<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 March 31, 1999
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 executive offices) Zip Code
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 May 10, 1999, Registrant had 33,242,830 shares of its Common Stock, $.01
par value, outstanding.
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
- -----------------------------------------------
<TABLE>
<CAPTION>
INDEX Page No.
- ----- ---------
<S> <C>
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 6. Exhibits and Reports on Form 8-K 15
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30,
1999 1998
----------------------- -----------------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,789,000 $ 11,809,000
Short-term investments 2,989,000 38,046,000
Research revenue receivable 3,875,000 6,847,000
Other current assets 379,000 694,000
----------------------- -----------------------
Total current assets 23,032,000 57,396,000
PROPERTY, PLANT AND EQUIPMENT - NET 23,817,000 23,087,000
PURCHASED TECHNOLOGY - NET 11,740,000 12,880,000
OTHER ASSETS - NET 646,000 314,000
----------------------- -----------------------
$ 59,235,000 $ 93,677,000
----------------------- -----------------------
----------------------- -----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,557,000 $ 2,191,000
Accrued expenses 1,533,000 3,121,000
Deferred revenue 2,286,000 2,286,000
Current portion of long-term debt 14,120,000 1,068,000
----------------------- -----------------------
Total current liabilities 20,496,000 8,666,000
LONG-TERM DEBT - 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
March 31, 1999 and June 30, 1998 5,000 5,000
52,163 and 0 shares of Series E-1 issued and outstanding at
March 31, 1999 and June 30, 1998, respectively 1,000 -
Common stock - $.01 par value; 75,000,000 shares authorized; 33,181,593
and 31,994,338 shares issued and outstanding at
March 31, 1999 and June 30, 1998, respectively 332,000 320,000
Additional paid-in capital 346,048,000 340,016,000
Accumulated deficit (307,671,000) (264,251,000)
----------------------- -----------------------
Total stockholders' equity 38,715,000 76,090,000
----------------------- -----------------------
$ 59,235,000 $ 93,677,000
----------------------- -----------------------
----------------------- -----------------------
</TABLE>
Note: The balance sheet at June 30, 1998 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
------------------ ------------------ ------------------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
License and research revenue $ 1,021,000 $ 4,331,000 $ 7,169,000 $ 16,144,000
OPERATING EXPENSES:
Research and development 14,771,000 13,414,000 44,735,000 37,238,000
General and administrative 2,101,000 2,285,000 6,276,000 5,965,000
------------------ ------------------ ------------------- ------------------
16,872,000 15,699,000 51,011,000 43,203,000
------------------ ------------------ ------------------- ------------------
LOSS FROM OPERATIONS (15,851,000) (11,368,000) (43,842,000) (27,059,000)
INVESTMENT INCOME AND OTHER - NET 176,000 1,207,000 905,000 3,084,000
------------------ ------------------ ------------------- ------------------
NET LOSS (15,675,000) (10,161,000) (42,937,000) (23,975,000)
IMPUTED DIVIDEND ON
SERIES E-1 PREFERRED STOCK - - (483,000) -
------------------ ------------------ ------------------- ------------------
NET LOSS APPLICABLE TO COMMON SHARES $ (15,675,000) $ (10,161,000) $ (43,420,000) $ (23,975,000)
------------------ ------------------ ------------------- ------------------
------------------ ------------------ ------------------- ------------------
NET LOSS PER COMMON SHARE:
BASIC AND DILUTED $ (0.48) $ (0.32) $ (1.35) $ (0.76)
------------------ ------------------ ------------------- ------------------
------------------ ------------------ ------------------- ------------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC AND DILUTED 32,550,000 31,946,000 32,202,000 31,657,000
------------------ ------------------ ------------------- ------------------
------------------ ------------------ ------------------- ------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
1999 1998
---------------------- ----------------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (42,937,000) $ (23,975,000)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization 4,495,000 3,737,000
Non-cash compensation - net - 320,000
Changes in operating assets and liabilities:
Research revenue receivable 2,972,000 1,073,000
Deferred revenue - (214,000)
Other assets (17,000) (158,000)
Accounts payable and accrued expenses and other (1,237,000) (1,821,000)
---------------------- ----------------------
Net cash used in operating activities (36,724,000) (21,038,000)
---------------------- ----------------------
INVESTING ACTIVITIES:
Purchases of short-term investments (23,711,000) (86,726,000)
