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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
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X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------ EXCHANGE ACT OF 1934
For the fiscal year ended JUNE 30, 2000
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OR
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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.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
New York 14-1644018
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3040 Science Park Road, San Diego, CA 92121
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (858) 410-5200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
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NONE
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Securities registered pursuant to Section 12(g) of the Act:
common stock, par value $0.01.
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(TITLE OF CLASS)
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(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
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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. [ ]
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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 August 25, 2000, was $694 million.
The number of shares of the Registrant's common stock, $.01 par value,
outstanding at August 25, 2000 was 47,587,273.
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
2000 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.
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PART I
EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS SET FORTH IN THIS REPORT ARE
FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH HEREIN. THE
COMPANY REFERS YOU TO CAUTIONARY INFORMATION CONTAINED ELSEWHERE HEREIN, IN
OTHER DOCUMENTS THE COMPANY FILES WITH THE SECURITIES AND EXCHANGE COMMISSION
FROM TIME TO TIME, AND THOSE RISK FACTORS SET FORTH IN THE COMPANY'S RECENT
REGISTRATION STATEMENT ON FORM S-3 (REGISTRATION NUMBER 333-33242).
ITEM 1. BUSINESS
Alliance Pharmaceutical Corp. (the "Company" or "Alliance") is a
pharmaceutical research and development company that focuses on developing
scientific discoveries into medical products and licensing these products to
multinational pharmaceutical companies in exchange for fixed payments and
royalty or profit sharing payments. To date, the Company has developed three
innovative products through initial clinical (human) trials and is in, or has
completed, pivotal clinical trials for these products. The products are
OXYGENT-TM-, an intravascular oxygen carrier to temporarily augment oxygen
delivery in surgical and other patients at risk of acute tissue hypoxia
(oxygen deficiency); LIQUIVENT-Registered Trademark-, an intrapulmonary agent
for use in reducing a patient's exposure to the harmful effects of
conventional mechanical ventilation; and IMAVIST-TM- (formerly named
IMAGENT-Registered Trademark-), an intravenous contrast agent for enhancement
of ultrasound images to assess cardiac function and organ lesions and to
detect blood flow abnormalities. Alliance and Baxter Healthcare Corporation
("Baxter") have formed a joint venture to further develop and market OXYGENT
in the US, Canada and Europe, and IMAVIST is licensed on a worldwide basis to
Schering AG, Germany ("Schering").
The Company's strategy is to identify potential new medical products
through its own efforts and scientific collaborations with researchers and
clinicians in universities and medical centers where many of the basic causes of
disease and potential targets for new therapies are discovered. Using its
experience in defining pharmaceutical formulations, designing manufacturing
processes, conducting preclinical pharmacology and toxicology studies, and
conducting human testing, Alliance endeavors to advance these discoveries into
clinical development. The Company seeks collaborative relationships for the
final stages of product development, including completing late-phase human
testing, obtaining worldwide regulatory approvals, building large-scale
manufacturing capacities, and marketing.
The Company was incorporated in New York in 1983. Its principal executive
offices are located at 3040 Science Park Road, San Diego, California 92121, and
its telephone number is (858) 410-5200.
PRODUCTS WHICH ARE IN OR HAVE COMPLETED PHASE 3 CLINICAL DEVELOPMENT
Three of Alliance's products are currently in or have completed late-stage
clinical development for a first indication. These are OXYGENT, LIQUIVENT, and
IMAVIST, which are based upon perfluorochemical ("PFC") and emulsion
technologies. PFCs are biochemically inert compounds and may be employed in a
variety of therapeutic and diagnostic applications. The Company's primary drug
substance is perflubron, a brominated PFC that has a high solubility for
respiratory gases and can be used to transport these gases throughout the body.
OXYGENT. OXYGENT (perflubron emulsion) is an intravascular oxygen carrier to
temporarily augment oxygen delivery in surgical and other patients at risk of
acute tissue oxygen deficit. It is intended to be used as a temporary oxygen
carrier to provide oxygen to tissues during elective surgeries where substantial
blood loss is anticipated. It is estimated that approximately eight to ten
million patients worldwide annually receive one or more units of donor blood
during elective surgeries, including, cardiovascular, orthopedic, and general
surgical procedures. An oxygen carrier could be used instead of donor blood for
a portion of these patients. A single unit of OXYGENT is expected to provide the
equivalent oxygen delivery of one to two units of red blood cells.
In addition to the well-publicized risks of infectious disease transmission
(e.g., HIV, hepatitis) and potential immune suppression effects related to blood
transfusions, there are emerging concerns regarding the availability and quality
of donor blood. The National Blood Data Resource Center ("NBDRC") has released
data showing that blood donations have decreased while blood usage has increased
over the past several years. These trends have led the NBDRC to predict that
this year (2000) the U.S. will experience a deficit of approximately 250,000
units of red blood cells available for
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transfusion. This expected blood shortage may be further exacerbated by the
August 17, 1999 recommendation of the U.S. Food and Drug Administration
("FDA") to prohibit donations from individuals who spent a cumulative six
months in the United Kingdom between the years 1980 and 1996, and are
therefore potentially at risk of having been exposed to infected beef that
may be linked to new variant Creutzfeld-Jakob Disease (CJD). Additionally,
there are concerns regarding the quality of donor blood because of a "storage
lesion" effect. The effect is a progressive deterioration of red blood cell
function that occurs while the blood is stored. This reduces the immediate
oxygen transport effectiveness of the donor red cells, which are typically
stored for up to six weeks prior to their use in transfusions.
These issues have heightened the search for alternatives that reduce or
eliminate the need for donor blood in elective surgeries and that are not
subject to the storage lesion effect. OXYGENT is a sterile emulsion that is
compatible with all blood types and is expected to have a shelf-life of
approximately two years. It is manufactured using a cost-effective, proprietary
process at Alliance's commercial-scale facility that has the potential to
produce approximately 800,000 units annually. OXYGENT may be used with other
autologous (a patient's own blood) blood collection techniques, including
Alliance's proprietary AUGMENTED ACUTE NORMOVOLEMIC HEMODILUTION technique.
In May 2000, enrollment in a Phase 3 clinical trial in general surgery
patients was completed in Europe. Preliminary results are expected to be
available this fall after conclusion of the patient follow-up period and data
compilation. If positive, results from this study and several previous
clinical trials involving more than 1,000 patients are expected to be
included in a Marketing Authorization Application (MAA) that is being
prepared for filing with the European Medicines Evaluation Agency. If
approved, the MAA will enable OXYGENT to receive a single marketing
authorization simultaneously in all European Union countries. In December
1999, the Company announced that it had initiated a Phase 3 clinical trial
involving approximately 600 patients undergoing coronary artery bypass
grafting (CABG) procedures with cardiopulmonary bypass (CPB) support.
This study is being conducted primarily in the U.S. with additional medical
centers in Canada and Europe. If successful, Alliance anticipates that the
cardiac surgery data will be combined with the European data from noncardiac
surgery patients to support a broad label claim in the U.S. for the use of
OXYGENT to avoid transfusion in patients undergoing various surgical
procedures.
In May 2000, the Company and Baxter entered into a joint venture for the
manufacturing, marketing, sales and distribution of OXYGENT in the United
States, Canada and countries in the European Union (the "Baxter Territory").
Under the arrangement, Baxter purchased $20 million of convertible preferred
stock in Alliance. In order for Baxter to maintain its rights to commercialize
the product, Baxter is required to purchase an additional $30 million of
convertible redeemable preferred stock through September 2001. Once OXYGENT is
launched, Alliance will also receive royalty income and an ongoing share in the
profits generated by product sales.
LIQUIVENT. LIQUIVENT (neat perflubron) is an intrapulmonary agent for use in
reducing a patient's exposure to the harmful effects of conventional mechanical
ventilation. Each year, more than 800,000 patients in the U.S. are placed on
mechanical gas ventilators for treatment of lung dysfunction. Some of these
patients suffer from acute respiratory failure, a disorder that can result from
many causes, including serious infections, traumatic shock, severe burns, or
inhalation of toxic substances. Acute respiratory failure is generally
characterized by an excessive inflammatory response, which leads to blockage of
the small airways and collapse of alveoli, resulting in inadequate gas exchange
and impairment of normal lung function. The most urgent need for these patients
is to improve their blood oxygenation; however, the prolonged use of high
ventilatory pressures or high continuous concentrations of inspired oxygen can
further damage the patients' lungs. Some of these patients may benefit from
treatment with LIQUIVENT.
LIQUIVENT is intended to be used according to a proprietary technique
called PARTIAL LIQUID VENTILATION-TM- ("PLV"). In this procedure, the drug is
administered through an endotracheal tube into the lungs of a patient being
supported by a mechanical ventilator. The initial goal of LIQUIVENT/PLV therapy
is to open collapsed alveoli to improve gas exchange. Once this has been
accomplished, ventilator pressure and oxygen concentration may be lowered to
minimize ventilator-induced lung trauma. Published results from initial clinical
trials have indicated that LIQUIVENT improved lung oxygenation, without
clinically significant side effects. In clinical studies, LIQUIVENT has also
been observed to promote the migration of mucus and alveolar debris to the
central airways, where suctioning and removal is easier. The ability to remove
such debris may reduce the excessive inflammatory response associated with acute
respiratory failure and enhance the effectiveness of other therapeutic
interventions, all serving potentially to reduce patient recovery time. The FDA
has granted Subpart E status (expedited review) for the product.
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In November 1998, the Company initiated a Phase 2-3 trial with LIQUIVENT
involving adult patients with acute lung injury and acute respiratory distress
syndrome at numerous medical centers in the U.S., Canada and Europe. In March
2000, the Company announced that an interim review of the Phase 2-3 clinical
data by an independent Data Safety Monitoring Board indicated that there were no
safety concerns warranting any alteration of the study. Additionally, a planned
interim analysis determined that the study should be adjusted slightly to
include approximately 45 additional patients. The Company expects to complete
enrollment for the entire study by December, 2000. Additional studies may be
necessary prior to submitting LIQUIVENT to the FDA for approval.
IMAVIST (formerly named Imagent). IMAVIST is an intravenous contrast agent
for enhancement of ultrasound images to assess cardiac function.
Additionally, IMAVIST has the potential to detect organ lesions and blood
flow abnormalities. More than 30 million scans of the heart, vasculature, and
abdominal organs are performed annually in the U.S., some of which may
potentially benefit from a cost-effective contrast agent. To be successful in
the marketplace, ultrasound contrast agents should provide enhanced
diagnostic images during several minutes of scanning, be easy to use, be
stable during transportation, and have a long shelf-life. IMAVIST is being
developed to meet these requirements.
IMAVIST is a powder comprising hollow microspheres containing a mixture of
PFC vapor and gas and water-soluble components that are known to be acceptable
for parenteral use. Prior to use, IMAVIST is constituted with water to form
microbubbles that are then injected into the patient. The gas microbubbles are
highly echogenic and, when delivered intravenously, reflect sound-wave signals
that enhance ultrasound images. In clinical trials with IMAVIST, gray-scale
contrast enhancement of cardiac, abdominal, and vascular structures has been
observed with no serious adverse events.
In 1999, the Company completed two Phase 3 studies with IMAVIST that
successfully demonstrated a clinically and highly statistically significant
improvement in visualization of the walls of the heart (endocardial border
delineation) compared to standard (non-contrasted) ultrasound imaging. In
October 1999, the Company submitted a New Drug Application ("NDA") to the FDA
and in August 2000, the Company received a letter from the FDA stating that it
found the NDA to be approvable. The Company is currently working to satisfy the
remaining requirements to obtain approval from the FDA. In 1999, the Company
completed a small Phase 2 clinical study in prostate cancer patients. Additional
evaluation studies are planned.
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 IMAVIST. The product is
being developed jointly by Alliance and Schering.
OTHER PRODUCTS
PULMOSPHERES-Registered Trademark-. PULMOSPHERES are hollow, porous spheres (in
powder form) suspended in perflubron or fluorochemical propellants for the
purpose of drug delivery, primarily to the lungs. Drugs can be stabilized within
the wall structure of these respirable particles, which are typically 1-3
microns in diameter. Laboratory and preclinical testing indicates that
PULMOSPHERE formulations may provide advantages over current formulation
technologies with regard to particle suspension stability and flow aerodynamics,
which could enhance the efficiency of pulmonary drug delivery.
In November 1999, the Company transferred to Inhale Therapeutic Systems,
Inc. ("Inhale") certain rights to the PULMOSPHERES technology and other assets
for use in respiratory drug delivery. The Company received $15 million in cash
from Inhale and $5 million in Inhale stock. Alliance will also receive milestone
payments based on the achievement of future defined events, plus additional
royalty payments based on eventual sales of a defined number of products
commercialized using the technology. In May 2000, Inhale announced that it
successfully completed a small Phase 1 (safety) clinical trial with
PULMOSPHERES.
RODA-Registered Trademark-. In July 1997, the Company entered into a development
agreement (the "VIA Development Agreement") with VIA Medical Corporation ("VIA")
for the joint development of RODA (Real-time Oxygen Dynamics Analyzer). RODA is
a minimally invasive, point-of-care patient monitoring system that combines
oxygen dynamics software designed by the Company with VIA's ex vivo blood gas
and chemistry sensor technology. RODA is intended to provide continuous
(intermittent) measurements of certain blood chemistry and blood gas parameters,
as well as an overall assessment of surgical and intensive care patients'
cardiovascular and oxygenation status. The Company has conducted pilot clinical
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studies in the U.S. and Europe to assess its oxygen dynamics software and VIA
developed an engineering prototype of the final device to use for clinical
testing and regulatory submissions. In August 1998, Alliance and VIA entered
into a manufacturing, marketing and distribution agreement (the "VIA Marketing
Agreement") whereby VIA is primarily responsible for manufacturing and marketing
RODA, and the parties will share revenues from the sale of products. The
companies will seek a worldwide marketing partner.
