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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, 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 February 8, 1999, Registrant had 33,137,739 shares of its Common Stock,
$.01 par value, outstanding.
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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
INDEX
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Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
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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,
1998 1998
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ASSETS (UNAUDITED) (NOTE)
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CURRENT ASSETS:
Cash and cash equivalents $ 13,772,000 $ 11,809,000
Short-term investments 23,071,000 38,046,000
Research revenue receivable 2,875,000 6,847,000
Other current assets 618,000 694,000
------------- -------------
Total current assets 40,336,000 57,396,000
PROPERTY, PLANT AND EQUIPMENT - NET 24,259,000 23,087,000
PURCHASED TECHNOLOGY - NET 12,120,000 12,880,000
OTHER ASSETS - NET 469,000 314,000
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$ 77,184,000 $ 93,677,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,830,000 $ 2,191,000
Accrued expenses 2,013,000 3,121,000
Deferred revenue 2,286,000 2,286,000
Current portion of long-term debt 2,143,000 1,068,000
------------- -------------
Total current liabilities 10,272,000 8,666,000
LONG-TERM DEBT 12,500,000 8,882,000
OTHER 24,000 39,000
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value; 5,000,000 shares
authorized; 500,000 shares of Series D issued and
outstanding at December 31, 1998 and June 30, 1998 5,000 5,000
100,000 and 0 shares of Series E-1 issued and
outstanding at December 31, 1998 and June 30, 1998,
respectively 1,000 -
Common stock - $.01 par value; 75,000,000 shares authorized;
32,042,482 and 31,994,338 shares issued and outstanding
at December 31, 1998 and June 30, 1998, respectively 320,000 320,000
Additional paid-in capital 346,057,000 340,016,000
Accumulated deficit (291,995,000) (264,251,000)
------------- -------------
Total stockholders' equity 54,388,000 76,090,000
------------- -------------
$ 77,184,000 $ 93,677,000
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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
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THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
---------- ---------- ---------- -----------
(UNAUDITED) (UNAUDITED)
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REVENUES:
License and research revenue $ 1,048,000 $ 5,274,000 $ 6,148,000 $ 11,813,000
OPERATING EXPENSES:
Research and development 16,418,000 11,778,000 29,964,000 23,824,000
General and administrative 1,990,000 1,868,000 4,175,000 3,680,000
------------ ----------- ------------ ------------
18,408,000 13,646,000 34,139,000 27,504,000
------------ ----------- ------------ ------------
LOSS FROM OPERATIONS (17,360,000) (8,372,000) (27,991,000) (15,691,000)
INVESTMENT INCOME AND OTHER - NET 287,000 908,000 729,000 1,877,000
------------ ----------- ------------ ------------
Net loss (17,073,000) (7,464,000) (27,262,000) (13,814,000)
IMPUTED DIVIDEND ON
SERIES E-1 PREFERRED STOCK - - (483,000) -
------------ ----------- ------------ ------------
NET LOSS APPLICABLE TO COMMON SHARES $(17,073,000) $(7,464,000) $(27,745,000) $(13,814,000)
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
NET LOSS PER COMMON SHARE:
BASIC AND DILUTED $ (0.53) $ (0.24) $ (0.87) $ (0.44)
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC AND DILUTED 32,042,000 31,458,000 32,032,000 31,387,000
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
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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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SIX MONTHS ENDED
DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
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OPERATING ACTIVITIES:
Net loss $(27,262,000) $(13,814,000)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization 2,795,000 2,488,000
Changes in operating assets and liabilities:
Research revenue receivable 3,972,000 3,037,000
Deferred revenue - (214,000)
Other assets (79,000) (73,000)
Accounts payable and accrued expenses and other 516,000 (1,833,000)
------------ ------------
Net cash used in operating activities (20,058,000) (10,409,000)
------------ ------------
INVESTING ACTIVITIES:
Purchases of short-term investments (23,711,000) (50,879,000)
Sales and maturities of short-term investments 38,663,000 54,808,000
Property, plant and equipment (3,207,000) (2,818,000)
Payment for acquired in-process technology - (57,000)
------------ ------------
Net cash provided by investing activities 11,745,000 1,054,000
------------ ------------
FINANCING ACTIVITIES:
Issuance of common stock - 394,000
Issuance of convertible preferred stock 5,583,000 9,600,000
Proceeds from long-term debt 5,050,000 -
Principal payments on long-term debt (357,000) (546,000)
------------ ------------
Net cash provided by financing activities 10,276,000 9,448,000
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 1,963,000 93,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,809,000 15,368,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,772,000 $ 15,461,000
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of common stock in connection with
acquired in-process technology $ - $ 7,500,000
</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., 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 1998 have been
reclassified to conform to the current year's presentation.
