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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1999
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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
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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, (858) 410-5200
INCLUDING AREA CODE ----------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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NONE
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Securities registered pursuant to Section 12(g) of the Act:
common stock, par value $0.01.
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(TITLE OF CLASS)
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(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / /
[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 10, 1999, was $126.2
million.
The number of shares of the Registrant's common stock, $.01 par
value, outstanding at September 10, 1999 was 43,510,049.
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 1999 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 333-76343).
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 has completed, pivotal
clinical trials for these products. The products are OXYGENT-TM-, an
intravascular oxygen carrier to temporarily augment oxygen delivery in
surgical and other patients at risk of acute tissue hypoxia (oxygen
deficiency); LIQUIVENT-Registered Trademark-, an intrapulmonary agent for
use in reducing a patient's exposure to the harmful effects of conventional
mechanical ventilation; and IMAGENT-Registered Trademark-, an intravenous
contrast agent for enhancement of ultrasound images to assess cardiac
function and organ lesions and to detect blood flow abnormalities. IMAGENT 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 (858) 410-5200.
PRODUCTS IN PHASE 3 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.
OXYGENT. OXYGENT (perflubron emulsion) is an intravascular oxygen delivery
agent 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 approximately
eight to ten million patients worldwide annually receive one or more units of
donor blood during elective surgeries, including, for example,
cardiovascular, orthopedic, and general surgical procedures. An oxygen
carrier could be used instead of donor blood for a portion of these patients.
A single unit of OXYGENT is expected to provide the equivalent oxygen
delivery of one to two units of red blood cells.
In addition to the well-publicized risks of infectious disease
transmission (e.g., HIV, hepatitis) and potential immune suppression effects
related to blood transfusions, there are emerging concerns regarding the
availability and quality of donor blood. The National Blood Data Resource
Center ("NBDRC") recently released data showing that blood donations have
decreased while blood usage has increased over the past several years. These
trends have led the NBDRC to predict that beginning next year (2000) the U.S.
will experience a deficit of approximately 250,000 units of red blood cells
available for transfusion. This expected blood shortage may be further
exacerbated by the August 17, 1999 recommendation of the U.S. Food and Drug
Administration ("FDA") to prohibit donations from individuals who spent a
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cumulative six months in the United Kingdom between the years 1980 and 1996,
and are therefore potentially at risk of having been exposed to infected beef
that may be linked to new variant Creutzfeld-Jakob Disease (CJD).
Additionally, there are concerns regarding the quality of donor blood because
of a "storage lesion" effect. The effect is a progressive deterioration of
red blood cell function that occurs while the blood is stored. This reduces
the immediate oxygen transport effectiveness of the donor red cells, which
are typically stored for up to six weeks prior to their use in transfusions.
These issues have heightened the search for alternatives that reduce
or eliminate the need for donor blood in elective surgeries and are not
subject to the storage lesion effect. OXYGENT is a sterile emulsion that is
compatible with all blood types and is expected to have a shelf-life of two
years. It is manufactured using a cost-effective, proprietary process at
Alliance's commercial-scale facility that has the potential to produce
approximately one million units annually. OXYGENT is used with other
autologous (a patient's own blood) blood collection techniques including
Alliance's proprietary Augmented Acute Normovolemic Hemodilution
(A-ANH-TM-) technique.
Two large multicenter Phase 2 clinical studies of OXYGENT have been
completed in general surgery patients in the U.S. and Europe. In addition,
three Phase 2 studies have been completed in which OXYGENT was administered
to cardiac surgery patients undergoing cardiopulmonary bypass procedures. In
November 1998, a Phase 3 clinical trial in general surgery patients was
initiated in Europe. In September 1999, the Company announced it had reached
agreement with the FDA on the key design features of a Phase 3 clinical trial
in the U.S., which it expects to begin soon.
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,
Ortho and Alliance restructured their agreement. Under the restructured
agreement, Alliance assumed responsibility for worldwide development of
OXYGENT at its own cost, and Ortho had a limited right of first offer to
enter into a development, marketing or license agreement for OXYGENT. The
first offer right was reacquired by Alliance in 1999.
LIQUIVENT. LIQUIVENT (neat perflubron) is an intrapulmonary agent
for use in reducing a patient's exposure to the harmful effects of
conventional mechanical ventilation. Each year, more than 800,000 patients in
the U.S. are placed on mechanical gas ventilators for treatment of lung
dysfunction. 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 patients'
lungs. Some of these patients may benefit from treatment with LIQUIVENT.
LIQUIVENT is intended to be used according to a proprietary
technique called Partial Liquid Ventilation-TM- ("PLV"). In this procedure,
the drug is administered through an endotracheal tube into the lungs of a
patient being supported by a mechanical ventilator. The initial goal of
LIQUIVENT/PLV therapy is to open collapsed alveoli to improve gas exchange.
Once this has been accomplished, ventilator pressure and oxygen concentration
may be lowered to minimize ventilator-induced lung trauma. Published results
from initial clinical trials have indicated that LIQUIVENT improved lung
oxygenation, without clinically significant side effects. In clinical
studies, LIQUIVENT has also been observed to promote the migration of mucus
and alveolar debris to the central airways, where suctioning and removal is
easier. The ability to remove such debris may reduce the excessive
inflammatory response associated with acute respiratory failure and enhance
the effectiveness of other therapeutic interventions, all serving potentially
to reduce patient recovery time. The FDA has granted Subpart E status
(expedited review) for the product.
In November 1998, the Company initiated a Phase 2/3 trial with
LIQUIVENT involving adult patients with acute lung injury and acute
respiratory distress syndrome at numerous medical centers in the U.S.,
Canada, and Europe. The Phase 2/3 trial protocol was validated in a small
Phase 2 study completed earlier in 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
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intratracheal administration of liquids, including LIQUIVENT, which perform
bronchoalveolar lavage or liquid ventilation. In December 1997, HMRI
terminated the HMRI License Agreement. In September 1999, the Company and
HMRI dismissed a related arbitration proceeding that had been filed in
September 1998. HMRI agreed to sell and Alliance agreed to purchase up to $3
million of clinical trial supplies upon the occurrence of certain events. No
other payments will be made by either party.
IMAGENT. IMAGENT is an intravenous contrast agent for enhancement of ultrasound
images to assess cardiac function. Additionally, IMAGENT has the potential 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 U.S., some of which may potentially benefit from a cost-effective contrast
agent. To be successful in the marketplace, ultrasound contrast agents should
provide enhanced diagnostic images during several minutes of scanning, be easy
to use, be stable during transportation, and have a long shelf-life. 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
sound-wave signals that enhance ultrasound images. In clinical trials with
IMAGENT, gray-scale contrast enhancement of cardiac, abdominal, and vascular
structures has been observed with no serious adverse events.
In 1999, the Company completed two Phase 3 studies with IMAGENT that
successfully demonstrated a clinically and highly statistically significant
improvement in visualization of the walls of the heart (endocardial border
delineation) compared to standard (non-contrasted) ultrasound imaging. The
results from these studies are being compiled for a New Drug Application
("NDA"), which is expected to be filed soon with the FDA, and a Marketing
Authorization Application in Europe. Additional studies for evaluation of
space-occupying lesions of the liver and kidney, and vascular flow
abnormalities are planned.
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.
OTHER PRODUCTS
PULMOSPHERES-Registered Trademark-. PULMOSPHERES are hollow, porous spheres
(in powder form) suspended in perflubron or fluorochemical propellants for
the purpose of drug delivery, primarily to the lungs. Drugs can be stabilized
within the wall structure of these respirable particles, which are typically
1-3 microns in diameter. Laboratory and preclinical testing indicates that
PULMOSPHERE formulations may provide advantages over current formulation
technologies with regard to particle suspension stability and flow
aerodynamics, which could enhance the efficiency of pulmonary drug delivery.
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 into 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 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 Company is planning to start a small Phase 1
(safety) clinical trial before the end of the calendar year.
The current business strategy for PULMOSPHERES involves finding a
suitable partner for further development and commercialization of the
technology.
RODA-TM-. 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 blood transfusions and other interventions. RODA will combine
oxygen dynamics software designed by the Company with VIA's EX VIVO blood gas
and
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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. The companies will seek a worldwide
marketing partner.
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. Based on the acquired technology, 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. Alliance is currently
analyzing data from a recently completed pilot clinical trial to evaluate
FLOGEL as a device to reduce the DE NOVO (new) formation and reformation of
post-surgical adhesions following gynecologic surgery. 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.
Alliance has developed and is selling 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 $130,000 for fiscal 1999. 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.
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 1999, 1998, and 1997,
the Company incurred research and development expenses of $60.4 million,
$50.1 million, and $43.3 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. In December 1997, HMRI terminated the HMRI License Agreement. In
September 1999, the Company and HMRI dismissed a related arbitration
proceeding that had been filed in September 1998. HMRI agreed to sell and
Alliance agreed to purchase up to $3.0 million of clinical trial supplies
upon the occurrence of certain events. No other payments will be made by
either party.