FLOGEL-Registered Trademark-. MDV Technologies, Inc. ("MDV"), a wholly-owned
subsidiary of Alliance, is developing a thermo-reversible gel, FLOGEL, intended
for use as an anti-adhesion treatment for patients undergoing abdominal or
pelvic surgeries. FLOGEL is applied in a cold liquid form and becomes a gel at
body temperature, forming a barrier between tissues. Alliance has completed a
pilot clinical trial to evaluate FLOGEL as a device to reduce the DE NOVO (new)
formation and reformation of post-surgical adhesions following gynecologic
surgery. Data from the trial indicated that FLOGEL reduced the number, total
severity and overall extent of adhesions that formed following laparoscopic
surgery. Alliance is seeking a partner for FLOGEL for its further development
and marketing. In addition to the anti-adhesion product, MDV also has patents
covering the use of gels for drug delivery and ophthalmic indications. The
Company will pay former shareholders of MDV milestone payments and royalties
upon the occurrence of clinical development, licensing, or commercialization
events.
Alliance is also supporting internal research efforts to expand the
applicability of its core technologies. In addition, the Company intends to
consider other technologies that may be available for licensing and research
agreements with other institutions or inventors. Alliance intends, where
appropriate, to seek outside sources of funding. If new license and research
agreements are added and the Company is not able to obtain outside sources of
funding, the Company's losses from research and development activities are
expected to increase significantly.
The Company's products require substantial development efforts. The Company
may encounter unforeseen technical or other problems which may force delay,
abandonment, or substantial change in the development of a specific product or
process, or technological change, or product development by others, any of which
may materially adversely affect its business. The Company expends substantial
amounts of money on research and development and expects to do so for the
foreseeable future. In fiscal 2000, 1999 and 1998, the Company incurred research
and development expenses of $54.6 million, $60.4 million and $50.1 million,
respectively.
COLLABORATIVE RELATIONSHIPS
BAXTER HEALTHCARE CORPORATION. In May 2000, Alliance and Baxter entered into
a joint venture for the manufacture, marketing, sales and distribution of
OXYGENT in the Baxter Territory. The companies formed PFC Therapeutics, LLC
("PFC Therapeutics") to oversee the further development, manufacture,
marketing, sales and distribution of OXYGENT; and each party invested $5
million in PFC Therapeutics. In connection with the transaction, PFC
Therapeutics obtained an exclusive license in the Baxter Territory to
manufacture, market, sell and distribute all of the Company's injectable PFC
emulsions capable of transporting oxygen in therapeutic effective amounts in
the bloodstream, including OXYGENT. PFC Therapeutics paid Alliance a prepaid
royalty of $10 million. Alliance and Baxter will also share in the
distribution of PFC Therapeutics' future cash flows. Under the arrangement,
Alliance will continue to fund the current development plan for OXYGENT'S
initial approval in the Baxter Territory. PFC Therapeutics has a right of
first offer to license OXYGENT in one or more countries outside the Baxter
Territory. Pursuant to a manufacturing and supplier agreement between
Alliance and PFC Therapeutics, Alliance will initially manufacture OXYGENT
for distribution in the Baxter Territory. Under separate agreements between
Baxter and PFC Therapeutics, Baxter has the exclusive right to promote,
market, distribute and sell OXYGENT in the Baxter Territory, and Baxter has
the right to take over the manufacturing responsibility for OXYGENT. In
connection with this arrangement, Baxter has purchased 500,000 shares of the
Company's convertible Series F Preferred Stock for $20 million. In order for
Baxter to maintain its rights to commercialize the product, Baxter is
required to purchase an additional $30 million of convertible redeemable
preferred stock from Alliance through September 2001.
SCHERING AG. 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 IMAVIST. This product is being developed jointly by Alliance and
Schering. Under the Schering License Agreement, Schering paid to Alliance an
initial license fee of $4 million and agreed to pay further milestone payments
and royalties on product sales. Schering also agreed to provide funding to
Alliance for some of its development expenses. In conjunction with the Schering
License Agreement, Schering Berlin Venture Corp. ("SBVC"), an affiliate of
Schering, purchased 500,000 shares of the Company's
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convertible Series D Preferred Stock for $10 million. In February 2000, the
Series D Preferred Stock converted into 1,000,000 shares of common stock.
VIA MEDICAL CORPORATION. In July 1997, the Company entered into the VIA
Development Agreement for the joint development of RODA. Pursuant to the VIA
Development Agreement, VIA will combine Alliance's oxygen dynamics software with
VIA's EX VIVO blood gas and chemistry sensor technology. Alliance reimburses VIA
for substantially all of its development costs and will be responsible for
obtaining regulatory approval of the product. In August 1998, Alliance and VIA
entered the VIA Marketing Agreement whereby VIA is primarily responsible for
manufacturing and marketing RODA, and the parties will share revenues from
product sales. The companies will seek a worldwide marketing partner.
INHALE THERAPEUTIC SYSTEMS, INC. In November 1999, the Company transferred to
Inhale certain rights to the PULMOSPHERES technology and other assets for use in
respiratory drug delivery. The Company received $15 million in cash from Inhale
and $5 million in Inhale stock. Alliance will also receive milestone payments
based on the achievement of future defined events, plus additional royalty
payments based on eventual sales of a defined number of products commercialized
using the technology. Inhale has agreed that Alliance can commercialize two
respiratory products that will be formulated by Inhale utilizing the
PULMOSPHERES technology on a royalty-free basis. As partial consideration for $5
million in Alliance stock, Alliance has retained the right to use the technology
to develop products for drug delivery in conjunction with liquid ventilation, as
well as an unlimited number of PULMOSPHERES-based non-respiratory products such
as topical and injectable formulations.
The Company intends to obtain new collaborative relationships for
LIQUIVENT, and to also obtain collaborative relationships for its other
products. There can be no assurances that the Company will be able to enter into
future collaborative relationships on acceptable terms. The termination of any
collaborative relationship or failure to enter into such relationships may limit
the ability of the Company to develop its technology and may have a material
adverse effect on the Company's business.
MARKETING
The Company does not have internal marketing and sales capabilities. The
Company's strategy is for its collaborative partners to market and sell any
products which it successfully develops. Currently, Schering will be solely
responsible for all activities related to marketing and sales of IMAVIST and
Baxter will be solely responsible for all activities related to marketing and
sales of OXYGENT in the Baxter Territory. The Company intends to obtain
appropriate marketing relationships for its other products. To the extent that
the Company enters into co-promotion or other licensing arrangements, any
revenues received by the Company will be dependent on the efforts of third
parties, and there can be no assurance that any such efforts will be successful.
Further, there can be no assurance that the Company will be able to enter into
future marketing relationships on acceptable terms. The termination of any
marketing relationships may limit the ability of the Company to market its
products, thereby materially adversely affecting its business.
Should the Company have to market and sell its products directly, the
Company would need to develop a marketing and sales force with technical
expertise and distribution capability. The creation of infrastructure to
commercialize pharmaceutical products is an expensive and time-consuming
process. There can be no assurance that the Company would be able to establish
marketing and sales capabilities or be successful in gaining market acceptance
for its products.
MANUFACTURING
The Company manufactures all of its products for preclinical testing and
clinical trials. OXYGENT is produced at a commercial-scale manufacturing
facility in San Diego, California. The Company believes that this production
facility will provide sufficient capacity for future clinical trials and market
launch of OXYGENT, if and when it is approved by the FDA. However, a larger
facility may be required in the future. Baxter has the right to take over
responsibility for manufacturing OXYGENT for sale in the Baxter Territory.
LIQUIVENT is manufactured for clinical trials at the Company's Otisville,
New York facility. LIQUIVENT is the same drug substance as IMAGENT GI, for which
Alliance obtained FDA approval in August 1993 as an oral contrast agent for
magnetic resonance imaging. As a result, certain chemistry, manufacturing, and
control requirements have been accepted by the FDA. This may benefit the Company
in the regulatory review process. The Company believes the Otisville facility
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has sufficient capacity for market launch of LIQUIVENT, if and when it is
approved by the FDA. However, a larger facility may be required in the future.
IMAVIST is manufactured in San Diego for clinical studies at its
commercial-scale facility. It is manufactured using a proprietary process to
form dry, PFC vapor-containing spheres which are reconstituted with an aqueous
solution to form microbubbles just prior to use. Alliance has expanded its
market launch production capacity in San Diego for IMAVIST. 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.
If facility expansion for any of the Company's products is necessary, it
may occur in stages, each of which would require regulatory approval, and
product demand could at times exceed supply capacity. The Company has not
selected a site for any expanded facilities and cannot predict the amount it
will expend for the construction of any facilities. The Company does not know
when or whether the FDA will determine that such facilities comply with Good
Manufacturing Practices. The projected location and construction of a facility
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.
SOURCES AND AVAILABILITY OF RAW MATERIALS
Prior to obtaining FDA approval for its products, the Company will seek to
obtain long-term supply for its principal raw materials. Raw materials used in
the Company's products cannot be changed without equivalency testing of any new
material by the Company and approval of the FDA. The Company has obtained a
sufficient inventory of perflubron, the principal raw material utilized in
OXYGENT and LIQUIVENT, for clinical trials. The Company and Baxter are
negotiating with a potential supplier to secure a long-term supply of
perflubron. The Company also believes it has a sufficient supply of the
principal raw material for IMAVIST for clinical trials and has negotiated a
long-term supply agreement for that material. Although some raw materials for
its products are currently qualified from only one source, the Company attempts
to acquire a substantial inventory of such materials and to negotiate long-term
supply arrangements. The Company believes it will not have any raw material
supply issues; however, no assurances can be given that a long-term supply will
be obtained for such materials on terms acceptable to the Company. The Company's
business could be materially and adversely affected if it or its collaborative
partners are unable to obtain qualified raw materials on a timely basis and at a
cost-effective price.
PATENTS
The Company seeks proprietary protection for its products, processes,
technologies and ongoing improvements. The Company is pursuing patent protection
in the U.S. and in foreign countries that it regards as important for future
endeavors. Numerous patent applications have been filed in the European Patent
Office, Australia, Canada, Israel, Japan, Norway, South Africa and other
countries, and patents have been granted in many of these countries.
Alliance has numerous issued U.S. patents related to or covering PFC
emulsions with corresponding patents and applications in Europe and Japan. Such
emulsions are the basis of the Company's OXYGENT products. The issued patents
and pending patent applications cover specific details of emulsified PFCs
through product-by-process claims, composition claims, and method claims
describing their manufacture and use. In addition to the specific OXYGENT
formulation, issued patents broadly cover concentrated PFC emulsions, as well as
methods for their manufacture and use.
In September 1994, Alliance received a U.S. patent for its preferred method
of using blood substitutes to facilitate oxygen delivery. A related U.S. patent
was issued in September 1995. Corresponding patents are issued or pending in
Europe, Japan and other countries. The issued claims cover methods for
facilitating autologous blood use in conjunction with administering
oxygen-enriched gas and oxygen carriers that contain fluorochemicals, as well as
those derived from human, animal, plant or recombinant hemoglobin, in order to
reduce or eliminate the need for allogeneic blood transfusions during surgery.
The Company has filed U.S. and foreign patent applications on its method of
using oxygen-carrying PFCs to enhance respiratory gas exchange utilizing
conventional gas ventilators. In August 1995, a U.S. patent licensed to the
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Company issued covering methods of administering liquids, including LIQUIVENT,
to patients. Other U.S. patents covering additional methods of enhancing
patients' respiratory gas exchange by administering liquids, including
LIQUIVENT, have issued subsequently. The Company also has issued patents and
pending patent applications regarding the use of PFCs to deliver drugs to the
lungs and to wash debris from, and open, collapsed lungs. In November 1995, the
Company received a U.S. patent covering the use of fluorochemicals to treat
localized and systemic inflammation. Additionally, the Company has issued
patents and pending applications that cover apparatus for liquid ventilation
using PFCs.
Alliance has several issued U.S. patents and patent applications related to
IMAVIST. The issued patents and pending applications contain claims directed to
the manufacture and use of novel stabilized microbubble compositions based on
the discovery that PFC gases, in combination with appropriate surfactants or
other non-PFC gases, can stabilize microbubbles for use in ultrasonic imaging.
The patents further contain claims directed to formulations and compositions
that cover IMAVIST. International applications directed to the same subject
matter are also issued or pending. In May 2000, the Company received its fifth
U.S. patent covering the use of various contrast agents, including IMAVIST, in
harmonic imaging.
The Company also has issued patents and pending patent applications
covering its novel fluorinated surfactants. These compounds may be useful in
oxygen-carrying or drug transport compositions, and in liposomal formulations
that have therapeutic and diagnostic applications. Additionally, the fluorinated
compounds may be employed in cosmetics, protective creams, and lubricating
agents, as well as being incorporated in emulsions, microemulsions and gels that
may be useful as drug delivery vehicles or contrast agents. The Company also has
pending applications relating to its PULMOSPHEREs technology and various types
of emulsions and microstructures (tubules, helixes, fibers) that may have uses
in the fields of medicine, biomolecular engineering, microelectronics and
electro-optics.
The Company, through its wholly owned subsidiary, MDV, has numerous issued
U.S. patents and pending applications related to the composition, use and
manufacture of FLOGEL. Corresponding patents have issued, or applications have
been filed, in Europe, Japan and certain other foreign countries. MDV also has
issued patents in the U.S. and Europe covering the use of poloxamer gels for the
prevention of adhesion formation, delivery of drugs and ophthalmic applications.
Aside from the issued patents and allowed applications referred to above,
no assurance can be given that any of these applications will result in issued
U.S. or foreign patents. Although patents are issued with a presumption of
validity and require a challenge with a high degree of proof to establish
invalidity, no assurance can be given that any issued patents would survive such
a challenge and would be valid and enforceable. Although certain patents of the
Company are subject to such ongoing challenges and Alliance has challenged the
patents of other companies, Alliance believes that the outcome of these
challenges will not have a material adverse effect on the Company's proprietary
technology position.
