<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-K/A
(Amendment No. 1)
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended JUNE 30, 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 OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3040 Science Park Road, San Diego, CA 92121
- ---------------------------------------- --------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 619-558-4300
---------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
------------------- ----------------------------
NONE
- ---------------------------------------- --------------------------------------
- ---------------------------------------- --------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
common stock, par value $0.01.
- --------------------------------------------------------------------------------
(TITLE OF CLASS)
- --------------------------------------------------------------------------------
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
[COVER PAGE 1 OF 2 PAGES]
<PAGE>
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closing price of such stock on
the Nasdaq National Market on September 4, 1998, was $83 million.
The number of shares of the Registrant's common stock, $.01 par value,
outstanding at September 4, 1998 was 32,042,482.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report on Form 10-K is
incorporated by reference to the definitive Proxy Statement with respect to
the 1998 Annual Meeting of Shareholders, which the Registrant intends to file
with the Securities and Exchange Commission no later than 120 days after the
end of the fiscal year covered by this report.
[COVER PAGE 2 OF 2 PAGES]
<PAGE>
The undersigned registrant hereby amends Item 8 of its Form 10-K for the
fiscal year ended June 30, 1998, as filed with the Securities and Exchange
Commission on September 11, 1998, to add additional information regarding
anticipated capital requirements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Table of Contents to Consolidated Financial Statements on page F-1
below for a list of the Financial Statements being filed herein.
1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ALLIANCE PHARMACEUTICAL CORP.
(Registrant)
Date: April 13, 1999 By: /s/ THEODORE D. ROTH
--------------------------------------
Theodore D. Roth
President
2
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets at June 30, 1998 and 1997 F-3
Consolidated Statements of Operations for the Years
Ended June 30, 1998, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7 - F-14
</TABLE>
No consolidated financial statement schedules are filed herewith because they
are not required or are not applicable, or because the required information
is included in the consolidated financial statements or notes thereto.
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Alliance Pharmaceutical Corp.
We have audited the accompanying consolidated balance sheets of Alliance
Pharmaceutical Corp. and subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated July 31, 1998,
the Company, as discussed in Note 1 has experienced a substantial reduction
in revenues and increased costs that adversely affect the Company's current
results of operations and liquidity. Note 1 describes management's plans to
address these issues.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Alliance
Pharmaceutical Corp. and subsidiaries at June 30, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
July 31, 1998, except for Note 8,
as to which the date is August 14, 1998 and
the second paragraph of Note 1,
as to which the date is April 12, 1999
F-2
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30,
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,809,000 $ 15,368,000
Short-term investments 38,046,000 57,041,000
Research revenue receivable 6,847,000 7,250,000
Other current assets 694,000 1,147,000
-------------- --------------
Total current assets 57,396,000 80,806,000
PROPERTY, PLANT AND EQUIPMENT - NET 23,087,000 16,574,000
PURCHASED TECHNOLOGY - NET 12,880,000 14,400,000
OTHER ASSETS - NET 314,000 233,000
-------------- --------------
$ 93,677,000 $ 112,013,000
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,191,000 $ 2,807,000
Accrued expenses 3,121,000 3,439,000
Deferred revenue 2,286,000 2,500,000
Payable for acquired in-process technology - 7,557,000
Current portion of long-term debt 1,068,000 1,508,000
-------------- --------------
Total current liabilities 8,666,000 17,811,000
LONG-TERM DEBT 8,882,000 2,742,000
OTHER 39,000 129,000
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value; 5,000,000 shares authorized;
500,000 and 0 shares of Series D issued and outstanding at
June 30, 1998 and 1997, respectively; liquidation preference of