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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. In May 1998, Ortho and
Alliance restructured their agreement. Under the restructured agreement,
Alliance assumed responsibility for worldwide development of OXYGENT at its
own cost, and Ortho had a limited right of first offer to enter into a
development, marketing or license agreement for OXYGENT. Alliance reacquired
the first-offer rights in 1999.
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 from
product sales. Recently, the companies have decided to seek a worldwide
marketing partner.
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.
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. The Company's only
commercialized product, SAT PAD, is currently sold 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. 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 a commercial-scale manufacturing
facility in San Diego, California. The Company believes that this production
facility will provide sufficient capacity for future clinical trials and
market launch of OXYGENT, if and when it is approved by the FDA. However, a
larger facility may be required in the future.
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.
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IMAGENT is manufactured in San Diego for clinical studies at its
commercial-scale facility. It is manufactured using a proprietary process to
form dry, PFC vapor-containing spheres which are reconstituted with an
aqueous solution to form microbubbles just prior to use. Alliance has
expanded its market launch production capacity in San Diego for 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 intends to negotiate 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 has negotiated a long-term supply agreement for that material.
Although some raw materials for its products are currently 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 U.S. and in foreign countries that it regards as
important for future endeavors. Numerous patent applications have been filed
in the European Patent Office, Australia, Canada, Israel, Japan, Norway, 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 issued or
pending in Europe, Japan, and other countries. The issued claims cover
methods for facilitating autologous blood use in conjunction with
administering oxygen-enriched gas and oxygen carriers that contain
fluorochemicals, as well as those derived from human, animal, plant, or
recombinant hemoglobin, in order to reduce or eliminate the need for
allogeneic blood transfusions during surgery.
The Company has filed U.S. and foreign patent applications on its
method of using oxygen-carrying PFCs to enhance respiratory gas exchange
utilizing conventional gas ventilators. In August 1995, a U.S. patent
licensed to the Company issued covering methods of administering liquids,
including LIQUIVENT, to patients. Other U.S. patents covering additional
methods of enhancing patients' respiratory gas exchange by administering
liquids, including LIQUIVENT, have issued subsequently. The Company also has
issued patents and pending patent applications regarding the use of PFCs to
deliver drugs to the lungs and to wash debris from, and open, collapsed
lungs. In November 1995, the Company received a
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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 its
PULMOSPHERES technology and various types of emulsions and microstructures
(tubules, helixes, fibers) that may have uses in the fields of medicine,
biomolecular engineering, microelectronics, and electro-optics.
The Company, through its wholly owned subsidiary, MDV, has numerous
issued U.S. patents and pending applications related to the 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 U.S. and Europe covering the use of poloxamer
gels for the prevention of adhesion formation, delivery of drugs and
ophthalmic applications.
Aside from the issued patents and allowed applications referred to
above, no assurance can be given that any of these applications will result
in issued U.S. or foreign patents. Although patents are issued with a
presumption of validity and require a challenge with a high degree of proof
to establish invalidity, no assurance can be given that any issued patents
would survive such a challenge and would be valid and enforceable. Although
certain patents of the Company are subject to such ongoing challenges and
Alliance has challenged the patents of other companies, Alliance believes
that the outcome of these challenges will not have a material adverse effect
on the Company's proprietary technology position.
The Company also attempts to protect its proprietary products,
processes, and other information by relying on trade secret laws and
non-disclosure and confidentiality agreements with its employees,
consultants, and certain other persons who have access to such products,
processes, and information. The agreements affirm that all inventions
conceived by employees are the exclusive property of the Company, with the
exception of inventions unrelated to the Company's business and developed
entirely on the 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 temporary blood
substitute. There are two primary approaches for oxygen delivery: PFC
emulsions and hemoglobin solutions. Hemoglobin development efforts include
chemically modified, stroma-free hemoglobin from human or bovine red blood
cells, and the use of genetic engineering to produce recombinant hemoglobin.
There are several companies working on hemoglobin solutions as a temporary
oxygen carrier "blood substitute," three of which are in Phase 3 clinical
7
trials. The Company believes that the relatively low cost and ease of
production of OXYGENT provide advantages over hemoglobin-based products.
Alliance is aware of two other early stage companies developing PFC-based
temporary oxygen carriers, neither of which has progressed to clinical trials.
Although liquid ventilation therapy has been in the research phase
for many years, the Company is unaware of any potential liquid ventilation
competitor that has reached the clinical trial stage; however, other
companies are evaluating compounds with the possibility of entering this
field. If major manufacturers of PFCs entered the field, the Company could
face competition from companies with substantially greater resources. The
Company believes that its patent position and stage of research and
development give it an advantage over potential competitors. Several other
companies are attempting to develop alternative types of therapies for
treatment of acute respiratory failure. One company plans to start a Phase 3
clinical trial for acute respiratory failure with a surfactant in the near
future, and several others have started Phase 2 clinical trials with various
compounds for acute respiratory failure.
Competition in the development of ultrasound imaging contrast agents
is intense and is expected to increase. There is currently only one available
ultrasound contrast agent for certain cardiology applications in the U.S.
There are currently five that have been approved in Europe, two of which are
currently being sold. In addition, there are currently three companies that
have filed NDAs with the FDA seeking approval to market their products.
Certain companies are in advanced clinical trials for the use of ultrasound
contrast agents for assessing certain organs and vascular structures. The
Company expects that competition in the ultrasound contrast imaging agent
field will be based primarily on each product's safety profile, efficacy,
stability, ease of administration, breadth of approved indications, and
physician, healthcare payor and patient acceptance. The Company believes if
and when 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.
PRODUCT LIABILITY CLAIMS AND UNINSURED RISKS
The sale or use of the Company's present products and any other
products or processes that may be developed or sold by the Company may expose
the Company to potential liability from claims by end-users of such products
or by manufacturers or others selling such products, either directly or as a
component of other products. While the Company has product liability
insurance, there can be no assurance that the Company will continue to
maintain such insurance or that it will provide adequate coverage. If the
Company is held responsible for damages in a product liability suit, the
Company's financial condition could be materially and adversely affected.
GOVERNMENT REGULATION
The Company's products require governmental approval before
production and marketing can commence. The regulatory approval process is
administered by the FDA in the U.S. and by similar agencies in foreign
countries. The process of obtaining regulatory clearances or approvals is
costly and time consuming. The Company cannot predict how long the necessary
clearances or approvals will take or whether it will be successful in
obtaining them.
Generally, all potential pharmaceutical products must successfully
complete two major stages of development (preclinical and clinical testing)
prior to receiving marketing approval by the governing regulatory agency. In
preclinical testing, potential compounds are tested both IN VITRO and in
animals to gain safety information prior to administration in humans.
Knowledge is obtained regarding the effects of the compound on bodily
functions as well as its absorption, distribution, metabolism, and
elimination.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase 1, which frequently begins with the
initial introduction of the drug into healthy human subjects prior to
introduction into patients, the compound will be tested for safety and dosage
tolerance. Phase 2 typically involves studies in a larger patient population
to identify possible adverse effects and safety risks, to begin gathering
preliminary efficacy data, and to investigate potential dose sizes and
schedules. Phase 3 trials are undertaken to further evaluate clinical
efficacy and to 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.
8
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 NDA must be submitted to
and approved by the FDA in order to market the product in the U.S. Similar
applications are required in foreign countries. There can be no assurance
that, upon completion of the foregoing trials, the results will be considered
adequate for government approval. If and when approval is obtained to market
a product, the FDA's (or applicable foreign agency's) regulations will govern
manufacturing and marketing activities.
The FDA has established a designation to speed the availability of
new therapies for life-threatening or severely debilitating diseases. This
designation, defined in Subpart E of the FDA's investigational new drug
regulations, may expedite clinical evaluation and regulatory review of some
new drugs, such as LIQUIVENT, which has been so designated.
Perflubron is an eight-carbon halogenated fluorocarbon liquid.
Certain halogenated fluorocarbons (primarily the gaseous chlorofluorocarbons)
have been implicated in stratospheric ozone depletion. The FDA issued a
Finding of No Significant Impact under the National Environmental Protection
Act in connection with the approval for marketing of IMAGENT GI, a
perflubron-based drug previously developed by the Company; however, all
materials contained in the Company's products remain subject to regulation by
governmental agencies.
In addition to FDA regulation, the Company is subject to regulation
by various governmental agencies including, without limitation, the Drug
Enforcement Administration, the U.S. Department of Agriculture, the
Environmental Protection Agency, the Occupational Safety and Health
Administration, and the California State Department of Health Services, Food
and Drug Branch. Such regulation, by governmental authorities in the U.S. and
other countries, may impede or limit the Company's ability to develop and
market its products.
EMPLOYEES
As of September 10, 1999, the Company had 221 full-time employees,
of whom 192 were engaged in research and development, production and
associated support, three in business development and market research, and 26
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 49, 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 48, was Executive Vice President and Chief
Financial Officer of the Company from November 1987 to May 1998, when he was
appointed President and Chief Operating Officer. For more than ten years
prior to joining the Company, he was General Counsel of SAI Corporation, a
company in the business of operating manufacturing concerns, and General
Manager of Holland Industries, Inc., a manufacturing company. Mr. Roth
received his J.D. from Washburn University and an LL.M. in Corporate and
Commercial Law from the University of Missouri in Kansas City. He is the
brother of Duane J. Roth, the Chairman and Chief Executive Officer of the
Company.