INTERIM CONDENSED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of December 31, 1998, the
condensed consolidated statements of operations for the three and six months
ended December 31, 1998 and 1997, and the condensed consolidated statements of
cash flows for the six months ended December 31, 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 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. The PFC technology has a
book value of $11.8 million and $12.4 million, net of accumulated amortization
of $11.4 million and $10.8 million at December 31
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and June 30, 1998, respectively. The technology acquired from BioPulmonics
has a book value of approximately $300,000 and $471,000, and is being
amortized over five to seven years and is net of accumulated amortization of
$1.7 million and $1.5 million at December 31 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 December 31, 1998 and 1997, the total
comprehensive loss, which includes the unrealized loss on available-for-sale
securities, was $17,079,000 and $7,465,000, respectively. During the six months
ended December 31, 1998 and 1997, the total comprehensive loss was $27,285,000
and $13,904,000, 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 right
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to sell additional preferred stock to these investors has terminated. 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. 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 $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
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. On January 4,
1999, 47,837 shares of preferred stock were converted into 1,091,338 shares
of common stock at an average price of $2.63 per share.
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. As of December 30, 1998, Schering and
the Company modified the Schering license agreement (the "Schering License
Agreement") to reduce the quarterly reimbursements, to increase the milestone
payments, and to revise the method of calculating royalties. 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, 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, and the reduction in the on-going
reimbursements from Schering, Alliance expects to incur a substantial increase
in development expenses 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.
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LIQUIDITY AND CAPITAL RESOURCES
Through December 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 December 31, 1998, the balance
outstanding on this loan was $14.6 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 the Schering License Agreement,
which provides Schering with worldwide exclusive marketing and manufacturing
rights to Alliance's drug compounds, drug compositions, and medical devices and
systems related to perfluorocarbon ultrasound imaging products, including
IMAGENT. In conjunction with the Schering License Agreement, Schering Berlin
Venture Corp., an affiliate of Schering, purchased 500,000 shares of the
Company's convertible Series D Preferred Stock for $10 million. The 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. Because of changes in the development
of the field of ultrasound contrast agents and in the parties' development
plans, Alliance and Schering amended the Schering License Agreement as of
December 30, 1998. Under the original arrangement, royalty rates were based
upon the development of specific medical uses for IMAGENT, which placed
limitations on the development effort. The parties elected to revise the
royalty calculation which is now based on sales of IMAGENT, a more traditional
method of determining royalties. This modification permits the parties to be
flexible in developing IMAGENT. Although the method of calculating royalties
has been changed, the Company believes that there will be no material difference
in the amount of royalties to be earned by the Company under the Schering
License Agreement. Additionally, the parties reduced ongoing development
reimbursements and added new milestone payments.
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 December 31, 1998, the unused supplies were approximately
$2.3 million. In December 1997,
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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 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 $30.1 million at December 31, 1998,
compared to $48.7 million at June 30, 1998. The Company's cash, cash
equivalents, and short-term investments decreased to $36.8 million at
December 31, 1998 from $49.9 million at June 30, 1998. The decrease resulted
primarily from cash used in operations of $20.1 million, and property, plant and
equipment additions of $3.2 million, partially offset by net proceeds from the
sale of convertible Series E-1 Preferred Stock of $5.6 million and by additional
proceeds of $5.1 million from its loan and security 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 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 as the products proceed in pivotal clinical trials.
The Company will seek additional collaborative research and development
relationships with suitable corporate partners for its non-
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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 will 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, 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 one year, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. Management
has a continuing Year 2000 program, which has already identified several systems
that are not yet Year 2000 compliant. The Company has substantially completed an
inventory of its systems, software and embedded chips, and is in the process of
obtaining confirmations from critical third parties with respect to their
computers, software and systems. Many systems have already been replaced over
the past two years in the ordinary course of Company plans for upgrading its
equipment, software and systems. The Company has initiated the removal and
exchange of other
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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. The Company's costs to date to
resolve its Year 2000 problems is not material; however, the total amount it
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.