Sales and maturities of short-term investments 58,747,000 100,398,000
Property, plant and equipment (4,085,000) (6,430,000)
Payment for acquired in-process technology - (57,000)
---------------------- ----------------------
Net cash provided by investing activities 30,951,000 7,185,000
---------------------- ----------------------
FINANCING ACTIVITIES:
Issuance of common stock 1,000 526,000
Issuance of convertible preferred stock 5,582,000 9,600,000
Proceeds from long-term debt 5,050,000 6,800,000
Principal payments on long-term debt (880,000) (750,000)
---------------------- ----------------------
Net cash provided by financing activities 9,753,000 16,176,000
---------------------- ----------------------
INCREASE IN CASH AND CASH EQUIVALENTS 3,980,000 2,323,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,809,000 15,368,000
---------------------- ----------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,789,000 $ 17,691,000
---------------------- ----------------------
---------------------- ----------------------
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
<PAGE>
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 March 31, 1999, the
condensed consolidated statements of operations for the three and nine months
ended March 31, 1999 and 1998, and the condensed consolidated statements of
cash flows for the nine months ended March 31, 1999 and 1998 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/A 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 $11.5 million and $12.4 million, net of accumulated
amortization of $11.7 million and
6
<PAGE>
$10.8 million at March 31, 1999 and June 30, 1998, respectively. The
technology acquired from BioPulmonics has a book value of approximately
$214,000 and $471,000, and is being amortized over five to seven years and is
net of accumulated amortization of $1.8 million and $1.5 million at March 31,
1999 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 stockholders' 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 March 31, 1999 and 1998, the total
comprehensive loss, which includes the unrealized loss on available-for-sale
securities, was $15,673,000 and $10,289,000, respectively. During the nine
months ended March 31, 1999 and 1998, the total comprehensive loss was
$42,959,000 and $24,192,000, 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
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.
2. LONG-TERM DEBT
As of March 31, 1999, the Company had not satisfied its financial
covenant as required by the loan and security agreement. The Company has
reclassified $12 million from long-term debt to the current liabilities
section of the Balance Sheet.
7
<PAGE>
3. 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 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. As of March 31, 1999, the
liquidation preference was $3.1 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 ("FDA") 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
8
<PAGE>
(collectively referred to as "Ortho") in May 1998, and the reduction in the
on-going reimbursements from Schering, Alliance has incurred a substantial
increase in development expenses and a substantial decrease in related
research revenue relative to prior years and expects to continue to do so.
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 March 1999, 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. 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. The Company
has a $1.5 million line of credit available with a bank which is primarily
available to cover letters of credit securing the leased premises
obligations. In January 1997, the Company entered into a loan and security
agreement with another 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
$15 million. Amounts borrowed are secured by assets, including equipment and
machinery, and are to be repaid over 4.5 years. As of May 10, 1999, the
outstanding bank loan balance had been reduced to $13.9 million. The loan
agreement requires the Company to have at all times cash, cash equivalents
and receivables of at least $25 million. As of March 1999, the Company's
cash, cash equivalents and receivables were below $25 million and it is in
violation of its agreement with the bank. Under the loan agreement, the bank
may demand that the Company pay all of its loan in full or the bank may take
possession of the assets that secure the loan. If the Company is forced to
pay off the loan with existing cash, it would not be able to continue current
development operations and would be forced to sell assets, including
technology, to raise capital. The bank has indicated that if the Company
raises $18 million in capital, it will reduce the cash covenant to $10
million ($5 million of which will be held by the bank as collateral), take a
lien on some of the Company's patents and otherwise restructure the loan
payments to increase principal payments.