9
HAROLD W. DELONG. Mr. DeLong, who is 51, has been Executive Vice President,
Business Development for the Company since February 1989. Mr. DeLong has been
employed for more than 25 years in the medical diagnostics and pharmaceutical
industry in various sales, marketing, and management positions. Prior to
joining Alliance, Mr. DeLong was Vice President, Sales and Marketing for
Murex Corporation, a company participating in the infectious disease
diagnostics market. He previously served as Director, Sales and Marketing for
Becton Dickinson's Immunocytometry Systems division. Mr. DeLong was also
employed previously by Ortho Diagnostic Systems, Inc. for over ten years,
where his last position was Director of the Hemostasis and Chemistry Products
business units.
ARTEMIOS B. VASSOS, M.D., F.A.C.P. Dr. Vassos, who is 52, joined Alliance in
1999 as Executive Vice President and Chief Scientific Officer. For ten years
prior to joining the Company, he served in several positions in Clinical
Research and Clinical Pharmacology at Parke-Davis where his last position was
Senior Director of Clinical Pharmacology and Experimental Medicine. He
received his MD degree at the University of Illinois, and his post-graduate
training in Internal Medicine and Hematology and Medical Oncology at the
University of California.
KEITH W. CHAPMAN. Mr. Chapman, who is 49, 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 54, 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 59, has been Vice
President, Medical Affairs Development for the Company since September 1990.
Dr. Faithfull joined Alliance after serving as Director of Medical Research
for Delta Biotechnology Ltd. from 1989 to 1990. He has also served as Senior
Lecturer in Anesthesia at the University of Manchester (UK), and has held
various academic appointments and clinical anesthesia positions at Erasmus
University (Netherlands), Tulane University and the University of Alabama
(Birmingham) for more than 15 years. He has served as Secretary of the
International Society on Oxygen Transport to Tissue. He received his Ph.D.
from Erasmus University, Rotterdam and his M.D. from London University.
KATHRYN E. FLAIM, PH.D. Dr. Flaim, who is 49, 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.
TIM T. HART, CPA. Mr. Hart, who is 42, was appointed Vice President in May
1999 and Chief Financial Officer in August 1998. He joined the Company in
1991 as Controller and has also served as Treasurer since 1994. Prior to
joining Alliance in 1991, he was employed in various financial management
positions at Cubic Corporation for over eight years. He was also employed by
Ernst & Whinney in San Diego, California as a C.P.A.
H. JOERG LIMMER, DVM. Dr. Limmer, who is 58, was appointed Vice President,
Pharmaceutical Research & Development and Clinical Operations 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.
10
GWEN ROSENBERG. Ms. Rosenberg, who is 45, 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.
LLOYD A. ROWLAND, JR. Mr. Rowland, who is 43, was appointed Vice President in
May 1999 and Secretary of the Company in May 1998, having served as General
Counsel and Assistant Secretary since 1993. Prior to joining Alliance, Mr.
Rowland served as Vice President and Senior Counsel, Finance and Securities,
at Imperial Savings Association for four years. For the previous eight years,
he was engaged in the private practice of corporate law with the San Diego,
California law firm of Gray Cary Ames & Fry, and the Houston, Texas law firm
of Bracewell & Patterson. He received a J.D. from Emory University.
MARK SEEFELD, PH.D., D.A.B.T. Dr. Seefeld, who is 46, 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.
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 IMAGENT and OXYGENT
manufacturing facilities. 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 1999 was
approximately $140,000. The provisions of the Land Use Agreement may be
deemed to be "covenants running with the land," which may bind the Company
and subsequent owners of the Otisville site for a substantial period of time.
While the Company believes that it can produce materials for
clinical trials and initial market launch for Oxygent and 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.
11
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, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock is traded in the over-the-counter market, and prices
therefor are quoted on the Nasdaq National Market under the symbol ALLP.
The following table sets forth, for the periods indicated, the high and
low sale prices of the common stock as reported on Nasdaq, without retail
mark-up, markdown or commission.
HIGH LOW
---- ---
Fiscal 1999
Quarter ended September 30, 1998 $ 5.625 $ 2.781
Quarter ended December 31, 1998 $ 5.063 $ 2.188
Quarter ended March 31, 1999 $ 3.938 $ 2.438
Quarter ended June 30, 1999 $ 3.438 $ 2.250
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
On September 10, 1999, the closing price of the Company's common stock
was $4.00.
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 10, 1999, the approximate number of record holders of the
Company's common stock was 1,282. The Company believes that, in addition, there
are in excess of 13,000 beneficial owners of its common stock whose shares are
held in street name and, consequently, the Company is unable to determine the
actual number of beneficial holders thereof.
As of March 30, 1999, the Company issued to Imperial Bank a warrant
exercisable at any time before January 1, 2002 for 180,000 shares of common
stock at $2.88 per share. The warrant was issued in connection with the bank's
agreement to restructure outstanding indebtedness of the Company. The warrant
was issued in a transaction exempt from registration with the Securities and
Exchange Commission ("SEC") under Section 4(2) ("Section 4(2)") of, and
Regulation D ("Regulation D") promulgated under, the Securities Act of 1933, as
amended.
12
On May 20, 1999, the Company sold $1.8 million principal amount of
convertible subordinated notes to Harris & Harris Group, Inc., Jan Dekker and
Stephen McGrath. The securities convert at any time upon the request of the
holder into common stock of the Company at $2.00 per share. In connection with
the transaction, for an aggregate purchase price of $3,000, the Company issued
warrants exercisable at any time for 300,000 shares of common stock at $2.45 per
share. The transactions were exempt from registration with the SEC under Section
4(2) and Regulation D.
As of June 10, 1999, the Company issued to Cruttenden Roth Incorporated
a warrant exercisable at any time before June 10, 2004 for 760,000 shares of
common stock at $3.675 per share. The warrant was issued in connection with
placement agency services provided in connection with the June 1999 public
offering of 9.5 million shares. The transaction was exempt from registration
with the SEC under Section 4(2) and Regulation D.
On June 23, 1999, the Company issued to Burrill & Company a warrant
exercisable at any time before June 24, 2004 a warrant for 100,000 shares
exercisable at $2.6875 per share. The warrant was issued in connection with the
agreement of Burrill & Company to provide consulting services to the Company.
The transaction was exempt from registration with the SEC under Section 4(2) and
Regulation D.
As of July 2, 1999, the Company issued to Jan A. Dekker warrants for
55,422 shares of common stock, exercisable at any time before July 2, 2004 at
$2.95 per share. The warrants were issued in connection with financial advisory
services provided to the Company. The transaction was exempt from registration
with the SEC under Section 4(2) and Regulation D.
As of July 19, 1999, the Company issued to Nico Havinga warrants for
20,000 shares and 30,000 shares of common stock, exercisable at any time before
July 20, 2004 at $6.00 per share and $3.00 per share, respectively. The warrants
were issued in connection with financial advisory services provided to the
Company. The transaction was exempt from registration with the SEC under Section
4(2) and Regulation D.
13
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below with respect
to the Company's statements of operations for each of the years in the three
year period ended June 30, 1999 and with respect to the balance sheets at June
30, 1998 and 1999, are derived from the audited consolidated financial
statements which are included elsewhere in this Annual Report on Form 10-K and
are qualified by reference to such financial statements. The statement of
operations data for the years ended June 30, 1995 and 1996 and the balance sheet
data at June 30, 1995, 1996 and 1997, are derived from audited financial
statements not included in this Annual Report on Form 10-K. The following
selected financial data should be read in conjunction with the Consolidated
Financial Statements for the Company and notes thereto and Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
Years ended June 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Statement of Operations Data:
Total revenues $ 8,251 $ 21,209 $ 44,580 $ 17,323 $ 11,816
Net loss applicable to
common shares $ (62,473) $ (33,003) $ (19,016) $ (23,172) $ (29,717)
Net loss per common share
Basic and diluted $ (1.89) $ (1.04) $ (.63) $ (.91) $ (1.35)
June 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $ 11,009 $ 48,691 $ 62,995 $ 73,244 $ 22,346
Total assets $ 65,984 $ 93,677 $ 112,013 $ 108,343 $ 56,030
Long-term debt and other $ 10,499 $ 8,882 $ 2,871 $ 1,166 $ 843
Stockholders' equity $ 42,125 $ 76,090 $ 91,331 $ 101,467 $ 50,077
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
14
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 has incurred 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.
LIQUIDITY AND CAPITAL RESOURCES
Through June 1999, the Company financed its activities primarily from
public and private sales of equity and funding from collaborations with
corporate partners. To date, the Company's revenue from the sale of products has
not been significant.
In June 1999 the Company completed a public offering of 9.5 million
shares of common stock which resulted in net proceeds of approximately $21.4
million to the Company.