$10,000,000 and $0 at June 30, 1998 and 1997, respectively 5,000 -
Common stock - $.01 par value; 50,000,000 shares authorized;
31,994,338 and 31,164,935 shares issued and outstanding at
June 30, 1998 and 1997, respectively 320,000 311,000
Additional paid-in capital 340,016,000 322,268,000
Accumulated deficit (264,251,000) (231,248,000)
-------------- --------------
Total stockholders' equity 76,090,000 91,331,000
-------------- --------------
$ 93,677,000 $ 112,013,000
-------------- --------------
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUES:
License and research revenue $ 21,209,000 $ 44,580,000 $ 17,323,000
OPERATING EXPENSES:
Research and development 50,084,000 43,278,000 33,730,000
General and administrative 7,886,000 7,932,000 7,214,000
Acquired in-process technology - 16,450,000 -
-------------- -------------- --------------
57,970,000 67,660,000 40,944,000
-------------- -------------- --------------
LOSS FROM OPERATIONS (36,761,000) (23,080,000) (23,621,000)
INVESTMENT INCOME AND OTHER - NET 3,758,000 4,064,000 1,355,000
-------------- -------------- --------------
NET LOSS (33,003,000) (19,016,000) (22,266,000)
DIVIDENDS ON PREFERRED STOCK - - (906,000)
-------------- -------------- --------------
NET LOSS APPLICABLE TO COMMON SHARES $ (33,003,000) $ (19,016,000) $ (23,172,000)
-------------- -------------- --------------
-------------- -------------- --------------
NET LOSS PER COMMON SHARE:
Basic and diluted $ (1.04) $ (0.63) $ (0.91)
-------------- -------------- --------------
-------------- -------------- --------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted 31,749,000 30,302,000 25,504,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------- ---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- ---------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JUNE 30, 1995 1,500,000 $ 15,000 24,759,000 $ 248,000 $238,874,000 $(189,060,000)
Sale of convertible Series B and Series C
Preferred Stock 950,000 9,500 21,530,000
Sale of common stock 2,865,000 29,000 43,925,000
Exercise of stock options and warrants 745,000 7,000 6,548,000
Conversion of convertible Series A Preferred
Stock to common shares (1,500,000) (15,000) 750,000 7,500 8,000
Conversion of convertible Series B Preferred
Stock to common shares (750,000) (7,500) 750,000 7,500
Conversion of convertible preferred
stock dividend to common shares 75,000 1,000 1,499,000
Payment related to acquisition of technology
rights 50,000 757,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 8,000 114,000
Net unrealized gain on available-for-sale
securities 142,000
Dividends on preferred stock (906,000)
Net loss (22,266,000)
---------- ---------- ---------- ---------- ------------ -------------
BALANCES AT JUNE 30, 1996 200,000 2,000 30,002,000 300,000 313,397,000 (212,232,000)
Exercise of stock options and warrants 105,000 1,000 654,000
Conversion of convertible Series C Preferred
Stock to common shares (200,000) (2,000) 345,000 3,000 (1,000)
Payment related to acquired in-process technology 703,000 7,000 7,840,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 10,000 133,000
Net unrealized gain on available-for-sale securities 245,000
Net loss (19,016,000)
---------- ---------- ---------- ---------- ------------ -------------
BALANCES AT JUNE 30, 1997 - - 31,165,000 311,000 322,268,000 (231,248,000)
Exercise of stock options and warrants 104,000 1,000 741,000
Sale of convertible Series D Preferred Stock 500,000 5,000 9,595,000
Payment related to acquired in-process technology 706,000 8,000 7,492,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 19,000 141,000
Net unrealized loss on available-for-sale securities (221,000)
Net loss (33,003,000)
---------- ---------- ---------- ---------- ------------ -------------
BALANCES AT JUNE 30, 1998 500,000 $ 5,000 31,994,000 $ 320,000 $340,016,000 $(264,251,000)
---------- ---------- ---------- ---------- ------------ -------------
---------- ---------- ---------- ---------- ------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (33,003,000) $ (19,016,000) $ (22,266,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operations:
Depreciation and amortization 5,064,000 3,997,000 3,086,000
Charge for acquired in-process technology - 16,450,000 757,000
Non-cash compensation - net 320,000 133,000 277,000
Changes in operating assets and liabilities:
Research revenue receivable 403,000 (1,500,000) (3,690,000)
Other assets 372,000 888,000 219,000
Accounts payable and accrued
expenses and other (1,024,000) 1,162,000 (263,000)
Deferred revenue (214,000) 2,500,000 -
--------------- --------------- ---------------
Net cash provided by (used in) operating activities (28,082,000) 4,614,000 (21,880,000)
--------------- --------------- ---------------
INVESTING ACTIVITIES:
