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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended JUNE 30, 1998
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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 619-558-4300
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH
TITLE OF EACH CLASS 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. [ ]
[COVER PAGE 1 OF 2 PAGES]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closing price of such stock on
the Nasdaq National Market on September 4, 1998, was $83 million.
The number of shares of the Registrant's common stock, $.01 par value,
outstanding at September 4, 1998 was 32,042,482.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report on Form 10-K is
incorporated by reference to the definitive Proxy Statement with respect to
the 1998 Annual Meeting of Shareholders, which the Registrant intends to file
with the Securities and Exchange Commission no later than 120 days after the
end of the fiscal year covered by this report.
[COVER PAGE 2 OF 2 PAGES]
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 333-15905).
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
royalties. To date, the Company has developed three innovative products
through initial clinical (human) trials, and is in, or is preparing to enter,
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 IMAGENT-Registered Trademark-, an intravenous
contrast agent for enhancement of ultrasound images to assess cardiac
function, organ lesions and to detect blood flow abnormalities, which is
licensed to Schering AG, Germany.
The Company's strategy is to identify potential new medical products
through 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 such 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 (619) 558-4300.
PRODUCTS IN CLINICAL DEVELOPMENT
Three of Alliance's products are currently in late-stage clinical
development. These are OXYGENT, LIQUIVENT, and IMAGENT, 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 safely throughout the body. The
Company also has two additional products in clinical development, RODA-TM-,
a device intended to measure the cardiovascular and oxygenation status of
patients, and FloGel-Registered Trademark-, a thermoreversible agent for
reduction of surgical adhesions.
OXYGENT. OXYGENT (perflubron emulsion) is an intravascular oxygen delivery
system to temporarily augment oxygen delivery in surgical and other patients
at risk of acute tissue oxygen deficit. It will 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 in excess of
three million patients annually in the United States may receive one or more
units of blood during elective surgeries, including, for example,
cardiovascular, orthopedic, and general surgical procedures. An oxygen
carrier could be used instead of blood for a portion of these patients. The
OXYGENT dose for surgical applications is expected to provide the equivalent
oxygen delivery of at least two units of red blood cells.
OXYGENT has several potential advantages over the use of allogeneic
(donor) blood: there is no risk of infectious disease transmission; it is
compatible with all blood types; it has a shelf-life of approximately two
years; and it can be sterilized. According to the 1995 estimates in the
American Journal of Surgery, the risks per unit of blood transfused in the
United States are 1:2,500 for bacterial infections, 1:5,000 for hepatitis,
1:600,000 for fatal hemolytic reactions, primarily due to clerical error, and
1:420,000 for HIV infection (AIDS). To minimize the use of allogeneic blood
and to avoid these risks, certain techniques can be employed that allow use
of the patient's own (autologous) blood during surgery. These
techniques include (i) predonation, in which the patient donates several
units of his or her blood in the six weeks preceding surgery, (ii)
perioperative hemodilution, in which several units of the patient's blood are
removed just prior to surgery and are replaced with a plasma expander, and
(iii) blood salvage, wherein a device (cell saver) is used to collect blood
lost during the surgical procedure. OXYGENT can be used with any of these
autologous blood collection techniques to enhance safety, by reducing the
need for allogeneic blood. When a blood transfusion is indicated during
surgery, one or more doses of OXYGENT would be used in place of allogeneic
blood to maintain an adequate level of oxygen delivery despite a lower red
blood cell concentration. This use of OXYGENT should delay or reduce the
need for the transfusion of donor blood, thereby avoiding its associated
risks. OXYGENT may also be advantageous during emergency situations such as
trauma, acute myocardial infarctions (heart attacks), or transient ischemia
(oxygen deprivation) in specific organs where there is an immediate need to
augment oxygen delivery to the tissues.
In fiscal 1997, two large multicenter Phase II clinical studies of
OXYGENT were completed in general surgery patients in the United States and
Europe. In fiscal 1998, three additional Phase II studies were completed in
which OXYGENT was administered to cardiac surgery patients undergoing
cardiopulmonary bypass procedures. Phase III clinical trials in general
surgery patients are expected to begin before the end of calendar 1998.
In August 1994, the Company entered into a license agreement (the "Ortho
License Agreement"), with Ortho Biotech, Inc. and The R.W. Johnson
Pharmaceutical Research Institute, a division of Ortho Pharmaceutical
Corporation, both affiliates of Johnson & Johnson (collectively referred to
as "Ortho"), which provided Ortho with certain development and worldwide
marketing rights to the Company's injectable PFC emulsions capable of
transporting oxygen for therapeutic use, including OXYGENT. In May 1998,
because of disagreements as to the scope and timing of further clinical
development, including whether to proceed with Phase III trials at that time
and for which indications, Ortho and Alliance restructured their agreement.
Under the restructured agreement, Alliance assumed responsibility for
worldwide development of OXYGENT at its own cost, and Ortho has a limited
right of first offer to enter into a development or marketing or license
agreement for OXYGENT, which right may be repurchased by Alliance for $2
million under certain circumstances.
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 United
States are placed on mechanical gas ventilators for treatment of lung
dysfunction. Many 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
patient's lungs. Some of these patients may benefit from treatment with
LIQUIVENT.
LIQUIVENT is intended to be used in a technique called partial liquid
ventilation ("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 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
U.S. Food and Drug Administration ("FDA") has granted Subpart E status
(expedited review) for the product.
In April 1997, the Company temporarily suspended enrollment in its
ongoing Phase III LIQUIVENT trial in pediatric patients to analyze an
unexplained, substantial decrease in the mortality rate for the control group
which occurred after a protocol amendment in December 1996. The decision was
not prompted by any LIQUIVENT-related adverse events. In August 1997, the
Company completed its analysis of data from the clinical trial. The Company
found that after the protocol amendment, patients in the post-amendment
control group were younger and had different disease etiologies compared to
the pre-amendment control group. Additionally, post-amendment control group
patients received additional
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therapies such as extracorporeal membrane oxygenation, high frequency
oscillatory ventilation, nitric oxide or surfactants more frequently,
earlier, and for a longer duration compared to both the pre-amendment control
group and the LIQUIVENT-treated patients. The study analysis also supported
previous reports that PLV therapy with LIQUIVENT is a safe procedure. In
December 1997, the Company started a small Phase II adult clinical trial
intended to validate the protocol for a subsequent pivotal trial with adult
patients. That trial has been completed and the Company intends to initiate
a Phase II/III clinical study in adult patients before the end of calendar
1998.
In February 1996, the Company entered into a license agreement (the
"HMRI License Agreement") with Hoechst Marion Roussel, Inc. ("HMRI"), which
provided HMRI with worldwide marketing and manufacturing rights to the
intratracheal administration of liquids, including LIQUIVENT, which perform
bronchoalveolar lavage or liquid ventilation. The product was being
developed jointly by Alliance and HMRI. In June 1997, Alliance announced
that the parties agreed in principle to adjust certain milestone payments, to
temporarily revise the method for reimbursing expenses of the development
work and terms to repurchase clinical supplies sold, in conjunction with the
April 1997 temporary interruption of the clinical development program. In
December 1997, HMRI terminated the HMRI License Agreement and Alliance
regained all rights to the product. In connection with the termination the
Company may acquire approximately $2.3 million of inventory from HMRI. HMRI
has also asserted a claim for an amount up to $7.5 million payable in 2002 in
cash or common stock, at the Company's election. The Company does not
believe the claim is meritorious and intends to contest such claim; however,
no assurances can be given that the Company will prevail on the claim.
IMAGENT. IMAGENT is an intravenous contrast agent for enhancement of
ultrasound images to assess cardiac function and organ lesions, and to detect
solid organ lesions and blood flow abnormalities. More than 30 million scans
of the heart, vasculature, and abdominal organs are performed annually in the
United States, 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. IMAGENT is being developed to meet these requirements.
IMAGENT 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, IMAGENT is reconstituted with
water to form microbubbles that are then injected into the patient. The gas
microbubbles are highly echogenic and, when delivered intravenously, reflect
signals that enhance ultrasound images. In early clinical trials with
IMAGENT, gray-scale contrast enhancement of cardiac, abdominal, and vascular
structures has been observed with no serious adverse events.
In March 1998, the Company initiated two Phase III clinical trials to
assess cardiac function. The multicenter trials are designed to demonstrate
the use of IMAGENT to aid in the evaluation of cardiac function as assessed
by both ejection fraction and endocardial border definition. A Phase II
myocardial perfusion feasibility study is also underway for assessment of
blood flow defects in the muscle of the heart. In July 1998, two Phase II
prostate and breast feasibility studies were initiated. Enrollment in a
Phase II clinical trial was completed in 1997 in adults undergoing diagnostic
procedures for evaluation of space-occupying lesions of the liver and kidney
and vascular flow abnormalities.
In September 1997, the Company entered into a license agreement (the
"Schering License Agreement") with Schering AG, Germany ("Schering"), which
provides Schering with worldwide exclusive marketing and manufacturing rights
to Alliance's drug compounds, drug compositions and medical devices and
systems related to perfluorocarbon ultrasound imaging products, including
IMAGENT. The product is being developed jointly by Alliance and Schering.
RODA. 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 an
EX VIVO device intended to provide on-line measurements of the cardiovascular
and oxygenation status of surgical patients by minimally invasive means. The
device could assist physicians in their decisions regarding transfusions and
other interventions. RODA will combine oxygen dynamics software designed by
the Company with VIA's EX VIVO blood gas and chemistry monitor and other VIA
technology. The Company has conducted pilot clinical studies in the U.S. and
Europe to assess its oxygen dynamics software. VIA is currently developing 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 will be responsible for manufacturing and marketing
RODA, and the parties will share revenues from the sale of products.
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OTHER PRODUCTS
PULMOSPHERES-TM-. PULMOSPHERES are hollow, porous spheres (in powder form)
suspended in perflubron or fluorochemical propellants for the purpose of
pulmonary drug delivery. 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.
Over the past year, different types of drugs have been successfully
formulated in PULMOSPHERES for feasibility testing purposes. Drugs such as
bronchodilators and steriodal anti-inflammatory agents could potentially be
formulated in PULMOSPHERES and delivered to the lung by way of standard
metered-dose inhaler (MDI) devices for the topical treatment of asthma.