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; the uncertainties associated with 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.
12
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1998 AS COMPARED WITH SIX MONTHS ENDED
DECEMBER 31, 1997
The Company's license and research revenue decreased by $5.7 million to
$6.1 million for the six months ended December 31, 1998, compared to
$11.8 million for the six months ended December 31, 1997. The decrease is
primarily a result of the decreased research revenue from Ortho under the Ortho
License Agreement. Also, revenue for the six months ended December 31, 1997
included a $4 million initial license fee from Schering. The Company expects
research revenue to significantly decrease in 1999 compared to 1998, due to the
restructuring of the Ortho License Agreement and reduced research reimbursement
from the Schering License Agreement.
Research and development expenses increased by 26% to $30 million for the
six months ended December 31, 1998, compared to $23.8 million for the six months
ended December 31, 1997. The increase in expenses was primarily due to a
$3.3 million increase in payments to outside researchers for preclinical and
clinical trials and other product development work, a $1.3 million increase in
staffing costs for employees engaged in research and development activities, a
$548,000 increase in rent and lease expense, a $480,000 increase in supplies and
chemical costs, as well as other increases related to the Company's research and
development activities. The increase for the six month period is primarily
attributable to increased expenses related to the IMAGENT Phase 3 clinical
trial and the preparation of the IMAGENT manufacturing facilities for
regulatory approval.
General and administrative expenses increased by approximately 13% to
$4.2 million for the six months ended December 31, 1998, compared to
$3.7 million for the six months ended December 31, 1997. The increase in
general and administrative expenses was primarily due to a $323,000 increase in
professional fees and a $137,000 increase in staffing costs.
Investment income and other was $729,000 for the six months ended
December 31, 1998, compared to $1.9 million for the six months ended
December 31, 1997. The decrease was primarily a result of lower average cash
and short-term investment balances.
THREE MONTHS ENDED DECEMBER 31, 1998 AS COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 1997
The Company's license and research revenue decreased by $4.2 million to
approximately $1 million for the three months ended December 31, 1998, compared
to $5.3 million for the three months ended December 31, 1997. The decrease is
primarily a result of decreased research revenue from the Ortho License
Agreement and the reduction in research and milestone revenue from the Schering
License Agreement. The Company expects research revenue to continue to
significantly decrease in 1999 compared to 1998, due to the restructuring of the
Ortho License Agreement and reduced research reimbursement from the Schering
License Agreement.
Research and development expenses increased by 39% to $16.4 million for the
three months ended December 31, 1998, compared to $11.8 million for the three
months ended December 31, 1997. The increase in expenses was primarily due to a
$3.2 million increase in
13
<PAGE>
payments to outside researchers for preclinical and clinical trials and other
product development work, a $474,000 increase in supplies and chemical costs,
a $330,000 increase in rent and lease expense, a $265,000 increase in
staffing costs for employees engaged in research and development activities,
as well as other increases related to the Company's research and development
activities. The increase for the three month period is primarily attributable
to increased expenses related to the IMAGENT Phase 3 clinical trial and the
preparation of the IMAGENT manufacturing facilities for regulatory approval.
General and administrative expenses were $2 million for the three months
ended December 31, 1998, compared to $1.9 million for the three months ended
December 31, 1997. The increase in general and administrative expenses was
primarily due to increased professional fees.
Investment income and other was $287,000 for the three months ended
December 31, 1998, compared to $908,000 for the three months ended December 31,
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.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of shareholders was held on November 11, 1998. 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. 28,310,665 1,514,162 0 0
Carroll O. Johnson 28,310,665 1,514,162 0 0
Stephen M. McGrath 28,305,163 1,519,664 0 0
Donald E. O'Neill 28,310,465 1,514,362 0 0
Helen M. Ranney, M.D. 28,304,063 1,520,764 0 0
Jean G. Riess, Ph.D. 28,310,665 1,514,162 0 0
Duane J. Roth 28,308,390 1,516,437 0 0
Theodore D. Roth 28,309,190 1,515,637 0 0
Thomas F. Zuck, M.D. 28,304,963 1,519,864 0 0
</TABLE>
The shareholders of the Company voted to increase the number of authorized
shares of Common Stock from 50,000,000 shares to 75,000,000 in accordance with
the following vote:
27,637,772 For 2,085,379 Against 101,676 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, 1999 in accordance with the following vote:
29,672,279 For 99,800 Against 52,748 Withheld 0 Broker Non-Votes
---------- ------ ------ ---
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3. Certificate of Amendment to the Certificate of Incorporation of the
Company filed on January 15, 1999.