Short-term investments 18,775,000 5,183,000 (50,815,000)
Property, plant and equipment (10,057,000) (6,823,000) (4,010,000)
Payment for acquired in-process technology (57,000) (1,046,000) -
--------------- --------------- ---------------
Net cash provided by (used in) investing activities 8,661,000 (2,686,000) (54,825,000)
--------------- --------------- ---------------
FINANCING ACTIVITIES:
Issuance of common stock
and warrants 562,000 597,000 50,461,000
Issuance of convertible preferred stock - net 9,600,000 - 21,540,000
Proceeds from long-term debt 6,800,000 3,493,000 2,208,000
Principal payments on long-term debt (1,100,000) (908,000) (543,000)
--------------- --------------- ---------------
Net cash provided by financing activities 15,862,000 3,182,000 73,666,000
--------------- --------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,559,000) 5,110,000 (3,039,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15,368,000 10,258,000 13,297,000
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,809,000 $ 15,368,000 $ 10,258,000
--------------- --------------- ---------------
--------------- --------------- ---------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Payable for acquired in-process technology $ 7,557,000
Issuance of common stock in connection with
acquired in-process technology $ 7,500,000 $ 7,847,000
Issuance of common stock and warrants in connection with
acquisition of patent rights and related documents $ 757,000
Preferred stock dividends $ 906,000
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Alliance Pharmaceutical Corp. and its subsidiaries (collectively, the
"Company" or "Alliance") are engaged in identifying, designing, and
developing novel medical products.
LIQUIDITY
Since July 1, 1998, the Company has experienced a substantial reduction
in revenues and increased costs and believes its available cash, cash
equivalents and short-term investments are sufficient to meet its anticipated
capital requirements through August 1999 which raises substantial doubt about
its ability to continue as a going concern. Additionally, the Company is
currently in violation of one of its debt covenants. Substantial additional
capital resources will be required to fund continuing operations related to
the Company's research, development, manufacturing and business development
activities. The Company believes there may be a number of alternatives
available to meet the continuing capital requirements of its operations, such
as additional public or private equity financings and collaborative
arrangements. There can be no assurance that any of these potential
financings will be consummated in the necessary time frames needed for
continuing operations or on terms favorable to the Company. If adequate funds
are not available, the Company will be required to significantly curtail its
operating plans and may have to sell or license our significant portions of
the Company's technology or potential 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 1997 and 1996 have
been reclassified to conform to the current year's presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the consolidated financial
statements. Actual results could differ from those estimates.
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
Short-term investments consist of highly liquid debt instruments.
Management has classified the Company's short-term investments as
available-for-sale securities in the accompanying financial statements.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of
stockholders' equity. The Company considers instruments purchased with an
original maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Cash, cash equivalents, and short-term investments are financial
instruments which potentially subject the Company to concentration of credit
risk. The Company invests its excess cash primarily in U.S. government
securities and debt instruments of financial institutions and corporations
with strong credit ratings. The Company has established guidelines relative
to diversification and maturities to maintain safety and liquidity. These
guidelines are reviewed periodically and modified to take advantage of trends
in yields and interest rates. The Company has not experienced any material
losses on its short-term investments.
PROPERTY, PLANT, EQUIPMENT, AND OTHER ASSETS
Buildings, furniture, and equipment are stated at cost and depreciation
is computed using the straight-line method over the estimated useful lives of
3 to 25 years. Leasehold improvements are amortized using the straight-line
method over the shorter of the estimated useful lives of the assets or the
lease term. Technology and patent rights are amortized using the
straight-line method over 5 to 20 years.