In August 1998, the Company sold 100,000 shares of its convertible
Series E-1 Preferred Stock to certain investors for $6 million. The preferred
shares were convertible at the option of the holder into common stock at $6 per
share through January 3, 1999, and thereafter certain adjustments applied based
on the market price. These adjustments to the market price potentially resulted
in a conversion price below the then trading market price of the stock. As a
result of this beneficial conversion feature, the Company has recognized an
imputed dividend of $483,000 on these preferred shares. On January 4, 1999,
47,837 shares of preferred stock were converted into 1,091,338 shares of common
stock at an average price of $2.63 per share. On May 20, 1999 31,456 shares of
Series E-1 Preferred Stock converted into 767,219 shares of common stock at an
average price of $2.46 per share. Also, on May 20, 1999, the Company repurchased
the remaining 20,707 shares of Series E-1 Preferred Stock for $2.2 million. The
Company recorded an imputed preferred dividend of $1.2 million, which represents
the excess of the fair value of the consideration transferred to the preferred
stockholders over the carrying value of the preferred stock. In connection with
their investment in Series E-1 Preferred Stock, the investors obtained a right
to receive a royalty on future sales of one of the Company's products under
development, provided that the product is approved by the FDA by December 2003.
The royalty amount is approximately 0.3% and Company has certain rights to
repurchase the royalty right.
In May 1999, the Company privately placed $1.8 million principal amount
of 6% convertible subordinated notes due May 2002 and issued warrants to the
note holders to purchase up to 300,000 shares of common stock at $2.45 per
share. The conversion price of the notes is $2 per share, which was below the
trading market price of the stock on the day the notes were issued. As a result
of this conversion price, the Company has recognized an immediate charge of
$844,000 to interest expense for the beneficial conversion feature on these
convertible notes. The Company has recorded deferred interest expense on the
warrants of $521,000, based upon a Black-Scholes valuation, and is amortizing
the deferred interest over the life of the notes. The unamortized deferred
interest balance was $507,000 at June 30, 1999.
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. In
March 1999, the Company was in violation of a financial covenant under the loan.
In June 1999, the bank waived the violation, took additional collateral and
restructured the loan which resulted in increased principal payments. As part of
the restructuring, the Company issued to the bank a warrant to purchase up to
180,000 shares of common stock at an exercise price of $2.88 per share. The
Company has recorded deferred interest expense on the warrant, based upon a
Black-Scholes valuation, of $241,000, which will be amortized over the life of
the warrant. The unamortized deferred interest balance was $221,000 at June 30,
1999. Amounts borrowed are secured by certain fixed assets and patents and are
to be repaid over four years. If certain financial covenants are not satisfied,
the outstanding balance may become due and payable. On June 30, 1999, the
balance outstanding on this loan was approximately $13.6 million. As long as
sufficient funding from collaborative agreements and public or private financing
is obtained, the Company believes it will be able to achieve and maintain its
debt covenants through June 30, 2000.
The Company has a $1.5 million line of credit available with a bank
which is primarily available to cover letters of credit securing the leased
premises obligations.
15
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 May 1998, Ortho and the Company
restructured the Ortho License Agreement and Alliance assumed responsibility
for worldwide development of OXYGENT at its expense. Under the restructured
agreement, Ortho retained certain rights to be the exclusive marketing agent
for the product, which rights have been re-acquired by the Company. As a
result of the restructuring, Alliance incurred a substantial increase in
development expenses related to OXYGENT and a substantial decrease in related
research revenue over prior years.
From February 1996 through June 1997, HMRI was responsible for most
of the costs of development and marketing of LIQUIVENT. In June 1997, the
Company sold $2.5 million in clinical trial supplies to HMRI and recorded it
as deferred revenue. At June 30, 1999, the unused supplies were approximately
$2.3 million. As of July 1997, Alliance assumed responsibility for most of
the costs of development of LiquiVent worldwide. In December 1997, the HMRI
License Agreement was terminated and HMRI has no continuing rights to the
development or marketing of LIQUIVENT. In September 1999, HMRI and Alliance
dismissed a related arbitration proceeding that was filed in September 1998.
HMRI agreed to sell and Alliance agreed to purchase the clinical trial
supplies from HMRI for up to $3 million over time and under certain
circumstances. No other payments will be made by either party.
In September 1997, the Company entered into the Schering License
Agreement, which provides Schering with worldwide exclusive marketing and
manufacturing rights to Alliance's drug compounds, drug compositions, and
medical devices and systems related to perfluorocarbon ultrasound imaging
products, including IMAGENT. In conjunction with the Schering License
Agreement, Schering Berlin Venture Corp., an affiliate of Schering, purchased
500,000 shares of the Company's convertible Series D Preferred Stock for $10
million. The product is being developed jointly by Alliance and Schering.
Under the Schering License Agreement, Schering paid to Alliance in 1998 an
initial license fee of $4 million, and agreed to pay further milestone
payments and royalties on product sales. Schering is also providing funding
to Alliance for some of its development expenses related to IMAGENT. Because
of changes in the development of the field of ultrasound contrast agents and
in the parties' development plans, Alliance and Schering amended the Schering
License Agreement as of December 30, 1998. Under the original arrangement,
royalty rates were based upon the development of specific medical uses for
IMAGENT, which placed limitations on the development effort. The parties
elected to revise the royalty calculation which is now based on sales of
IMAGENT, a more traditional method of determining royalties. This
modification permits the parties to be flexible in developing IMAGENT.
Although the method of calculating royalties has been changed, the Company
believes that there will be no material difference in the amount of royalties
to be earned by the Company under the Schering License Agreement.
Additionally, the parties reduced ongoing development reimbursements and
added new milestone payments.
The Company had net working capital of $11 million at June 30, 1999,
compared to $48.7 million at June 30, 1998. The Company's cash, cash
equivalents, and short-term investments decreased to $19.1 million at June
30, 1999 from $49.9 million at June 30, 1998. The decrease resulted primarily
from cash used in operations of $54.8 million and property, plant, and
equipment additions of $6.2 million, partially offset by net proceeds from
the public
16
offering of 9.5 million shares of common stock totalling $21.4 million, by
net proceeds from the sale of convertible Series E-1 Preferred Stock of $5.6
million, and by additional proceeds of $5.1 million from its loan and
security agreement The Company's operations to date have consumed substantial
amounts of cash, and are expected to continue to do so for the foreseeable
future.
The Company continually reviews its product development activities
in an effort to allocate its resources to those product candidates that the
Company believes have the greatest commercial potential. Factors considered
by the Company in determining the products to pursue include projected
markets and need, potential for regulatory approval and reimbursement under
the existing healthcare system, status of its proprietary rights, technical
feasibility, expected and known product attributes, and estimated costs to
bring the product to market. Based on these and other factors, the Company
may from time to time reallocate its resources among its product development
activities. Additions to products under development or changes in products
being pursued can substantially and rapidly change the Company's funding
requirements.
The Company expects to incur substantial additional expenditures
associated with product development, particularly for LIQUIVENT and OXYGENT
as they continue through pivotal clinical trials. The Company is seeking
additional collaborative research and development relationships with suitable
corporate partners for its non-licensed products. There can be no assurance
that such relationships, if any, will successfully reduce the Company's
funding requirements. Additional equity or debt financing may be required,
and there can be no assurance that such financing will be available on
reasonable terms, if at all. If adequate funds are not available, the Company
may be required to delay, scale back, or eliminate one or more of its product
development programs, or obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to
certain of its technologies, product candidates, or products that the Company
would not otherwise relinquish.
Alliance anticipates that its current capital resources, expected
revenue from the Schering License Agreement and investments will be adequate
to satisfy its capital requirements through December 1999. The Company's
future capital requirements will depend on many factors, including, but not
limited to, continued scientific progress in its research and development
programs, progress with preclinical testing and clinical trials, the time and
cost involved in obtaining regulatory approvals, patent costs, competing
technological and market developments, changes in existing collaborative
relationships, the ability of the Company to establish additional
collaborative relationships, and the cost of manufacturing scale-up.
While the Company believes that it can produce materials for
clinical trials and the initial market launch for OXYGENT and IMAGENT at its
existing San Diego facilities and for LIQUIVENT at its Otisville, New York
facility, it may need to expand its commercial manufacturing capabilities for
its products in the future. Any expansion for any of its products may occur
in stages, each of which would require regulatory approval, and product
demand could at times exceed supply capacity. The Company has not selected a
site for such expanded facilities and cannot predict the amount it will
expend for the construction of such facilities. There can be no assurance as
to when or whether the FDA will determine that such facilities comply with
Good Manufacturing Practices. The projected location and construction of such
facilities will depend on regulatory approvals, product development, and
capital resources, among other factors. The Company has not obtained any
regulatory approvals for its production facilities for these products, nor
can there be any assurance that it will be able to do so. The Schering
License Agreement requires the Company to manufacture products at its San
Diego facility for a period of time after market launch at a negotiated
price. Schering will be responsible for establishing production capacity
beyond the maximum capacity of the San Diego facility.