10. First Amendment to License Agreement, dated as of December 30, 1998,
between the Company and Schering Aktiengesellschaft.
(b) There was no report on Form 8-K.
15
<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: February 11, 1999
16
<PAGE>
Alliance Pharmaceutical Corp.
Form 10-Q
EXHIBIT INDEX
The following exhibits are being filed herewith:
<TABLE>
<CAPTION>
Number Document
------ -------------------------------------------------------------
<S> <C>
3. Certificate of Amendment to the Certificate of Incorporation
of the Company filed on January 15, 1999.
10. First Amendment to License Agreement, dated as of December 30,
1998, between the Company and Schering Aktiengesellschaft. *
</TABLE>
* Confidential treatment being requested.
17
<PAGE>
EXHIBIT 3
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ALLIANCE PHARMACEUTICAL CORP.
Under Section 805 of the Business Corporation Law
We, the undersigned, Theodore D. Roth and Lloyd A. Rowland, being
respectively the President and the Secretary of Alliance Pharmaceutical Corp.,
hereby certify:
1. The name of the corporation is Alliance Pharmaceutical Corp.
(hereinafter called the "Company"). The name under which the Company was formed
is Otisville Biologics, Inc.
2. The Certificate of Incorporation was filed in the office of the
Secretary of State on the 23rd day of February, 1983 (the "Certificate of
Incorporation").
3. The Certificate of Incorporation of the Company was first restated and
the Restated Certificate was filed on November 10, 1993 (the "Restated
Certificate of Incorporation").
4. The Restated Certificate of Incorporation of the Company, as amended
heretofore, is further amended to increase the amount of the authorized shares
of common stock, $0.01 par value, of the Company from 50,000,000 shares to
75,000,000 shares.
5. To effect the foregoing, the first two sentences of Article 4 of the
Restated Certificate of Incorporation are hereby amended to read as follows:
"4. The total number of shares of stock which the Corporation is
authorized to issue is 80,000,000 of which 75,000,000 shares shall be
designated Common Stock, $.01 par value per share, and 5,000,000 shares
shall be designated Preferred Stock, $.01 par value per share. The
relative rights, preferences and limitations of the shares of each class
are as follows:"
6. The manner in which the foregoing amendment of the Restated
Certificate of Incorporation was authorized is as follows: The Board of
Directors of the Corporation adopted the amendment by a majority vote of the
Board of Directors and the holders of a majority of the outstanding shares
entitled to vote adopted the amendment at the annual meeting of shareholders on
November 11, 1998.
<PAGE>
IN WITNESS WHEREOF, we have subscribed this document on the date set forth
below and do hereby affirm, under the penalties of perjury, that the statements
contained therein have been examined by us and are true and correct.
Date: January 15, 1999
/s/ Theodore D. Roth
--------------------
Name: Theodore D. Roth
Title: President and Chief Operating Officer
/s/ Lloyd A. Rowland
--------------------
Name: Lloyd A. Rowland
Title: General Counsel and Secretary
<PAGE>
EXHIBIT 10
FIRST AMENDMENT TO LICENSE AGREEMENT
THIS FIRST AMENDMENT TO LICENSE AGREEMENT (the "Amendment"), dated
as of December 30, 1998 (the "Effective Date"), is by and between Alliance
Pharmaceutical Corp., a New York corporation, having its principal place of
business at 3040 Science Park Road, San Diego, California 92121 ("Alliance")
and Schering Aktiengesellschaft, a German corporation having its principal
place of business at 13342 Berlin, Germany ("Schering").