PURCHASED TECHNOLOGY
The purchased technology was primarily acquired as a result of the
merger of Fluoromed Pharmaceutical, Inc. into a subsidiary of the Company in
1989. The technology acquired is the Company's core perfluorochemical
("PFC") technology and was valued based on an analysis of the present value
of future earnings anticipated from this technology at that time. The
Company identified alternative future uses for the PFC technology, including
the OXYGENT-TM-(temporary blood substitute) and LIQUIVENT-Registered
Trademark- (intrapulmonary oxygen carrier) products. Purchased technology
also includes $2 million for technology capitalized as a result of the
acquisition of BioPulmonics, Inc. ("BioPulmonics") in December 1991. Since
the acquisition, an alternative future use of the acquired technology has
been pursued by the Company. An intrapulmonary drug delivery system using
the PFC-based liquid as a carrier (or dispersing agent) is being developed by
Alliance from the liquid ventilation technology.
F-7
<PAGE>
The PFC technology is the basis for the Company's main drug development
programs and is being amortized over a 20-year life. The PFC technology has
a book value of $12.4 million and $13.5 million net of accumulated
amortization of $10.8 million and $9.7 million at June 30, 1998 and 1997,
respectively. The technology acquired from BioPulmonics has a book value of
approximately $480,000 and $850,000 and is being amortized over five to seven
years and is net of accumulated amortization of $1.5 million and $1.2 million
at June 30, 1998 and 1997, respectively.
The carrying value of purchased technology is reviewed periodically
based on the projected cash flows to be received from license fees, milestone
payments, royalties and other product revenues. If such cash flows are less
than the carrying value of the purchased technology, the difference will be
charged to expense.
ACQUIRED IN-PROCESS TECHNOLOGY
In November 1996, the Company acquired MDV by a merger (the "MDV
Merger") of a wholly owned subsidiary of the Company into MDV. MDV is
engaged in the development of a thermoreversible gel, FLOGEL-Registered
Trademark-, intended for use as an anti-adhesion treatment for persons
undergoing abdominal or pelvic surgeries. The consideration payable in the
MDV Merger consisted of $15.5 million, payable in common stock or cash, of
which $8 million was paid through the delivery of 703,093 shares of common
stock during fiscal 1997, and $7.5 million was paid through the delivery of
706,100 shares of common stock during fiscal 1998. Additionally, the Company
will pay up to $20 million if advanced clinical development or licensing
milestones are achieved in connection with MDV's technology. The Company
will also make certain royalty payments on the sales of products, if any,
developed from such technology. The Company may buy out its royalty
obligation for $10 million at any time prior to the first anniversary of the
approval by U.S. regulatory authorities of any products based upon the MDV
technology (the amount increasing thereafter over time). All of such
payments to the former MDV shareholders may be made in cash or, at the
Company's option, shares of the Company's common stock, except for the
royalty obligations which will be payable only in cash. The Company has not
determined whether subsequent payments (other than royalties) will be made in
cash or in common stock or, if made in cash, the source of such payments.
There can be no assurance that any of the contingent payments will be made
because they are dependent on future developments which are inherently
uncertain.
The Company has accounted for the MDV Merger as a purchase, and recorded
a one-time charge in fiscal 1997 of $16.5 million, including the $15.5
million payments described above and related transaction costs.
LONG-TERM DEBT
The Company entered into a loan and security agreement in August 1995
under which the Company received $2.2 million at an interest rate of 10.84%.
The loan was paid in full during fiscal 1998.
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
at the bank's prime rate plus .5% (9% at June 30, 1998). 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 June 30, 1998, the balance outstanding on this
loan was approximately $10 million.
The Company's principal payments for the long-term debt for the years
ending June 30, 1999, 2000, 2001, 2002 and 2003 are $1.1 million, $1.4
million, $1.4 million, $1.4 million and $4.6 million, respectively.
REVENUE RECOGNITION
Revenue under collaborative research agreements is recognized as
services are provided and milestone payments are recognized upon the
completion of the milestone event or requirement under such agreements.
Revenue from product sales is recognized as products are shipped.
Non-refundable contract fees that reimburse the Company for previously
incurred research and development are recorded as revenue upon contract
"execution."
F-8
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenditures are charged to expense as incurred.
ACCOUNTING FOR STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company has
elected to retain its current intrinsic value-based method and will disclose
the pro forma effect of using the fair value-based method to account for its
stock-based compensation in its financial statements.