Alternatively, proteins or peptides intended for systemic distribution and
treatment of other chronic diseases might be incorporated into PULMOSPHERES
and be delivered by other commonly used devices such as nebulizers or dry
powder inhalers, which tend to propel small particles deeper into the lung
for improved systemic uptake.
The current business strategy for PULMOSPHERES involves Alliance
formulating the drugs and subsequently manufacturing bulk powders for
pharmaceutical company partners. The partners would be responsible for
filling the powders in delivery device(s), conducting preclinical and
clinical trials, and marketing the resultant products.
FLOGEL-Registered Trademark-. In November 1996, Alliance acquired all of
the stock of MDV Technologies, Inc. ("MDV") for initial payments of $15.5
million over a one-year period, with additional payments and royalties to the
former MDV shareholders upon the occurrence of certain clinical development,
licensing, or commercialization events. The Company 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. Preliminary human safety data with a previous formulation
for the product have been obtained and, during the past year, preclinical
studies have been performed on additional formulations. The Company has
selected a formulation for a pilot clinical trial which is expected to
commence in the near future. In addition to the anti-adhesion product, MDV
also has patents covering the use of gels for drug delivery and ophthalmic
indications.
Alliance is also supporting internal research efforts to expand the
applicability of its core technologies. The Company has patented fluorinated
surfactants that are potentially useful in the preparation of therapeutic or
diagnostic emulsions and other formulations.
In addition to PULMOSPHERES, Alliance is investigating the use of other
PFC-containing reverse emulsions, microemulsions, gels, foams, and other
compositions as drug delivery agents. These compositions are either aqueous
or oil-based, and may be administered via oral, intravenous, intrapulmonary,
or topical routes to distribute antibiotics, chemotherapy agents, gene
therapies, or other medicaments systemically or to selected areas of the body.
The Company has certain agreements with research institutions to develop
discoveries that the Company believes may be the basis of new products.
Antigenized antibodies that could potentially stimulate or down-regulate
antibody production are being developed in conjunction with Mt. Sinai Medical
Center in New York City. A prototype vaccine for infectious disease and a
prototype tolerogen for an autoimmune disease are also under development. In
addition, Alliance is working with researchers at Temple University to
develop an apoptotic factor for regulating the death of certain cancer cells.
Alliance has developed and is marketing SAT PAD-Registered Trademark-, a
re-usable magnetic resonance ("MR") imaging accessory that improves the
quality of images obtained by certain MR imaging techniques. SAT PAD is
distributed by dealers specializing in radiology products. Sales of SAT PAD
were approximately $100,000 for fiscal 1998. Alliance expects that the sales
volume of SAT PAD will be limited and does not anticipate significant revenue
from the product.
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.
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The Company's products require substantial development efforts. The
Company may encounter unforeseen technical and 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 have a material adverse effect on the Company. The
Company expends substantial amounts of money on research and development and
expects to do so for the foreseeable future. In fiscal 1998, 1997, and 1996,
the Company incurred research and development expenses of $50.1 million,
$43.3 million, and $33.7 million, respectively.
COLLABORATIVE RELATIONSHIPS
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 IMAGENT. 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 convertible Series D Preferred Stock for $10 million.
HOECHST MARION ROUSSEL, INC. In February 1996, the Company entered into the
HMRI License Agreement, which provided HMRI with worldwide exclusive
marketing and manufacturing rights to the intratracheal administration of
liquids, including LIQUIVENT, which perform bronchoalveolar lavage or liquid
ventilation. This product was being developed jointly by Alliance and HMRI,
with HMRI responsible for most of the costs of development and marketing. On
June 30, 1997, HMRI paid the Company a $2.5 million milestone payment and
$2.5 million for the purchase of clinical trial supplies. In June 1997, the
Company also announced that the parties had agreed in principle to modify the
HMRI License Agreement to (i) adjust certain milestone payments, (ii)
temporarily revise the method for reimbursing the expenses for portions of
the development work, and (iii) provide for the Company to repurchase any
unused clinical trial supplies if the license agreement is terminated before
January 1, 1998, in conjunction with the temporary interruption of the
LIQUIVENT clinical development program in April 1997. In December 1997, HMRI
terminated the HMRI License Agreement and Alliance regained all rights to the
product. In connection with the termination the Company may acquire
approximately $2.3 million of inventory from HMRI. HMRI has also asserted a
claim for an amount up to $7.5 million payable in 2002 in cash or common
stock, at the Company's election. The Company does not believe the claim is
meritorious and intends to contest such claim, however, no assurances can be
given that the Company will prevail on the claim.
ORTHO BIOTECH, INC. In August 1994, the Company entered into the Ortho
License Agreement which provided Ortho with worldwide exclusive marketing and
manufacturing rights to injectable PFC emulsions capable of transporting
oxygen for therapeutic use, including OXYGENT. The product was being
developed jointly by Alliance and Ortho, with Ortho responsible for
substantially all of the costs of developing and marketing the product. In
May 1998, because of disagreements as to the scope and timing of further
clinical development, including whether to proceed with Phase III trials at
that time and for which indications, Ortho and Alliance restructured their
agreement. Under the restructured agreement, Alliance assumed responsibility
for worldwide development of OXYGENT at its own cost, and Ortho has a limited
right of first offer to enter into a development or marketing or license
agreement for OXYGENT, which right may be repurchased by Alliance for $2
million under certain circumstances.
VIA MEDICAL CORPORATION. In July 1997, the Company entered into the VIA
Development Agreement for the joint development of RODA, an EX VIVO device
intended to measure the cardiovascular and oxygenation status of patients by
minimally invasive means. Pursuant to the VIA Development Agreement, VIA
will combine Alliance's oxygen dynamics software with VIA's EX VIVO blood gas
and chemistry monitor and other technology. Alliance will reimburse 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 will be responsible for
manufacturing and marketing RODA, and the parties will share revenues on the
sale of products.
The Company intends to obtain new collaborative relationships for
OXYGENT and 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.
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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 for the market. The Company's
only commercialized product, SAT PAD, is currently distributed through
certain distributors of MR imaging equipment and supplies. Currently,
Schering will be solely responsible for all activities related to marketing
and sales of IMAGENT. Under the terms of the restructured Ortho agreement,
Ortho has a limited right of first offer to enter into a marketing agreement
for OXYGENT. 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 and
may have a material adverse effect on the Company's 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 one of Alliance's San Diego
facilities, which includes both a pilot plant and a production-scale
manufacturing facility. 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.
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 MR imaging. As a result, certain chemistry,
manufacturing, and control requirements have been accepted by the FDA, which
may benefit the Company in the regulatory review process. The Company
believes the Otisville facility 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.
IMAGENT is manufactured for clinical studies at one of the San Diego
facilities, 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 is in the process of expanding its market launch
production capacity in San Diego for IMAGENT. 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.
Expansion for any of the Company's 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 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
The Company has obtained a sufficient inventory of perflubron, the
principal raw material utilized in OXYGENT and LIQUIVENT, for clinical
trials. The Company is currently 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 IMAGENT for clinical
trials and is in the process of negotiating with a potential supplier to
secure long-term supply of that material. Although
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some raw materials for its products are available 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 or that a long-term
supply agreement for such materials can be obtained 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 necessary
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 United States 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, and
South Africa, 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 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
Company issued covering methods of administering liquids, including
LIQUIVENT, to patients. Other U.S. patents, covering additional methods of
enhancing respiratory gas exchange by administering liquids to patients,
including LIQUIVENT, have subsequently issued. The Company also has issued
patents and pending patent applications which seek to cover 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 IMAGENT. 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 IMAGENT. International
applications directed to the same subject matter have also been filed. In
March 1998, the Company received its second U.S. patent covering the use of
various contrast agents, including IMAGENT, 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
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 use, manufacture
and composition of FLOGEL. Corresponding patents have issued, or
applications have been filed, in Europe, Japan and certain other foreign
countries. MDV also has issued claims in the United States and
7
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, however, 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.
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 employee's 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.
Well-publicized side effects associated with the transfusion of human
donor blood have spurred efforts to develop a blood substitute. There are
two primary approaches for temporary 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", two of which are in Phase III 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 companies developing PFC-based temporary oxygen carriers, one of
which has entered Phase II clinical trials.
Although liquid ventilation therapy has been in the research phase for
the last two decades, 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 has started a Phase
II/III clinical trial for acute respiratory failure with a surfactant, and
several others have started Phase II clinical trials with various compounds
for acute respiratory failure.
Competition in the development of ultrasound imaging contrast agents is
intense and is expected to increase. There are currently only two available
ultrasound contrast agents for certain cardiology applications in the U.S.
There are currently five (including the two U.S. approved contrast agents)
that have been approved in Europe, three of which are currently being sold.
In addition, 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 IMAGENT 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.
8
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 United States 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 I, which frequently begins with
the initial introduction of the drug into healthy human subjects prior to
introduction into patients, the compound will be tested for safety and dosage
tolerance. Phase II 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 III trials are undertaken to further evaluate clinical
efficacy and to further test for safety within an expanded patient
population. Each trial is conducted in accordance with certain 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, a new drug application ("NDA")
must be submitted to and approved by the FDA in order to market the product
in the United States. 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 United
States and other countries, may impede or limit the Company's ability to
develop and market its products.
9
EMPLOYEES
As of September 4, 1998, the Company had 284 full-time employees, of
whom 247 were engaged in research and development, production and associated
support, six in business development and market research, and 31 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 48, 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 47, was Executive Vice President and
Chief Financial Officer of the Company since November 1987, and was
appointed President and Chief Operating Officer in May 1998. 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.
HAROLD W. DELONG. Mr. DeLong, who is 50, 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.
KEITH W. CHAPMAN. Mr. Chapman, who is 48, 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 53, 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 58, 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.
10
KATHRYN E. FLAIM, PH.D. Dr. Flaim, who is 48, was appointed Vice President,
Clinical Research in August 1998, having joined Alliance in 1990 as Director
of 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. at the University of California at
Davis.
HENRY A. GRAHAM, PH.D. Dr. Graham, who is 55, is Vice President, Quality.