WHEREAS, Alliance and Schering entered into a license agreement
dated as of September 23, 1997 (the "Agreement"), whereby Alliance licensed
to Schering certain rights to IMAGENT-Registered Trademark-, an ultrasound
contrast agent in development;
WHEREAS, the parties have agreed that the focus of industry-wide
development activities pertaining to ultrasound contrast agents has changed
during the past year and the Agreement needs to be modified to reflect such
industry-wide changes;
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants and agreements contained herein, the parties hereto
intending to be legally bound, do hereby agree as follows:
1. Any capitalized term not otherwise defined herein shall have the meaning
ascribed to it in the Agreement.
2. Section 1.01 of the Agreement is hereby amended so that the definitions
of "Indications" and "MP Indication" read as follows and the following
definition for CAD Indication is added:
"INDICATIONS" means the *
"MP Indication" MEANS the *
"CAD INDICATION" means the *
3. Section 4.02(a) of the Agreement is hereby amended in its entirety to
read as follows:
"(a) the sum of *
- ----------
* Indicates confidential information which has been omitted and filed
separately with the Securities and Exchange Commission
1
<PAGE>
, the first such installment being
accrued and earned on December 31, 1997 and payable on March 30,
1998, and subsequent installments accrued and earned on the last
day of March, June, September and December, respectively, and each
payable on the last day of each subsequent June, September,
December and March, respectively, to cover future research."
4. Section 4.02 of the Agreement is hereby amended to add sections (f),
(g), (h), (i) and (j) as follows:
"(f) the sum of *
(g) the sum of *
(h) the sum of *
(i) the sum of *
(j) the sum of *
5. Section 8.01 of the Agreement is hereby amended in its entirety to read
as follows:
"SECTION 8.01. ROYALTIES. In further consideration of the rights and
licenses granted to Schering under Article VI of this Agreement,
Schering shall pay to Alliance the following royalties based on the Net
Sales of the Product in the Territory (the "ROYALTY PERCENTAGE"):
(a) SALES IN THE UNITED STATES AND EUROPE. With respect to sales of
the Product in the United States and Europe collectively;
(i) Subject to Section 8.01(d), Schering shall pay to Alliance a
royalty on Net Sales of the Product in accordance with the
following table:
2
<PAGE>
<TABLE>
<CAPTION>
Maximum Royalty
Total Net Royalty Payment Average
Sales/Year Percentage (% of Net Sales) (% of Net Sales)
Category ($ millions) (% of Net Sales) (Section 8.01(a)(ii)) (Section 8.01(a)(iv))
- -------- ------------ ---------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
1. * * *
2. * * * *
3. * * * *
4. * * * *
5. * * * *
</TABLE>
(ii) In any calendar year *
shall not exceed the *
, any such amount
exceeding the Maximum Payment shall be reimbursed by
Alliance to Schering. Any *
made in accordance with this Section 8.01(a) shall be made
after the end of the calendar year for which such adjustment
is applicable, and any amount *
Alliance ratably over the next four (4) quarters.
Reasonably detailed accounting records to support such
adjustments shall be provided to Alliance within sixty (60)
days after the end of the calendar year.
(iii) Notwithstanding Section 8.01(a)(i) above, in the event Net
Sales of Product *
(a) Net Sales for *
Net
Sales * of such
total. Schering shall make such adjustments at the end of
the first calendar quarter of the year and shall deliver any
necessary payments (with reasonably detailed records of such
adjustments) to Alliance within sixty (60) days after the
end of the first calendar quarter of such year.
(iv) Notwithstanding Section 8.01(a)(i) above, *
applicable for total Net Sales for the
immediately preceding calendar year. Adjustments from
amounts paid as royalties pursuant to this
3
<PAGE>
section to amounts actually earned as royalties shall be
made to fourth quarter payments to Alliance (with reasonably
detailed records of such adjustments provided therewith).