The Company is currently conducting a public offering to raise up to $20
million. The Company is also looking at other opportunities to raise capital.
Additionally, the Company is in the process of taking several actions to
reduce its on-going expenses, including on-going reductions in workforce,
attempting to sublease certain of its facilities to third parties, reducing
certain experimental research, and winding down certain development
activities. However, no assurances can be given that the Company will be able
to raise the necessary capital, restructure the bank debt, or reduce the
on-going expenses sufficiently to allow continued operations of the Company.
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
9
<PAGE>
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 was terminated before January 1, 1998. The
Company sold $2.5 million in clinical trial supplies to HMRI and recorded it
as deferred revenue. At March 31, 1999, the unused supplies were
approximately $2.3 million. In December 1997, the HMRI License Agreement was
terminated. Therefore, Alliance has not been reimbursed for its LIQUIVENT
development expenses since July 1, 1997, and it is 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, which rights have been re-acquired by the Company. In 1998, Ortho
reimbursed the Company $10.2 million for research and development expenses.
As a result of the restructuring, Alliance incurred a substantial increase in
development expenses related to OXYGENT and a substantial decrease in related
research revenue over prior years.
10
<PAGE>
The Company had net working capital of $2.5 million at March 31, 1999,
compared to $48.7 million at June 30, 1998. The Company's cash, cash
equivalents, and short-term investments decreased to $18.8 million at March
31, 1999 from $49.9 million at June 30, 1998. The decrease resulted primarily
from cash used in operations of $36.7 million, and property, plant and
equipment additions of $4.1 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-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
11
<PAGE>
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
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 cost 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
12
<PAGE>
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.
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1999 AS COMPARED WITH NINE MONTHS ENDED
MARCH 31, 1998
The Company's license and research revenue decreased by approximately $9
million to $7.2 million for the nine months ended March 31, 1999, compared to
$16.1 million for the nine months ended March 31, 1998. The decrease is
primarily a result of the decreased research revenue from Ortho under the
Ortho License Agreement. 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 20% to $44.7 million for
the nine months ended March 31, 1999, compared to $37.2 million for the nine
months ended March 31, 1998. The increase in expenses was primarily due to a
$4.6 million increase in payments to outside researchers for clinical trials
and other product development work, a $1.3 million increase in staffing costs
for employees primarily engaged in research and development activities, a
$665,000 increase in rent and lease expense, a $709,000 increase in
depreciation expense, as well as other increases related to the Company's
research and development activities. The increase for the nine-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 $6.3 million for the nine
months ended March 31, 1999, compared to $6 million for the nine months ended
March 31, 1998. The increase in general and administrative expenses was
primarily due to a $320,000 increase in professional fees.
13
<PAGE>
Investment income and other was $905,000 for the nine months ended March
31, 1999, compared to $3.1 million for the nine months ended March 31, 1998.
The decrease was primarily a result of lower average cash and short-term
investment balances.
THREE MONTHS ENDED MARCH 31, 1999 AS COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1998
The Company's license and research revenue decreased by $3.3 million to
$1 million for the three months ended March 31, 1999, compared to $4.3
million for the three months ended March 31, 1998. The decrease is primarily
a result of the decreased research revenue from Ortho under the Ortho License
Agreement. 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 10% to $14.8 million for
the three months ended March 31, 1999, compared to $13.4 million for the
three months ended March 31, 1998. The increase in expenses was primarily due
to a $1.4 million increase in payments to outside researchers for clinical
trials and other product development work, as well as other increases related
to the company's research and development activities.
General and administrative expenses were $2.1 million for the three
months ended March 31, 1999, compared to $2.3 million for the three months
ended March 31, 1998.