Prior to joining Alliance in January 1990, he worked for Johnson & Johnson
for 17 years on a broad range of projects including injectable human
biologicals, immunohematology reagents, immunoassay reagents and instrument
systems. Dr. Graham was Director of Product Development for Ortho Diagnostic
Systems, Inc. for over five years prior to 1990. During his tenure at
Johnson & Johnson, he was the recipient of several awards, including the
Corporate Medal for Outstanding Research. Dr. Graham received his Ph.D. in
immunology from Rutgers University.
JOERG LIMMER, DVM. Dr. Limmer, who is 57, was appointed Vice President,
Clinical Operations and New Technology Assessment 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 DVM from the Freie
Universitaet of Berlin, Germany.
TIMOTHY J. PELURA, PH.D. Dr. Pelura, who is 44, was appointed Vice
President, Pharmaceutical Research & Development in July 1997, having joined
Alliance in 1988 as Director, Product Research. For over 22 years he has
worked extensively in the field of emulsion research and parenteral product
development. Prior to joining Alliance, he spent 12 years at Pharmacia and
KabiVitrum Inc. working in various areas including quality control,
formulation and process development, project management, and basic research.
Dr. Pelura received a M.S. and Ph.D. in Chemistry from Rutgers University.
GWEN ROSENBERG. Ms. Rosenberg, who is 43, was appointed Vice President,
Corporate Communications in May 1998. Ms. Rosenberg joined the Company in
1990 and has served in various capacities, most recently as Director of
Corporate Communications. 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.
GORDON L. SCHOOLEY, PH.D. Dr. Schooley, who is 51, has been Vice President,
Clinical and Regulatory Development since January 1989. Dr. Schooley has
been employed for over 25 years in research and development in the
pharmaceutical industry. Prior to joining Alliance in 1989, Dr. Schooley was
Vice President of Clinical Research and Regulatory Affairs for Newport
Pharmaceuticals, a company developing antiviral drugs. For the previous
eight years, he was Director of Clinical Research and Biostatistics for
Allergan Pharmaceuticals, a division of SmithKline Beecham, developing
ophthalmologic and dermatologic drugs and devices. He was also employed by
McGaw Laboratories as Manager of Biostatistics for parenteral products, and
by The Upjohn Company as a senior biostatistician for analgesic and CNS
drugs. Dr. Schooley received his Ph.D. from the University of Michigan
School of Public Health.
MARK SEEFELD, PH.D., D.A.B.T. Dr. Seefeld, who is 45, was appointed Vice
President, Drug Safety 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.
TIM T. HART, CPA. Mr. Hart, who is 41, was appointed 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
Group Controller of the Cubic Revenue Collection Group, a group of nine
domestic and international Cubic Corporation companies that design,
manufacture and service automatic fare-collection systems. Mr. Hart was
employed in various financial management positions at Cubic for over eight
years. He was also employed by Ernst & Whinney in San Diego, California as a
C.P.A. Mr. Hart received a B.S. from San Diego State University.
LLOYD A. ROWLAND, JR. Mr. Rowland, who is 42, was appointed 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.
11
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 emulsion products
manufacturing facility. The fourth San Diego facility was leased in 1997 and
consists of manufacturing and development space. The Otisville site, where
the Company has established the LIQUIVENT and SAT PAD 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 1998 was
approximately $140,000. The provisions of the Land Use Agreement are
"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 IMAGENT at its existing San
Diego facilities and for LIQUIVENT at its Otisville, New York facility, it
may need to expand its commercial manufacturing capabilities for its products
in the future. Any expansion for any of its products may occur in stages,
each of which would require regulatory approval, and product demand could at
times exceed supply capacity. The Company has not selected a site for such
expanded facilities and cannot predict the amount it will expend for the
construction of such facilities. There can be no assurance as to when or
whether the FDA will determine that such facilities comply with Good
Manufacturing Practices. The projected location and construction of such
facilities will depend on regulatory approvals, product development, and
capital resources, among other factors. The Company has not obtained any
regulatory approvals for its production facilities for these products nor can
there be any assurance that it will be able to do so. The Schering License
Agreement requires the Company to manufacture products at its San Diego
facility for a period of time after market launch at a negotiated price.
Schering will be responsible for establishing production capacity beyond the
maximum capacity of the San Diego facility.
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, 1998.
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.
12
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.
HIGH LOW
---- ---
Fiscal 1998
Quarter ended September 30, 1997 $ 13.25 $ 8.125
Quarter ended December 31, 1997 $ 12.875 $ 6.625
Quarter ended March 31, 1998 $ 11.375 $ 6.75
Quarter ended June 30, 1998 $ 8.938 $ 3.625
HIGH LOW
---- ---
Fiscal 1997
Quarter ended September 30, 1996 $ 18.125 $ 12.25
Quarter ended December 31, 1996 $ 17.375 $ 10.50
Quarter ended March 31, 1997 $ 15.75 $ 11.875
Quarter ended June 30, 1997 $ 12.00 $ 5.875
On September 4, 1998, the closing price of the Company's common stock
was $3.313.
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.
On September 4, 1998, the approximate number of record holders of the
Company's common stock was 1,420. The Company believes that, in addition,
there are in excess of 14,000 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 September 23, 1997 the Company sold 500,000 shares of its convertible
Series D Preferred Stock for an aggregate purchase price of $10 million to
SBVC in connection with the licensing of IMAGENT to Schering. The shares
were sold in reliance on the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended. The Series D Preferred Stock
is convertible on the earlier of (i) receipt of written notice from the
holders of 50% or more of the Series D Preferred Stock, (ii) termination of
the Schering License Agreement by Schering or, if such agreement is
terminated by the Company, at Schering's election, or (iii) such time as a
twenty-day average of the last reported selling price of Company common stock
equals or exceeds $20 per share.
13
ITEM 6. SELECTED FINANCIAL DATA
The following information has been summarized from the financial
statements included elsewhere herein and should be read in conjunction with
such financial statements and the related notes thereto (in thousands except
per share amounts):
Years ended June 30,
1998 1997 1996 1995 1994
Statement of Operations Data:
Total revenues $ 21,209 $ 44,580 $ 17,323 $ 11,816 $ 409
Net loss $ (33,003) $ (19,016) $ (23,172) $ (29,717) $ (36,946)
Net loss per common
Basic and diluted $ (1.04) $ (.63) $ (.91) $ (1.35) $ (1.83)
June 30,
1998 1997 1996 1995 1994
Balance Sheet Data:
Working capital $ 48,730 $ 62,995 $ 73,244 $ 22,346 $ 19,446
Total assets $ 93,677 $ 112,013 $ 108,343 $ 56,030 $ 53,132
Long-term debt and other $ 8,921 $ 2,871 $ 1,166 $ 843 $ 348
Stockholders' equity $ 76,090 $ 91,331 $ 101,467 $ 50,077 $ 49,825
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.)
Alliance has devoted substantial resources to research and development
related to its medical products. The Company has been unprofitable since
inception and expects to incur operating losses for at least the next several
years due to substantial spending on research and development, preclinical
testing, clinical trials, regulatory activities, and commercial manufacturing
start-up. The Company has collaborative research and development agreements
with companies for IMAGENT and RODA. Under the arrangement for IMAGENT,
Schering has agreed to reimburse the Company for some of its development
expenses. Schering will also make milestone payments to the Company upon the
achievement of certain product development events, followed by royalties on
sales at commercialization. With respect to RODA, the Company has agreed to
reimburse VIA for substantially all of its development expenses and to share
revenues from the sale of products. Due to the termination of the HMRI
License Agreement in December 1997, and the restructuring of the Ortho
License Agreement in May 1998, Alliance expects to incur a substantial
increase in development expenses related to LIQUIVENT and OXYGENT and a
substantial decrease in related research revenue relative to prior years.
There can be no assurance that the Company will be able to achieve
profitability at all or on a sustained basis.
14
LIQUIDITY AND CAPITAL RESOURCES
Through June 1998, the Company financed its activities primarily from
public and private sales of equity and funding from collaborations with
corporate partners. To date, the Company's revenue from the sale of products
has not been significant.
In August 1998, the Company sold 100,000 shares of Series E-1 Preferred
Stock ("E-1 Stock") to certain investors pursuant to a preferred stock
purchase agreement (the "Stock Purchase Agreement") for an aggregate amount
equal to $6 million. Pursuant to the Stock Purchase Agreement, the Company
has the option to sell preferred shares on substantially similar terms to the
investors from time to time through early 1999 in an amount not to exceed an
additional $14 million, subject to certain limitations. The 100,000 shares
of E-1 Stock are convertible into common stock at $6 per share through
January 3, 1999, and thereafter certain adjustments may apply based on the
market price. The Company has the right to redeem the preferred shares under
certain circumstances. No dividends will accrue to the holders. In
connection with the sale of 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 such product is approved by the FDA by December
2003. The royalty amount will be between 0.4% and 1.6%, subject to
adjustments downward, of net sales of the product for a period of three
years. The Company has certain rights to repurchase the royalty right.
In January 1997, the Company entered into a loan and security agreement
with a bank under which the Company received $3.5 million and in December
1997, the amount available under the loan was increased to $15.2 million. In
June 1998, the Company restructured the loan to provide for up to $15
million. Amounts borrowed are secured by certain fixed assets and are to be
repaid over 4.5 years. If certain financial covenants are not satisfied, the
outstanding balance may become due and payable. On June 30, 1998, the
balance outstanding on this loan was $10 million. The Company also has a
$1.5 million line of credit available with another bank. The Company has
financed substantially all of its office and research facilities and related
leasehold improvements under operating lease arrangements and loan and
security agreements.