(b) SALES IN JAPAN. With respect to sales of the Product in Japan,
Schering shall pay to Alliance a royalty payment equal to *
(c) SALES IN THE TERRITORY EXCLUDING THE UNITED STATES, EUROPE AND
JAPAN. With respect to sales of the Product in the Territory,
excluding sales of the Product in the United States, Europe and
Japan as provided for in Section 8.01(a) and (b), *
(d) MINIMUM PAYMENTS. Notwithstanding anything to the contrary in
Section 8.01 *
on a country-by-country basis *
The rate of *
If this Section 8.01(d) becomes applicable, *
The
minimum payments refered to in this Section 8.01(d) *
(e) THIRD PARTY ROYALTIES. In the event that after the First Commercial
Sale Alliance pays any royalties to Third Parties *
(f) If the Product is sold in any country in which Alliance does not
have valid patent coverage for the Product which would prevent the
sale of a generic form of the
4
<PAGE>
Product, the royalty obligation set forth in Section 8.01 above
with respect to Net Sales attributable to the sale of the Product
in such country shall be reduced by *
Net Sales attributable to the sale of the Product in such country
unless and until Alliance is granted such valid patent coverage for
the Product in such country; provided that *
(g) ROYALTY TERM. Except where expressly provided otherwise in this
Agreement, all royalties to a Party shall be paid, on a
country-by-country basis, from the date of the First Commercial
Sale of each Product in a particular country until the later of (i)
ten (10) years from the First Commercial Sale in such country and
(ii) the last to expire of any valid Alliance Patents which covers
the use or sale of the Product in such country.
(h) DISCONTINUANCE. Subject to the provisions of Article XIV, Schering
may discontinue Commercialization of a Product at any time.
(i) LICENSE FOLLOWING EXPIRATION. Upon expiration of the royalty term
for a Product in the country as described above, Schering shall
thereafter have an exclusive (even as to Alliance), paid-up license
to Alliance Know-How to make, have made, use, sell, offer for sale,
have sold and import that Product in that country. In such event,
Schering shall retain responsibility for, and indemnify Alliance
from, the payment of all applicable royalties and other obligations
owed to a Third Party with respect to the Product."
6. Section 9.01 of the Agreement is amended as follows:
(a) The phrase "until Schering becomes the Manufacturing Party (as
provided for in Section 9.10 hereof)" is hereby deleted and
replaced with the phrase " *
in the
Territory."
(b) The sentence "Schering hereby agrees to purchase all of its
requirements of Product (to the capacity of Alliance's San Diego
facility)" is hereby added at the end of Section 9.01.
7. Section 9.10 of the Agreement is hereby amended to read in its entirety as
follows:
"SECTION 9.10. MANUFACTURE AND SUPPLY OF THE PRODUCT BY SCHERING.
Schering agrees to become the sole Party responsible for the manufacture
and supply of the Product when *
and, in such event, shall use commercially reasonable efforts to
manufacture and supply the Product (or arrange for such manufacture and
supply) to meet reasonable demand for the Product throughout the
Territory. Alliance shall provide reasonable assistance to Schering
with respect to the transfer of all manufacturing capabilities from
Alliance (or its subcontractors) to Schering. Schering
5
<PAGE>
agrees to reimburse Alliance for all direct costs reasonably incurred by
Alliance specifically attributable to the transfer of the manufacturing
capabilities; provided however, that an estimate of the expected costs
of such transfer be delivered to Schering in sufficient detail and at
least one (1) month prior to any such transfer."
8. Section 9.11 of the Agreement is amended by adding the following language
at the end of the first sentence thereof:
"; *
."
9. Section 14.02(a) of the Agreement is hereby amended to add the phrase:
"but in any event not before September 30, 1999" at the end of the first
sentence thereof.
10. Except as set forth herein, all other terms of the Agreement shall
remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first written above.
ALLIANCE PHARMACEUTICAL CORP. SCHERING AKTIENGESELLSCHAFT
By: \s\ Theodore D. Roth By: \s\ Dr. Eckhard Duchert
------------------------------ ------------------------------
Name: Theodore D. Roth Name: Dr. Eckhard Duchert
---------------------------- ----------------------------
Title: President & Chief Title: Head of Strategic
Operating Officer Marketing DG
--------------------------- ---------------------------
By: \s\ Dr. Uhich Koch
------------------------------
Name: Dr. Uhich Koch
----------------------------
Title: Head Corporate Licensing
---------------------------
6
<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>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 13,772,000
<SECURITIES> 23,071,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40,336,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 77,184,000
<CURRENT-LIABILITIES> 10,272,000
<BONDS> 0
0
6,000
<COMMON> 320,000
<OTHER-SE> 54,062,000
<TOTAL-LIABILITY-AND-EQUITY> 77,184,000
<SALES> 0
<TOTAL-REVENUES> 6,148,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 34,139,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (27,745,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (27,745,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,745,000)
<EPS-PRIMARY> (0.87)
<EPS-DILUTED> (0.87)
</TABLE>