YEAR 2000
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field. Beginning in
the year 2000, these date code fields will need to accept four-digit entries
to distinguish the 21st century dates from 20th century dates. As a result,
in less than one year, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000"
requirements. Management has a continuing Year 2000 program which it believes
has identified most, if not all, critical internal systems, software and
embedded chips. The Company currently believes that approximately 90% of its
identified critical and non-critical internal systems, software and embedded
chips are now compliant, however, no assurances can be given that operating
problems will not occur. The Company continues to evaluate and remedy the
remaining identified critical and non-critical internal systems. The
17
Company has compliance confirmations from approximately 50% of its critical
third party, suppliers, contractors and vendors (collectively, "contractors")
with respect to their computers, software and systems, and it believes that
most of the remaining contractors will be compliant by December 31, 1999.
However, no assurances can be given that the Company's contractors will be
compliant. Many systems have already been replaced over the past two years in
the ordinary course of Company plans for upgrading its equipment, software
and systems. The Company has removed and exchanged several 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. Additionally, the Company has contingency plans for
some of its external contractors, although there can be no assurance that
such contingency plans will work or that there are contingency plans for all
contractors whose equipment or systems may fail. The Company's cost to date
to resolve its Year 2000 problems is not material and is expected to total
less than $400,000; however, the actual total amount it will spend to
remediate such issues remains uncertain. The Company believes such costs will
not have a material effect on the Company's consolidated financial position
or results of operations. There can be no assurance, however, that the
Company's computer systems and applications of other companies on which the
Company's operations rely, will be timely converted, or that any such failure
to convert by another company will not have a material adverse effect on the
Company systems. Moreover, a failure of (i) the Company's scientific,
manufacturing and other equipment to operate at all or operate accurately,
(ii) clinical trial site medical equipment to perform properly, (iii)
necessary materials or supplies to be available to the Company when needed,
or (iv) other equipment, software, or systems to perform properly, 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 2000, and beyond, to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. These risks include, but are not limited to, the inability to obtain
adequate financing for the Company's development efforts; the inability to
enter into collaborative relationships to further develop and commercialize
the Company's products; changes in any such relationships, or the inability
of any collaborative partner to adequately commercialize any of the Company's
products; the uncertainties associated with the lengthy regulatory approval
process; the uncertainties associated with obtaining and enforcing patents
important to the Company's business; possible competition from other
products; and Year 2000 issues. Furthermore, even if the Company's products
appear promising at an early stage of development, they may not reach the
market for a number of important reasons. Such reasons include, but are not
limited to, the possibilities that the potential products will be found
ineffective during clinical trials; failure to receive necessary regulatory
approvals; difficulties in manufacturing on a large scale; failure to obtain
market acceptance; and the inability to commercialize because of proprietary
rights of third parties. The research, development, and market introduction
of new products will require the application of considerable technical and
financial resources, while revenues generated from such products, assuming
they are developed successfully, may not be realized for several years. Other
material and unpredictable factors which could affect operating results
include, without limitation, the uncertainty of the timing of product
approvals and introductions and of sales growth; the ability to obtain
necessary raw materials at cost-effective prices or at all; the effect of
possible technology and/or other business acquisitions or transactions; and
the increasing emphasis on controlling healthcare costs and potential
legislation or regulation of healthcare pricing.
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
The Company's license and research revenue was $8.3 million for
1999, compared to $21.2 million for 1998. The decrease in revenue is
primarily a result of the decreased research revenue from Ortho under the
Ortho License Agreement. The Company expects research revenue to decrease in
2000 compared to 1999, due to the reduction in revenue from the Schering
License Agreement.
Research and development expenses increased by 21% to $60.4 million for
1999, compared to $50.1 million for 1998. The increase in expenses was primarily
due to a $6.8 million increase in payments to outside researchers for
preclinical and clinical trials and other product development work, a $2.3
million increase in staffing costs for employees primarily engaged in research
and development activities, a $1.1 million increase in depreciation expense, and
a $769,000 increase in rent and lease expense, as well as other increases
related to the Company's research and development activities.
18
The increase for 1999 is primarily attributable to increased expenses related
to the IMAGENT Phase 3 clinical trial and the preparation of the IMAGENT
manufacturing facilities for regulatory approval.
General and administrative expenses were $8.6 million for 1999,
compared to $7.9 million for 1998. The increase in general and administrative
expenses was primarily due to a $712,000 increase in professional fees.
Investment income and other was $813,000 for 1999, compared to $3.8
million for 1998. The decrease was primarily a result of lower average cash
and short-term investment balances.
In 1999, the Company recorded interest expense of $844,000 related
to the beneficial conversion feature on the $1.8 million convertible
subordinated notes.
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.
ITEM 7A. MARKET RISK
The Company is or has been exposed to changes in interest rates
primarily from its long-term debt arrangements and, secondarily, its
investments in certain securities. Under its current policies, the Company
does not use interest rate derivative instruments to manage exposure to
interest rate changes. The Company believes that a hypothetical 100 basis
point adverse move in interest rates along the entire interest rate yield
curve would not materially affect the fair value of the Company's interest
sensitive financial instruments at June 30, 1999.
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.
19
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 December 1999 Annual Meeting of Shareholders (the
"Proxy Statement"). Copies of the Proxy Statement will be duly filed with the
SEC pursuant to Rule 14a-6(c) promulgated under the Securities Exchange Act
of 1934, as amended, not later than 120 days after the end of the fiscal year
covered by its Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The sections labeled "Executive Compensation" and "Election of
Directors" to appear in the Company's Proxy Statement are incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section labeled "Ownership of Voting Securities by Certain
Beneficial Owners and Management" to appear in the Company's Proxy Statement
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The sections labeled "Election of Directors" and "Executive
Compensation" to appear in the Company's Proxy Statement are incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of the Report.
1. See Table of Contents to Consolidated Financial Statements
on Page F-1 for a list of Financial Statements being filed
herein.
2. See Page F-2 for the Report of Ernst & Young LLP,
Independent Auditors, being filed herein.
3. See Exhibits below for a list of all Exhibits being filed
or incorporated by reference herein.
(b) Reports on Form 8-K. None.
(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").)
20
(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. (Incorporated by reference to Exhibit
3(d) of the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1998 (the "1998 10-K").)
(e) Certificate of Amendment to the Certificate of
Incorporation of the Company filed on January 15, 1999. (Incorporated by
reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 1998 (the "December 1998 10-Q").)
(f) 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. (Incorporated by reference to Exhibit 10(d)
to the 1994 10-K.) (1)
(c) Formula Award of Stock Options for Non-employee Members of
the Board of Directors as approved by shareholders of the Company. (Incorporated
by reference to Exhibit 10(e) to the 1994 10-K.) (1)
(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").) (2)
(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.
(Incorporated by reference to Exhibit 10(j) to the 1998 10-K.)
(k) Royalty Rights Agreement dated as of August 13, 1998
between the Company and the E-1 Investors. (Incorporated by reference to
Exhibit 10(k) to the 1998 10-K.)
(l) Registration Rights Agreement dated as of August 13, 1998
between the Company and the E-1 Investors. (Incorporated by reference to Exhibit
10(l) to the 1998 10-K.)
21
(m) Credit Agreement dated as of June 17, 1998 between the
Company and Imperial Bank. (Incorporated by reference to Exhibit 10(m) to the
1998 10-K.)
(n) Security Agreement dated June 17, 1998 executed by the
Company in favor of Imperial Bank. (Incorporated by reference to Exhibit
10(o) to the 1998 10-K.)
(o) Lease Agreement dated November 7, 1998 between the Company
and WHAMC Real Estate Limited Partnership, a Delaware limited partnership,
relating to certain manufacturing and development facilities in San Diego,
California. (Incorporated by reference to Exhibit 10(p) to the 1998 10-K.)
(p) First Amendment to License Agreement, dated as of
December 30, 1998, between the Company and Schering Aktiengesellschaft.
(Incorporated by reference to Exhibit 10 of the December 1998 10-Q.) (2)
(q) Employment Letter Agreement dated February 26, 1999 and
executed by Dr. Artemios B. Vassos. (Incorporated by reference to Exhibit
10(a) to the Company's Quarterly Report on Form 10-Q for the quarterly period
ending March 31, 1999 (the "March 31, 1999 10-Q").) (1)
(r) Promissory Note in the amount of $180,000, dated March
3, 1999 and executed by Dr. Artemios B. Vassos in favor of the Company.
(Incorporated by reference to Exhibit 10(b) of the March 1999 10-Q.) (1)
(s) Promissory Note in the amount of $125,000, dated March
3, 1999 and executed by Dr. Artemios B. Vassos in favor of the Company.
(Incorporated by reference to Exhibit 10(c) of the March 1999 10-Q.) (1)
(t) Promissory Note in the amount of $125,000, dated March
3, 1999 and executed by Dr. Artemios B. Vassos in favor of the Company.
