Borrower's representations or warranties
made herein or any statement or certificate at any time given in writing
pursuant hereto or in connection herewith shall be false or misleading in any
respect.
4.04 INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent; or
admit its inability to pay its debts as they mature; or make an assignment for
the
6
<PAGE>
CREDIT AGREEMENT
DECEMBER 5, 1997
benefit of creditors; or apply for or consent to the appointment of a receiver
or trustee for it or for a substantial part of its property or business.
4.05 JUDGMENTS, ATTACHMENTS. Any money judgment greater than $100,000,
writ or warrant of attachment, or similar process shall be entered or filed
against Borrower or any of its assets and shall remain unvacated, unbonded or
unstayed for a period later than five days prior to the date of any proposed
sale thereunder.
4.06 BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors, if not terminated within 60 days, shall be instituted
by or against Borrower and, if instituted against it, shall be consented to.
5. MISCELLANEOUS PROVISIONS
5.01 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of
Bank or any holder of any note issued by Borrower to Bank, in the exercise of
any power, right or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or of any other right, power or
privilege. All rights and remedies existing under this Agreement or any note
issued in connection with a loan that Bank may make hereunder, are cumulative
to, and not exclusive of, any rights or remedies otherwise available.
5.02 ADDITIONAL REMEDIES. The rights, powers and remedies given to Bank
hereunder shall be cumulative and not alternative and shall be in addition to
all rights, powers and remedies given to Bank by law against Borrower or any
other person, including but not limited to Bank's rights of setoff or banker's
lien.
5.03 INUREMENT. The benefits of this Agreement shall inure to the
successors and assigns of Bank and the permitted successors and assigns of
Borrower.
5.04 APPLICABLE LAW. This Agreement and all other agreements and
instruments required by Bank in connection therewith shall be governed by and
construed according to the laws of the State of California, to the jurisdiction
of whose courts the parties hereby agree to submit.
5.05 OFFSET. In addition to and not in limitation of all rights of offset
that Bank or other holder of any note issued by Borrower in favor of Bank may
have under applicable law, Bank or other holder of such notes shall, upon the
occurrence of any Event of Default or any event which with the passage of time
or notice would constitute such an Event of Default, have the right to
appropriate and apply to the payment of the outstanding under any such note any
and all balances, credits, deposits, accounts or monies of Borrower then or
thereafter with Bank or other holder, within ten (10) days after the Event of
Default, and notice of the occurrence of any Event of Default by Bank to
Borrower.
7
<PAGE>
CREDIT AGREEMENT
DECEMBER 5, 1997
5.06 SEVERABILITY. Should any one or more provisions of the Agreement be
determined to be illegal or unenforceable, all other provisions nevertheless
shall be effective.
5.07 TIME OF THE ESSENCE. Time is hereby declared to be of the essence of
this Agreement and of every part hereof.
5.08 ACCOUNTING. All accounting terms shall have the meanings applied
under generally accepted accounting principles unless otherwise specified.
5.10 MODIFICATION. This Agreement may be modified only by a writing signed
by both parties hereto.
5.11 JUDICIAL REFERENCE.
(a) Other than (i) nonjudicial foreclosure and all matters in connection
therewith regarding security interests in real or personal property; or (ii) the
appointment of a receiver, or the exercise of other provisional remedies (any
and all of which may be initiated pursuant to applicable law), each controversy,
dispute or claim between the parties arising out of or relating to this Credit
Agreement, any General Security Agreement executed by Borrower in favor of Bank
or any Note executed by Borrower in favor of Bank (collectively, in this Section
5.11, the "Agreement") which controversy, dispute or claim is not settled in
writing within thirty (30) days after the "CLAIM DATE" (defined as the date on
which a party subject to this Agreement gives written notice to all other
parties that a controversy, dispute or claim exists), will be settled by a
reference proceeding in California in accordance with the provisions of Section
638 ET SEQ. of the California Code of Civil Procedure, or their successor
section ("CCP"), which shall constitute the exclusive remedy for the settlement
of any controversy, dispute or claim concerning this Agreement, including
whether such controversy, dispute or claim is subject to the reference
proceeding and except as set forth above, the parties waive their rights to
initiate any legal proceedings against each other in any court or jurisdiction
other than the Superior Court in the County where the Real Property, if any, is
located or San Diego County if none (the "COURT"). The referee shall be a
retired Judge of the Court selected by mutual agreement of the parties, and if
they cannot so agree within forty-five (45) days after the Claim Date, the
referee shall be promptly selected by the Presiding Judge of the Court (or his
representative). The referee shall be appointed to sit as a temporary judge,
with all of the powers for a temporary judge, as authorized by law, and upon
selection should take and subscribe to the oath of office as provided for in
Rule 244 of the California Rules of Court (or any subsequently enacted Rule).