The Company also attempts to protect its proprietary products, processes
and other information by relying on trade secret laws and non-disclosure and
confidentiality agreements with its employees, consultants, and certain other
persons who have access to such products, processes and information. The
agreements affirm that all inventions conceived by employees are the exclusive
property of the Company, with the exception of inventions unrelated to the
Company's business and developed entirely on the employees' own time.
Nevertheless, there can be no assurance that these agreements will afford
significant protection against or adequate compensation for misappropriation or
unauthorized disclosure of the Company's trade secrets.
COMPETITION
Biotechnology and pharmaceutical companies are highly competitive. There
are many pharmaceutical companies, biotechnology companies, public and private
universities, and research organizations actively engaged in research and
development of products that may be similar to Alliance's products. Many of the
Company's existing or potential competitors have substantially greater
financial, technical and human resources than the Company and may be better
equipped to develop, manufacture and market products. These companies may
develop and introduce products and processes competitive with or superior to
those of the Company. In addition, other technologies or products may be
developed that have an entirely different approach or means of accomplishing the
intended purposes of the Company's products, which might render the Company's
technology and products uncompetitive or obsolete. There can be no assurance
that the Company will be able to compete successfully.
7
<PAGE>
Well-publicized side effects associated with the transfusion of human donor
blood have spurred efforts to develop a temporary blood substitute. There are
two primary approaches for oxygen delivery: PFC emulsions and hemoglobin
solutions. Hemoglobin development efforts include chemically modified,
stroma-free hemoglobin from human or bovine red blood cells, and the use of
genetic engineering to produce recombinant hemoglobin. There are several
companies working on hemoglobin solutions as a temporary oxygen carrier "blood
substitute," three of which are in Phase 3 clinical trials. The Company believes
that the relatively low cost and ease of production of OXYGENT provide
advantages over hemoglobin-based products. Alliance is aware of two other
early-stage companies developing PFC-based temporary oxygen carriers, neither of
which has progressed to clinical trials.
Although liquid ventilation therapy has been in the research phase for many
years, the Company is unaware of any potential liquid ventilation competitor
that has reached the clinical trial stage; however, other companies are
evaluating compounds with the possibility of entering this field. If major
manufacturers of PFCs entered the field, the Company could face competition from
companies with substantially greater resources. The Company believes that its
patent position and stage of research and development give it an advantage over
potential competitors. Several other companies are attempting to develop
alternative types of therapies for treatment of acute respiratory failure. One
company is in a Phase 3 clinical trial for acute respiratory failure with a
surfactant, and several others have started Phase 2 clinical trials with various
compounds for acute respiratory failure.
Competition in the development of ultrasound imaging contrast agents is
intense. There is currently one available ultrasound contrast agent for certain
cardiology applications in the U.S. There are currently five that have been
approved in Europe, two of which are currently being sold. In addition, there
are currently two companies that have filed NDAs with the FDA seeking approval
to market their products. Certain companies are in advanced clinical trials for
the use of ultrasound contrast agents for assessing certain organs and vascular
structures. The Company expects that competition in the ultrasound contrast
imaging agent field will be based primarily on each product's safety profile,
efficacy, stability, ease of administration, breadth of approved indications,
and physician, healthcare payor and patient acceptance. The Company believes if
and when IMAVIST is approved for commercial sale, it will be well positioned to
compete successfully, although there can be no assurance that the product will
be able to do so.
PRODUCT LIABILITY CLAIMS AND UNINSURED RISKS
The sale or use of the Company's present products and any other products or
processes that may be developed or sold by the Company may expose the Company to
potential liability from claims by end-users of such products or by
manufacturers or others selling such products, either directly or as a component
of other products. While the Company has product liability insurance, there can
be no assurance that the Company will continue to maintain such insurance or
that it will provide adequate coverage. If the Company is held responsible for
damages in a product liability suit, the Company's financial condition could be
materially and adversely affected.
GOVERNMENT REGULATION
The Company's products require governmental approval before production and
marketing can commence. The regulatory approval process is administered by the
FDA in the U.S. and by similar agencies in foreign countries. The process of
obtaining regulatory clearances or approvals is costly and time-consuming. The
Company cannot predict how long the necessary clearances or approvals will take
or whether it will be successful in obtaining them.
Generally, all potential pharmaceutical products must successfully complete
two major stages of development (preclinical and clinical testing) prior to
receiving marketing approval by the governing regulatory agency. In preclinical
testing, potential compounds are tested both in vitro and in animals to gain
safety information prior to administration in humans. Knowledge is obtained
regarding the effects of the compound on bodily functions as well as its
absorption, distribution, metabolism and elimination.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase 1, which frequently begins with the
initial introduction of the drug into healthy human subjects prior to
introduction into patients, the compound is tested for safety and dosage
tolerance. Phase 2 typically involves studies in a larger patient population to
identify possible adverse effects and safety risks, to begin gathering
preliminary efficacy data, and to investigate potential dose sizes and
schedules. Phase 3 trials are undertaken to further evaluate clinical efficacy
and to
8
<PAGE>
further test for safety within an expanded patient population. Each trial is
conducted in accordance with standards under protocols that detail the
objectives of the study, the parameters to be used to monitor safety, and the
efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as
part of the investigational new drug application. Further, each clinical study
must be evaluated by an independent review board at the institution at which the
study will be conducted. The review board will consider, among other things,
ethical factors, the safety of human subjects and the possible liability of the
institution.
Following completion of these studies, an NDA must be submitted to and
approved by the FDA in order to market the product in the U.S. Similar
applications are required in foreign countries. There can be no assurance that,
upon completion of the foregoing trials, the results will be considered adequate
for government approval. If and when approval is obtained to market a product,
the FDA's (or applicable foreign agency's) regulations will govern manufacturing
and marketing activities.
The FDA has established a designation to speed the availability of new
therapies for life-threatening or severely debilitating diseases. This
designation, defined in Subpart E of the FDA's investigational new drug
regulations, may expedite clinical evaluation and regulatory review of some new
drugs, such as LIQUIVENT which has been so designated.
Perflubron is an eight-carbon halogenated fluorocarbon liquid. Certain
halogenated fluorocarbons (primarily the gaseous chlorofluorocarbons) have been
implicated in stratospheric ozone depletion. The FDA issued a Finding of No
Significant Impact under the National Environmental Protection Act in connection
with the approval for marketing of IMAGENT GI, a perflubron-based drug
previously developed by the Company; however, all materials contained in the
Company's products remain subject to regulation by governmental agencies.
In addition to FDA regulation, the Company is subject to regulation by
various governmental agencies including, without limitation, the Drug
Enforcement Administration, the U.S. Department of Agriculture, the
Environmental Protection Agency, the Occupational Safety and Health
Administration, and the California State Department of Health Services, Food and
Drug Branch. Such regulation, by governmental authorities in the U.S. and other
countries may impede or limit the Company's ability to develop and market its
products.
EMPLOYEES
As of August 14, 2000, the Company had 234 full-time employees, of whom 202
were engaged in research and development, production and associated support, two
in business development and market research, and 30 in general administration.
There can be no assurance that the Company will be able to continue attracting
and retaining sufficient qualified personnel in order to meet its needs. None of
the Company's employees is represented by a labor union. The Company believes
that its employee relations are satisfactory.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the executive officers of the Company:
DUANE J. ROTH. Mr. Roth, who is 50, has been Chief Executive Officer since 1985
and Chairman since October 1989. Prior to joining Alliance, Mr. Roth served as
President of Analytab Products, Inc., an American Home Products company involved
in manufacturing and marketing medical diagnostics, pharmaceuticals and devices.
For the previous ten years, he was employed in various sales, marketing and
general management capacities by Ortho Diagnostic Systems, Inc., a Johnson &
Johnson company, which is a manufacturer of diagnostic and pharmaceutical
products. Mr. Roth's brother, Theodore D. Roth, is President and Chief Operating
Officer of the Company.
THEODORE D. ROTH. Mr. Roth, who is 49, was Executive Vice President and Chief
Financial Officer of the Company from November 1987 to May 1998, when he was
appointed President and Chief Operating Officer. For more than ten years prior
to joining the Company, he was General Counsel of SAI Corporation, a company in
the business of operating manufacturing concerns, and General Manager of Holland
Industries, Inc., a manufacturing company. Mr. Roth received his J.D. from
Washburn University and an LL.M. in Corporate and Commercial Law from the
University of Missouri in Kansas City. He is the brother of Duane J. Roth, the
Chairman and Chief Executive Officer of the Company.
9
<PAGE>
HAROLD W. DELONG. Mr. DeLong, who is 52, has been Executive Vice President,
Business Development for the Company since February 1989. Mr. DeLong has been
employed for more than 25 years in the medical diagnostics and pharmaceutical
industry in various sales, marketing and management positions. Prior to joining
Alliance, Mr. DeLong was Vice President, Sales and Marketing for Murex
Corporation, a company participating in the infectious disease diagnostics
market. He previously served as Director, Sales and Marketing for Becton
Dickinson's Immunocytometry Systems division. Mr. DeLong was also employed
previously by Ortho Diagnostic Systems, Inc. for over ten years, where his last
position was Director of the Hemostasis and Chemistry Products business units.
ARTEMIOS B. VASSOS, M.D., F.A.C.P. Dr. Vassos, who is 53, joined Alliance in
1999 as Executive Vice President and Chief Scientific Officer. For ten years
prior to joining the Company, he served in several positions in clinical
research and clinical pharmacology at Parke-Davis where his last position was
Senior Director of Clinical Pharmacology and Experimental Medicine. He received
his M.D. degree at the University of Illinois, and his post-graduate training in
internal medicine and hematology and medical oncology at the University of
California.
DAVID H. KLEIN, PH.D. Dr. Klein, who is 67, is Senior Vice President,
Pharmaceutical Development. He originally joined Alliance in 1989, became a
consultant to the Company in 1997, and rejoined the Company in June 2000. For
over 40 years he has carried out and directed chemical research in various
academic, research and pharmaceutical institutions. Prior to joining Alliance,
Dr. Klein worked for over four years at Sun, Inc. on medical uses of
perfluorocarbon emulsions. He has served as a consultant for the National
Science Foundation, the Michigan Department of Natural Resources and the United
States Senate. He received his Ph.D. in analytical chemistry from Case Western
Reserve University.
KEITH W. CHAPMAN. Mr. Chapman, who is 50, was appointed Vice President,
Operations in July 1997, having joined the Company in 1992 as Director, Transfer
Operations. For 14 years prior to joining Alliance, he was responsible for
scale-up development and production of modified hemoglobins for the Army's Blood
Substitute Program. He received training as a research associate in dermatology,
tropical medicine and blood cell preservation at the Letterman Army Institute of
Research, Presidio of San Francisco, California.
B. JACK DEFRANCO. Mr. DeFranco, who is 55, has been Vice President, Market
Development for Alliance since January 1991. He has more than 25 years
experience in sales and marketing in the medical products industry. He was
President of Orthoconcept Inc., a private firm marketing orthopedic and
urological devices from 1986 through 1990. Prior to 1986, he was Director of
Marketing and New Business Development for Smith and Nephew Inc., which markets
orthopedic and general wound-care products, and he served in various sales and
marketing positions with Ortho Diagnostic Systems, Inc. Mr. DeFranco received
his M.B.A. from Fairleigh Dickinson University.
N. SIMON FAITHFULL, M.D., PH.D. Dr. Faithfull, who is 60, has been Vice
President, Medical Affairs Development for the Company since September 1990. Dr.
Faithfull joined Alliance after serving as Director of Medical Research for
Delta Biotechnology Ltd. from 1989 to 1990. He has also served as Senior
Lecturer in Anesthesia at the University of Manchester (UK), and has held
various academic appointments and clinical anesthesia positions at Erasmus
University (Netherlands), Tulane University and the University of Alabama
(Birmingham) for more than 15 years. He has served as Secretary of the
International Society on Oxygen Transport to Tissue. He received his Ph.D. from
Erasmus University, Rotterdam and his M.D. from London University.
KATHRYN E. FLAIM, PH.D. Dr. Flaim, who is 50, was appointed Vice President,
Clinical Products Support in August 1998, having joined Alliance in 1990 as
Director, Clinical Research. Dr. Flaim has over 15 years of experience in
clinical trial design and regulatory submissions. For nine years before joining
Alliance, she was Associate Director of the Division of Clinical Research and
Development at SmithKline Beecham. Previously, she was an Assistant Professor at
the Milton S. Hershey Medical Center at Pennsylvania State University. Dr. Flaim
received her Ph.D. from the University of California at Davis.
TIM T. HART, C.P.A. Mr. Hart, who is 43, was appointed Vice President in May
1999 and Chief Financial Officer in August 1998. He joined the Company in 1991
as Controller and has also served as Treasurer since 1994. Prior to joining
Alliance in 1991, he was employed in various financial management positions at
Cubic Corporation for over eight years. He was also employed by Ernst & Whinney
in San Diego, California as a C.P.A.
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H. JOERG LIMMER, DVM. Dr. Limmer, who is 59, was appointed Vice President,
Worldwide Clinical Development in September 1996. Prior to joining Alliance, Dr.
Limmer worked six years for Boehringer Ingelheim Pharma as Regional Director and
Vice President where he was responsible for medical and marketing affairs for
Eastern European countries. For the previous 20 years, he was Director of
Clinical Research at Dr. Karl Thomae GmbH, a subsidiary of Boehringer Ingelheim
GmbH in Germany. His primary focus was in the area of diabetes mellitus, fat
metabolism, atherosclerosis and intensive care products. Dr. Limmer received his
D.V.M. from the Freie Universitaet of Berlin, Germany.
CHRISTIANE ROCKWELL. Ms. Rockwell, who is 47, was appointed Vice President,
Quality Assurance in July 2000. Prior to joining Alliance, Ms. Rockwell worked
for 20 years for Allergan, Inc., where she served in various capacities, most
recently as Worldwide Quality Assurance Manager. Ms. Rockwell received her
M.B.A. from Pepperdine University and her B.S. from University of Tours, France.