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 options, warrants, 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.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Both of these standards
are effective for fiscal years beginning after December 15, 1997. SFAS No.
130 requires that all components of comprehensive income, including net
income, be reported in the financial statements in the period in which they
are recognized. The Company believes that comprehensive income or loss will
not be materially different than net income or loss. 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 is in the process of evaluating the
effect and believes that adoption of these standards will not have a material
impact on the Company's financial statements.
2. FINANCIAL STATEMENT DETAILS
PROPERTY, PLANT AND EQUIPMENT - NET
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
June 30,
1998 1997
------------ ------------
<S> <C> <C>
Land $ 225,000 $ 225,000
Buildings 300,000 300,000
Building improvements 2,193,000 1,657,000
Furniture, fixtures, and equipment 18,825,000 15,446,000
Leasehold improvements 15,542,000 9,402,000
------------ ------------
37,085,000 27,030,000
Less accumulated depreciation and amortization (13,998,000) (10,456,000)
------------ ------------
$ 23,087,000 $ 16,574,000
------------ ------------
------------ ------------
</TABLE>
F-9
<PAGE>
ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
June 30,
1998 1997
------------ ------------
<S> <C> <C>
Payroll and related expenses $ 2,786,000 $ 2,569,000
Rent and related operating expenses 205,000 206,000
Other 130,000 664,000
------------ ------------
$ 3,121,000 $ 3,439,000
------------ ------------
------------ ------------
</TABLE>
3. INVESTMENTS
The Company classifies its investment securities as available-for-sale
and records holding gains or losses in stockholders' equity.
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
-------------------------------------------- --------------------------------------------
Gross Unrealized Estimated Gross Unrealized Estimated
Cost Gains (Losses) Fair Value Cost Gains (Losses) Fair Value
-------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
Securities $ 12,785,000 $ 10,000 $ 12,795,000 $ 32,700,000 $ 242,000 $ 32,942,000
Corporate Securities 25,240,000 11,000 25,251,000 24,099,000 -- 24,099,000
-------------------------------------------- --------------------------------------------
$ 38,025,000 $ 21,000 $ 38,046,000 $ 56,799,000 $ 242,000 $ 57,041,000
-------------------------------------------- --------------------------------------------
-------------------------------------------- --------------------------------------------
</TABLE>
The gross realized gains on sales of available-for-sale securities
totaled $357,000 and $65,000, in 1998 and 1997, respectively. The gross
unrealized gains of $21,000 and $242,000, in 1998 and 1997, respectively,
are recorded as components of additional paid-in capital. The unrealized
gains had no cash effect and therefore are not reflected in the consolidated
statements of cash flows.
The amortized cost and estimated fair value of available-for-sale debt
securities at June 30, 1998 and 1997, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations.
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
-------------------------------- ------------------------------
Estimated Estimated
Cost Fair Value Cost Fair Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Due in one year or less $ 23,885,000 $ 23,885,000 $ 34,517,000 $ 34,759,000
Due after one year through three years 12,221,000 12,227,000 22,282,000 22,282,000
Due after three years 1,919,000 1,934,000 - -
-------------- -------------- -------------- --------------
$ 38,025,000 $ 38,046,000 $ 56,799,000 $ 57,041,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
4. STOCKHOLDERS' EQUITY
STOCK OPTION PLANS
The Company has a 1983 Incentive Stock Option Plan (the "1983 Plan"), a
1983 Non-Qualified Stock Option Program (the "1983 Program"), and a 1991
Stock Option Plan which provides for both incentive and non-qualified stock
options (the "1991 Plan"). These plans provide for the granting of options
to purchase shares of the Company's common stock (up to an aggregate of
500,000, 2,500,000, and 6,200,000 shares under the 1983 Plan, 1983 Program,
and 1991 Plan, respectively) to directors, officers, employees, and
consultants. The optionees, date of grant, option price (which cannot be
less than 100% and 80% of the fair market value of the common stock on the
date of grant for incentive stock options and non-qualified stock options,
respectively), vesting schedule, and term of options, which cannot exceed ten
years (five years under the 1983 Plan), are determined by the Compensation
Committee of the Board of Directors. The 1983 Plan has expired and no
additional options may be granted under such plan.