(Incorporated by reference to Exhibit 10(d) of the March 1999 10-Q.) (1)
(u) Security Purchase Agreement dated May 20, 1999 between
the Company and Harris & Harris Group, Inc, Jan A. Dekker and Stephen McGrath
with forms of the 6% Convertible Subordinated Note Due May 20, 2002 and
Warrant.
(v) Form of Amended 1991 Stock Option Plan.
(w) Agreement to Waive Covenant Violation and Modify Loan
dated May 17, 1999 between the Company and Imperial Bank.
(x) Intellectual Property Security Agreement dated May 17,
1999 between the Company and Imperial Bank. (3)
(y) First Amendment to Credit Agreement dated June 17, 1999
among the Company, MDV Technologies, Inc., a wholly-owned subsidiary of the
Company ("MDV"), and Imperial Bank. (3)
(z) Intellectual Property Security Agreement dated August
2, 1999 between MDV and Imperial Bank.
(aa) Commercial Security Agreement dated August 3, 1999
among the Company, MDV and Imperial Bank.
(bb) Promissory Note dated August 2, 1999 in the amount of
$5,000,000 executed by the Company and MDV in favor of Imperial Bank.
(cc) Promissory Note dated August 2, 1999 in the amount of
$8,422,619.04 executed by the Company and MDV in favor of Imperial Bank.
(dd) Warrant for 180,000 shares to Purchase Common Stock
dated March 30, 1999 issued to Imperial Bancorp.
(21) Subsidiary List
22
(23.1) Consent of Ernst & Young LLP, Independent Auditors
(1) Management contract or compensatory plan or arrangement
required to be filed
(2) Certain confidential portions of this exhibit have been deleted
pursuant to an order granted by the Securities and Exchange Commission under
the Securities Exchange Act of 1934.
(3) A request for confidential treatment of certain portions of this
exhibit has been filed with the Securities and Exchange Commission.
23
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 23, 1999 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 23, 1999
- -------------------------- Chief Executive Officer
Duane J. Roth
\S\ THEODORE D. ROTH Director, President, and September 23, 1999
- -------------------------- Chief Operating Officer
Theodore D. Roth
\S\ TIM T. HART Chief Financial Officer, September 23, 1999
- -------------------------- Treasurer, and Chief
Tim T. Hart Accounting Officer
\S\ PEDRO CUATRECASAS, M.D. Director September 23, 1999
- --------------------------
Pedro Cuatrecasas, M.D.
\S\ CARROLL O. JOHNSON Director September 23, 1999
- --------------------------
Carroll O. Johnson
\S\ STEPHEN M. MCGRATH Director September 23, 1999
- --------------------------
Stephen M. McGrath
\S\ HELEN M. RANNEY, M.D. Director September 23, 1999
- --------------------------
Helen M. Ranney, M.D.
\S\ DONALD E. O'NEILL Director September 23, 1999
- --------------------------
Donald E. O'Neill
\S\ JEAN RIESS, PH.D. Director September 23, 1999
- --------------------------
Jean Riess, Ph.D.
\S\ THOMAS F. ZUCK, M.D. Director September 23, 1999
- --------------------------
Thomas F. Zuck, M.D.
24
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, 1999 and 1998 F-3
Consolidated Statements of Operations for the Years
Ended June 30, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7 - F-15
No consolidated financial statement schedules are filed herewith because they
are not required or are not applicable, or because the required information
is included in the consolidated financial statements or notes thereto.
F-1
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, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 1999. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, Alliance Pharmaceutical
Corp. and subsidiaries have reported accumulated losses of $326,724,000 and
without additional financing, lacks sufficient working capital to fund
operations beyond December 1999, which raises substantial doubt about its
ability to continue as a going concern. Management's plans as to these
matters are described in Note 1. The 1999 financial statements do not include
any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of liabilities
that may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
San Diego, California
July 23, 1999
except for paragraph 2 of Note 5, as
to which the date is September 14, 1999
F-2
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,
------------------------------
1999 1998
------------ ------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 19,081,000 $ 11,809,000
Short-term investments - 38,046,000
Research revenue receivable 4,875,000 6,847,000
Other current assets 413,000 694,000
------------ ------------
Total current assets 24,369,000 57,396,000
PROPERTY, PLANT AND EQUIPMENT - NET 24,621,000 23,087,000
PURCHASED TECHNOLOGY - NET 11,361,000 12,880,000
RESTRICTED CASH 5,000,000 -
OTHER ASSETS - NET 633,000 314,000
------------ ------------
$ 65,984,000 $ 93,677,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 4,910,000 $ 2,191,000
Accrued expenses 4,280,000 5,446,000
Current portion of long-term debt 4,170,000 1,068,000
------------ ------------
Total current liabilities 13,360,000 8,705,000
LONG-TERM DEBT 10,499,000 8,882,000
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value; 5,000,000 shares authorized;
500,000 shares of Series D issued and outstanding at
June 30, 1999 and 1998; liquidation preference of $10,000,000
at June 30, 1999 and 1998 5,000 5,000
Common stock - $.01 par value; 75,000,000 shares authorized;
43,510,049 and 31,994,338 shares issued and outstanding at
June 30, 1999 and 1998, respectively 435,000 320,000
Additional paid-in capital 368,409,000 340,016,000
Accumulated deficit (326,724,000) (264,251,000)
------------ ------------
Total stockholders' equity 42,125,000 76,090,000
------------ ------------
$ 65,984,000 $ 93,677,000
------------ ------------
------------ ------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30,
--------------------------------------------------
1999 1998 1997
------------- ------------- --------------
REVENUES:
License and research revenue $ 8,251,000 $ 21,209,000 $ 44,580,000
OPERATING EXPENSES:
Research and development 60,427,000 50,084,000 43,278,000
General and administrative 8,566,000 7,886,000 7,932,000
Acquired in-process technology - - 16,450,000
------------- ------------- --------------
68,993,000 57,970,000 67,660,000
------------- ------------- --------------
LOSS FROM OPERATIONS (60,742,000) (36,761,000) (23,080,000)
IMPUTED INTEREST EXPENSE ON CONVERTIBLE NOTES (844,000) - -
INVESTMENT INCOME AND OTHER - NET 813,000 3,758,000 4,064,000
------------- ------------- --------------
NET LOSS (60,773,000) (33,003,000) (19,016,000)
IMPUTED DIVIDENDS ON PREFERRED STOCK (1,700,000) - -
------------- ------------- --------------
NET LOSS APPLICABLE TO COMMON SHARES $ (62,473,000) $ (33,003,000) $ (19,016,000)
------------- ------------- --------------
------------- ------------- --------------
NET LOSS PER COMMON SHARE:
Basic and diluted $ (1.89) $ (1.04) $ (0.63)
------------- ------------- --------------
------------- ------------- --------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted 33,045,000 31,749,000 30,302,000
------------- ------------- --------------
------------- ------------- --------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
-------- -------- ---------- ---------
BALANCES AT JUNE 30, 1996 200,000 $ 2,000 30,002,000 $ 300,000
Exercise of stock options and warrants 105,000 1,000
Conversion of convertible Series C Preferred
Stock to common shares (200,000) (2,000) 345,000 3,000
Payment related to acquired in-process technology 703,000 7,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 10,000
Net unrealized gain on available-for-sale securities
Net loss
-------- -------- ---------- ---------
BALANCES AT JUNE 30, 1997 - - 31,165,000 311,000
Exercise of stock options and warrants 104,000 1,000
Sale of convertible Series D Preferred Stock 500,000 5,000
Payment related to acquired in-process technology 706,000 8,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 19,000
Net unrealized loss on available-for-sale securities
Net loss
-------- -------- ---------- ---------
BALANCES AT JUNE 30, 1998 500,000 5,000 31,994,000 320,000
Exercise of stock options and warrants 96,000 1,000
Issuance of warrants
Sale of common stock 9,500,000 95,000
Sale of convertible Series E-1 Preferred Stock 100,000 1,000
Conversion and redemption of convertible Series E-1
Preferred Stock to common shares (100,000) (1,000) 1,859,000 18,000
Imputed interest expense on convertible notes
Imputed dividends on Series E-1 Preferred Stock
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 61,000 1,000
Net unrealized loss on available-for-sale securities
Net loss
-------- -------- ---------- ---------
BALANCES AT JUNE 30, 1999 500,000 $ 5,000 43,510,000 $ 435,000
-------- -------- ---------- ---------
-------- -------- ---------- ---------
ADDITIONAL TOTAL
PAID-IN ACCUMULATED COMPREHENSIVE
CAPITAL DEFICIT LOSS
------------- -------------- -------------
BALANCES AT JUNE 30, 1996 $ 313,397,000 $ (212,232,000)
Exercise of stock options and warrants 654,000
Conversion of convertible Series C Preferred
Stock to common shares (1,000)
Payment related to acquired in-process technology 7,840,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 133,000
Net unrealized gain on available-for-sale securities 245,000 $ 245,000
Net loss (19,016,000) (19,016,000)
------------- ------------- -------------
BALANCES AT JUNE 30, 1997 322,268,000 (231,248,000) $ (18,771,000)
Exercise of stock options and warrants 741,000 -------------
Sale of convertible Series D Preferred Stock 9,595,000 -------------
Payment related to acquired in-process technology 7,492,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 141,000
Net unrealized loss on available-for-sale securities (221,000) $ (221,000)
Net loss (33,003,000) (33,003,000)
------------- ------------- -------------
BALANCES AT JUNE 30, 1998 340,016,000 (264,251,000) $ (33,224,000)
Exercise of stock options and warrants -------------
Issuance of warrants 922,000 -------------
Sale of common stock 21,415,000
Sale of convertible Series E-1 Preferred Stock 5,582,000
Conversion and redemption of convertible Series E-1
Preferred Stock to common shares (2,248,000)
Imputed interest expense on convertible notes 844,000
Imputed dividends on Series E-1 Preferred Stock 1,700,000 (1,700,000)
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 200,000
Net unrealized loss on available-for-sale securities (22,000) $ (22,000)
Net loss (60,773,000) (60,773,000)
------------- ------------- --------------