GWEN ROSENBERG. Ms. Rosenberg, who is 46, was appointed Vice President,
Corporate Communications in May 1998. Ms. Rosenberg joined the Company in 1990
and has served in various capacities. For the previous eleven years, she was a
research scientist at the University of California, San Diego and at Scripps
Clinic and Research Foundation, and was concurrently a science reporter for the
San Diego Daily Transcript. Ms. Rosenberg has also taught high school chemistry
and biology in New York. She received her B.A. and M.A. degrees from Adelphi
University and The State University of New York at Stony Brook, respectively.
LLOYD A. ROWLAND, JR. Mr. Rowland, who is 43, was appointed Vice President in
May 1999 and Secretary of the Company in May 1998, having served as General
Counsel and Assistant Secretary since 1993. Prior to joining Alliance, Mr.
Rowland served as Vice President and Senior Counsel, Finance and Securities, at
Imperial Savings Association for four years. For the previous eight years, he
was engaged in the private practice of corporate law with the San Diego,
California law firm of Gray Cary Ames & Fry, and the Houston, Texas law firm of
Bracewell & Patterson. He received a J.D. from Emory University.
MARK SEEFELD, PH.D., D.A.B.T. Dr. Seefeld, who is 47, was appointed Vice
President, Preclinical Drug Safety and Development in August 1998, having joined
Alliance in 1993 as Director, Toxicology. For more than ten years prior to
joining the Company, he held positions in both general and reproductive
toxicology at Parke-Davis, Pharmaceutical Research Division of the
Warner-Lambert Company, and 3M Pharmaceuticals. Dr. Seefeld received his Ph.D.
from the University of Wisconsin-Madison and is board certified by the American
Board of Toxicology.
ITEM 2. PROPERTIES
FACILITIES
The Company has principal facilities in two locations: San Diego,
California and Otisville, New York. In San Diego, California, where the Company
has approximately 159,000 square feet in four leased facilities, the Company
maintains its principal executive offices, performs research and development on
its PFC-based products, and has its IMAVIST and OXYGENT manufacturing
facilities. The Otisville site, where the Company has established the LIQUIVENT
and SAT PAD (magnetic resonance imaging accessory) production facility, also
includes laboratories and administrative offices.
The Company purchased the Otisville site from the New York City Public
Development Corporation ("PDC") in June 1983. In connection with the
acquisition, the Company entered into a land use agreement (the "Land Use
Agreement") with New York City and the PDC. The Company estimates that the cost
of complying with the Land Use Agreement for fiscal 2000 was approximately
$160,000. The provisions of the Land Use Agreement may be deemed to be
"covenants running with the land," which may bind the Company and subsequent
owners of the Otisville site for a substantial period of time.
While the Company believes that it can produce materials for clinical
trials and initial market launch for OXYGENT and IMAVIST at its existing San
Diego facilities and for LIQUIVENT at its Otisville facility, it may need to
expand its commercial manufacturing capabilities for its products in the future.
Any expansion for any of its products may occur in stages, each of which would
require regulatory approval, and product demand could at times exceed supply
capacity. The Company has not selected a site for such expanded facilities and
cannot predict the amount it will expend for the construction of such
facilities. There can be no assurance as to when or whether the FDA will
determine that such facilities
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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. Baxter has the right to take
over responsibility for manufacturing OXYGENT for sale in the Baxter Territory.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the last quarter of Alliance's fiscal year ended June 30, 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock is traded in the over-the-counter market, and prices
therefor are quoted on the Nasdaq National Market under the symbol ALLP.
The following table sets forth, for the periods indicated, the high and low
sale prices of the common stock as reported on Nasdaq, without retail mark-up,
markdown or commission.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal 2000
Quarter ended September 30, 1999 $ 7.000 $ 2.438
Quarter ended December 31, 1999 $ 8.500 $ 3.750
Quarter ended March 31, 2000 $ 20.750 $ 7.125
Quarter ended June 30, 2000 $ 14.750 $ 4.438
</TABLE>
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal 1999
Quarter ended September 30, 1998 $ 5.625 $ 2.781
Quarter ended December 31, 1998 $ 5.063 $ 2.188
Quarter ended March 31, 1999 $ 3.938 $ 2.438
Quarter ended June 30, 1999 $ 3.438 $ 2.250
</TABLE>
On August 25, 2000, the closing price of the Company's common stock was
$14.8125.
The Company has not paid dividends on its common stock and the Board of
Directors does not anticipate paying cash dividends in the foreseeable future.
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On August 25, 2000, the approximate number of record holders of the
Company's common stock was 1,282. The Company believes that, in addition, there
are in excess of 13,000 beneficial owners of its common stock whose shares are
held in street name and, consequently, the Company is unable to determine the
actual number of beneficial holders thereof.
On August 22, 2000, the Company sold $10 million principal amount of
convertible subordinated notes to Brown Simpson Partners I, Ltd., Narragansett
I, LP, Narragansett Offshore, Ltd., SDS Merchant Fund, LP, Castle Creek
Healthcare Partners LLC, CCL Fund LLC. The securities convert at any time upon
the request of the holder into common stock of the Company at $13.32 per share,
subject to certain antidilution provisions. The investors are all accredited
investors and the transactions were exempt from registration with the Securities
and Exchange Commission under Section 4(2) of the Securities Act of 1933, as
amended (the "Act") and Regulation D promulgated under the Act.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
the Company's statements of operations for each of the years in the three year
period ended June 30, 2000, and with respect to the balance sheets at June 30,
1999 and 2000, are derived from the audited consolidated financial statements
which are included elsewhere in this Annual Report on Form 10-K and are
qualified by reference to such financial statements. The statement of operations
data for the years ended June 30, 1996 and 1997, and the balance sheet data at
June 30, 1996, 1997 and 1998, are derived from audited financial statements not
included in this Annual Report on Form 10-K. The following selected financial
data should be read in conjunction with the Consolidated Financial Statements
for the Company and notes thereto and Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein (in thousands except per share amounts).
<TABLE>
<CAPTION>
Years ended June 30,
----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues $ 16,000 $ 8,251 $ 21,209 $ 44,580 $ 17,323
Net loss applicable to common
shares $ (46,467) $ (62,473) $ (33,003) $ (19,016) $ (23,172)
Net loss per common share
Basic and diluted $ (1.03) $ (1.89) $ (1.04) $ (.63) $ (.91)
</TABLE>
<TABLE>
<CAPTION>
June 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 11,325 $ 11,009 $ 48,691 $ 62,995 $ 73,244
Total assets $ 75,949 $ 65,984 $ 93,677 $ 112,013 $ 108,343
Long-term debt and other $ 19,013 $ 10,499 $ 8,882 $ 2,871 $ 1,166
Stockholders' equity $ 33,266 $ 42,125 $ 76,090 $ 91,331 $ 101,467
</TABLE>
ITEM 7. 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.)
Since commencing operations in 1983, the Company has applied substantially
all of its resources to research and development programs and to clinical
trials. The Company has incurred losses since inception and, as of June 30,
2000,
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has an accumulated deficit of $373.2 million. The Company expects to incur
significant losses over at least the next few years as the Company continues its
research and product development efforts and attempt to commercialize its
products.
The Company's revenues have come primarily from collaborations with
corporate partners, including research and development and milestone payments.
The Company's expenses have consisted primarily of research and development
costs and administrative costs. To date, the Company's revenues from the sale of
products have not been significant. The Company believes its future operating
results may be subject to quarterly fluctuations due to a variety of factors,
including the timing of future collaborations and the achievement of milestones
under collaborative agreements, whether and when new products are successfully
developed and introduced by the Company or its competitors, and market
acceptance of products under development.
LIQUIDITY AND CAPITAL RESOURCES
Through June 2000, the Company has financed its activities primarily from
public and private sales of equity and funding from collaborations with
corporate partners.
In August 2000, the Company sold $10 million in principal amount of
four-year 5% subordinated convertible debentures to certain investors. The
debentures are convertible at any time at each investor's option into shares of
Alliance common stock at $13.32 per share, subject to certain antidilution
provisions. The conversion price of the debentures was below the trading market
price on the day the debentures were issued. As a result of this beneficial
conversion price, the Company will record an immediate charge to interest
expense of $792,000 on these convertible debentures in the first quarter of
fiscal year 2001. The Company will have certain rights to cause the debentures
to convert into common stock. The investors will have the option at any time to
purchase, and the Company will have certain rights to require the investors to
purchase, an additional $10 million of four-year 5% subordinated convertible
debentures, convertible into Alliance common stock at $16 per share.
In May 2000, Alliance and Baxter entered into a joint venture for the
manufacture, marketing, sales and distribution of OXYGENT in the Baxter
Territory. The companies formed PFC Therapeutics to oversee the further
development, manufacture, marketing, sales and distribution of OXYGENT; and
each party invested $5 million in PFC Therapeutics. In connection with the
transaction, PFC Therapeutics obtained an exclusive license in the Baxter
Territory, to manufacture and market all of the Company's injectable
perfluorochemical emulsions capable of transporting oxygen in therapeutic
effective amounts in the bloodstream, including OXYGENT. PFC Therapeutics
paid Alliance a prepaid royalty of $10 million. Alliance and Baxter will also
share in the distribution of PFC Therapeutics' future cash flows. Under the
arrangement, Alliance will continue to fund the current development plan for
OXYGENT'S initial approval in the Baxter Territory. PFC Therapeutics has a
right of first offer to license OXYGENT in one or more countries outside the
Baxter Territory. Pursuant to a manufacturing and supplier agreement between
Alliance and PFC Therapeutics, Alliance will initially manufacture OXYGENT
for distribution in the Baxter Territory. Under separate agreements between
Baxter and PFC Therapeutics, Baxter will have the exclusive right to promote,
market, distribute and sell OXYGENT in the Baxter Territory, and Baxter has
the right to take over the manufacturing responsibility for OXYGENT. In
connection with this arrangement, Baxter has purchased 500,000 shares of the
Company's convertible Series F Preferred Stock for $20 million. In order for
Baxter to maintain its rights to commercialize the product, Baxter is
required to purchase an additional $30 million of convertible redeemable
preferred stock from Alliance through September 2001.
In February 2000, the Company sold $15 million in principal amount of
four-year 5% subordinated convertible debentures to certain investors. The
debentures are convertible at any time at each investor's option into shares of
Alliance common stock at $9.65 per share, subject to certain antidilution
provisions. The conversion price of the debentures was below the trading market
price on the day the debentures were issued. As a result of this beneficial
conversion price, the Company has recorded an immediate charge to interest
expense of $3.7 million on these convertible debentures. The Company will have
certain rights to cause the debentures to convert into common stock. The
investors will have the option at any time to purchase, and the Company will
have certain rights to require the investors to purchase, an additional $15
million of four-year 5% subordinated convertible debentures, convertible into
Alliance common stock at $12.06 per share. In connection with the transaction,
the Company issued a warrant to purchase up to 77,720 shares of common stock at
an exercise price of $9.65 per share. The Company has recorded deferred interest
expense on the warrant, based upon a Black-Scholes valuation, of $503,000, which
will be amortized over the life of the warrant. The unamortized deferred
interest balance was $433,000 at June 30, 2000.
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<PAGE>
In November 1999, the Company completed the sale of certain aspects of its
PULMOSPHERES technology to Inhale for $15 million in cash and $5 million in
common stock of Inhale, plus the right to receive additional future milestone
and royalty payments. In consideration for retaining certain rights to use the
technology, Alliance issued $5 million in Alliance common stock to Inhale.
In May 1999, the Company privately placed $1.8 million of 6% convertible
subordinated notes due May 2002 and issued warrants to the note holders to
purchase up to 300,000 shares of common stock at $2.45 per share. In February
2000, the Company caused the notes to be converted into 900,000 shares of common
stock of the Company. The conversion price of the notes was $2 per share, which
was below the trading market price of the stock on the day the notes were
issued. As a result of this beneficial conversion price, the Company recognized
an immediate charge to interest expense of $844,000 on these convertible notes.
The Company recorded deferred interest expense on the warrants of $521,000,
based upon a Black-Scholes valuation, and amortized the deferred interest over
the life of the notes. The unamortized deferred interest balance was expensed in
February 2000 when the notes were converted.
In September 1997, the Company entered into the Schering License Agreement,
which provides Schering with worldwide exclusive marketing and manufacturing
rights to IMAVIST. In conjunction with the Schering License Agreement, SBVC
purchased 500,000 shares of the Company's convertible Series D Preferred Stock
for $10 million. In February 2000, the Series D Preferred Stock was converted
into 1,000,000 shares of common stock of the Company. The product is being
developed jointly by Alliance and Schering. Under the Schering License
Agreement, Schering paid to Alliance in 1998 an initial license fee of $4
million, and agreed to pay further milestone payments and royalties on product
sales. Schering is also providing funding to Alliance for some of its
development expenses related to IMAVIST. 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 IMAVIST, which placed limitations
on the development effort. The parties elected to revise the royalty calculation
which is now based on sales of IMAVIST, a more traditional method of determining
royalties. This modification permits the parties to be flexible in developing
IMAVIST. 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.
In June 1997, the Company sold $2.5 million in clinical trial supplies
to Hoechst Marion Roussel ("HMRI") and recorded it as deferred revenue. In
September 1999, HMRI agreed to sell and Alliance agreed to purchase the
clinical trial supplies for up to $3 million over time and under certain
circumstances. As of June 30, 2000, the Company had repurchased all of the
clinical trial supplies.