F-10
<PAGE>
The following table summarizes stock option activity through June 30, 1998:
<TABLE>
<CAPTION>
Weighted
Shares Average Price
-----------------------------------
<S> <C> <C>
Balance at June 30, 1995 3,043,988 $ 9.02
Granted 288,600 $ 13.62
Exercised (469,078) $ 7.73
Terminated/Expired (122,937) $ 13.47
--------------
Balance at June 30, 1996 2,740,573 $ 9.53
Granted 1,403,100 $ 13.07
Exercised (108,830) $ 6.67
Terminated/Expired (236,239) $ 13.65
--------------
Balance at June 30, 1997 3,798,604 $ 10.66
Granted 1,814,750 $ 8.89
Exercised (135,660) $ 5.44
Terminated/Expired (391,771) $ 11.47
--------------
Balance at June 30, 1998 5,085,923 $ 10.11
--------------
--------------
Available for future grant under the 1983 Program 37,185
--------------
--------------
Available for future grant under the 1991 Plan 1,375,520
--------------
--------------
</TABLE>
The following table summarizes information concerning outstanding and
exercisable stock options at June 30, 1998:
<TABLE>
<CAPTION>
Weighted
Weighted Average Weighted
Range of Exercise Number Average Remaining Number Average
Prices Outstanding Exercise Contractual Exercisable Exercise
Price Life Price
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.01 129,918 $0.01 0.4 years 129,918 $0.01
$ 3.25-$6.94 976,270 $5.28 6.4 years 680,920 $5.34
$ 7.00-$9.25 818,340 $8.40 5.5 years 535,630 $8.47
$ 9.38-$9.88 1,389,725 $9.41 9.1 years 151,975 $9.60
$10.00-$13.63 1,180,620 $12.70 7.6 years 437,575 $12.37
$14.00-$28.00 591,050 $19.13 5.2 years 455,375 $20.14
------------- -------------
5,085,923 $10.11 7.0 years 2,391,393 $10.13
------------- -------------
------------- -------------
</TABLE>
F-11
<PAGE>
The Company has adopted the disclosure-only provisions of SFAS No. 123.
In accordance with its provisions, the Company applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its stock
option plans, and accordingly, no compensation cost has been recognized for
stock options in 1998, 1997 or 1996. If the Company had elected to recognize
compensation cost based on the fair value of the options granted at grant
date amortized to expense over their vesting period as prescribed by SFAS No.
123, the Company's net loss and net loss per share would have been increased
to the pro forma amounts indicated below for the years ended June 30:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net loss
As reported $(33,003,000) $(19,016,000) $(23,172,000)
Pro forma (34,708,000) (21,453,000) (23,958,000)
Net loss per share
As reported $ (1.04) $ (.63) $ (.91)
Pro forma (1.09) (.71) (.94)
</TABLE>
The impact of outstanding non-vested stock options granted prior to 1996
has been excluded from the pro forma calculations; accordingly, the 1998,
1997 and 1996 pro forma adjustments are not indicative of future period pro
forma adjustments when the calculation will reflect all applicable stock
options. The fair value of options at date of grant was estimated using the
Black-Scholes option-pricing model with the following assumptions for 1998,
1997 and 1996, respectively: risk-free interest rate range of 5.63% to
6.63%, 5.25% to 6.5%, and 5.25% to 6.5%; dividend yield of 0% (for all
years); volatility factor of 66%, 63%, and 63%; and a weighted-average
expected term of 6 years, 4 years, and 4 years. The estimated weighted
average fair value at grant date for the options granted during 1998, 1997
and 1996 was $5.85, $6.90 and $7.02 per option, respectively.
WARRANTS
At June 30, 1998, the Company had warrants outstanding to purchase
573,835 shares of common stock at prices ranging from $6.67 to $20 per share.
The warrants expire on various dates from August 1998 through February 2001.