Investment income and other was $176,000 for the three months ended
March 31, 1999, compared to $1.2 million for the three months ended March 31,
1998. 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
14
<PAGE>
Company believes that the ultimate resolution will not have a material
adverse effect on the Company's financial condition, results of operations or
liquidity. However, no assurances can be given that the Company will prevail
on the claim or that an adverse result will not have a material adverse
effect on the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10 (a) Employment Letter Agreement dated February 26, 1999 and executed
by Dr. Artemios B. Vassos;
(b) Promissory Note in the amount of $180,000, dated March 3, 1999 and
executed by Dr. Artemios B. Vassos in favor of the Company;
(c) Promissory Note in the amount of $125,000, dated March 3, 1999 and
executed by Dr. Artemios B. Vassos in favor of the Company;
(d) Promissory Note in the amount of $125,000, dated March 3, 1999 and
executed by Dr. Artemios B. Vassos in favor of the Company.
(b) There was no report on Form 8-K
15
<PAGE>
Alliance Pharmaceutical Corp.
Form 10-Q
EXHIBIT INDEX
The following exhibits are being filed herewith:
Number Document
------ ------------
10(a) Employment Letter Agreement dated February 26, 1999 and
executed by Dr. Artemios B. Vassos
10(b) Promissory Note in the amount of $180,000, dated March 3,
1999 and executed by Dr. Artemios B. Vassos in favor of
the Company
10(c) Promissory Note in the amount of $125,000, dated March 3,
1999 and executed by Dr. Artemios B. Vassos in favor of
the Company
10(d) Promissory Note in the amount of $125,000, dated March 3,
1999 and executed by Dr. Artemios B. Vassos in favor of
the Company
<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: May 13, 1999
<PAGE>
EXHIBIT 10(a)
[LOGO]
February 26, 1999
Dr. Artemios B. Vassos
2675 North Maple Road
Ann Arbor, MI 48103
Dear Dr. Vassos:
This letter will set forth the basic terms of your offer of at-will
employment with Alliance Pharmaceutical Corp. Upon your acceptance of
employment by March 5, 1999, you will be employed by Alliance as Executive
Vice President and Chief Scientific Officer, reporting to Duane J. Roth. If
you accept this offer of employment, it is anticipated that you will begin
work on or before March 4, 1999.
You will receive an annual salary of $210,000 and a car allowance, payable in
accordance with Alliance's usual payroll practices. You will also be eligible
for the Company's variable pay program. In addition, you will receive an
option to purchase up to 75,000 shares of Alliance common stock, vesting 25%
annually, commencing on the first anniversary of the grant. The exercise
price for such option shares shall be the market price of Alliance stock (as
quoted by NASDAQ) on today's date.
Relocation costs will be provided by Alliance, through Relocation
Coordinates. Please contact them directly to coordinate all moving
activities. Relocation expenses include:
- Reasonable expenses of moving, including packing, insurance, and
shipping.
- Transportation costs for the employee and his/her family at the time
of the move, not to exceed the rate of an economy class air ticket
for each family member and employee, regardless of mode of
transportation.
- Two trips to the new location (for employee and spouse) for the
purposes of securing a new residence; additional trips are subject
to the approval of the CEO.
- Closing costs, as agreed upon in advance, incurred in the selling of
the employee's prior residence and the purchase of a new residence.
- Reimbursement for points requires approval from the CEO.
Alliance employees are required to execute and abide by the terms and
conditions set forth in Alliance's standard employee confidentiality
agreement, and other standard employee policies. You will be entitled to
participate in any benefit plans which are available to other employees,
including three weeks paid vacation per year. Group health and life insurance
will be effective the first of the month following 30 days employment.
<PAGE>
Dr. Artemios B. Vassos
February 26, 1999
Page 2
Additionally, you will receive a loan for the acquisition of a house in the
amount of $250,000. One half of the loan plus interest on such portion will
be forgiven in three annual installments beginning on the first anniversary
of your date of employment; payable within 90 days if you leave the company
before it is forgiven. The remaining $125,000 loan shall be payable over five
years (on a monthly basis deducted from payroll) from the first date of your
employment; payable within 90 days upon termination of employment. Interest
shall accrue on the loans at a fixed rate equal to 7.75% per annum.