Each party shall have one peremptory challenge pursuant to CCP Section 170.6.
The referee shall (a) be requested to set the matter for hearing within sixty
(60) days after the date of selection of the referee and (b) try any and all
issues of law or fact and report a statement of decision upon them, if possible,
within ninety (90) days of the Claim Date. Any decision rendered by the referee
will be final, binding and conclusive and judgment shall be entered
8
<PAGE>
CREDIT AGREEMENT
DECEMBER 5, 1997
pursuant to CCP Section 644 in any court in the State of California having
jurisdiction. Any party may apply for a reference proceeding at any time after
thirty (30) days following notice to any other party of the nature of the
controversy, dispute or claim, by filing a petition for a hearing and/or trial.
All discovery permitted by this Section 5.11 shall be completed no later than
fifteen (15) days before the first hearing date established by the referee. The
referee may extend such period in the event of a party's refusal to provide
requested discovery for any reason whatsoever, including, without limitation,
legal objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducting
discovery. Depositions may be taken by either party upon seven (7) days written
notice, and request for production or inspection of documents shall be responded
to within ten (10) days after service. All disputes relating to discovery which
cannot be resolved by the parties shall be submitted to the referee whose
decision shall be final and binding upon the parties. Pending appointment of
the referee as provided herein, the Superior Court is empowered to issue
temporary and/or provisional remedies, as appropriate.
9
<PAGE>
CREDIT AGREEMENT
DECEMBER 5, 1997
(b) Except as expressly set forth in this Section 5.11, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of all hearings, the order of presentation of evidence, and
all other questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter except that when any
party so requests, a court reporter will be used at any hearing conducted before
the referee. The party making such a request shall have the obligation to
arrange for and pay for the court reporter. The costs of the court reporter at
the trial shall be borne equally by the parties.
(c) The referee shall be required to determine all issues in accordance
with existing case law and the statutory laws of the State of California. The
rules of evidence applicable to proceedings at law in the State of California
will be applicable to the reference proceeding. The referee shall be empowered
to enter equitable as well as legal relief, to provide all temporary and/or
provisional remedies and to enter equitable orders that will be binding upon the
parties. The referee shall issue a single judgment at the close of the
reference proceeding which shall dispose of all of the claims of the parties
that are the subject of the reference. The parties hereto expressly reserve the
right to contest or appeal from the final judgment or any appealable order or
appealable judgment entered by the referee. The parties hereto expressly
reserve the right to findings of fact, conclusions of laws, a written statement
of decision, and the right to move for a new trial or a different judgment,
which new trial, if granted, is also to be a reference proceeding under this
provision.
(d) In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, Section 1280 through Section 1294.2 of the
CCP as amended from time to time. The limitations with respect to discovery as
set forth hereinabove shall apply to any such arbitration proceeding.
This Agreement is executed on behalf of the parties by duly authorized
representatives as of December 5, 1997.