BALANCES AT JUNE 30, 1999 $ 368,409,000 (326,724,000) $ (60,795,000)
------------- ------------- --------------
------------- ------------- --------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
-----------------------------------------------------
1999 1998 1997
------------- -------------- --------------
OPERATING ACTIVITIES:
Net loss $ (60,773,000) $ (33,003,000) $ (19,016,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operations:
Depreciation and amortization 6,265,000 5,064,000 3,997,000
Imputed interest expense on convertible notes 844,000 - -
Expense associated with warrant issurance 160,000 - -
Charge for acquired in-process technology - - 16,450,000
Non-cash compensation - net 201,000 320,000 133,000
Changes in operating assets and liabilities:
Research revenue receivable 1,972,000 403,000 (1,500,000)
Restricted cash and other assets (5,038,000) 372,000 888,000
Accounts payable and accrued
expenses and other 1,553,000 (1,238,000) 3,662,000
------------- -------------- --------------
Net cash provided by (used in) operating activities (54,816,000) (28,082,000) 4,614,000
------------- -------------- --------------
INVESTING ACTIVITIES:
Purchases of short-term investments (23,711,000) (113,099,000) (132,754,000)
Sales and maturities of short-term investments 61,735,000 131,874,000 137,937,000
Property, plant and equipment (6,246,000) (10,057,000) (6,823,000)
Payment for acquired in-process technology - (57,000) (1,046,000)
------------- -------------- --------------
Net cash provided by (used in) investing activities 31,778,000 8,661,000 (2,686,000)
------------- -------------- --------------
FINANCING ACTIVITIES:
Issuance of common stock and warrants 21,511,000 562,000 597,000
Issuance of convertible preferred stock - net 5,582,000 9,600,000 -
Redemption of preferred stock (2,230,000) - -
Proceeds from long-term debt 6,850,000 6,800,000 3,493,000
Principal payments on long-term debt (1,403,000) (1,100,000) (908,000)
------------- -------------- --------------
Net cash provided by financing activities 30,310,000 15,862,000 3,182,000
------------- -------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,272,000 (3,559,000) 5,110,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 11,809,000 15,368,000 10,258,000
------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 19,081,000 $ 11,809,000 $ 15,368,000
------------- -------------- --------------
------------- -------------- --------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Deferred interest expense on long-term debt $ 728,000 - -
Imputed dividends on preferred stock 1,700,000 - -
Payable for acquired in-process technology - - $ 7,557,000
Issuance of common stock in connection with aquired
in-process technology - $ 7,500,000 7,847,000
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 in November 1996, its wholly owned subsidiary Alliance
Pharmaceutical GmbH, from its inception in December 1998, 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 1998 and 1997 have been reclassified to conform to the
current year's presentation.
LIQUIDITY AND BASIS OF PRESENTATION
The Company believes its available cash and cash equivalents would
be sufficient to meet its anticipated capital requirements through December
1999, which raises substantial doubt about its ability to continue as a going
concern. Substantial additional capital resources will be required to fund
continuing operations related to the Company's research, development,
manufacturing and business development activities. The Company believes there
may be a number of alternatives available to meet the continuing capital
requirements of its operations, such as collaborative agreements and public
or private financings. The Company is currently in preliminary discussions
with a number of potential collaborative partners and, based on the results
of various product evaluations, revenues in the form of license fees,
milestone payments or research and development reimbursements could be
generated. There can be no assurance that any of these fundings will be
consummated in the necessary time frames needed for continuing operations or
on terms favorable to the Company. The Company is continuing to take actions
to reduce its ongoing expenses. If adequate funds are not available, the
Company will be required to significantly curtail its operating plans and may
have to sell or license out significant portions of the Company's technology
or potential products. The 1999 financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities
that may result from the outcome of this uncertainty.
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 additional
paid-in capital. 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
F-7
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(R) (intrapulmonary
oxygen carrier) products. Purchased technology also includes $2 million for
technology capitalized as a result of the acquisition of BioPulmonics, Inc.
("BioPulmonics") in December 1991. Since the acquisition, an alternative
future use of the acquired technology has been pursued by the Company. An
intrapulmonary drug delivery system using the PFC-based liquid as a carrier
(or dispersing agent) is being developed by Alliance from the liquid
ventilation technology.
The PFC technology is the basis for the Company's main drug
development programs and is being amortized over a 20-year life. The PFC
technology has a net book value of $11.2 million and $12.4 million, and is
reported net of accumulated amortization of $12 million and $10.8 million at
June 30, 1999 and 1998, respectively. The technology acquired from
BioPulmonics has a net book value of approximately $129,000 and $480,000 and
is being amortized over five to seven years and is reported net of
accumulated amortization of $1.9 million and $1.5 million at June 30, 1999
and 1998, respectively.
The carrying value of purchased technology is reviewed periodically
based on the projected cash flows to be received from license fees, milestone
payments, royalties and other product revenues. If such cash flows are less
than the carrying value of the purchased technology, the difference will be
charged to expense.
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(R), 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.
F-8
LONG-TERM DEBT
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%. In March 1999, the Company was
in violation of a financial covenant under the loan. In June 1999, the bank
waived the violation, took additional collateral and restructured the loan
which resulted in increased principal payments. The loan bears interest at
rates ranging from 6.5% to 8.25% at June 30, 1999. As part of the
restructuring, the Company issued to the bank a warrant to purchase up to
180,000 shares of common stock at an exercise price of $2.88 per share. The
Company has recorded deferred interest expense on the warrant, based upon a
Black-Scholes valuation, of $241,000, which will be amortized over the life
of the warrant. The unamortized deferred interest balance was $221,000 at
June 30, 1999. Amounts borrowed are secured by certain fixed assets and
patents and are to be repaid over 4 years. If certain financial covenants are
not satisfied, the outstanding balance may become due and payable. On June
30, 1999, the balance outstanding on this loan was $13.6 million. In
connection with the restructuring in June 1999, the Company pledged $5
million in cash as collateral and has separately disclosed this amount as
restricted cash on the Consolidated Balance Sheet at June 30, 1999. As long
as sufficient funding from collaborative agreements and public or private
financing is obtained, the Company believes it will be able to achieve and
maintain its debt covenants through June 30, 2000.
In May 1999, the Company privately placed $1.8 million of 6%
convertible subordinated notes due May 2002 and issued warrants to the note
holders to purchase up to 300,000 shares of common stock at $2.45 per share.
The conversion price of the notes is $2 per share, which was below the
trading market price of the stock on the day the notes were issued. As a
result of this conversion price, the Company has recognized an immediate
charge to interest expense of $844,000 on these convertible notes related to
the beneficial conversion feature. The Company has recorded deferred interest
expense on the warrants of $521,000, based upon a Black-Scholes valuation,
and is amortizing the deferred interest over the life of the notes. The
unamortized deferred interest balance was $507,000 at June 30, 1999.
The Company's principal payments for the long-term debt for the
years ending June 30, 2000, 2001, 2002, 2003 and 2004 are $4.4 million, $4.7
million, $2.8 million, $1.7 million and $-0-, respectively. Due to the option
of the Company to satisfy the $1.8 million convertible subordinated notes
with the issuance of common stock, the Company has excluded any principal
payments on the convertible notes from the 5 year schedule of principal
payments.
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."
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
F-9
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
Effective July 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement No. 130, "Comprehensive Income" ("SFAS No. 130"),
and Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131"). SFAS No. 130 establishes new rules for
the reporting and display of comprehensive income and its components;
however, the adoption of SFAS No. 130 had no impact on the Company's net loss
or stockholders' equity. SFAS No. 130 requires unrealized gains and losses on
the Company's available-for-sale securities to be included in comprehensive
income. The Company has reported the total comprehensive loss in the
Consolidated Statements of Stockholders' Equity. SFAS No. 131 amends the
requirements for public enterprises to report financial and descriptive
information about its reportable operating segments. Operating segments, as
defined in SFAS No. 131, are components of an enterprise for which separate
financial information is available regularly by the Company in deciding how
to allocate resources in assessing performance. The financial information is
required to be reported on the basis that is used internally for evaluating
the segment performance. The Company believes it operates in one business and
operating segment. The adoption of SFAS No. 131 did not affect results of
operations or financial position of the Company.