In November 1996, the Company acquired MDV by a merger (the "MDV
Merger") of a wholly owned subsidiary of the Company into MDV. MDV is
engaged in the development of a thermoreversible gel, FLOGEL, intended for
use as an anti-adhesion treatment for persons undergoing abdominal or pelvic
surgeries. The consideration in the MDV Merger consisted of $15.5 million,
of which $8 million was paid through the delivery of 703,093 shares of common
stock during 1997, and $7.5 million was paid through the delivery of 706,100
shares of common stock during 1998. Additionally, the Company will pay up to
$20 million if advanced clinical development or licensing milestones are
achieved in connection with MDV's technology. The Company will also make
certain royalty payments on the sales of products, if any, developed from
such technology. The Company may buy out its royalty obligation for $10
million at any time prior to the first anniversary of the approval by U.S.
regulatory authorities of any products based upon the MDV technology (the
amount increasing thereafter over time). All of such payments to the former
MDV shareholders may be made in cash or, at the Company's option, shares of
the Company's common stock, except for the royalty obligations which will be
payable only in cash. The Company has not determined whether subsequent
payments (other than royalties) will be made in cash or in common stock or,
if made in cash, the source of such payments. There can be no assurance that
any of the contingent payments will be made because they are dependent on
future developments that are inherently uncertain.
The Company has accounted for the MDV Merger as a purchase, and recorded
a one-time charge in fiscal 1997 of $16.5 million, including the $15.5
million payments described above and related transaction costs.
From September 1994 until May 1998, under the Ortho License Agreement,
Ortho was responsible for substantially all the costs of developing and
marketing OXYGENT. In June 1996, the convertible Series A Preferred Stock
held by J&JDC and accrued dividends thereon were converted into 815,625
shares of common stock of the Company. In June 1996, J&JDC also exercised
its warrant for 300,000 shares, resulting in proceeds to the Company of $4.5
million. In December 1996, Ortho paid to Alliance a $15 million milestone
payment. In May 1998, Ortho and the Company restructured the Ortho License
Agreement and Alliance assumed responsibility for worldwide development of
OXYGENT at its expense. Under the restructured agreement, Ortho retained
certain rights to be the exclusive marketing agent for the product. In 1998,
Ortho reimbursed the Company $10.2 million for research and development
expenses. As a result of the restructuring, Alliance expects to incur a
substantial increase in development expenses related to OXYGENT and a
substantial decrease in related research revenue over prior years.
15
From February 1996 through June 1997, HMRI was responsible for most of
the costs of development and marketing of LIQUIVENT. In conjunction with the
HMRI License Agreement, HMRI purchased shares of convertible Series B
Preferred Stock and shares of convertible Series C Preferred Stock for an
aggregate of $22 million. In addition, HMRI paid Alliance an initial license
fee of $5 million and agreed to pay milestone payments and royalties on
product sales. HMRI also received a five-year warrant to acquire 300,000
shares of common stock at $20 per share. On June 6, 1996, the Series B
Preferred Stock and accrued dividends thereon were converted into 759,375
shares of common stock of the Company. On June 30, 1997, the Series C
Preferred Stock was converted into 345,327 shares of common stock of the
Company. On June 30, 1997, HMRI paid the Company a $2.5 million milestone
payment and $2.5 million for the purchase of clinical trial supplies. The
Company also announced in June 1997 that the parties agreed in principle to
modify the HMRI License Agreement to (i) adjust certain milestone payments,
(ii) temporarily revise the method for reimbursing the expenses for portions
of the development work, and (iii) provide for the Company to repurchase any
unused clinical trial supplies if the license agreement is terminated before
January 1, 1998. The Company recorded the $2.5 million in clinical trial
supplies as deferred revenue and at June 30, 1998, the unused supplies were
approximately $2.3 million. In December 1997, the HMRI License Agreement was
terminated. Therefore, Alliance has not been reimbursed for its LIQUIVENT
development expenses since July 1, 1997, and it will be responsible for all
future LIQUIVENT development expenses worldwide. HMRI has no continuing
rights to the development or marketing of LIQUIVENT. The parties are
considering a repurchase by Alliance of clinical trial supplies from HMRI.
In May 1998, HMRI asserted a claim for an amount up to $7.5 million, payable
in 2002 in cash or common stock, at the Company's election. The Company does
not believe that the claim is meritorious and intends to vigorously contest
such claim.
In September 1997, the Company entered into the Schering License
Agreement, which provides Schering with worldwide exclusive marketing and
manufacturing rights to Alliance's drug compounds, drug compositions, and
medical devices and systems related to perfluorocarbon ultrasound imaging
products, including IMAGENT. The product is being developed jointly by
Alliance and Schering. Under the Schering License Agreement, Schering paid to
Alliance in 1998 an initial license fee of $4 million, and agreed to pay
further milestone payments and royalties on product sales. Schering is also
providing funding to Alliance for some of its development expenses related to
IMAGENT. In conjunction with the Schering License Agreement, SBVC purchased
500,000 shares of the Company's convertible Series D Preferred Stock for $10
million.
The Company had net working capital of $48.7 million at June 30, 1998,
compared to $63 million at June 30, 1997. The Company's cash, cash
equivalents, and short-term investments decreased to $49.9 million at June
30, 1998 from $72.4 million at June 30, 1997. The decrease resulted
primarily from cash used in operations of $28.1 million and property, plant,
and equipment additions of $10.1 million, partially offset by proceeds from a
loan and security agreement of $6.8 million and by net proceeds from the sale
to SBVC of convertible Series D Preferred Stock in the amount of $9.6 million
in conjunction with the Schering License Agreement. The Company's operations
to date have consumed substantial amounts of cash, and are expected to
continue to do so for the foreseeable future.
The Company continually reviews its product development activities in an
effort to allocate its resources to those product candidates that the Company
believes have the greatest commercial potential. Factors considered by the
Company in determining the products to pursue include projected markets and
need, potential for regulatory approval and reimbursement under the existing
healthcare system, status of its proprietary rights, technical feasibility,
expected and known product attributes, and estimated costs to bring the
product to market. Based on these and other factors, the Company may from
time to time reallocate its resources among its product development
activities. Additions to products under development or changes in products
being pursued can substantially and rapidly change the Company's funding
requirements.
The Company expects to incur substantial additional expenditures
associated with product development, particularly for LIQUIVENT and OXYGENT
as they move into pivotal clinical trials. The Company will seek additional
collaborative research and development relationships with suitable corporate
partners for its non-licensed products. There can be no assurance that such
relationships, if any, will successfully reduce the Company's funding
requirements. Additional equity or debt financing 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.
16
Alliance anticipates that its current capital resources, including
proceeds from the sale of the E-1 Stock in August 1998, expected revenue
from the Schering License Agreement and investments, and future proceeds from
the sale of additional preferred stock under the August 1998 Stock Purchase
Agreement, will be adequate to satisfy its capital requirements for at least
the next 12 months. The Company's future capital requirements will depend on
many factors, including, but not limited to, continued scientific progress in
its research and development programs, progress with preclinical testing and
clinical trials, the time and cost involved in obtaining regulatory
approvals, patent costs, competing technological and market developments,
changes in existing collaborative relationships, the ability of the Company
to establish additional collaborative relationships, and the cost of
manufacturing scale-up.
While the Company believes that it can produce materials for clinical
trials and the initial market launch for OXYGENT and IMAGENT at its existing
San Diego facilities and for LIQUIVENT at its Otisville, New York facility,
it may need to expand its commercial manufacturing capabilities for its
products in the future. Any expansion for any of its products may occur in
stages, each of which would require regulatory approval, and product demand
could at times exceed supply capacity. The Company has not selected a site
for such expanded facilities and cannot predict the amount it will expend for
the construction of such facilities. There can be no assurance as to when or
whether the FDA will determine that such facilities comply with Good
Manufacturing Practices. The projected location and construction of such
facilities will depend on regulatory approvals, product development, and
capital resources, among other factors. The Company has not obtained any
regulatory approvals for its production facilities for these products, nor
can there be any assurance that it will be able to do so. The Schering
License Agreement requires the Company to manufacture products at its San
Diego facility for a period of time after market launch at a negotiated
price. Schering will be responsible for establishing production capacity
beyond the maximum capacity of the San Diego facility.
YEAR 2000
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field. Beginning in
the year 2000, these date code fields will need to accept four-digit entries
to distinguish the 21st century dates from 20th century dates. As a result,
in less than two years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000"
requirements. Management has initiated its Year 2000 program, which has
already identified several systems that are not yet Year 2000 compliant. The
Company expects to complete its initial assessment by the end of the year.
The assessment will include third-party confirmations with respect to their
computers, software and systems, and a listing of all equipment subject to
Year 2000 concerns. The Company has already initiated the removal and
exchange of some non-compliant systems and expects to continue such
replacement or other remedial programs to assure that its computers,
software, and other systems will continue to operate in the Year 2000. While
the Company has begun evaluating potential strategies for resolving its Year
2000 problems, the dollar amount the Company will spend to remediate such
issues remains uncertain. The Company believes such costs will not have a
material effect on the Company's consolidated financial position or results
of operations. There can be no assurance, however, that the Company's
computer systems and applications of other companies on which the Company's
operations rely, will be timely converted, or that any such failure to
convert by another company will not have a material adverse effect on the
Company systems. Moreover, a failure of (i) Company scientific, manufacturing
and other equipment to operate at all or operate accurately, (ii) clinical
trial site medical equipment to perform properly, (iii) necessary materials
or supplies to be available to the Company when needed, or (iv) other
equipment, software, or systems as a result of Year 2000 problems could have
a material adverse effect on the Company's business or financial condition.
Except for historical information, the statements made herein and
elsewhere are forward-looking. The Company wishes to caution readers that
these statements are only predictions and that the Company's business is
subject to significant risks. The factors discussed herein and other
important factors, in some cases have affected, and in the future could
affect, the Company's actual results and could cause the Company's actual
consolidated results for 1999, and beyond, to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. These risks include the inability to enter into collaborative
relationships to further develop and commercialize the Company's products;
changes in any such relationships, or the inability of any collaborative
partner to adequately commercialize any of the Company's products; the
uncertainties associated with the lengthy regulatory approval process;
obtaining and enforcing patents important to the Company's business; possible
competition from other products; and Year 2000 issues. Furthermore, even if
the Company's products appear promising at an early stage of development,
they may not reach the market for a number of important reasons. Such reasons
include, but are not limited to, the possibilities that the potential
17
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
1998 COMPARED TO 1997
- ---------------------
The Company's license and research revenue was $21.2 million for 1998,
compared to $44.6 million for 1997. Research revenue in 1997 included a $15
million milestone payment from Ortho under the Ortho License Agreement. The
decrease in revenue is primarily due to decreased milestone payments and the
decreased development expense reimbursement from HMRI, due to the
restructuring and eventual termination of the HMRI License Agreement. The
Company expects research revenue to significantly decrease in 1999 compared
to 1998, due to the lack of revenue from the Ortho License Agreement.