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 0.5%. In March 1999, the Company was in violation of a
financial covenant under the loan. In June 1999, the bank waived the violation,
took additional collateral and restructured the loan which resulted in increased
principal payments. The loan bears interest at rates ranging from 7.5% to 10% at
June 30, 2000. As part of the restructuring, the Company issued to the bank a
warrant to purchase up to 180,000 shares of common stock at an exercise price of
$2.88 per share. The Company has recorded deferred interest expense on the
warrant, based upon a Black-Scholes valuation, of $241,000, which is being
amortized over the life of the warrant. The unamortized deferred interest
balance was $141,000 at June 30, 2000. Amounts borrowed are secured by a $5
million restricted certificate of deposit, by certain fixed assets and patents,
and are to be repaid over four years. The certificate of deposit is separately
disclosed as restricted cash on the Consolidated Balance Sheets at June 30, 2000
and 1999. If certain financial covenants are not satisfied, the outstanding
balance may become due and payable. On June 30, 2000, the balance outstanding on
this loan was $9.2 million. 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 November 1996, the Company acquired MDV by a merger of a wholly owned
subsidiary of the Company into MDV. MDV is engaged in the development of a
thermoreversible gel, FLOGEL, intended for use as an anti-adhesion treatment for
persons undergoing abdominal or pelvic surgeries. The Company is obligated to
pay up to $20 million to the former shareholders of MDV 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
15
<PAGE>
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 that are
inherently uncertain.
The Company had net working capital of $11.3 million at June 30, 2000,
compared to $11 million at June 30, 1999. The Company's cash, cash equivalents,
and short-term investments increased to $33.5 million at June 30, 2000, from
$19.1 million at June 30, 1999. The increase resulted primarily from net
proceeds of $19.2 million from the issuance of preferred stock, proceeds of $15
million from the sale of convertible debentures, proceeds from the sale of
equity securities, and proceeds of $2.7 million from the issuance of common
stock upon the exercise of options and warrants, partially offset by net cash
used in operations of $26.9 million and principal payments on long-term debt of
$4.4 million. The Company's operations to date have consumed substantial amounts
of cash and are expected to continue to do so for the foreseeable future.
The Company continually reviews its product development activities in an
effort to allocate its resources to those product candidates that the Company
believes have the greatest commercial potential. Factors considered by the
Company in determining the products to pursue include projected markets and
need, potential for regulatory approval and reimbursement under the existing
healthcare system, status of its proprietary rights, technical feasibility,
expected and known product attributes, and estimated costs to bring the product
to market. Based on these and other factors, the Company may from time to time
reallocate its resources among its product development activities. Additions to
products under development or changes in products being pursued can
substantially and rapidly change the Company's funding requirements.
The Company expects to incur substantial expenditures associated with
product development, particularly for IMAVIST, LIQUIVENT and OXYGENT. The
Company is seeking additional collaborative research and development
relationships with suitable corporate partners for its non-licensed products.
There can be no assurance that such relationships, if any, will successfully
reduce the Company's funding requirements. Additional equity or debt financing
may be required, and there can be no assurance that such financing will be
available on reasonable terms, if at all. If adequate funds are not available,
the Company may be required to delay, scale back, or eliminate one or more of
its product development programs, or obtain funds through arrangements with
collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates, or products that the
Company would not otherwise relinquish.
Alliance anticipates that its current capital resources, estimated proceeds
of $10 million from the convertible debenture offering in August 2000, expected
equity investments by Baxter and expected revenue from investments will be
adequate to satisfy its capital requirements through at least fiscal 2001. 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 IMAVIST at its existing San
Diego, California facilities and for LIQUIVENT at its Otisville, New York
facility, it may need to expand its commercial manufacturing capabilities for
its products in the future. Any expansion for any of its products may occur in
stages, each of which would require regulatory approval, and product demand
could at times exceed supply capacity. The Company has not selected a site for
such expanded facilities and cannot predict the amount it will expend for the
construction of such facilities. There can be no assurance as to when or whether
the FDA will determine that such facilities comply with Good Manufacturing
Practices. The projected location and construction of such facilities will
depend on regulatory approvals, product development, and capital resources,
among other factors. The Company has not obtained any regulatory approvals for
its production facilities for these products, nor can there be any assurance
that it will be able to do so. The Company currently has responsibility for
manufacturing OXYGENT; however, Baxter has the right to take over responsibility
for manufacturing the product for sale in the Baxter Territory. The Schering
License Agreement
16
<PAGE>
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.
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 2001, and beyond, to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company. These risks include, but are not limited to,
the inability to obtain adequate financing for the Company's development
efforts; the inability to enter into collaborative relationships to further
develop and commercialize the Company's products; changes in any such
relationships, or the inability of any collaborative partner to adequately
commercialize any of the Company's products; the uncertainties associated with
the lengthy regulatory approval process; and the uncertainties associated with
obtaining and enforcing patents important to the Company's business; and
possible competition from other products. Furthermore, even if the Company's
products appear promising at an early stage of development, they may not reach
the market for a number of important reasons. Such reasons include, but are not
limited to, the possibilities that the potential products will be found
ineffective during clinical trials; failure to receive necessary regulatory
approvals; difficulties in manufacturing on a large scale; failure to obtain
market acceptance; and the inability to commercialize because of proprietary
rights of third parties. The research, development, and market introduction of
new products will require the application of considerable technical and
financial resources, while revenues generated from such products, assuming they
are developed successfully, may not be realized for several years. Other
material and unpredictable factors which could affect operating results include,
without limitation, the uncertainty of the timing of product approvals and
introductions and of sales growth; the ability to obtain necessary raw materials
at cost-effective prices or at all; the effect of possible technology and/or
other business acquisitions or transactions; and the increasing emphasis on
controlling healthcare costs and potential legislation or regulation of
healthcare pricing.
RESULTS OF OPERATIONS
2000 COMPARED TO 1999
The Company's license and research revenue was $16 million for 2000,
compared to $8.3 million for 1999. The increase in revenue is primarily a result
of the proceeds from the sale of technology to Inhale. The Company expects
research revenue to decrease in 2001 compared to 2000, due to the reduction of
revenue from the Inhale transaction.
Research and development expenses decreased by 10% to $54.6 million for
2000, compared to $60.4 million for 1999. The decrease in expenses was primarily
due to a $3.4 million decrease in payments to outside researchers for
preclinical and clinical trials and other product development work, a $1.8
million decrease in staffing costs for employees primarily engaged in research
and development activities, as well as other decreases related to the Company's
research and development activities.
General and administrative expenses were $9.8 million for 2000, compared to
$8.6 million for 1999. The increase in general and administrative expenses was
primarily due to increased professional fees resulting from partnering and
financing activities.
Investment income was $7.5 million for 2000, compared to $1.9 million for
1999. The increase was primarily a result of an increase in realized gains from
the sale of short-term investments.
Interest expense was $2 million for 2000, compared to $1.1 million for
1999. The increase was primarily due to non-cash interest expense charges
related to warrants issued.
In 2000, the Company recorded imputed interest expense of $3.7 million
related to the beneficial conversion feature on the $15 million subordinated
convertible debentures. In 1999, the Company recorded imputed interest
expense of $844,000 related to the beneficial conversion feature on the $1.8
million convertible subordinated notes.
17
<PAGE>
1999 COMPARED TO 1998
The Company's license and research revenue was $8.3 million for 1999,
compared to $21.2 million for 1998. The decrease in revenue is primarily a
result of the decreased research revenue from its previous licensing arrangement
with Ortho Biotech Inc.
Research and development expenses increased by 21% to $60.4 million for
1999, compared to $50.1 million for 1998. The increase in expenses was primarily
due to a $6.8 million increase in payments to outside researchers for
preclinical and clinical trials and other product development work, a $2.3
million increase in staffing costs for employees primarily engaged in research
and development activities, a $1.1 million increase in depreciation expense, a
$769,000 increase in rent and lease expense, as well as other increases related
to the Company's research and development activities. The increase for 1999 is
primarily attributable to increased expenses related to the IMAVIST Phase 3
clinical trial and the preparation of the IMAVIST manufacturing facilities for
regulatory approval.
General and administrative expenses were $8.6 million for 1999, compared to
$7.9 million for 1998. The increase in general and administrative expenses was
primarily due to a $712,000 increase in professional fees.
Investment income was $1.9 million for 1999, compared to $4.3 million for
1998. The decrease was primarily a result of lower average cash and short-term
investment balances.
Interest expense was $1 million for 1999, compared to $574,000 for 1998.
The increase was primarily a result of higher average long-term debt balances.
In 1999, the Company recorded imputed interest expense of $844,000
related to the beneficial conversion feature on the $1.8 million convertible
subordinated notes.
ITEM 7a. MARKET RISK
The Company is or has been exposed to changes in interest rates primarily
from its long-term debt arrangements and, secondarily, its investments in
certain securities. Under its current policies, the Company does not use
interest rate derivative instruments to manage exposure to interest rate
changes. The Company believes that a hypothetical 100 basis point adverse move
in interest rates along the entire interest rate yield curve would not
materially affect the fair value of the Company's interest sensitive financial
instruments at June 30, 2000.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the executive officers of the Company is contained
in Part I of this Annual Report on Form 10-K under the caption "Executive
Officers of the Registrant." Information concerning the directors of the Company
is incorporated by reference to the section entitled "Election of Directors"
that the Company intends to include in its definitive proxy statement for
Alliance's November 2000 Annual Meeting of Shareholders (the "Proxy Statement").
Copies of the
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<PAGE>
Proxy Statement will be duly filed with the SEC pursuant to Rule 14a-6(c)
promulgated under the Securities Exchange Act of 1934, as amended, not later
than 120 days after the end of the fiscal year covered by its Annual Report on
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The sections labeled "Executive Compensation" and "Election of Directors"
to appear in the Company's Proxy Statement are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section labeled "Ownership of Voting Securities by Certain Beneficial
Owners and Management" to appear in the Company's Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The sections labeled "Election of Directors" and "Executive Compensation"
to appear in the Company's Proxy Statement are incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of the Report.
1. See Table of Contents to Consolidated Financial
Statements on Page F-1 for a list of Financial
Statements being filed herein.
2. See Page F-2 for the Report of Ernst & Young LLP,
Independent Auditors being filed herein.
3. See Exhibits below for a list of all Exhibits being
filed or incorporated by reference herein.
(b) Reports on Form 8-K.
1. The Company filed a Current Report on Form 8-K dated May
11, 2000, stating that it entered into an arrangement with
Baxter for the manufacture, marketing, sales and distribution
of OXYGENT.
(c) Exhibits.
(a) Restated Certificate of Incorporation of the Company, as
amended through August 31, 1994 (incorporated by reference to Exhibit 3(a) of
the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994
(the "1994 10-K")).
(b) Certificate of Amendment to the Certificate of
Incorporation of the Company filed on March 25, 1996 (incorporated by reference
to Exhibit 3 to Amendment No. 1 of the S-3 Registration Statement of the Company
filed on March 28, 1996 (the "1996 S-3")).
(c) Certificate of Amendment to the Certificate of
Incorporation of the Company filed on September 22, 1997 (incorporated by
reference to Exhibit 3(c) of the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1997).
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<PAGE>
(d) Certificate of Amendment to the Certificate of
Incorporation of the Company filed on August 14, 1998 (incorporated by reference
to Exhibit 3(d) of the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1998 (the "1998 10-K")).
(e) Certificate of Amendment to the Certificate of
Incorporation of the Company filed on January 15, 1999 (incorporated by
reference to Exhibit 3 of the Company's Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 1998 (the "December 1998 10-Q")).
(f) Certificate of Amendment to the Certificate of
Incorporation of the Company (incorporated by reference to Exhibit 4.1 of the
Current Report on Form 8-K dated May 11, 2000).
(g) By-Laws of the Company, as amended (incorporated by
reference to Exhibit 3(b) of the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1989 (the "1989 10-K")).
(10) (a) Lease Agreement, as amended, between the Company and
Hartford Accident and Indemnity Company relating to certain research and
manufacturing facilities in San Diego, California (incorporated by reference to
Exhibit 10(x) of the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1993).
(b) Formula Award of Stock Options for Non-employee Members of
the Board of Directors as approved by shareholders of the Company (incorporated
by reference to Exhibit 10(e) of the 1994 10-K). (1)
(c) Agreement and Plan of Merger by and among the Company, MDV
Acquisition Corp. and MDV Technologies, Inc. dated October 8, 1996 (incorporated
by reference to Exhibit 1 of the Current Report on Form 8-K filed on November
20, 1996).
(d) License Agreement dated September 23, 1997, between the
Company and Schering AG, Germany (incorporated by reference to Exhibit 2(a) of
the Current Report on Form 8-K/A filed on February 27, 1998 (the "1997 8-K/A")).
(2)
(e) Preferred Stock Purchase Agreement dated September 23,
1997, between the Company and Schering Berlin Venture Corp. (incorporated by
reference to Exhibit 2(b) of the 1997 8-K/A).
(f) Royalty Rights Agreement dated as of August 13, 1998,
between the Company and certain investors (incorporated by reference to Exhibit
10(k) of the 1998 10-K).
(g) Credit Agreement dated as of June 17, 1998, between the
Company and Imperial Bank (incorporated by reference to Exhibit 10(m) of the
1998 10-K).
(h) Security Agreement dated June 17, 1998, executed by the
Company in favor of Imperial Bank (incorporated by reference to Exhibit 10(o) of
the 1998 10-K).
(i) Lease Agreement dated November 7, 1998, between the
Company and WHAMC Real Estate Limited Partnership, a Delaware limited
partnership, relating to certain manufacturing and development facilities in San
Diego, California (incorporated by reference to Exhibit 10(p) of the 1998 10-K).
(j) First Amendment to License Agreement, dated as of December
30, 1998, between the Company and Schering AG, Germany (incorporated by
reference to Exhibit 10 of the December 1998 10-Q). (2)
(k) Employment Letter Agreement dated February 26, 1999 and
executed by Dr. Artemios B. Vassos (incorporated by reference to Exhibit 10(a)
of the Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1999 (the "March 1999 10-Q")). (1)
(l) Promissory Note in the amount of $180,000 dated March 3,
1999, and executed by Dr. Artemios B. Vassos in favor of the Company
(incorporated by reference to Exhibit 10(b) of the March 1999 10-Q). (1)
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<PAGE>
(m) Promissory Note in the amount of $125,000 dated March 3,
1999, and executed by Dr. Artemios B. Vassos in favor of the Company
(incorporated by reference to Exhibit 10(c) of the March 1999 10-Q). (1)
(n) Promissory Note in the amount of $125,000 dated March 3,
1999, and executed by Dr. Artemios B. Vassos in favor of the Company
(incorporated by reference to Exhibit 10(d) of the March 1999 10-Q). (1)
(o) Security Purchase Agreement dated May 20, 1999, between
the Company and Harris & Harris Group, Inc., Jan A. Dekker and Stephen McGrath
with forms of the 6% Convertible Subordinated Note Due May 20, 2002 and Warrant
(incorporated by reference to Exhibit 10(u) of the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1999 (the "1999 10-K")).