IMPERIAL BANK ("BANK")
By:
-----------------------
Tim Bubnack, Vice President
Date:
-----------------------
ALLIANCE PHARMACEUTICAL, CORP. ("BORROWER")
By:
-----------------------
Theodore D. Roth, CFO
10
<PAGE>
CREDIT AGREEMENT
DECEMBER 5, 1997
By:
-----------------------
Tim T. Hart, Treasurer
Date:
-----------------------
11
<PAGE>
EXHIBIT 10(b)
[LOGO]
NOTE
$ 15,181,000.00 SAN DIEGO, California, DECEMBER 5, 1997
On DECEMBER 5, 2002, and as hereinafter provided, for value received, the
undersigned promises to pay to IMPERIAL BANK ("Bank") a California banking
corporation, or order, at its SAN DIEGO REGIONAL office, the principal sum of
$ 15,181,000.00 or such sums up to the maximum if so stated, as the Bank may
now or hereafter advance to or for the benefit of the undersigned in
accordance with the terms hereof, together with interest from date of
disbursement or N/A, whichever is later, on the unpaid principal balance / /
at the rate of % per year /X/ at the rate of 0.000*% per year in
excess of the rate of interest which Bank has announced as its prime lending
rate (the "Prime Rate"), which shall vary concurrently with any change in
such Prime Rate, or $ 250.00, whichever is greater. Interest shall be
computed at the above rate on the basis of the actual number of days during
which the principal balance is outstanding, divided by 360, which shall, for
interest computation purposes, be considered one year.
Interest shall be payable /X/ monthly / / quarterly / / included with
principal /X/ in addition to principal / / beginning JANUARY 15, 1998, and
if not so paid shall become a part of the principal. All payments shall be
applied first to any late charges owing, then to interest and the remainder,
if any, to principal. /X/ (If checked), Principal shall be payable in
installments of $** or more, each installment on the 15TH day of each MONTH,
beginning JANUARY 15, 1999. Advances not to exceed any unpaid balance owing
at any one time equal to the maximum amount specified above, may be made at
the option of Bank.
Any partial prepayment shall be applied to the installments, if any, in
inverse order of maturity. Should default be made in the payment of
principal or interest when due, or in the performance or observance, when
due, of any item, covenant or condition of any deed of trust, security
agreement or other agreement (including amendments or extensions thereof)
securing or pertaining to this note, at the option of the holder hereof and
without notice or demand, the entire balance of principal and accrued
interest then remaining unpaid shall (a) become immediately due and payable,
and (b) thereafter bear interest, until paid in full, at the increased rate
of 5% per year in excess of the rate provided for above, as it may vary from
time to time.
Defaults shall include, but not be limited to, the failure of the
maker(s) to pay principal or interest when due; the filing as to each person
obligated hereon, whether as maker, co-maker, endorser or guarantor
(individually or collectively referred to as the "Obligor") of a voluntary or
involuntary petition*** under the provisions of the Federal Bankruptcy Act;
the issuance of any attachment or execution against any asset of any Obligor;
the death of any Obligor; ***IF NOT TERMINATED WITHIN 60 DAYS.
If any installment payment, interest payment, principal payment or
principal balance payment due hereunder is delinquent ten or more days,
Obligor agrees to pay Bank a late charge in the amount of 5% of the payment
so due and unpaid, in addition to the payment; but nothing in this paragraph
is to be construed as any obligation on the part of the holder of this note
to accept payment of any payment past due or less than the total unpaid
principal balance after maturity.
If this note is not paid when due, each Obligor promises to pay all
costs and expenses of collection and reasonable attorneys fees incurred by
the holder hereof on account of such collection, plus interest at the rate
applicable to principal, whether or not suit is filed hereon. Each Obligor
shall be jointly and severally liable hereon and consents to renewals,
replacements and extensions of time for payment hereof, before, at, or after
maturity; consents to the acceptance, release or substitution of security for
this note; and waives demand and protest and the right to assert any statute
of limitations. Any married person who signs this note agrees that recourse
may be had against separate property for any obligations hereunder. The
indebtedness evidenced hereby shall be payable in lawful money of the United
States. In any action brought under or arising out of this note, each
Obligor, including successor(s) or assign(s) hereby consents to the
application of California law, to the jurisdiction of any competent court
within the State of California, and to service of process by any means
authorized by California law.
No single or partial exercise of any power hereunder, or under any deed
of trust, security agreement or other agreement in connection herewith shall
preclude other or further exercises thereof or the exercise of any other such
power. The holder hereof shall at all times have the right to proceed
against any portion of the security for this note in such order and in such
manner as such holder may consider appropriate, without waiving any rights
with respect to any of the security. Any delay or omission on the part of
the holder hereof in exercising any right hereunder, or under any deed of
trust, security agreement or other agreement, shall not operate as a waiver
of such right, or of any other right, under this note or any deed of trust,
security agreement or other agreement in connection herewith.