Research and development expenses increased by 16% to $50.1 million for
1998, compared to $43.3 million for 1997. The increase in expenses was
primarily due to a $4.1 million increase in staffing costs for employees
primarily engaged in research and development activities, a $791,000 increase
in rent and lease expense, an $833,000 increase in depreciation expense, a
$487,000 increase in payments to outside researchers for preclinical and
clinical trials and other product development work, as well as other
increases related to the Company's research and development activities.
General and administrative expenses were $7.9 million for 1998, compared
to $7.9 million for 1997.
The Company accounted for the acquisition of MDV as a purchase and
recorded a one-time charge in 1997 of $16.5 million, including payments to
former MDV shareholders of $15.5 million and related transaction costs.
Investment income and other was $3.8 million for 1998, compared to $4.1
million for 1997. The decrease was primarily a result of lower average cash
and short-term investment balances.
1997 COMPARED TO 1996
- ---------------------
The Company's license and research revenue was $44.6 million for 1997,
compared to $17.3 million for 1996. The increase was primarily a result of
the $15 million milestone payment from Ortho under the Ortho License
Agreement, and the $2.5 million milestone payment and increased research
revenue from HMRI under the HMRI License Agreement.
Research and development expenses increased by 28% to $43.3 million for
1997, compared to $33.7 million for 1996. The increase in expenses was
primarily due to a $4.7 million increase in payments to universities and
outside consultants for preclinical and clinical trials and other product
development work, a $2.3 million increase in staffing costs, a $1 million
increase in depreciation expense, a $414,000 increase in rent and lease
expense, and a $369,000 increase in repairs and maintenance expense, as well
as other increases related to the Company's research and development
activities. The expenses for 1996 included a $757,000 charge arising from
the acquisition of certain PFC patents, patent rights, and related documents.
General and administrative expenses increased by 10% to $7.9 million for
1997, compared to $7.2 million for 1996. The increase in general and
administrative expenses was primarily due to increased professional fees.
Investment income and other was $4.1 million for 1997, compared to $1.4
million for 1996. The increase was primarily a result of higher average cash
balances as a result of the Ortho milestone payment received in December
1996, the February 1996 HMRI transaction, and the receipt of approximately
$44 million from the April 1996 public offering by the Company of 2.9 million
shares of common stock.
18
Alliance expects to continue to incur substantial and increasing
expenses associated with its research and development programs. Operating
results may fluctuate from quarter to quarter as a result of the differences
in the timing of revenues earned and expenses incurred and such fluctuations
may be substantial. The Company's historical results are not necessarily
indicative of future results.
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 1998 Annual Meeting of Shareholders (the
"Proxy Statement"). Copies of the Proxy Statement will be duly filed with
the commission 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.
19
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) A report on Form 8-K was filed with the Commission on June 1, 1998.
The Company reported that on May 14, 1998, the Company and Ortho Biotech,
Inc. and The R. W. Johnson Pharmaceutical Research Institute, both
subsidiaries of Johnson & Johnson, entered into an agreement to restructure
their collaboration with respect to the development of the Company's OXYGENT
product.
(c) Exhibits.
(3) (a) Restated Certificate of Incorporation of the Company, as
amended through August 31, 1994. (Incorporated by reference to Exhibit 3(a)
to 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.)
(d) Certificate of Amendment to the Certificate of Incorporation
filed on August 14, 1998.
(e) By-Laws of the Company, as amended. (Incorporated by
reference to Exhibit 3(b) to 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) to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1993.)
(b) Loan Modification Agreement between the Company and Theodore
Roth, dated May 24, 1994 - Management contract or compensatory plan or
arrangement required to be filed. (Incorporated by reference to Exhibit
10(d) to the 1994 10-K.)
(c) Formula Award of Stock Options for Non-employee Members of the
Board of Directors as approved by shareholders of the Company - Management
contract or compensatory plan or arrangement required to be filed.
(Incorporated by reference to Exhibit 10(e) to the 1994 10-K.)
(d) Stock and Warrant Purchase Agreement dated August 16, 1994
between the Company and Johnson & Johnson Development Corporation.
(Incorporated by reference to Exhibit 10(g) to the 1994 10-K.)
(e) Stock and Warrant Purchase Agreement dated February 28, 1996
between the Company and Hoechst Marion Roussel, Inc. (Incorporated by
reference to Exhibit 10 (b) to the 1996 S-3).
(f) 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 to the Current Report on Form 8-K
filed on November 20, 1996)
(g) License Agreement dated September 23, 1997, between the
Company and Schering AG, Germany. (Incorporated by reference to Exhibit 2(a)
to the Current Report on Form 8-K/A filed on February 27, 1998 (the "1997
8_K/A")(1)
20
(h) Preferred Stock Purchase Agreement dated September 23, 1997,
between the Company and Schering Berlin Venture Corp. (Incorporated by
reference to Exhibit 2(b) to the 1997 8-K/A.)
(i) Agreement dated May 14, 1998, between the Company and Ortho
Biotech, Inc. and The R.W. Johnson Pharmaceutical Research Institute with
respect to the restructuring of the relationship between the Company and such
companies. (Incorporated by reference to Exhibit 10.1 to the Current Report
on Form 8-K filed on May 14, 1998.)
(j) Convertible Preferred Stock Purchase Agreement dated as of
August 13, 1998 between the Company and certain investors ("E-1 Investors")
pertaining to the sale of Series E-1 Preferred Stock.
(k) Royalty Rights Agreement dated as of August 13, 1998 between
the Company and the E-1 Investors.
(l) Registration Rights Agreement dated as of August 13, 1998
between the Company and the E-1 Investors.
(m) Credit Agreement dated as of June 17, 1998 between the Company
and Imperial Bank.
(n) Promissory Note in the amount $15 million dated June 17, 1998
executed by the Company in favor of Imperial Bank.
(o) Security Agreement dated June 17, 1998 executed by the Company
in favor of Imperial Bank.
(p) 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.
(23.1) Consent of Ernst & Young LLP, Independent Auditors
(1) 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.
21
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: September 7, 1998 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.
/s/ Duane J. Roth Chairman and September 7, 1998
- ----------------------------------- Chief Executive Officer
Duane J. Roth
/s/ Theodore D. Roth Director, President, and September 7, 1998
- ----------------------------------- Chief Operating Officer
Theodore D. Roth
/s/ Tim T. Hart Chief Financial Officer, Treasurer, September 7, 1998
- ----------------------------------- and Chief Accounting Officer
Tim T. Hart
/s/ Pedro Cuatrecasas, M.D. Director September 7, 1998
- -----------------------------------
Pedro Cuatrecasas, M.D.
/s/ Carroll O. Johnson Director September 7, 1998
- -----------------------------------
Carroll O. Johnson
/s/ Stephen M. McGrath Director September 7, 1998
- -----------------------------------
Stephen M. McGrath
/s/ Helen M. Ranney, M.D. Director September 7, 1998
- -----------------------------------
Helen M. Ranney, M.D.
/s/ Donald E. O'Neill Director September 7, 1998
- -----------------------------------
Donald E. O'Neill
/s/ Jean Riess, PH.D. Director September 7, 1998
- -----------------------------------
Jean Riess, Ph.D.
/s/ Thomas F. Zuck, M.D. Director September 7, 1998
- -----------------------------------
Thomas F. Zuck, M.D.
22
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, 1998 and 1997 F-3
Consolidated Statements of Operations for the Years
Ended June 30, 1998, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7 - F-14
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
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Alliance Pharmaceutical Corp.