(p) Form of Amended 1991 Stock Option Plan (incorporated by
reference to Exhibit 10(v) of the 1999 10-K).
(q) Agreement to Waive Covenant Violation and Modify Loan
dated May 17, 1999, between the Company and Imperial Bank (incorporated by
reference to Exhibit 10(w) of the 1999 10-K).
(r) Intellectual Property Security Agreement dated May 17,
1999, between the Company and Imperial Bank (incorporated by reference to
Exhibit 10(x) of the 1999 10-K). (3)
(s) First Amendment to Credit Agreement dated June 17, 1999,
among the Company, MDV Technologies, Inc. and Imperial Bank (incorporated by
reference to Exhibit 10(y) of the 1999 10-K). (3)
(t) Intellectual Property Security Agreement dated August 2,
1999, between MDV Technologies, Inc. and Imperial Bank (incorporated by
reference to Exhibit 10(z) of the 1999 10-K).
(u) Commercial Security Agreement dated August 3, 1999, among
the Company, MDV Technologies, Inc. and Imperial Bank (incorporated by reference
to Exhibit 10(aa) of the 1999 10-K).
(v) Promissory Note dated August 2, 1999, in the amount of
$5,000,000 executed by the Company and MDV Technologies, Inc. in favor of
Imperial Bank (incorporated by reference to Exhibit 10(bb) of the 1999 10-K).
(w) Promissory Note dated August 2, 1999, in the amount of
$8,422,619.04 executed by the Company and MDV Technologies, Inc. in favor of
Imperial Bank (incorporated by reference to Exhibit 10(cc) of the 1999 10-K).
(x) Split Dollar Life Insurance Agreement between the Company
and Duane J. Roth dated November 12, 1998 (incorporated by reference to Exhibit
10(a) to the Company's Quarterly report on Form 10-Q for the quarterly period
ended September 31, 1999 (the "September 1999 10-Q")). (1)
(y) Collateral Assignment of Life Insurance Policy between the
Company and Duane J. Roth dated November 25, 1998 (incorporated by reference to
Exhibit 10(b) of the September 1999 10-Q). (1)
(z) Split Dollar Life Insurance Agreement between the Company
and Theodore D. Roth dated November 12, 1998 (incorporated by reference to
Exhibit 10(c) of the September 1999 10-Q). (1)
(aa) Collateral Assignment of Life Insurance Policy between
the Company and Theodore D. Roth dated November 12, 1998 (incorporated by
reference to Exhibit 10(d) of the September 1999 10-Q). (1)
(bb) Eleventh Amendment to Lease Agreement dated September 1,
1999, between the Company and HUB Properties Trust (incorporated by reference to
Exhibit 10(e) of the September 1999 10-Q). (1)
(cc) Asset Purchase Agreement between Alliance and Inhale
Therapeutic Systems, Inc. dated October 4, 1999 (incorporated by reference to
Exhibit 2(a) of the Current Report on Form 8-K dated November 4, 1999 (the
"November 1999 8-K"). (2)
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<PAGE>
(dd) Product Development Rights Agreement between Alliance and
Inhale Therapeutic Systems, Inc. dated November 4, 1999 (incorporated by
reference to Exhibit 2(b) of the November 1999 8-K). (2)
(ee) License Agreement (License to Inhale) between Alliance
and Inhale Therapeutic Systems, Inc. dated November 4, 1999 (incorporated by
reference to Exhibit 2(c) to the November 1999 8-K). (2)
(ff) License Agreement (License to Alliance) between Alliance
and Inhale Therapeutic Systems, Inc. dated November 4, 1999 (incorporated by
reference to Exhibit 2(d) of the November 1999 8-K). (2)
(gg) Inhale Common Stock Purchase Agreement between Alliance
and Inhale Therapeutic Systems, Inc. dated November 4, 1999 (incorporated by
reference to Exhibit 2(e) of the November 1999 8-K).
(hh) Alliance Common Stock Purchase Agreement between Alliance
and Inhale Therapeutic Systems, Inc. dated November 4, 1999 (incorporated by
reference to Exhibit 2(f) of the November 1999 8-K).
(ii) Supply Agreement dated as of July 9, 1999, between the
Company and Fluoromed L.P. (incorporated by reference to Exhibit 10(d) of the
Company's Quarterly report on Form 10-Q for the quarterly period ended December
31, 1999). (2)
(jj) Form of 5% Subordinated Convertible Debenture dated
February 11, 2000 (incorporated by reference to Exhibit 4.1 of the Current
Report on Form 8-K dated February 11, 2000 (the "February 2000 8-K")).
(kk) Form of Securities Purchase Agreement dated February 11,
2000 (incorporated by reference to Exhibit 4.2 of the February 2000 8-K).
(ll) Form of Registration Rights Agreement dated February 11,
2000 (incorporated by reference to Exhibit 4.3 of the February 2000 8-K).
(mm) Form of 5% Subordinated Convertible Debenture dated
August 22, 2000 (incorporated by reference to Exhibit 4.1 of the Current Report
on Form 8-K dated August 22, 2000 (the "August 2000 8-K")).
(nn) Form of Securities Purchase Agreement dated August 22,
2000 (incorporated by reference to Exhibit 4.2 of the August 2000 8-K).
(oo) Form of Registration Rights Agreement dated August 22,
2000 (incorporated by reference to Exhibit 4.3 of the August 2000 8-K).
(pp) License Agreement dated May 19, 2000, between the Company
and PFC Therapeutics, LLC. (3)
(qq) Marketing and Distribution Agreement executed May 19,
2000, effective June 1, 2000 between the Company, Baxter Healthcare Corporation
and PFC Therapeutics, LLC. (3)
(rr) Alliance Manufacturing and Supplier Agreement dated May
19, 2000, between the Company and PFC Therapeutics, LLC. (3)
(ss) Baxter Manufacturing and Supplier Agreement dated May 19,
2000, between Baxter Healthcare Corporation and PFC Therapeutics, LLC. (3)
(tt) Operating Agreement dated May 17, 2000, between the
Company and Baxter Healthcare Corporation. (3)
(uu) Preferred Stock Purchase Agreement dated May 19, 2000,
between the Company and Baxter Healthcare Corporation.
(vv) Deferred Stock Purchase Agreement dated May 19, 2000,
between the Company and Baxter Healthcare Corporation.
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<PAGE>
(ww) Security Agreement dated May 19, 2000, between the
Company and PFC Therapeutics, LLC. (3)
(21) Subsidiary List
(23.1) Consent of Ernst & Young LLP, Independent Auditors
(1) Management contract or compensatory plan or arrangement required to
be filed.
(2) Certain confidential portions of this exhibit have been deleted
pursuant to an order granted by the Securities and Exchange Commission under the
Securities Exchange Act of 1934.
(3) A request for confidential treatment of certain portions of this
exhibit has been filed with the Securities and Exchange Commission.
23
<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: August 29, 2000 By: \s\ THEODORE D. ROTH
-------------------------------
Theodore D. Roth
President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
\s\ Duane J. Roth Chairman and August 29, 2000
----------------------------------- Chief Executive Officer
Duane J. Roth
\s\ Theodore D. Roth Director, President and August 29, 2000
----------------------------------- Chief Operating Officer
Theodore D. Roth
\s\ Tim T. Hart Chief Financial Officer, Treasurer August 29, 2000
----------------------------------- and Chief Accounting Officer
Tim T. Hart
\s\ Pedro Cuatrecasas, M.D. Director August 29, 2000
-----------------------------------
Pedro Cuatrecasas, M.D.
\s\ Carroll O. Johnson Director August 29, 2000
-----------------------------------
Carroll O. Johnson
\s\ Stephen M. McGrath Director August 29, 2000
-----------------------------------
Stephen M. McGrath
\s\ Helen M. Ranney, M.D. Director August 29, 2000
-----------------------------------
Helen M. Ranney, M.D.
\s\ Donald E. O'Neill Director August 29, 2000
-----------------------------------
Donald E. O'Neill
\s\ Jean Riess, PH.D. Director August 29, 2000
-----------------------------------
Jean Riess, Ph.D.
\s\ Thomas F. Zuck, M.D. Director August 29, 2000
-----------------------------------
Thomas F. Zuck, M.D.
</TABLE>
24
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets at June 30, 2000 and 1999 F-3
Consolidated Statements of Operations for the Years
Ended June 30, 2000, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the Years
Ended June 30, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7 - F-15
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, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 2000. 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 auditing standards generally accepted
in the United States. 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.
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, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 2000, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
San Diego, California
August 1, 2000
F-2
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30,
2000 1999
-------------------- ---------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 28,721,000 $ 19,081,000
Short-term investments 4,806,000 -
Research revenue receivable 146,000 4,875,000
Other current assets 1,322,000 413,000
-------------------- ---------------------
Total current assets 34,995,000 24,369,000
PROPERTY, PLANT AND EQUIPMENT - NET 20,309,000 24,621,000
PURCHASED TECHNOLOGY - NET 10,065,000 11,361,000
RESTRICTED CASH 5,000,000 5,000,000
INVESTMENT IN JOINT VENTURE 5,000,000 -
OTHER ASSETS - NET 580,000 633,000
-------------------- ---------------------
$ 75,949,000 $ 65,984,000
==================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,983,000 $ 4,910,000
Accrued expenses 4,101,000 4,280,000
Deferred revenue 10,000,000 -
Current portion of long-term debt 4,586,000 4,170,000
-------------------- ---------------------
Total current liabilities 23,670,000 13,360,000
LONG-TERM DEBT 19,013,000 10,499,000
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value; 5,000,000 shares authorized; Series D
Preferred stock - 0 and 500,000 shares issued and outstanding
at June 30, 2000 and 1999, respectively; liquidation preference of
$10,000,000 at June 30, 1999 - 5,000
Series F Preferred stock - 500,000 and 0 shares issued and outstanding
at June 30, 2000 and 1999, respectively; liquidation preference of
$20,000,000 at June 30, 2000 5,000 -
Common stock - $.01 par value; 75,000,000 shares authorized; 47,233,454
and 43,510,049 shares issued and outstanding at
June 30, 2000 and 1999, respectively 472,000 435,000
Additional paid-in capital 402,470,000 368,409,000
Accumulated comprehensive income (loss) 3,510,000 -
Accumulated deficit (373,191,000) (326,724,000)
-------------------- ---------------------
Total stockholders' equity 33,266,000 42,125,000
-------------------- ---------------------
$ 75,949,000 $ 65,984,000
==================== =====================
</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,
2000 1999 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
REVENUES:
License and research revenue $ 16,000,000 $ 8,251,000 $ 21,209,000
OPERATING EXPENSES:
Research and development 54,605,000 60,427,000 50,084,000
General and administrative 9,760,000 8,566,000 7,886,000
------------------ ------------------ ------------------
64,365,000 68,993,000 57,970,000
------------------ ------------------ ------------------
LOSS FROM OPERATIONS (48,365,000) (60,742,000) (36,761,000)
IMPUTED INTEREST EXPENSE ON CONVERTIBLE NOTES (3,653,000) (844,000) -
INVESTMENT INCOME 7,512,000 1,876,000 4,332,000
INTEREST EXPENSE (1,961,000) (1,063,000) (574,000)
---------------- ---------------- ----------------
NET LOSS (46,467,000) (60,773,000) (33,003,000)
IMPUTED DIVIDENDS ON PREFERRED STOCK - (1,700,000) -
------------------ ------------------ ------------------
NET LOSS APPLICABLE TO COMMON SHARES $ (46,467,000) $ (62,473,000) $ (33,003,000)
================== ================== ==================
NET LOSS PER COMMON SHARE:
Basic and diluted $ (1.03) $ (1.89) $ (1.04)
================== ================== ==================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted 45,203,000 33,045,000 31,749,000
================== ================== ==================
</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
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
BALANCES AT JUNE 30, 1997 - $ - 31,165,000 $ 311,000
Exercise of stock options and warrants 104,000 1,000
Sale of convertible Series D Preferred Stock 500,000 5,000
Payment related to acquired in-process technology 706,000 8,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 19,000
Net unrealized loss on available-for-sale securities
Net loss
--------------- -------------- -------------- ----------------
BALANCES AT JUNE 30, 1998 500,000 5,000 31,994,000 320,000
Exercise of stock options and warrants 96,000 1,000
Issuance of warrants
Sale of common stock 9,500,000 95,000
Sale of convertible Series E-1 Preferred Stock 100,000 1,000
Conversion and redemption of convertible Series E-1
Preferred Stock to common shares (100,000) (1,000) 1,859,000 18,000
Imputed interest expense on convertible notes
Imputed dividends on Series E-1 Preferred Stock
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 61,000 1,000
Net unrealized loss on available-for-sale securities
Net loss
--------------- -------------- -------------- ----------------
BALANCES AT JUNE 30, 1999 500,000 5,000 43,510,000 435,000
Exercise of stock options and warrants 663,000 6,000
Issuance of warrants and stock options
Issuance of stock in exchange for technology 1,135,000 11,000
Sale of convertible Series F Preferred Stock 500,000 5,000
Conversion of convertible Series D Preferred Stock (500,000) (5,000) 1,000,000 10,000
Conversion of $1.8 million convertible debt 900,000 9,000
Imputed interest expense on convertible notes
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 25,000 1,000
Net unrealized gain on available-for-sale securities
Net loss
--------------- -------------- -------------- ----------------
BALANCES AT JUNE 30, 2000 500,000 $ 5,000 47,233,000 $ 472,000
=============== ============== ============== ================
</TABLE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
ADDITIONAL ACCUMULATED
PAID-IN COMPREHENSIVE ACCUMULATED
CAPITAL INCOME (LOSS) DEFICIT
----------------- ----------------- -----------------
<S> <C> <C> <C>
BALANCES AT JUNE 30, 1997 $ 322,025,000 $ 243,000 $ (231,248,000)
Exercise of stock options and warrants 741,000
Sale of convertible Series D Preferred Stock 9,595,000
Payment related to acquired in-process technology 7,492,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 141,000
Net unrealized loss on available-for-sale securities (221,000)
Net loss (33,003,000)
----------------- ----------------- -----------------
BALANCES AT JUNE 30, 1998 339,994,000 22,000 (264,251,000)
Exercise of stock options and warrants
Issuance of warrants 922,000
Sale of common stock 21,415,000
Sale of convertible Series E-1 Preferred Stock 5,582,000
Conversion and redemption of convertible Series E-1
Preferred Stock to common shares (2,248,000)
Imputed interest expense on convertible notes 844,000
Imputed dividends on Series E-1 Preferred Stock 1,700,000 (1,700,000)
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 200,000
Net unrealized loss on available-for-sale securities (22,000)
Net loss (60,773,000)