PREFERRED STOCK
In fiscal 1996, in conjunction with a license agreement, Hoechst Marion
Roussel, Inc. ("HMRI") purchased 750,000 shares of the Company's convertible
Series B Preferred Stock and 200,000 shares of its convertible Series C
Preferred Stock for an aggregate of $22 million. In June 1996, all
outstanding shares of convertible Series A Preferred Stock (issued to Johnson
& Johnson Development Corp. ("J&JDC") in 1995) and Series B Preferred Stock
and accrued dividends thereon were converted into 815,625 and 759,375 shares
of Alliance common stock, respectively. In June 1997, all outstanding shares
of Series C Preferred Stock were converted into 345,327 shares of Alliance
common stock (see Note 5). In September 1997, in conjunction with a license
agreement, Schering Berlin Venture Corp. ("SBVC"), an affiliate of Schering
AG, Germany ("Schering"), purchased 500,000 shares of the Company's
convertible Series D Preferred Stock for $10 million. The Series D Preferred
Stock is convertible into Alliance common stock upon certain events at a rate
based upon a 20 day average of the closing market prices of the common stock
at the time of conversion. The Series D Preferred Stock is entitled to one
vote per share and has no annual dividend.
The Series A Preferred Stock carried a cumulative annual dividend of
$0.50 per share. The Series B Preferred Stock carried a cumulative annual
dividend of $1.00 per share. The dividends were payable in cash or common
stock. In June 1996, these dividends were paid by issuing 75,000 shares of
Alliance common stock.
5. LICENSE AGREEMENTS
In August 1994, the Company executed a license agreement (the "Ortho
License Agreement") with Ortho Biotech Inc. and The R.W. Johnson
Pharmaceutical Research Institute, a division of Ortho Pharmaceutical
Corporation (collectively referred to as "Ortho"), which provided Ortho with
worldwide marketing and, at its election, manufacturing rights to the
Company's injectable perfluorochemical emulsions capable of transporting
oxygen for therapeutic use, including OXYGENT. Ortho agreed to pay to
Alliance a royalty based upon sales of products after commercialization. In
addition, Ortho paid to Alliance an initial license fee of $4 million and
agreed to make other payments upon the achievement of certain milestones.
Under the agreement, Ortho was responsible for substantially all of the costs
of developing and marketing the products. In December 1996, Ortho paid the
Company a $15 million milestone payment. In conjunction with the Ortho
License Agreement, J&JDC purchased 1.5 million shares of Alliance Series A
Preferred Stock for $15 million and obtained a three-year warrant to purchase
300,000 shares of Alliance common stock at $15 per share. In June 1996, the
preferred stock and warrant were converted into common stock (see Note 4).
In May 1998, Ortho and the Company restructured the agreement.
F-12
<PAGE>
Under the restructured agreement, Alliance assumed responsibility for
worldwide development of OXYGENT at its own cost, and Ortho retained certain
rights to be the exclusive marketing agent for the product.
In February 1996, the Company entered into a license agreement (the
"HMRI License Agreement") with HMRI, which provided HMRI with worldwide
marketing and manufacturing rights to the intratracheal administration of
liquids, including LIQUIVENT, which perform bronchoalveolar lavage or liquid
ventilation. Under the agreement, HMRI was responsible for most of the costs
of development and marketing of LIQUIVENT. On June 30, 1997, HMRI paid the
Company a $2.5 million milestone payment and $2.5 million for the purchase of
clinical trial supplies. The Company also announced in June 1997 that the
parties agreed in principle to modify the HMRI License Agreement to (i)
adjust certain milestone payments, (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
recorded the $2.5 million in clinical trial supplies as deferred revenue and
at June 30, 1998 the unused supplies were approximately $2.3 million. In
December 1997, the HMRI License Agreement was terminated. Therefore,
Alliance has not been reimbursed for its LIQUIVENT development expenses since
July 1, 1997, and it will be responsible for all future LIQUIVENT development
expenses worldwide. HMRI has no continuing rights to the development or
marketing of LIQUIVENT. The parties are considering a repurchase by Alliance of
clinical trial supplies from HMRI. In May 1998, HMRI asserted a claim for an
amount up to $7.5 million, payable in 2002 in cash or common stock, at the
Company's election. The Company does not believe that the claim is
meritorious and intends to vigorously contest such claim.