*SEE INTEREST RATE ADDENDUM ATTACHED HERETO AND MADE A PART HEREOF BY THIS
REFERENCE
**SEE ADDENDUM ATTACHED HERETO AND MADE A PART HEREOF BY THIS REFERENCE
SUBJECT TO THE TERMS AND LIMITATIONS CONTAINED IN THE
CREDIT AGREEMENT DATED DECEMBER 5, 1997
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- --------------------------------------------------------------
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ALLIANCE PHARMACEUTICAL CORP.,
A NEW YORK CORPORATION
- --------------------------------------------------------------
By:
- --------------------------------------------------------------
By:
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<PAGE>
INTEREST RATE ADDENDUM TO NOTE
This Interest Rate Addendum to Note (the "Addendum") is a supplement to the
Note (the "Note") dated as of December 5, 1997, executed by ALLIANCE
PHARMACEUTICAL CORP., a New York corporation ("Borrower"), and forms a part of
and is incorporated into the Note to Imperial Bank ("Bank").
1. Definitions.
"Business Day" means a day of the year (a) that is not a Saturday, Sunday
or other day on which banks in the State of California or the City of London are
authorized or required to close and (b) on which dealings are carried on in the
interbank market in which Bank customarily participates.
"Interest Period" means for each LIBOR Rate Loan, a period of approximately
one, two or three months as the Borrower may elect, provided that the last day
of an Interest Period for a LIBOR Rate Loan shall be determined in accordance
with the practices of the LIBOR interbank market as from time to time in effect,
provided, further, in all cases such period shall expire not later than the date
the Note is due and payable.
"Interest Rate" shall mean as to: (a) Prime Rate Loans, the rate equal to zero
percent (0.000%) in excess of the Prime Rate; and (b) LIBOR Rate Loans, a rate
of one and one-half percent (1.500%) per annum in excess of the LIBOR Rate
(based on the LIBOR Rate applicable for the Interest Period selected by the
Borrower).
"LIBOR Base Rate" means, for any Interest Period for a LIBOR Rate Loan,
the rate of interest per annum determined by Bank (to be the per annum rate
of interest at which deposits in United States Dollars are offered to Bank in
the London interbank market in which Bank customarily participates) at
11:00AM (local time in such interbank market) two (2) Business Days before
the first day of such Interest Period for a period approximately equal to
such Interest Period and in an amount approximately equal to the amount of
such Loan.
"LIBOR Rate" shall mean, for any Interest Period for a LIBOR Rate Loan, a
rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1% equal
to (i) the LIBOR Base Rate for such Interest Period divided by (ii) 1 minus the
Reserve Requirement for such Interest Period.
"LIBOR Rate Loans" means any Loans made or a portion thereof on which
interest is payable based on the LIBOR Rate in accordance with the terms hereof.
"Prime Rate" means the variable rate of interest per annum, most
recently announced by Bank as its "prime rate," whether or not such announced
rate is the
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<PAGE>
lowest rate available from Bank. The interest rate applicable to the Prime Rate
Loans shall change on each date there is a change in the Prime Rate.
"Prime Rate Loans" means any Loans made or a portion thereof on which
interest is payable based on the Prime Rate in accordance with the terms hereof.
"Regulatory Change" means, with respect to Bank, any change on or after
the date of this Loan Agreement in United States federal, state or foreign
laws or regulations, including Regulation D, or the adoption or making on or
after such date of any interpretations, directives or requests applying to a
class of lenders, including Bank, of or under any United States federal or
state, or any foreign, laws or regulations (whether or not having the force
of law) by any court or governmental or monetary authority charged with the
interpretation or administration thereof.
"Reserve Requirement" means, for any Interest Period, the average
maximum rate at which reserves (including any marginal, supplemental or
emergency reserves) are required to be maintained during such Interest Period
under Regulation D against "Eurocurrency liabilities" (as such term is used
in Regulation D) by member banks of the Federal Reserve System. Without
limiting the effect of the foregoing, the Reserve Requirement shall reflect
any other reserves required to be maintained by Bank by reason of any
Regulatory Change against (i) any category of liabilities which includes
deposits by reference to which the LIBOR Rate is to be determined as provided
in the definition of "LIBOR Base Rate" or (ii) any category of extensions of
credit or other assets which include Loans.