Additionally, we will lend you an additional [$180,000] to you, such amount
payable by you with interest at 7.75% per annum, upon the sale of your home
in Michigan; payable within 90 days upon termination of employment. We will
also pay your mortgage payment on the Michigan home for 3 months.
Your term of employment will be for up to two years. In the event you are
terminated without cause by Alliance during the first two years of
employment, you will receive your base rate of pay for the lesser of 12
months or the amount of time then remaining in your employment term, to be
paid in accordance with the Company's normal payroll practices. You will be
provided with an agreement setting forth the severance benefits.
If there are no questions regarding the foregoing offer, please acknowledge
your acceptance by signing and returning this letter in the envelope
provided. I look forward to welcoming you to Alliance!
Sincerely,
/s/ DUANE J. ROTH
- ---------------------
Duane J. Roth
Chairman and
Chief Executive Officer
Accepted: /s/ AB VASSOS Date: March 1, 1999
_______________________________________ ___________________
Rejected: _______________________________________ Date: ___________________
<PAGE>
EXHIBIT 10(b)
PROMISSORY NOTE
$180,000.00 March 3, 1999
San Diego, California
1. FOR VALUE RECEIVED, the undersigned maker promises to pay Alliance
Pharmaceutical Corp. ("Alliance"), at 3040 Science Park Road, San Diego,
California, the principal sum of One Hundred Eighty Thousand Dollars
($180,000) with interest on the unpaid principal at the rate of seven and
three-quarters percent (7.75%) per annum during the time such principal
remains outstanding.
2. This Note is payable ninety (90) days after demand; provided that
unless and until demand is made, all outstanding principal and interest shall
be payable within five (5) days of the closing of the sale of maker's
residence located at 2675 North Maple Road, Ann Arbor, Michigan 48103;
provided further that in the event the undersigned's employment with Alliance
is terminated for any reason, the entire outstanding balance of principal and
interest shall be paid in full within ninety (90) days of such termination.
Maker hereby authorizes Alliance to deduct any payments on this Note,
scheduled or otherwise, from maker's earnings from Alliance at any time.
3. This Note may be prepaid in whole or in part at any time without
penalty or premium, provided that each such prepayment shall be applied first
to accrued interest.
4. Maker's spouse hereby acknowledges that she will benefit from the
proceeds of this loan, and agrees to the terms of this Note.
5. The maker of this Note and maker's spouse hereby waive presentment,
demand, protest or notice of any kind, and agree to reimburse Alliance for
any costs or expenses of collection or enforcement (including attorney's
fees) of this Note.
6. Maker and maker's spouse hereby agree to execute and deliver a deed of
trust on any real property of maker, including maker's residence, granting a
lien on such property to secure the repayment of this Note at any time.
7. This Note shall be construed in accordance with and governed by the laws
of the State of California.
IN WITNESS WHEREOF, the undersigned has caused this Note to
be duly executed and delivered as of the date set forth above.
Maker's Spouse
/s/ DR. ARTEMIOS B. VASSOS /s/ KATHLEEN FRAZIER
- ----------------------------------- ---------------------------------
Dr. Artemios B. Vassos Kathleen Frazier
<PAGE>
EXHIBIT 10(c)
PROMISSORY NOTE
$125,000.00 March 3, 1999
San Diego, California
1. FOR VALUE RECEIVED, the undersigned maker promises to pay Alliance
Pharmaceutical Corp. ("Alliance"), at 3040 Science Park Road, San Diego,
California, the principal sum of One Hundred Twenty-Five Thousand Dollars
($125,000) with interest on the unpaid principal at the rate of seven and
three-quarters percent (7.75%) per annum during the time such principal
remains outstanding.
2. Provided maker remains employed with Alliance, on each of March 15,
2000 and March 15, 2001, Alliance shall forgive $41,000 of outstanding
principal and all accrued interest under this Note, and all remaining
principal and accrued interest shall be forgiven on March 15, 2002.