We have audited the accompanying consolidated balance sheets of Alliance
Pharmaceutical Corp. and subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Alliance
Pharmaceutical Corp. and subsidiaries at June 30, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
July 31, 1998, except for Note 8,
as to which the date is August 14, 1998
F-2
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
JUNE 30,
1998 1997
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,809,000 $ 15,368,000
Short-term investments 38,046,000 57,041,000
Research revenue receivable 6,847,000 7,250,000
Other current assets 694,000 1,147,000
-------------- --------------
Total current assets 57,396,000 80,806,000
PROPERTY, PLANT AND EQUIPMENT - NET 23,087,000 16,574,000
PURCHASED TECHNOLOGY - NET 12,880,000 14,400,000
OTHER ASSETS - NET 314,000 233,000
-------------- --------------
$ 93,677,000 $ 112,013,000
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,191,000 $ 2,807,000
Accrued expenses 3,121,000 3,439,000
Deferred revenue 2,286,000 2,500,000
Payable for acquired in-process technology - 7,557,000
Current portion of long-term debt 1,068,000 1,508,000
-------------- --------------
Total current liabilities 8,666,000 17,811,000
LONG-TERM DEBT 8,882,000 2,742,000
OTHER 39,000 129,000
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value; 5,000,000 shares authorized;
500,000 and 0 shares of Series D issued and outstanding at
June 30, 1998 and 1997, respectively; liquidation preference of
$10,000,000 and $0 at June 30, 1998 and 1997, respectively 5,000 -
Common stock - $.01 par value; 50,000,000 shares authorized;
31,994,338 and 31,164,935 shares issued and outstanding at
June 30, 1998 and 1997, respectively 320,000 311,000
Additional paid-in capital 340,016,000 322,268,000
Accumulated deficit (264,251,000) (231,248,000)
-------------- --------------
Total stockholders' equity 76,090,000 91,331,000
-------------- --------------
$ 93,677,000 $ 112,013,000
-------------- --------------
-------------- --------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Years ended June 30,
1998 1997 1996
-------------- -------------- --------------
REVENUES:
License and research revenue $ 21,209,000 $ 44,580,000 $ 17,323,000
OPERATING EXPENSES:
Research and development 50,084,000 43,278,000 33,730,000
General and administrative 7,886,000 7,932,000 7,214,000
Acquired in-process technology - 16,450,000 -
-------------- -------------- --------------
57,970,000 67,660,000 40,944,000
-------------- -------------- --------------
LOSS FROM OPERATIONS (36,761,000) (23,080,000) (23,621,000)
INVESTMENT INCOME AND OTHER - NET 3,758,000 4,064,000 1,355,000
-------------- -------------- --------------
NET LOSS (33,003,000) (19,016,000) (22,266,000)
DIVIDENDS ON PREFERRED STOCK - - (906,000)
-------------- -------------- --------------
NET LOSS APPLICABLE TO COMMON SHARES $ (33,003,000) $ (19,016,000) $ (23,172,000)
-------------- -------------- --------------
-------------- -------------- --------------
NET LOSS PER COMMON SHARE:
Basic and diluted $ (1.04) $ (0.63) $ (0.91)
-------------- -------------- --------------
-------------- -------------- --------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted 31,749,000 30,302,000 25,504,000
-------------- -------------- --------------
-------------- -------------- --------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------- ---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- ---------- ---------- ---------- ------------ -------------
BALANCES AT JUNE 30, 1995 1,500,000 $ 15,000 24,759,000 $ 248,000 $238,874,000 $(189,060,000)
Sale of convertible Series B and Series C
Preferred Stock 950,000 9,500 21,530,000
Sale of common stock 2,865,000 29,000 43,925,000
Exercise of stock options and warrants 745,000 7,000 6,548,000
Conversion of convertible Series A Preferred
Stock to common shares (1,500,000) (15,000) 750,000 7,500 8,000
Conversion of convertible Series B Preferred
Stock to common shares (750,000) (7,500) 750,000 7,500
Conversion of convertible preferred
stock dividend to common shares 75,000 1,000 1,499,000
Payment related to acquisition of technology
rights 50,000 757,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 8,000 114,000
Net unrealized gain on available-for-sale
securities 142,000
Dividends on preferred stock (906,000)
Net loss (22,266,000)
---------- ---------- ---------- ---------- ------------ -------------
BALANCES AT JUNE 30, 1996 200,000 2,000 30,002,000 300,000 313,397,000 (212,232,000)
Exercise of stock options and warrants 105,000 1,000 654,000
Conversion of convertible Series C Preferred
Stock to common shares (200,000) (2,000) 345,000 3,000 (1,000)
Payment related to acquired in-process technology 703,000 7,000 7,840,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 10,000 133,000
Net unrealized gain on available-for-sale securities 245,000
Net loss (19,016,000)
---------- ---------- ---------- ---------- ------------ -------------
BALANCES AT JUNE 30, 1997 - - 31,165,000 311,000 322,268,000 (231,248,000)
Exercise of stock options and warrants 104,000 1,000 741,000
Sale of convertible Series D Preferred Stock 500,000 5,000 9,595,000
Payment related to acquired in-process technology 706,000 8,000 7,492,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 19,000 141,000
Net unrealized loss on available-for-sale securities (221,000)
Net loss (33,003,000)
---------- ---------- ---------- ---------- ------------ -------------
BALANCES AT JUNE 30, 1998 500,000 $ 5,000 31,994,000 $ 320,000 $340,016,000 $(264,251,000)
---------- ---------- ---------- ---------- ------------ -------------
---------- ---------- ---------- ---------- ------------ -------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Years ended June 30,
1998 1997 1996
--------------- --------------- ---------------
OPERATING ACTIVITIES:
Net loss $ (33,003,000) $ (19,016,000) $ (22,266,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operations:
Depreciation and amortization 5,064,000 3,997,000 3,086,000
Charge for acquired in-process technology - 16,450,000 757,000
Non-cash compensation - net 320,000 133,000 277,000
Changes in operating assets and liabilities:
Research revenue receivable 403,000 (1,500,000) (3,690,000)
Other assets 372,000 888,000 219,000
Accounts payable and accrued
expenses and other (1,024,000) 1,162,000 (263,000)
Deferred revenue (214,000) 2,500,000 -
--------------- --------------- ---------------
Net cash provided by (used in) operating activities (28,082,000) 4,614,000 (21,880,000)
--------------- --------------- ---------------
INVESTING ACTIVITIES:
Short-term investments 18,775,000 5,183,000 (50,815,000)
Property, plant and equipment (10,057,000) (6,823,000) (4,010,000)
Payment for acquired in-process technology (57,000) (1,046,000) -
--------------- --------------- ---------------
Net cash provided by (used in) investing activities 8,661,000 (2,686,000) (54,825,000)
--------------- --------------- ---------------
FINANCING ACTIVITIES:
Issuance of common stock
and warrants 562,000 597,000 50,461,000
Issuance of convertible preferred stock - net 9,600,000 - 21,540,000
Proceeds from long-term debt 6,800,000 3,493,000 2,208,000
Principal payments on long-term debt (1,100,000) (908,000) (543,000)
--------------- --------------- ---------------
Net cash provided by financing activities 15,862,000 3,182,000 73,666,000
--------------- --------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,559,000) 5,110,000 (3,039,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15,368,000 10,258,000 13,297,000
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,809,000 $ 15,368,000 $ 10,258,000
--------------- --------------- ---------------
--------------- --------------- ---------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Payable for acquired in-process technology $ 7,557,000
Issuance of common stock in connection with
acquired in-process technology $ 7,500,000 $ 7,847,000
Issuance of common stock and warrants in connection with
acquisition of patent rights and related documents $ 757,000
Preferred stock dividends $ 906,000
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
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") from the
acquisition date of November 1996, and its majority-owned subsidiaries, Talco
Pharmaceutical, Inc. and Applications et Transferts de Technologies Avancees
("ATTA"). ATTA was dissolved in 1997. All significant intercompany accounts
and transactions have been eliminated. Certain amounts in 1997 and 1996 have
been reclassified to conform to the current year's presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the consolidated financial
statements. Actual results could differ from those estimates.
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
Short-term investments consist of highly liquid debt instruments.
Management has classified the Company's short-term investments as
available-for-sale securities in the accompanying financial statements.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of
stockholders' equity. The Company considers instruments purchased with an
original maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Cash, cash equivalents, and short-term investments are financial
instruments which potentially subject the Company to concentration of credit
risk. The Company invests its excess cash primarily in U.S. government
securities and debt instruments of financial institutions and corporations
with strong credit ratings. The Company has established guidelines relative
to diversification and maturities to maintain safety and liquidity. These
guidelines are reviewed periodically and modified to take advantage of trends
in yields and interest rates. The Company has not experienced any material
losses on its short-term investments.
PROPERTY, PLANT, EQUIPMENT, AND OTHER ASSETS
Buildings, furniture, and equipment are stated at cost and depreciation
is computed using the straight-line method over the estimated useful lives of
3 to 25 years. Leasehold improvements are amortized using the straight-line
method over the shorter of the estimated useful lives of the assets or the
lease term. Technology and patent rights are amortized using the
straight-line method over 5 to 20 years.
PURCHASED TECHNOLOGY
The purchased technology was primarily acquired as a result of the
merger of Fluoromed Pharmaceutical, Inc. into a subsidiary of the Company in
1989. The technology acquired is the Company's core perfluorochemical
("PFC") technology and was valued based on an analysis of the present value
of future earnings anticipated from this technology at that time. The
Company identified alternative future uses for the PFC technology, including
the OXYGENT-TM-(temporary blood substitute) and LIQUIVENT-Registered
Trademark- (intrapulmonary oxygen carrier) products. Purchased technology
also includes $2 million for technology capitalized as a result of the
acquisition of BioPulmonics, Inc. ("BioPulmonics") in December 1991. Since
the acquisition, an alternative future use of the acquired technology has
been pursued by the Company. An intrapulmonary drug delivery system using
the PFC-based liquid as a carrier (or dispersing agent) is being developed by
Alliance from the liquid ventilation technology.
F-7
The PFC technology is the basis for the Company's main drug development
programs and is being amortized over a 20-year life. The PFC technology has
a book value of $12.4 million and $13.5 million net of accumulated
amortization of $10.8 million and $9.7 million at June 30, 1998 and 1997,
respectively. The technology acquired from BioPulmonics has a book value of
approximately $480,000 and $850,000 and is being amortized over five to seven
years and is net of accumulated amortization of $1.5 million and $1.2 million
at June 30, 1998 and 1997, respectively.
The carrying value of purchased technology is reviewed periodically
based on the projected cash flows to be received from license fees, milestone
payments, royalties and other product revenues. If such cash flows are less
than the carrying value of the purchased technology, the difference will be
charged to expense.
ACQUIRED IN-PROCESS TECHNOLOGY
In November 1996, the Company acquired MDV by a merger (the "MDV
Merger") of a wholly owned subsidiary of the Company into MDV. MDV is
engaged in the development of a thermoreversible gel, FLOGEL-Registered
Trademark-, intended for use as an anti-adhesion treatment for persons
undergoing abdominal or pelvic surgeries. The consideration payable in the
MDV Merger consisted of $15.5 million, payable in common stock or cash, of
which $8 million was paid through the delivery of 703,093 shares of common
stock during fiscal 1997, and $7.5 million was paid through the delivery of
706,100 shares of common stock during fiscal 1998. Additionally, the Company
will pay up to $20 million if advanced clinical development or licensing
milestones are achieved in connection with MDV's technology. The Company
will also make certain royalty payments on the sales of products, if any,
developed from such technology. The Company may buy out its royalty
obligation for $10 million at any time prior to the first anniversary of the
approval by U.S. regulatory authorities of any products based upon the MDV
technology (the amount increasing thereafter over time). All of such
payments to the former MDV shareholders may be made in cash or, at the
Company's option, shares of the Company's common stock, except for the
royalty obligations which will be payable only in cash. The Company has not
determined whether subsequent payments (other than royalties) will be made in
cash or in common stock or, if made in cash, the source of such payments.
There can be no assurance that any of the contingent payments will be made
because they are dependent on future developments which are inherently
uncertain.
The Company has accounted for the MDV Merger as a purchase, and recorded
a one-time charge in fiscal 1997 of $16.5 million, including the $15.5
million payments described above and related transaction costs.