In September 1997, the Company entered into a license agreement (the
"Schering License Agreement") with Schering, which provides Schering with
worldwide exclusive marketing and manufacturing rights to Alliance's drug
compounds, drug compositions, and medical devices and systems related to
perfluorocarbon ultrasound imaging products, including IMAGENTS. The product
will be developed jointly by Alliance and Schering. Under the Schering
License Agreement, Schering paid to Alliance an up-front, non-refundable
initial license fee of $4 million and agreed to pay further milestone
payments and royalties on product sales. Schering also agreed to provide
funding to Alliance for some of its development expenses. In conjunction
with the Schering License Agreement, SBVC purchased 500,000 shares of the
Company's convertible Series D Preferred stock for $10 million.
6. INCOME TAXES
Significant components of the Company's deferred tax assets as of June
30, 1998 are shown below. A valuation allowance of $96,202,000, of which
$9,111,000 is related to 1998, has been recognized to offset the deferred tax
assets as realization of such assets is uncertain.
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
June 30,
1998 1997
------------- -------------
<S> <C> <C>
Net operating loss carryforwards $ 74,481,000 $ 69,360,000
Research and development credits 8,571,000 8,220,000
Capitalized research expense 10,744,000 7,286,000
Other - net 2,406,000 2,225,000
------------- -------------
Total deferred tax assets 96,202,000 87,091,000
Valuation allowance for deferred tax assets (96,202,000) (87,091,000)
------------- -------------
Net deferred tax assets $ -- $ --
------------- -------------
------------- -------------
</TABLE>
Approximately $3,580,000 of the valuation allowance for deferred tax
assets relates to stock option deductions which, when recognized, will be
allocated to contributed capital.
At June 30, 1998, the Company had federal and various state net
operating loss carryforwards of approximately $206,015,000 and $41,320,000,
respectively. The difference between the federal and state tax loss
carryforwards is primarily attributable to the capitalization of research and
development expenses for California tax purposes and the fifty percent
limitation on California loss carryforwards. The federal tax loss
carryforwards will begin expiring in fiscal 1999, unless previously utilized.
The California tax loss carryforwards will continue to expire in fiscal 1999
unless previously utilized. The Company also has federal and state research
and development tax credit carryforwards of $8,879,000 and $2,868,000,
respectively, which will begin expiring in fiscal 1999 unless previously
utilized.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual
use of the Company's net operating loss and credit carryforwards may be
limited because of cumulative changes in ownership of more than 50% which
have
F-13
<PAGE>
occurred; however, the Company does not believe such limitation will have a
material impact upon the utilization of these carryforwards.
7. COMMITMENTS
The Company leases certain office and research facilities in San Diego
and certain equipment under operating leases. Provisions of the facilities
lease provide for abatement of rent during certain periods and escalating
rent payments during the lease terms based on changes in the Consumer Price
Index. Rent expense is recognized on a straight-line basis over the term of
the leases.
Minimum annual commitments related to operating lease payments at June
30, 1998 are as follows:
<TABLE>
<CAPTION>
Years ending June 30,
---------------------
<S> <C>
1999 $ 3,389,000
2000 2,406,000
2001 2,262,000
2002 2,331,000
2003 1,617,000
Thereafter 4,306,000
------------
Total $ 16,311,000
------------
------------
</TABLE>
Rent expense for fiscal 1998, 1997, and 1996 was $3.4 million, $2.6
million, and $2.1 million, respectively.
8. SUBSEQUENT EVENT
In August 1998, the Company sold 100,000 shares of its convertible
Series E-1 Preferred Stock to certain investors for $6 million and retained
the right to sell similar preferred stock periodically through early 1999 in
an amount not to exceed an additional $14 million. The preferred shares are
convertible at the option of the holder into common stock at $6 per share
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. In recognition of this beneficial conversion feature, the Company will
recognize an imputed dividend of approximately $450,000 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 the same voting rights as common stock and has
a liquidation preference of $60 per share. 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.
F-14