"T Note Rate" means the rate quoted by Bank on the third Business Day
before the conversion of the Note to an amortizing loan as the equivalent to the
yield on a U.S. Treasury Note with 42 months left to run to maturity.
"T Note Loan" means the loan represented by the Note if Borrower selects
the T Note Rate to apply to the Note on the day the Note is converted to
amortization as provided therein by written notice to Bank.
2. Requests for Loans, Confirmation of Initial Loans. Borrower shall notify
Bank in writing of its selection of the T Note Loan not sooner than 30 nor later
than 5 days prior to the conversion date. Each LIBOR Rate Loan shall be made
upon the irrevocable written request of Borrower received by Bank not later than
11:00AM (California time) on the Business Day three (3) Business Days prior to
the date such Loan is to be made. Each such notice shall specify the date such
Loan is to be made, which day shall be a Business Day, the amount of such Loan,
the Interest Period for such Loan, and comply with such other requirements as
Bank determines are reasonable or desirable in connection herewith.
Each written request for a LIBOR Rate Loan shall be in the form of a LIBOR
Rate Loan Borrowing Certificate as set forth on Exhibit A, which shall be duly
executed by the Borrower.
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<PAGE>
Each Prime Rate Loan shall be made upon the irrevocable written request of
Borrower received by Bank not later than 11:00AM (California time) on the
Business Day one (1) Business Day prior to the date such Loan is to be made.
Each such notice shall specify the date such Loan is to be made, which day shall
be a Business Day and the amount of such Loan, and comply with such other
requirements as Bank determines are reasonable or desirable in connection
therewith.
3. Conversion/Continuation of Loans.
a. Borrower may from time to time submit in writing a request that Prime
Rate Loans be converted to LIBOR Rate Loans or that any existing LIBOR Rate
Loans continue for an additional Interest Period. Such request shall specify
the amount of the Prime Rate Loans which will constitute LIBOR Rate Loans
(subject to the limits set forth below) and the Interest Period to be applicable
to such LIBOR Rate Loans. Each written request for a conversion to a LIBOR Rate
Loan or a continuation of a LIBOR Rate Loan shall be substantially in the form
of a LIBOR Rate Conversion/Continuation Certificate as set forth on Exhibit B,
which shall be duly executed by the Borrower. Subject to the terms and
conditions contained herein, three (3) Business Days after Bank's receipt of
such a request from Borrower, such Prime Rate Loans shall be converted to LIBOR
Rate Loans or such LIBOR Rate Loans shall continue, as the case may be provided
that:
i. no Default or event which with notice or passage of time or
both would constitute a Default exists;
ii. no party hereto shall have sent any notice of termination of
this Supplement or of the Loan Agreement.
iii. Borrower shall have complied with such customary procedures as
Bank has established from time to time for Borrower's requests for LIBOR Rate
Loans;
iv. the amount of a LIBOR Rate Loan shall be $500,000 or such
greater amount which is an integral multiple of $50,000; and
v. Bank shall have determined that the Interest Period or LIBOR
Rate is available to Bank which can be readily determined as of the date of the
request for such LIBOR Rate Loan.
vi. There shall not be due on the Note any principal payments during
the Interest Period that would reduce the principal balance of
the Note below the amount of all LIBOR Rate Loans then
outstanding.
Any request by Borrower to convert Prime Rate Loans to LIBOR Rate Loans or
continue any existing LIBOR Rate Loans shall be irrevocable. Notwithstanding
anything to the contrary contained herein, Bank shall not be required to
purchase United States Dollar deposits in the London interbank market or
other applicable LIBOR
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<PAGE>
Rate market to fund any LIBOR Rate Loans, but the provisions hereof shall be
deemed to apply as if Bank had purchased such deposits to fund the LIBOR Rate
Loans.