LONG-TERM DEBT
The Company entered into a loan and security agreement in August 1995
under which the Company received $2.2 million at an interest rate of 10.84%.
The loan was paid in full during fiscal 1998.
In January 1997, the Company entered into a loan and security agreement
with a bank under which the Company received $3.5 million and in December
1997, the amount available under the loan was increased to $15.2 million. In
June 1998, the Company restructured the loan to provide for up to $15 million
at the bank's prime rate plus .5% (9% at June 30, 1998). Amounts borrowed
are secured by certain fixed assets and are to be repaid over 4.5 years. If
certain financial covenants are not satisfied, the outstanding balance may
become due and payable. On June 30, 1998, the balance outstanding on this
loan was approximately $10 million.
The Company's principal payments for the long-term debt for the years
ending June 30, 1999, 2000, 2001, 2002 and 2003 are $1.1 million, $1.4
million, $1.4 million, $1.4 million and $4.6 million, respectively.
REVENUE RECOGNITION
Revenue under collaborative research agreements is recognized as
services are provided and milestone payments are recognized upon the
completion of the milestone event or requirement under such agreements.
Revenue from product sales is recognized as products are shipped.
Non-refundable contract fees that reimburse the Company for previously
incurred research and development are recorded as revenue upon contract
"execution."
F-8
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenditures are charged to expense as incurred.
ACCOUNTING FOR STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company has
elected to retain its current intrinsic value-based method and will disclose
the pro forma effect of using the fair value-based method to account for its
stock-based compensation in its financial statements.
NET INCOME (LOSS) PER SHARE
The Company computes net loss per common share in accordance with
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). SFAS No. 128 requires the presentation of basic and diluted earnings
per share amounts. Basic earnings per share is calculated based upon the
weighted average number of common shares outstanding during the period while
diluted earnings per share also gives effect to all potential dilutive common
shares outstanding during the period such as options, warrants, convertible
securities, and contingently issuable shares. All potential dilutive
common shares have been excluded from the calculation of diluted earnings per
share as their inclusion would be anti-dilutive.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Both of these standards
are effective for fiscal years beginning after December 15, 1997. SFAS No.
130 requires that all components of comprehensive income, including net
income, be reported in the financial statements in the period in which they
are recognized. The Company believes that comprehensive income or loss will
not be materially different than net income or loss. SFAS No. 131 amends the
requirements for public enterprises to report financial and descriptive
information about its reportable operating segments. Operating segments, as
defined in SFAS No. 131, are components of an enterprise for which separate
financial information is available regularly by the Company in deciding how
to allocate resources in assessing performance. The financial information is
required to be reported on the basis that is used internally for evaluating
the segment performance. The Company is in the process of evaluating the
effect and believes that adoption of these standards will not have a material
impact on the Company's financial statements.
2. FINANCIAL STATEMENT DETAILS
PROPERTY, PLANT AND EQUIPMENT - NET
Property, plant and equipment consist of the following:
June 30,
1998 1997
------------ ------------
Land $ 225,000 $ 225,000
Buildings 300,000 300,000
Building improvements 2,193,000 1,657,000
Furniture, fixtures, and equipment 18,825,000 15,446,000
Leasehold improvements 15,542,000 9,402,000
------------ ------------
37,085,000 27,030,000
Less accumulated depreciation and amortization (13,998,000) (10,456,000)
------------ ------------
$ 23,087,000 $ 16,574,000
------------ ------------
------------ ------------
F-9
ACCRUED EXPENSES
Accrued expenses consist of the following:
June 30,
1998 1997
------------ ------------
Payroll and related expenses $ 2,786,000 $ 2,569,000
Rent and related operating expenses 205,000 206,000
Other 130,000 664,000
------------ ------------
$ 3,121,000 $ 3,439,000
------------ ------------
------------ ------------
3. INVESTMENTS
The Company classifies its investment securities as available-for-sale
and records holding gains or losses in stockholders' equity.
The following is a summary of available-for-sale securities:
June 30, 1998 June 30, 1997
-------------------------------------------- --------------------------------------------
Gross Unrealized Estimated Gross Unrealized Estimated
Cost Gains (Losses) Fair Value Cost Gains (Losses) Fair Value
-------------------------------------------- --------------------------------------------
U.S. Government
Securities $ 12,785,000 $ 10,000 $ 12,795,000 $ 32,700,000 $ 242,000 $ 32,942,000
Corporate Securities 25,240,000 11,000 25,251,000 24,099,000 -- 24,099,000
-------------------------------------------- --------------------------------------------
$ 38,025,000 $ 21,000 $ 38,046,000 $ 56,799,000 $ 242,000 $ 57,041,000
-------------------------------------------- --------------------------------------------
-------------------------------------------- --------------------------------------------
The gross realized gains on sales of available-for-sale securities
totaled $357,000 and $65,000, in 1998 and 1997, respectively. The gross
unrealized gains of $21,000 and $242,000, in 1998 and 1997, respectively,
are recorded as components of additional paid-in capital. The unrealized
gains had no cash effect and therefore are not reflected in the consolidated
statements of cash flows.
The amortized cost and estimated fair value of available-for-sale debt
securities at June 30, 1998 and 1997, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations.
June 30, 1998 June 30, 1997
-------------------------------- ------------------------------
Estimated Estimated
Cost Fair Value Cost Fair Value
-------------- -------------- -------------- --------------
Due in one year or less $ 23,885,000 $ 23,885,000 $ 34,517,000 $ 34,759,000
Due after one year through three years 12,221,000 12,227,000 22,282,000 22,282,000
Due after three years 1,919,000 1,934,000 - -
-------------- -------------- -------------- --------------
$ 38,025,000 $ 38,046,000 $ 56,799,000 $ 57,041,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
4. STOCKHOLDERS' EQUITY
STOCK OPTION PLANS
The Company has a 1983 Incentive Stock Option Plan (the "1983 Plan"), a
1983 Non-Qualified Stock Option Program (the "1983 Program"), and a 1991
Stock Option Plan which provides for both incentive and non-qualified stock
options (the "1991 Plan"). These plans provide for the granting of options
to purchase shares of the Company's common stock (up to an aggregate of
500,000, 2,500,000, and 6,200,000 shares under the 1983 Plan, 1983 Program,
and 1991 Plan, respectively) to directors, officers, employees, and
consultants. The optionees, date of grant, option price (which cannot be
less than 100% and 80% of the fair market value of the common stock on the
date of grant for incentive stock options and non-qualified stock options,
respectively), vesting schedule, and term of options, which cannot exceed ten
years (five years under the 1983 Plan), are determined by the Compensation
Committee of the Board of Directors. The 1983 Plan has expired and no
additional options may be granted under such plan.
F-10
The following table summarizes stock option activity through June 30, 1998:
Weighted
Shares Average Price
-----------------------------------
Balance at June 30, 1995 3,043,988 $ 9.02
Granted 288,600 $ 13.62
Exercised (469,078) $ 7.73
Terminated/Expired (122,937) $ 13.47
--------------
Balance at June 30, 1996 2,740,573 $ 9.53
Granted 1,403,100 $ 13.07
Exercised (108,830) $ 6.67
Terminated/Expired (236,239) $ 13.65
--------------
Balance at June 30, 1997 3,798,604 $ 10.66
Granted 1,814,750 $ 8.89
Exercised (135,660) $ 5.44
Terminated/Expired (391,771) $ 11.47
--------------
Balance at June 30, 1998 5,085,923 $ 10.11
--------------
--------------
Available for future grant under the 1983 Program 37,185
--------------
--------------
Available for future grant under the 1991 Plan 1,375,520
--------------
--------------
The following table summarizes information concerning outstanding and
exercisable stock options at June 30, 1998:
Weighted
Weighted Average Weighted
Range of Exercise Number Average Remaining Number Average
Prices Outstanding Exercise Contractual Exercisable Exercise
Price Life Price
---------------------------------------------------------------------------------------
$0.01 129,918 $0.01 0.4 years 129,918 $0.01
$ 3.25-$6.94 976,270 $5.28 6.4 years 680,920 $5.34
$ 7.00-$9.25 818,340 $8.40 5.5 years 535,630 $8.47
$ 9.38-$9.88 1,389,725 $9.41 9.1 years 151,975 $9.60
$10.00-$13.63 1,180,620 $12.70 7.6 years 437,575 $12.37
$14.00-$28.00 591,050 $19.13 5.2 years 455,375 $20.14
------------- -------------
5,085,923 $10.11 7.0 years 2,391,393 $10.13
------------- -------------
------------- -------------
F-11
The Company has adopted the disclosure-only provisions of SFAS No. 123.
In accordance with its provisions, the Company applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its stock
option plans, and accordingly, no compensation cost has been recognized for
stock options in 1998, 1997 or 1996. If the Company had elected to recognize
compensation cost based on the fair value of the options granted at grant
date amortized to expense over their vesting period as prescribed by SFAS No.
123, the Company's net loss and net loss per share would have been increased
to the pro forma amounts indicated below for the years ended June 30:
1998 1997 1996
------------- ------------- -------------
Net loss
As reported $(33,003,000) $(19,016,000) $(23,172,000)
Pro forma (34,708,000) (21,453,000) (23,958,000)
Net loss per share
As reported $ (1.04) $ (.63) $ (.91)
Pro forma (1.09) (.71) (.94)
The impact of outstanding non-vested stock options granted prior to 1996
has been excluded from the pro forma calculations; accordingly, the 1998,
1997 and 1996 pro forma adjustments are not indicative of future period pro
forma adjustments when the calculation will reflect all applicable stock
options. The fair value of options at date of grant was estimated using the
Black-Scholes option-pricing model with the following assumptions for 1998,
1997 and 1996, respectively: risk-free interest rate range of 5.63% to
6.63%, 5.25% to 6.5%, and 5.25% to 6.5%; dividend yield of 0% (for all
years); volatility factor of 66%, 63%, and 63%; and a weighted-average
expected term of 6 years, 4 years, and 4 years. The estimated weighted
average fair value at grant date for the options granted during 1998, 1997
and 1996 was $5.85, $6.90 and $7.02 per option, respectively.
WARRANTS
At June 30, 1998, the Company had warrants outstanding to purchase
573,835 shares of common stock at prices ranging from $6.67 to $20 per share.