----------------- ----------------- -----------------
BALANCES AT JUNE 30, 1999 368,409,000 - (326,724,000)
Exercise of stock options and warrants 2,958,000
Issuance of warrants and stock options 1,277,000
Issuance of stock in exchange for technology 4,989,000
Sale of convertible Series F Preferred Stock 19,215,000
Conversion of convertible Series D Preferred Stock (5,000)
Conversion of $1.8 million convertible debt 1,791,000
Imputed interest expense on convertible notes 3,653,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 183,000
Net unrealized gain on available-for-sale securities 3,510,000
Net loss (46,467,000)
----------------- ----------------- -----------------
BALANCES AT JUNE 30, 2000 $ 402,470,000 $ 3,510,000 $ (373,191,000)
================= ================= =================
</TABLE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
TOTAL
COMPREHENSIVE
LOSS
-----------------
<S> <C>
BALANCES AT JUNE 30, 1997
Exercise of stock options and warrants
Sale of convertible Series D Preferred Stock
Payment related to acquired in-process technology
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan
Net unrealized loss on available-for-sale securities $ (221,000)
Net loss (33,003,000)
-----------------
BALANCES AT JUNE 30, 1998 $ (33,224,000)
=================
Exercise of stock options and warrants
Issuance of warrants
Sale of common stock
Sale of convertible Series E-1 Preferred Stock
Conversion and redemption of convertible Series E-1
Preferred Stock to common shares
Imputed interest expense on convertible notes
Imputed dividends on Series E-1 Preferred Stock
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan
Net unrealized loss on available-for-sale securities $ (22,000)
Net loss (60,773,000)
-----------------
BALANCES AT JUNE 30, 1999 $ (60,795,000)
=================
Exercise of stock options and warrants
Issuance of warrants and stock options
Issuance of stock in exchange for technology
Sale of convertible Series F Preferred Stock
Conversion of convertible Series D Preferred Stock
Conversion of $1.8 million convertible debt
Imputed interest expense on convertible notes
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan
Net unrealized gain on available-for-sale securities $ 3,510,000
Net loss (46,467,000)
-----------------
BALANCES AT JUNE 30, 2000 $ (42,957,000)
=================
</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,
2000 1999 1998
----------------- ------------------ -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (46,467,000) $ (60,773,000) $ (33,003,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operations:
Depreciation and amortization 6,344,000 6,265,000 5,064,000
Imputed interest expense on convertible notes 3,653,000 844,000 -
Expense associated with warrant issuance 1,431,000 160,000 -
Gain on sale of equity securities (6,282,000) - -
Receipt of equity securities in exchange for
technology (4,800,000) - -
Issuance of common stock in exchange for technology 5,000,000 - -
Non-cash compensation - net 406,000 201,000 320,000
Changes in operating assets and liabilities:
Research revenue receivable 4,729,000 1,972,000 403,000
Restricted cash and other assets (856,000) (5,038,000) 372,000
Accounts payable and accrued expenses and other (106,000) 1,553,000 (1,238,000)
Deferred revenue 10,000,000 - -
----------------- ------------------ -----------------
Net cash used in operating activities (26,948,000) (54,816,000) (28,082,000)
----------------- ------------------ -----------------
INVESTING ACTIVITIES:
Purchases of short-term investments - (23,711,000) (113,099,000)
Sales and maturities of short-term investments 9,785,000 61,735,000 131,874,000
Investment in joint venture (5,000,000) - -
Property, plant and equipment - net (736,000) (6,246,000) (10,057,000)
Payment for acquired in-process technology - - (57,000)
----------------- ------------------ -----------------
Net cash provided by investing activities 4,049,000 31,778,000 8,661,000
----------------- ------------------ -----------------
FINANCING ACTIVITIES:
Issuance of common stock and warrants 2,743,000 21,511,000 562,000
Issuance of convertible preferred stock - net 19,220,000 5,582,000 9,600,000
Redemption of preferred stock - (2,230,000) -
Proceeds from long-term debt 15,000,000 6,850,000 6,800,000
Principal payments on long-term debt (4,424,000) (1,403,000) (1,100,000)
----------------- ------------------ -----------------
Net cash provided by financing activities 32,539,000 30,310,000 15,862,000
----------------- ------------------ -----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,640,000 7,272,000 (3,559,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 19,081,000 11,809,000 15,368,000
----------------- ------------------ -----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 28,721,000 $ 19,081,000 $ 11,809,000
================= ================== =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 1,304,000 $ 1,104,000 $ 566,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Deferred interest expense on long-term debt $ 503,000 $ 728,000 -
Imputed dividends on preferred stock - $ 1,700,000 -
Issuance of common stock in connection with
acquired in-process technology - - $ 7,500,000
Issuance of common stock upon conversion of notes $ 1,800,000 - -
Issuance of common stock upon conversion of preferred stock $ 10,000,000 - -
</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.
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"), its wholly owned
subsidiary Alliance Pharmaceutical GmbH, from its inception in December 1998,
and its majority-owned subsidiary Talco Pharmaceutical, Inc. All significant
intercompany accounts and transactions have been eliminated. Certain amounts in
1999 and 1998 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 accumulated
comprehensive income (loss). 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
F-7
<PAGE>
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
net book value of $10.1 million and $11.2 million, and is reported net of
accumulated amortization of $13.2 million and $12 million at June 30, 2000 and
1999, respectively. The technology acquired from BioPulmonics has a net book
value of approximately $0 and $129,000 and is being amortized over five to seven
years and is reported net of accumulated amortization of $2 million and $1.9
million at June 30, 2000 and 1999, 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 which is engaged in the
development of FLOGEL-Registered Trademark-, intended for use as an
anti-adhesion treatment for persons undergoing abdominal or pelvic surgeries.
The consideration of $15.5 million was paid through the issuance of common
stock. The Company is obligated to pay up to $20 million in common stock or
cash if advanced clinical development or licensing milestones are achieved in
connection with MDV's technology. The Company will also make certain royalty
payments in cash on the sales of products, if any, developed from such
technology.
INVESTMENT IN JOINT VENTURE
In May 2000, the Company and Baxter Healthcare Corporation ("Baxter")
formed a joint venture, PFC Therapeutics, LLC ("PFC Therapeutics"), for the
manufacture, marketing, sales and distribution of OXYGENT in the United
States, Canada and countries in the European Union. The Company received a
prepaid royalty of $10 million from PFC Therapeutics, which is recorded as
deferred revenue as of June 30, 2000. The Company will recognize the revenue
as the royalties are earned and will record its portion of the income of the
joint venture as equity in income of the joint venture within the Company's
consolidated statement of operations.
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. The Company recognizes
revenue only on payments that are non-refundable, and defers revenue recognition
until performance obligations have been completed. Non-refundable contract fees
that reimburse the Company for previously incurred research and development are
recorded as revenue upon contract "execution."
In December 1999, the Securities and Exchange Commission released
Staff Accounting Bulletin No. 101 ("SAB No. 101"), Revenue Recognition in the
Financial Statements, which provides guidance on the recognition,
presentation and disclosure of revenue in the financial statements. The
application of SAB No. 101 is not expected to have a material impact on the
Company's financial statements.
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.
F-8
<PAGE>
COMPREHENSIVE INCOME (LOSS)
Financial Accounting Standards Board's Statement No. 130,
"Comprehensive Income" ("SFAS No. 130") requires unrealized gains and losses
on the Company's available-for-sale securities to be included in accumulated
comprehensive income (loss). The Company has reported the total comprehensive
loss in the Consolidated Statements of Stockholders' Equity.
2. FINANCIAL STATEMENT DETAILS
PROPERTY, PLANT AND EQUIPMENT - NET
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
June 30,
2000 1999
----------------------- ---------------------
<S> <C> <C>
Land $ 225,000 $ 225,000
Buildings 300,000 300,000
Building improvements 2,422,000 2,323,000
Furniture, fixtures, and equipment 19,686,000 20,614,000
Leasehold improvements 20,045,000 19,870,000
----------------------- ---------------------
42,678,000 43,332,000
Less accumulated depreciation and amortization (22,369,000) (18,711,000)
----------------------- ---------------------
$ 20,309,000 $ 24,621,000
======================= =====================
</TABLE>
ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
June 30,
2000 1999
----------------------- ---------------------
<S> <C> <C>
Payroll and related expenses $ 3,338,000 $ 1,704,000
Rent and related operating expenses 433,000 201,000
Clinical trial supplies expense -- 2,286,000
Other 330,000 89,000
----------------------- ---------------------
$ 4,101,000 $ 4,280,000
======================= =====================
</TABLE>
3. INVESTMENTS
The Company classifies its investment securities as
available-for-sale and records holding gains or losses in accumulated
comprehensive income (loss).
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
--------------------------------------------------- ---------------------------------------------------
Gross Gross
Unrealized Estimated Unrealized Estimated
Cost Gains (Losses) Fair Value Cost Gains (Losses) Fair Value
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
Securities $ -- $ -- $ -- $ -- $ -- $ --
Corporate securities 1,296,000 3,510,000 4,806,000 -- -- --
--------------------------------------------------- ---------------------------------------------------
$ 1,296,000 $ 3,510,000 $ 4,806,000 $ -- $ -- $ --
=================================================== ===================================================
</TABLE>
The gross realized gain on sales of available-for-sale securities
totaled $6,282,000 in 2000. The gross unrealized gain of $3,510,000 in 2000
is recorded as
F-9
<PAGE>
a component of comprehensive income. The unrealized gain had no cash effect
and therefore is not reflected in the Consolidated Statements of Cash Flows.
4. LONG-TERM DEBT
In June 1998, the Company restructured a loan and security agreement
with a bank to provide for up to $15 million at the bank's prime rate plus 0.5%.
In March 1999, the Company was in violation of a financial covenant under the
loan. In June 1999, the bank waived the violation, took additional collateral
and restructured the loan which resulted in increased principal payments. The
loan bears interest at rates ranging from 7.5% to 10% at June 30, 2000. As part
of the restructuring, the Company issued to the bank a warrant to purchase up to
180,000 shares of common stock at an exercise price of $2.88 per share The
Company has recorded deferred interest expense on the warrant, based upon a
Black-Scholes valuation, of $241,000, which is being amortized over the life of
the warrant. The unamortized deferred interest balance was $141,000 at June 30,
2000. Amounts borrowed are secured by a $5 million restricted certificate of
deposit, by certain fixed assets and patents, and are to be repaid over four
years. If certain financial covenants are not satisfied, the outstanding balance
may become due and payable. On June 30, 2000, the balance outstanding on this
loan was $9.2 million.
In May 1999, the Company privately placed $1.8 million of 6%
convertible subordinated notes due May 2002 and issued warrants to the note
holders to purchase up to 300,000 shares of common stock at $2.45 per share. In
February 2000, the Company caused the notes to be converted into 900,000 shares
of common stock of the Company. The conversion price of the notes was $2 per
share, which was below the trading market price of the stock on the day the
notes were issued. As a result of this beneficial conversion price, the Company
recognized an immediate charge to interest expense of $844,000 on these
convertible notes. The Company recorded deferred interest expense on the
warrants of $521,000, based upon a Black-Scholes valuation, and amortized the
deferred interest over the life of the notes. The unamortized deferred interest
balance was expensed in February 2000 when the notes were converted.
In February 2000, the Company sold $15 million in four-year 5%
subordinated convertible debentures to certain investors. The debentures are
convertible at any time at each investor's option into shares of Alliance common
stock at $9.65 per share, subject to certain antidilution provisions. The
conversion price of the debentures was below the trading market price on the day
the debentures were issued. As a result of this beneficial conversion price, the
Company has recorded an immediate charge to interest expense of $3.7 million on
these convertible debentures. The Company will have certain rights to cause the
debentures to convert into common stock. The investors will have the option at
any time to purchase, and the Company will have certain rights to require the
investors to purchase, an additional $15 million of four-year 5% subordinated
convertible debentures, convertible into Alliance common stock at $12.06 per
share. The Company issued to certain investors of the debentures a warrant to
purchase up to 77,720 shares of common stock at an exercise price of $9.65 per
share. The Company has recorded deferred interest expense on the warrant, based
upon a Black-Scholes valuation, of $503,000, which will be amortized over the
life of the warrant. The unamortized deferred interest balance was $433,000 at
June 30, 2000.
The Company's principal payments for the long-term debt for the years
ending June 30, 2001, 2002, 2003, 2004 and 2005 are $4.4 million, $2.8 million,
$1.7 million, $300,000 and $-0-, respectively. Due to the option of the Company
to satisfy the $15 million subordinated convertible debentures with the issuance
of common stock, the Company has excluded any principal payments on the
convertible notes from the five year schedule of principal payments.