b. Any LIBOR Rate Loans shall automatically convert to Prime Rate Loans
upon the last day of the applicable Interest Period, unless Bank has received
and approved a complete and proper request to continue such LIBOR Rate Loan at
least three (3) Business Days prior to such last day in accordance with the
terms hereof. Any LIBOR Rate Loans shall, at Bank's option, convert to Prime
Rate Loans in the event that (i) a Default, or event which with the notice or
passage of time or both would constitute a Default, shall exist, (ii) this
Supplement or the Loan Agreement shall terminate, or (iii) the aggregate
principal amount of LIBOR Rate Loans at any time exceeds the Maximum
Availability. Borrower agrees to pay to Bank, upon demand by Bank (or Bank may,
at its option, charge Borrower's loan account) any amounts required to
compensate Bank for any loss (including loss of anticipated profits), cost or
expense incurred by such person, as a result of the conversion of LIBOR Rate
Loans to Prime Rate Loans pursuant to any of the foregoing.
e. On all Loans, Interest shall be payable by Borrower to Bank monthly in
arrears not later than the tenth (10th) day of each calendar month at the
applicable Interest Rate.
4. Additional Requirements/Provisions Regarding LIBOR Rate Loans; etc.
a. If for any reason (including voluntary or mandatory prepayment or
acceleration), Bank receives all or part of the principal amount of a LIBOR Rate
Loan prior to the last day of the Interest Period for such Loan, Borrower shall
immediately notify Borrower's account officer at Bank and, on demand by Bank,
pay Bank the amount (if any) by which (i) the additional interest which would
have been payable on the amount so received had it not been received until the
last day of such Interest Period exceeds (ii) the interest which would have been
recoverable by Bank by placing the amount so received on deposit in the
certificate of deposit markets or the offshore currency interbank markets or
United States Treasury investment products, as the case may be, for a period
starting on the date on which it was so received and ending on the last day of
such Interest Period at the interest rate determined by Bank in its reasonable
discretion. Bank's determination as to such amount shall be conclusive absent
manifest error.
b. Borrower shall pay to Bank, upon demand by Bank, from time to time
such amounts as Bank may determine to be necessary to compensate it for any
costs incurred by Bank that Bank determines are attributable to its making or
maintaining of any amount receivable by Bank hereunder in respect of any Loans
relating thereto (such increases in costs and reductions in amounts receivable
being herein called "Additional Costs"), in each case resulting from any
Regulatory Change which:
i. changes the basis of taxation of any amounts payable to Bank
under this Supplement in respect of any Loans (other than changes which affect
taxes
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<PAGE>
measured by or imposed on the overall net income of Bank by the jurisdiction in
which such Bank has its principal office); or
ii. imposes or modifies any reserve, special deposit or similar
requirements relating to any extensions of credit or other assets of, or any
deposits with or other liabilities of Bank (including any Loans or any deposits
referred to in the definition of "LIBOR Base Rate"); or
iii. imposes any other condition affecting this Supplement (or any
of such extensions of credit or liabilities).
Bank will notify Borrower of any event occurring after the date of the Loan
Agreement which will entitle Bank to compensation pursuant to this section as
promptly as practicable after it obtains knowledge thereof and determines to
request such compensation. Bank will furnish Borrower with a statement setting
forth the basis and amount of each request by Bank for compensation under this
Section 4. Determinations and allocations by Bank for purposes of this
Section 4 of the effect of any Regulatory Change on its costs of maintaining its
obligations to make Loans or of making or maintaining Loans or on amounts
receivable by it in respect of Loans, and of the additional amounts required to
compensate Bank in respect of any Additional Costs, shall be conclusive absent
manifest error.
c. Borrower shall pay to Bank, upon the request of Bank, such amount or
amounts as shall be sufficient (in the sole good faith opinion of such Bank) to
compensate it for any loss, costs or expense incurred by it as a result of any
failure by Borrower to borrow a Loan on the date for such borrowing specified in
the relevant notice of borrowing hereunder.