The warrants expire on various dates from August 1998 through February 2001.
PREFERRED STOCK
In fiscal 1996, in conjunction with a license agreement, Hoechst Marion
Roussel, Inc. ("HMRI") purchased 750,000 shares of the Company's convertible
Series B Preferred Stock and 200,000 shares of its convertible Series C
Preferred Stock for an aggregate of $22 million. In June 1996, all
outstanding shares of convertible Series A Preferred Stock (issued to Johnson
& Johnson Development Corp. ("J&JDC") in 1995) and Series B Preferred Stock
and accrued dividends thereon were converted into 815,625 and 759,375 shares
of Alliance common stock, respectively. In June 1997, all outstanding shares
of Series C Preferred Stock were converted into 345,327 shares of Alliance
common stock (see Note 5). In September 1997, in conjunction with a license
agreement, Schering Berlin Venture Corp. ("SBVC"), an affiliate of Schering
AG, Germany ("Schering"), purchased 500,000 shares of the Company's
convertible Series D Preferred Stock for $10 million. The Series D Preferred
Stock is convertible into Alliance common stock upon certain events at a rate
based upon a 20 day average of the closing market prices of the common stock
at the time of conversion. The Series D Preferred Stock is entitled to one
vote per share and has no annual dividend.
The Series A Preferred Stock carried a cumulative annual dividend of
$0.50 per share. The Series B Preferred Stock carried a cumulative annual
dividend of $1.00 per share. The dividends were payable in cash or common
stock. In June 1996, these dividends were paid by issuing 75,000 shares of
Alliance common stock.
5. LICENSE AGREEMENTS
In August 1994, the Company executed a license agreement (the "Ortho
License Agreement") with Ortho Biotech Inc. and The R.W. Johnson
Pharmaceutical Research Institute, a division of Ortho Pharmaceutical
Corporation (collectively referred to as "Ortho"), which provided Ortho with
worldwide marketing and, at its election, manufacturing rights to the
Company's injectable perfluorochemical emulsions capable of transporting
oxygen for therapeutic use, including OXYGENT. Ortho agreed to pay to
Alliance a royalty based upon sales of products after commercialization. In
addition, Ortho paid to Alliance an initial license fee of $4 million and
agreed to make other payments upon the achievement of certain milestones.
Under the agreement, Ortho was responsible for substantially all of the costs
of developing and marketing the products. In December 1996, Ortho paid the
Company a $15 million milestone payment. In conjunction with the Ortho
License Agreement, J&JDC purchased 1.5 million shares of Alliance Series A
Preferred Stock for $15 million and obtained a three-year warrant to purchase
300,000 shares of Alliance common stock at $15 per share. In June 1996, the
preferred stock and warrant were converted into common stock (see Note 4).
In May 1998, Ortho and the Company restructured the agreement.
F-12
Under the restructured agreement, Alliance assumed responsibility for
worldwide development of OXYGENT at its own cost, and Ortho retained certain
rights to be the exclusive marketing agent for the product.
In February 1996, the Company entered into a license agreement (the
"HMRI License Agreement") with HMRI, which provided HMRI with worldwide
marketing and manufacturing rights to the intratracheal administration of
liquids, including LIQUIVENT, which perform bronchoalveolar lavage or liquid
ventilation. Under the agreement, HMRI was responsible for most of the costs
of development and marketing of LIQUIVENT. On June 30, 1997, HMRI paid the
Company a $2.5 million milestone payment and $2.5 million for the purchase of
clinical trial supplies. The Company also announced in June 1997 that the
parties agreed in principle to modify the HMRI License Agreement to (i)
adjust certain milestone payments, (ii) temporarily revise the method for
reimbursing the expenses for portions of the development work and (iii)
provide for the Company to repurchase any unused clinical trial supplies if
the license agreement is terminated before January 1, 1998. The Company
recorded the $2.5 million in clinical trial supplies as deferred revenue and
at June 30, 1998 the unused supplies were approximately $2.3 million. In
December 1997, the HMRI License Agreement was terminated. Therefore,
Alliance has not been reimbursed for its LIQUIVENT development expenses since
July 1, 1997, and it will be responsible for all future LIQUIVENT development
expenses worldwide. HMRI has no continuing rights to the development or
marketing of LIQUIVENT. The parties are considering a repurchase by Alliance of
clinical trial supplies from HMRI. In May 1998, HMRI asserted a claim for an
amount up to $7.5 million, payable in 2002 in cash or common stock, at the
Company's election. The Company does not believe that the claim is
meritorious and intends to vigorously contest such claim.
In September 1997, the Company entered into a license agreement (the
"Schering License Agreement") with Schering, which provides Schering with
worldwide exclusive marketing and manufacturing rights to Alliance's drug
compounds, drug compositions, and medical devices and systems related to
perfluorocarbon ultrasound imaging products, including IMAGENTS. The product
will be developed jointly by Alliance and Schering. Under the Schering
License Agreement, Schering paid to Alliance an up-front, non-refundable
initial license fee of $4 million and agreed to pay further milestone
payments and royalties on product sales. Schering also agreed to provide
funding to Alliance for some of its development expenses. In conjunction
with the Schering License Agreement, SBVC purchased 500,000 shares of the
Company's convertible Series D Preferred stock for $10 million.
6. INCOME TAXES
Significant components of the Company's deferred tax assets as of June
30, 1998 are shown below. A valuation allowance of $96,202,000, of which
$9,111,000 is related to 1998, has been recognized to offset the deferred tax
assets as realization of such assets is uncertain.
Deferred tax assets consist of the following:
June 30,
1998 1997
------------- -------------
Net operating loss carryforwards $ 74,481,000 $ 69,360,000
Research and development credits 8,571,000 8,220,000
Capitalized research expense 10,744,000 7,286,000
Other - net 2,406,000 2,225,000
------------- -------------
Total deferred tax assets 96,202,000 87,091,000
Valuation allowance for deferred tax assets (96,202,000) (87,091,000)
------------- -------------
Net deferred tax assets $ -- $ --
------------- -------------
------------- -------------
Approximately $3,580,000 of the valuation allowance for deferred tax
assets relates to stock option deductions which, when recognized, will be
allocated to contributed capital.
At June 30, 1998, the Company had federal and various state net
operating loss carryforwards of approximately $206,015,000 and $41,320,000,
respectively. The difference between the federal and state tax loss
carryforwards is primarily attributable to the capitalization of research and
development expenses for California tax purposes and the fifty percent
limitation on California loss carryforwards. The federal tax loss
carryforwards will begin expiring in fiscal 1999, unless previously utilized.
The California tax loss carryforwards will continue to expire in fiscal 1999
unless previously utilized. The Company also has federal and state research
and development tax credit carryforwards of $8,879,000 and $2,868,000,
respectively, which will begin expiring in fiscal 1999 unless previously
utilized.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual
use of the Company's net operating loss and credit carryforwards may be
limited because of cumulative changes in ownership of more than 50% which
have
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occurred; however, the Company does not believe such limitation will have a
material impact upon the utilization of these carryforwards.
7. COMMITMENTS
The Company leases certain office and research facilities in San Diego
and certain equipment under operating leases. Provisions of the facilities
lease provide for abatement of rent during certain periods and escalating
rent payments during the lease terms based on changes in the Consumer Price
Index. Rent expense is recognized on a straight-line basis over the term of
the leases.
Minimum annual commitments related to operating lease payments at June
30, 1998 are as follows:
Years ending June 30,
---------------------
1999 $ 3,389,000
2000 2,406,000
2001 2,262,000
2002 2,331,000
2003 1,617,000
Thereafter 4,306,000
------------
Total $ 16,311,000
------------
------------
Rent expense for fiscal 1998, 1997, and 1996 was $3.4 million, $2.6
million, and $2.1 million, respectively.
8. SUBSEQUENT EVENT
In August 1998, the Company sold 100,000 shares of its convertible
Series E-1 Preferred Stock to certain investors for $6 million and retained
the right to sell similar preferred stock periodically through early 1999 in
an amount not to exceed an additional $14 million. The preferred shares are
convertible at the option of the holder into common stock at $6 per share
through January 3, 1999, and thereafter certain adjustments may apply based
on the market price. These adjustments to the market price could potentially
result in a conversion price below the then trading market price of the
stock. In recognition of this beneficial conversion feature, the Company will
recognize an imputed dividend of approximately $450,000 on these preferred
shares. At the option of the Company, beginning in 2003, the Company can
either force the conversion of any remaining unconverted shares into common
stock, or can redeem the stock at the then prevailing conversion price. The
Company may be liable for penalties if certain conditions are not met. The
Series E-1 Preferred Stock has the same voting rights as common stock and has
a liquidation preference of $60 per share. No dividends will accrue to the
holders of the preferred stock, however, the investors obtained a right to
receive a royalty on future sales of one of the Company's products under
development, provided that the product is approved by the U.S. Food and Drug
Administration by December 2003. The royalty amount will be between 0.4% and
1.6%, subject to adjustments downward, of net sales of the product for a
period of three years. The Company has certain rights to repurchase the
royalty right.
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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
- ------ --------
3(c) Certificate of Amendment to the Certificate of Incorporation of the
Company filed August 14, 1998.
10(j) Convertible Preferred Stock Purchase Agreement dated as of August 13,
1998 between the Company and certain investors ("E-1 Investors").
10(k) Royalty Rights Agreement dated as of August 13, 1998 between the
Company and the E-1 Investors.
10(l) Registration Rights Agreement dated as of August 13, 1998 between the
Company and the E-1 Investors.
10(m) Credit Agreement dated as of June 17, 1998 between the Company and
Imperial Bank.
10(n) Promissory Note in the amount $15 million dated June 17, 1998 executed
by the Company in favor of Imperial Bank.
10(o) Security Agreement dated June 17, 1998 executed by the Company in
favor of Imperial Bank.
10(p) Lease Agreement dated November 7, 1997 between the Company and WHAMC
Real Estate Limited Partnership, a Delaware limited partnership,
relating to certain manufacturing and development facilities in
San Diego, California.
(23.1) Consent of Ernst & Young LLP, Independent Auditors