5. 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 8,300,000 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
F-10
<PAGE>
under the 1983 Plan), are determined by the Compensation Committee of the Board
of Directors. The 1983 Plan and the 1983 Program have expired and no additional
options may be granted under such plans.
The following table summarizes stock option activity through June 30,
2000:
<TABLE>
<CAPTION>
Weighted
Shares Average Price
------------------ ---------------------
<S> <C> <C>
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
Granted 2,617,008 $ 4.90
Exercised (129,918) $ 0.01
Terminated/Expired (2,373,791) $ 10.08
------------------
Balance at June 30, 1999 5,199,222 $ 7.75
Granted 2,672,300 $ 6.27
Exercised (501,894) $ 5.11
Terminated/Expired (675,788) $ 6.64
------------------
Balance at June 30, 2000 6,693,840 $ 7.47
==================
Available for future grant under the 1983 Plan and the 1983 Program -0-
==================
Available for future grant under the 1991 Plan 1,238,681
==================
</TABLE>
The following table summarizes information concerning outstanding and
exercisable stock options at June 30, 2000:
<TABLE>
<CAPTION>
Weighted
Weighted Average Weighted
Range of Exercise Number Average Remaining Number Average
Prices Outstanding Exercise Price Contractual Life Exercisable Exercise Price
------------------------ ---------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$2.375 - $2.75 840,750 $ 2.72 9.04 years 355,275 $ 2.73
$2.938 - $4.813 222,050 $ 4.034 8.58 years 32,450 $ 3.864
$4.875 1,138,000 $ 4.875 8.37 years 385,100 $ 4.875
$5.00 332,065 $ 5.00 8.15 years 228,132 $ 5.00
$5.031 - $7.688 696,850 $ 5.70 5.38 years 618,650 $ 5.68
$7.75 1,315,500 $ 7.75 9.46 years 16,000 $ 7.75
$7.8125 - $9.25 419,800 $ 8.72 5.87 years 279,375 $ 8.82
$9.375 684,900 $ 9.375 7.37 years 314,800 $ 9.375
$9.4375 - $13.188 704,700 $12.41 6.40 years 429,845 $12.37
$13.625 - $28.00 339,225 $19.54 3.07 years 314,943 $19.89
---------------- -----------------
6,693,840 $7.47 7.62 years 2,974,570 $8.32
================ =================
</TABLE>
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 2000, 1999 or 1998. 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 applicable to common shares and net loss per share would
have been increased to the pro forma amounts indicated below for the years ended
June 30:
F-11
<PAGE>
<TABLE>
<CAPTION>
2000 1999 1998
------------------- ------------------ -------------------
<S> <C> <C> <C>
Net loss
As reported $ (46,467,000) $ (62,473,000) $ (33,003,000)
Pro forma (52,716,000) (67,386,000) (36,422,000)
Net loss per share
As reported $ (1.03) $ (1.89) $ (1.04)
Pro forma (1.17) (2.04) (1.15)
</TABLE>
The impact of outstanding non-vested stock options granted prior to
1996 has been excluded from the pro forma calculations; accordingly, the 2000,
1999 and 1998 pro forma adjustments are not indicative of future period pro
forma adjustments if the calculation reflected 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 2000, 1999 and 1998,
respectively: risk-free interest rate range of 5.63% to 6.63% (for all years);
dividend yield of 0% (for all years); volatility factor of 83%, 78% and 66%; and
a weighted-average expected term of 6 years, 7 years and 6 years. The estimated
weighted average fair value at grant date for the options granted during 2000,
1999 and 1998 was $4.64, $3.23 and $5.85 per option, respectively.
The following table summarizes common shares reserved for issuance at
June 30, 2000 on exercise or conversion of:
<TABLE>
<CAPTION>
Shares
----------------------
<S> <C>
Series F convertible preferred stock 909,091
Convertible subordinated debentures 1,554,404
Common stock options 7,932,521
Common stock warrants 1,996,743
----------------------
Total common shares reserved for issuance 12,392,759
======================
</TABLE>
WARRANTS
At June 30, 2000, the Company had warrants outstanding to purchase
1,996,743 shares of common stock at prices ranging from $2.45 to $20 per share.
The warrants expire on various dates from July 2000 through November 2004.
PREFERRED STOCK
In September 1997, in conjunction with a license agreement (the
"Schering 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. In February
2000, the Series D Preferred Stock was converted into 1,000,000 shares of common
stock of the Company.
In August 1998, the Company sold 100,000 shares of its convertible
Series E-1 Preferred Stock to certain investors for $6 million. The Company
recognized an imputed dividend of $483,000 to reflect a beneficial conversion
feature on these preferred shares. In January 1999, 47,837 shares of the Series
E-1 Preferred Stock were converted into 1,091,338 shares of Alliance common
stock at an average price of $2.63 per share. In May 1999, 31,456 shares of
Series E-1 Preferred Stock converted into 767,219 shares of Alliance common
stock. The Company also repurchased the remaining 20,707 shares of Series E-1
Preferred Stock for $2.2 million of cash. The Company recorded a preferred stock
dividend of $1.2 million, which represents the excess of the fair value of the
consideration transferred to the preferred stockholders over the carrying value
of the preferred stock. 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 total royalty obligation is 0.3% of net sales of the product for a
period of three years. The Company has certain rights to repurchase the royalty
right.
In May 2000, the Company entered into a joint venture with Baxter
and sold 500,000 shares of its convertible Series F Preferred Stock for $20
million. If Alliance's common stock price averages $22
F-12
<PAGE>
per share over a 20-day period within the next four years, the conversion price
for the Series F Preferred Stock will be $22 per share. If the stock does not
reach that price, the conversion price will be based on the market value of
Alliance's common stock at the time of conversion. The Series F Preferred Stock
has no annual dividend and is not entitled to any voting rights except as
otherwise required by law.
6. LICENSE AGREEMENTS
From February 1996 through June 1997, Hoechst Marion Roussel
("HMRI") was responsible for most of the costs of development and marketing
of LIQUIVENT. In June 1997, the Company sold $2.5 million in clinical trial
supplies to HMRI and recorded it as deferred revenue. In December 1997, the
license agreement with HMRI was terminated. Therefore, since July 1, 1997
Alliance has been responsible for all LIQUIVENT development expenses
worldwide. HMRI has no continuing rights to the development or marketing of
LIQUIVENT. In September 1999, HMRI dismissed an arbitration proceeding filed
against Alliance in September 1998, and Alliance agreed to repurchase the
clinical trial supplies from HMRI for up to $3 million over time and under
certain circumstances. The Company converted the balance of deferred revenue
to accrued expenses at June 30, 1999. During fiscal 2000, the Company
repurchased all of the clinical trial supplies and the associated liability
was reduced to $-0-.
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 IMAVIST-TM- (formerly named IMAGENT-Registered
Trademark-). In conjunction with the Schering License Agreement, SBVC
purchased 500,000 shares of the Company's convertible Series D Preferred
Stock for $10 million. In February 2000, the Series D Preferred Stock was
converted into 1,000,000 shares of common stock of the Company. IMAVIST is
being developed jointly by Alliance and Schering. Under the Schering License
Agreement, Schering paid to Alliance in 1998 an initial license fee of $4
million, and agreed to pay further milestone payments and royalties on
product sales. Schering is also providing funding to Alliance for some of its
development expenses related to IMAVIST.
In May 2000, Alliance and Baxter entered into a joint venture for
the manufacture, marketing, sales and distribution of OXYGENT in the United
States, Canada and countries in the European Union (the "Baxter Territory").
The companies formed PFC Therapeutics to oversee the further development,
manufacture, marketing, sales and distribution of OXYGENT; and each party
invested $5 million in PFC Therapeutics. In connection with the transaction,
PFC Therapeutics obtained an exclusive license in the Baxter Territory, to
manufacture and market all of the Company's injectable perfluorochemical
emulsions capable of transporting oxygen in therapeutic effective amounts in
the bloodstream, including OXYGENT. PFC Therapeutics paid Alliance a prepaid
royalty of $10 million, which has been recorded as deferred revenue. Alliance
and Baxter will also share in the distribution of PFC Therapeutics' future
cash flows. Under the arrangement, Alliance will continue to fund the current
development plan for OXYGENT'S initial approval in the Baxter Territory. PFC
Therapeutics has a right of first offer to license OXYGENT in one or more
countries outside the Baxter Territory. Pursuant to a manufacturing and
supplier agreement between Alliance and PFC Therapeutics, Alliance will
initially manufacture OXYGENT for distribution in the Baxter Territory. Under
separate agreements between Baxter and PFC Therapeutics, Baxter will have the
exclusive right to promote, market, distribute and sell OXYGENT in the Baxter
Territory, and Baxter has the right to take over the manufacturing
responsibility for OXYGENT. In connection with this arrangement, Baxter has
purchased 500,000 shares of the Company's convertible Series F Preferred
Stock for $20 million. In order for Baxter to maintain its rights to
commercialize the product, Baxter is required to purchase an additional $30
million of convertible redeemable preferred stock from Alliance through
September 2001.
7. SALE OF TECHNOLOGY
In November 1999, the Company completed the sale of certain aspects
of its PULMOSPHERES-Registered Trademark- technology to Inhale Therapeutic
Systems, Inc. ("Inhale") for $15 million in cash and $5 million in common
stock of Inhale, plus the right to receive additional future milestone and
royalty payments. In consideration for retaining certain rights to use the
technology, Alliance issued $5 million in Alliance common stock to Inhale.
The Company recorded net revenue of $14.1 million associated with this
transaction.
F-13
<PAGE>
8. INCOME TAXES
Significant components of the Company's deferred tax assets as of June
30, 2000 and 1999, respectively, are shown below. A valuation allowance of
$144,955,000, of which $23,554,000 is related to 2000, 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,
2000 1999
--------------------- --------------------
<S> <C> <C>
Net operating loss carryforwards $ 107,107,000 $ 93,497,000
Research and development credits 17,563,000 12,423,000
Capitalized research expense 14,883,000 12,047,000
Other - net 5,402,000 3,434,000
--------------------- -----------------
Total deferred tax assets 144,955,000 121,401,000
Valuation allowance for deferred tax assets (144,955,000) (121,401,000)
--------------------- --------------------
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, 2000, the Company had federal and various state net
operating loss carryforwards of approximately $299,820,000 and $37,735,000,
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. Approximately $1,457,000 of
California tax loss carryforwards expired in fiscal 2000 and will continue to
expire (approximately $1,090,000 in fiscal 2001) unless previously utilized.
Approximately $1,273,000 of federal tax loss carryforwards expired in fiscal
2000 and will continue to expire (approximately $1,851,000 in fiscal 2001)
unless previously utilized. The Company also has federal and state research and
development tax credit carryforwards of $14,355,000 and $4,937,000,
respectively, which will begin expiring in fiscal 2001 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 occurred;
however, the Company does not believe such limitation will have a material
impact upon the utilization of these carryforwards.
9. COMMITMENTS
The Company leases certain office and research facilities in San Diego
and certain equipment under operating leases. Provisions of the facilities
leases 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.
F-14
<PAGE>
Minimum annual commitments related to operating lease payments at June
30, 2000 are as follows:
<TABLE>
<CAPTION>
Years ending June 30,
---------------------
<S> <C>
2001 $ 3,495,000
2002 3,605,000
2003 1,830,000
2004 1,216,000
2005 805,000
Thereafter 2,284,000
-------------------
Total $ 13,235,000
===================
</TABLE>
Rent expense for fiscal 2000, 1999, and 1998 was $4.2 million, $4.1
million and $3.4 million, respectively.
10. SUBSEQUENT EVENT (UNAUDITED)
In August 2000, the Company sold $10 million in principal amount of
four-year 5% subordinated convertible debentures to certain investors. The
debentures are convertible at any time at each investor's option into shares of
Alliance common stock at $13.32 per share, subject to certain antidilution
provisions. The conversion price of the debentures was below the trading market
price on the day the debentures were issued. As a result of this beneficial
conversion price, the Company will record an immediate charge to interest
expense of $792,000 on these convertible debentures in the first quarter of
fiscal year 2001. The Company will have certain rights to cause the debentures
to convert into common stock. The investors will have the option at any time to
purchase, and the Company will have certain rights to require the investors to
purchase, an additional $10 million of four-year 5% subordinated convertible
debentures, convertible into Alliance common stock at $16 per share.
F-15
<PAGE>
EXHIBIT INDEX
Certain exhibits to this Report on Form 10-K have been incorporated by
reference. For a list of exhibits, see Item 14 hereof.
The following exhibits are being filed herewith:
Number Document
------------ ------------------------------------------------------------
10(pp) License Agreement dated May 19, 2000 between the
Company and PFC Therapeutics, LLC (1)
10(qq) Marketing and Distribution Agreement executed May 19,
2000, effective June 1, 2000 between the Company,
Baxter Healthcare Corporation and PFC Therapeutics,
LLC (1)
10(rr) Alliance Manufacturing and Supplier Agreement dated
May 19, 2000 between the Company and PFC
Therapeutics, LLC (1)
10(ss) Baxter Manufacturing and Supplier Agreement dated May 19,
2000 between Baxter Healthcare Corporation and PFC
Therapeutics, LLC (1)
10(tt) Operating Agreement dated May 17, 2000 between the
Company and Baxter Healthcare Corporation (1)
10(uu) Preferred Stock Purchase Agreement dated May 19, 2000
between the Company and Baxter Healthcare Corporation
10(vv) Deferred Stock Purchase Agreement dated May 19, 2000
between the Company and Baxter Healthcare Corporation
10(ww) Security Agreement dated May 19, 2000 between the
Company and PFC Therapeutics, LLC (1)
21 Subsidiary List
23.1 Consent of Ernst & Young LLP, Independent Auditors
(1) A request for confidential treatment of certain portions of
this exhibit has been filed with the Securities and Exchange
Commission.
1