d. If Bank shall determine that the adoption or implementation of any
applicable law, rule, regulation or treaty regarding capital adequacy, or any
change therein, or any change in the interpretation or administration thereof by
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by Bank (or its
applicable lending office) with any respect or directive regarding capital
adequacy (whether or not having the force of law) of any such authority, central
bank or comparable agency, has or would have the effect of reducing the rate of
return on capital of Bank or any person on entity controlling Bank (a "Parent")
as a consequence of its obligations hereunder to a level below that which Bank
(or its Parent) could have achieved but for such adoption, change or compliance
(taking into consideration its policies with respect to capital adequacy) by an
amount deemed by Bank to be material, then from time to time, within 125 days
after demand by Bank, Borrower shall pay to Bank such additional amount or
amounts as will compensate Bank for such reduction. A statement of Bank
claiming compensation under this Section and setting forth the additional amount
or amounts to be paid to it hereunder shall be conclusive absent manifest error.
e. If at any time Bank, in its sole and absolute discretion, determines
that: (i) the amount of the LIBOR Rate Loans for periods equal to the
corresponding Interest Periods are not available to Bank in the offshore
currency interbank markets, or (ii) the
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LIBOR Rate does not accurately reflect the cost to Bank of lending the LIBOR
Rate Loan, then Bank shall promptly give notice thereof to Borrower, and upon
the giving of such notice Bank's obligation to make the LIBOR Rate Loans shall
terminate, unless Bank and the Borrower agree in writing to a different interest
rate applicable to LIBOR Rate Loans. If it shall become unlawful for Bank to
continue to fund or maintain any Loans, or to perform its obligations hereunder,
upon demand by Bank, Borrower shall prepay the Loans in full with accrued
interest thereon and all other amounts payable by Borrower hereunder (including,
without limitation, any amount payable in connection with such prepayment
pursuant to Section 4(a)).
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<PAGE>
Exhibit A
LIBOR RATE LOAN BORROWING CERTIFICATE
The undersigned hereby certifies as follows:
I, ___________________________ am the duly elected and acting
________________________ ("Borrower").
This certificate is delivered pursuant to Section 2 of that certain
Interest Rate Addendum by Borrower to Imperial Bank ("Bank")(the "Note"). The
terms used in this Borrowing Certificate which are defined in the Note have the
same meaning herein as ascribed to them therein.
Borrower hereby requests on _________, 19__, a LIBOR Rate Loan (the "Loan")
as follows:
a. The date on which the Loan is to be made is ________, 19__.
b. The amount of the Loan is to be ________ ($_______), for an Interest
Period of __________ month(s).
All representations and warranties of Borrower stated in the Loan Agreement
are true, correct and complete in all material respect as of the date of this
request for a loan; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respect as of such date.
IN WITNESS WHEREOF, this Borrowing Base Certificate is executed by the
undersigned as of ___________________, 19__.
ALLIANCE PHARMACEUTICAL CORP., a
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New York corporation
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By:
--------------------------
By:
-----------------------------------
Title:
----------------------
Title:
--------------------------------
FOR INTERNAL BANK USE ONLY
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LIBOR Pricing Date LIBOR Rate LIBOR Rate Maturity Date
Variance
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__%
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<PAGE>
ADDENDUM ATTACHED TO THAT CERTAIN NOTE IN THE AMOUNT OF $15,181,000.00 DATED
DECEMBER 5, 1997 EXECUTED BY ALLIANCE PHARMACEUTICAL CORP., A NEW YORK
CORPORATION:
ADDENDUM
Beginning January 15, 1998, and continuing on the 15th day of each calendar
month until December 15, 1998, monthly payments of interest only shall be due on
the Note. Thereafter, the outstanding principal balance under the Note shall be
converted to an amortizing loan payable in 48 equal monthly payments of
principal plus accrued interest commencing January 15, 1999 based on a 10 year
amortization period.
All principal and accrued but unpaid interest shall in any event be due and
payable on December 5, 2002.
<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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,461,000
<SECURITIES> 53,024,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 73,898,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 105,455,000
<CURRENT-LIABILITIES> 8,368,000
<BONDS> 0
0
5,000
<COMMON> 319,000
<OTHER-SE> 94,598,000
<TOTAL-LIABILITY-AND-EQUITY> 105,455,000
<SALES> 0
<TOTAL-REVENUES> 11,813,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 27,504,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (13,814,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,814,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,814,000)
<EPS-PRIMARY> (.44)
<EPS-DILUTED> (.44)
</TABLE>