Notwithstanding the foregoing, in the event the undersigned's employment with
Alliance is terminated for any reason, the entire outstanding balance of
principal and interest at the time of termination shall be paid in full
within ninety (90) days of such termination. Maker hereby authorizes Alliance
to deduct any payments on this Note, scheduled or otherwise, from maker's
earnings from Alliance at any time.
3. This Note may be prepaid in whole or in part at any time without
penalty or premium, provided that each such prepayment shall be applied first
to accrued interest.
4. Maker's spouse hereby acknowledges that she will benefit from the
proceeds of this loan, and agrees to the terms of this Note.
5. The maker of this Note and maker's spouse hereby waive presentment,
demand, protest or notice of any kind, and agree to reimburse Alliance for
any costs or expenses of collection or enforcement (including attorney's
fees) of this Note.
6. Maker and maker's spouse hereby agree to execute and deliver a deed of
trust on any real property of maker, including maker's residence, granting a
lien on such property to secure the repayment of this Note at any time.
7. This Note shall be construed in accordance with and governed by the laws
of the State of California.
IN WITNESS WHEREOF, the undersigned has caused this Note to be duly
executed and delivered as of the date set forth above.
Maker's Spouse
/s/ DR. ARTEMIOS B. VASSOS /s/ KATHLEEN FRAZIER
- ----------------------------------- ---------------------------------
Dr. Artemios B. Vassos Kathleen Frazier
<PAGE>
EXHIBIT 10(d)
PROMISSORY NOTE
$125,000.00 March 3, 1999
San Diego, California
1. FOR VALUE RECEIVED, the undersigned maker promises to pay Alliance
Pharmaceutical Corp. ("Alliance"), at 3040 Science Park Road, San Diego,
California, the principal sum of One Hundred Twenty-Five Thousand Dollars
($125,000) with interest on the unpaid principal at the rate of seven and
three-quarters percent (7.75%) per annum during the time such principal
remains outstanding.
2. Principal and interest on this Note shall be payable in installments of
$1,157.80 every pay day at Alliance, commencing with Alliance's pay day on
March 24, 1999 and continuing thereafter until all principal and interest
have been paid in full; provided that in the event the undersigned's
employment with Alliance is terminated for any reason, the entire outstanding
balance of principal and interest shall be paid in full within ninety (90)
days of such termination. Maker hereby authorizes Alliance to deduct any
payments due on this Note, scheduled or otherwise, from maker's earnings from
Alliance at any time.
3. This Note may be prepaid in whole or in part at any time without
penalty or premium, provided that each such prepayment shall be applied first
to accrued interest.
4. Maker's spouse hereby acknowledges that she will benefit from the
proceeds of this loan, and agrees to the terms of this Note.
5. The maker of this Note and maker's spouse hereby waive presentment,
demand, protest or notice of any kind, and agree to reimburse Alliance for
any costs or expenses of collection or enforcement (including attorney's
fees) of this Note.
6. Maker and maker's spouse hereby agree to execute and deliver a deed of
trust on any real property of maker, including maker's residence, granting a
lien on such property to secure the repayment of this Note at any time.
7. This Note shall be construed in accordance with and governed by the laws
of the State of California.
IN WITNESS WHEREOF, the undersigned has caused this Note to be duly
executed and delivered as of the date set forth above.
Maker's Spouse
/s/ DR. ARTEMIOS B. VASSOS /s/ KATHLEEN FRAZIER
- ----------------------------------- ---------------------------------
Dr. Artemios B. Vassos Kathleen Frazier
<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> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 15,789,000
<SECURITIES> 2,989,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,032,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 59,235,000
<CURRENT-LIABILITIES> 20,496,000
<BONDS> 0
0
6,000
<COMMON> 332,000
<OTHER-SE> 38,377,000
<TOTAL-LIABILITY-AND-EQUITY> 59,235,000
<SALES> 0
<TOTAL-REVENUES> 7,169,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 51,011,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (43,420,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (43,420,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,420,000)
<EPS-PRIMARY> (1.35)
<EPS-DILUTED> (1.35)
</TABLE>