2. FINANCIAL STATEMENT DETAILS
PROPERTY, PLANT AND EQUIPMENT - NET
Property, plant and equipment consist of the following:
June 30,
----------------------------------
1999 1998
------------- -------------
Land $ 225,000 $ 225,000
Buildings 300,000 300,000
Building improvements 2,323,000 2,193,000
Furniture, fixtures, and equipment 20,614,000 18,825,000
Leasehold improvements 19,870,000 15,542,000
------------- -------------
43,332,000 37,085,000
Less accumulated depreciation and amortization (18,711,000) (13,998,000)
------------- -------------
$ 24,621,000 $ 23,087,000
------------- -------------
ACCRUED EXPENSES
Accrued expenses consist of the following:
June 30,
----------------------------------
1999 1998
------------- -------------
Clinical trial supplies expense $ 2,286,000 $ 2,286,000
Payroll and related expenses 1,704,000 2,786,000
Rent and related operating expenses 201,000 205,000
Other 89,000 169,000
------------- -------------
$ 4,280,000 $ 5,446,000
------------- -------------
F-10
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, 1999 June 30, 1998
--------------------------------------------- --------------------------------------------
Gross Unrealized Estimated Gross Unrealized Estimated
Cost Gains (Losses) Fair Value Cost Gains (Losses) Fair Value
------------ ----------------- ------------ ------------ ---------------- ------------
U.S. Government Securities $ - $ - $ - $ 12,784,000 $ 11,000 $ 12,795,000
Corporate Securities - - - 25,240,000 11,000 25,251,000
------------ ----------------- ------------ ------------ ---------------- ------------
$ - $ - $ - $ 38,024,000 $ 22,000 $ 38,046,000
------------ ----------------- ------------ ------------ ---------------- ------------
------------ ----------------- ------------ ------------ ---------------- ------------
The gross realized gains on sales of available-for-sale securities
totaled $75,000 and $357,000, in 1999 and 1998, respectively. The gross
unrealized gains of $-0- and $22,000, in 1999 and 1998, 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, 1999 and 1998, 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, 1999 June 30, 1998
------------------------------ ------------------------------
Estimated Fair Estimated Fair
Cost Value Cost Value
------------ -------------- ------------ --------------
Due in one year or less $ - $ - $ 23,884,000 $ 23,885,000
Due after one year through three years - - 12,221,000 12,227,000
Due after three years - - 1,919,000 1,934,000
------------ -------------- ------------ --------------
$ - $ - $ 38,024,000 $ 38,046,000
------------ -------------- ------------ --------------
------------ -------------- ------------ --------------
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 and the 1983 Program have
expired and no additional options may be granted under such plans.
In August 1998, the Board of Directors approved a plan whereby each
employee option holder, excluding certain officers and directors of the
Company, could exchange all of their current vested and unvested options for
new options priced at $5.00, which was in excess of the market value on the
date of the exchange. Existing options were exchangeable two shares for one.
A total of 1,179,066 existing option shares, ranging in price from $5.00 to
$28.00, were exchanged for 589,533 replacement options shares with an
exercise price of $5.00. These replacement options vest on the same basis as
the replaced options but require that the employee continue their employment
with the Company for a minimum of one year
F-11
from the date of grant in order for any of the shares to vest. The
replacement options are included as both grants and cancellations in the
stock option activity table shown below.
The following table summarizes stock option activity through
June 30, 1999:
Weighted
Shares Average Price
---------- -------------
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
Granted 2,617,008 $ 4.90
Exercised (129,918) $ 0.01
Terminated/Expired (2,373,791) $ 10.08
----------
Balance at June 30, 1999 5,199,222 $ 7.75
----------
----------
Available for future grant under the 1983 Plan and the 1983 Program -0-
----------
----------
Available for future grant under the 1991 Plan 1,144,193
----------
----------
The following table summarizes information concerning outstanding
and exercisable stock options at June 30, 1999:
Weighted
Weighted Average Weighted
Range of Number Average Remaining Number Average
Exercise Prices Outstanding Exercise Price Contractual Life Exercisable Exercise Price
---------------- ----------- -------------- ---------------- ----------- --------------
$2.38 - $4.81 445,500 $ 3.34 8.60 years 69,400 $ 3.42
$4.88 1,324,500 $ 4.88 9.37 years 161,250 $ 4.88
$5.00 405,392 $ 5.00 9.11 years 2,560 $ 5.00
$5.03 - $6.00 633,350 $ 5.29 5.76 years 567,250 $ 5.30
$6.13 - $9.25 596,455 $ 7.98 4.70 years 495,560 $ 8.00
$9.38 786,900 $ 9.38 8.37 years 208,400 $ 9.38
$9.44 - $13.38 679,650 $12.33 6.73 years 409,700 $12.09
$13.63 - $28.00 327,475 $19.68 3.85 years 293,758 $20.26
----------- -----------
5,199,222 $7.75 7.46 years 2,207,878 $ 9.45
----------- -----------
----------- -----------
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 1999, 1998 or 1997. If the Company had
elected to recognize compensation cost based on the fair value of the options
granted at grant date amortized to expense over their vesting period as
prescribed by SFAS No. 123, the Company's net loss applicable to common
shares and net loss per share would have been increased to the pro forma
amounts indicated below for the years ended June 30:
F-12
1999 1998 1997
------------- ------------- -------------
Net loss
As reported $ (62,473,000) $ (33,003,000) $ (19,016,000)
Pro forma (67,386,000) (36,422,000) (21,453,000)
Net loss per share
As reported $ (1.89) $ (1.04) $ (.63)
Pro forma (2.04) (1.15) (.71)
The impact of outstanding non-vested stock options granted prior to
1996 has been excluded from the pro forma calculations; accordingly, the
1999, 1998 and 1997 pro forma adjustments are not indicative of future period
pro forma adjustments if the calculation reflected all applicable stock
options. The fair value of options at date of grant was estimated using the
Black-Scholes option-pricing model with the following assumptions for 1999,
1998 and 1997, respectively: risk-free interest rate range of 5.63% to 6.63%,
5.63% to 6.63% and 5.25% to 6.5%; dividend yield of 0% (for all years);
volatility factor of 78%, 66% and 63%; and a weighted-average expected term
of 7 years, 6 years and 4 years. The estimated weighted average fair value at
grant date for the options granted during 1999, 1998 and 1997 was $3.23,
$5.85 and $6.90 per option, respectively.
The following table summarizes common shares reserved for issuance
at June 30, 1999 on exercise or conversion of:
Shares
----------
Series D convertible preferred stock 1,000,000
Convertible subordinated notes 900,000
Common stock options 6,343,415
Common stock warrants 1,905,523
----------
Total common shares reserved for issuance 10,148,938
----------
----------
WARRANTS
At June 30, 1999, the Company had warrants outstanding to purchase
1,905,523 shares of common stock at prices ranging from $2.45 to $20 per
share. The warrants expire on various dates from July 1999 through June 2004.
PREFERRED STOCK
In fiscal 1996, in conjunction with a license agreement (the "HMRI
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). The Series A and B Preferred Stock carried a cumulative annual dividend
of $0.50 and $1.00 per share, respectively. 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. In September 1997, in conjunction
with a license agreement (the "Schering License Agreement"), Schering Berlin
Venture Corp. ("SBVC"), an affiliate of Schering AG, Germany ("Schering"),
purchased 500,000 shares of the Company's convertible Series D Preferred
Stock for $10 million. 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.
In August 1998, the Company sold 100,000 shares of its convertible
Series E-1 Preferred Stock to certain investors for $6 million. The Company
recognized an imputed dividend of $483,000 to reflect a beneficial conversion
feature on these preferred shares. In January 1999, 47,837 shares of the
Series E-1 Preferred Stock were converted into 1,091,338 shares of Alliance
common stock at an average price of $2.63 per share. In May 1999, 31,456
shares of Series E-1
F-13
Preferred Stock converted into 767,219 shares of Alliance common stock. The
Company also repurchased the remaining 20,707 shares of Series E-1 Preferred
Stock for $2.2 million of cash. The Company recorded a preferred stock
dividend of $1.2 million, which represents the excess of the fair value of
the consideration transferred to the preferred stockholders over the carrying
value of the preferred stock. The investors obtained a right to receive a
royalty on future sales of one of the Company's products under development,
provided that the product is approved by the U.S. Food and Drug
Administration ("FDA") by December 2003. The total royalty obligation is 0.3%
of net sales of the product for a period of three years. The Company has
certain rights to repurchase the royalty right.
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 and Alliance
assumed responsibility for worldwide development of OXYGENT at its expense.
Under the restructured agreement, Ortho retained certain rights to be the
exclusive marketing agent for the product, which rights have been re-acquired
by the Company.
From February 1996 through June 1997, HMRI was responsible for most
of the costs of development and marketing of LIQUIVENT. In June 1997, the
Company sold $2.5 million in clinical trial supplies to HMRI and recorded it
as deferred revenue. At June 30, 1999, the unused supplies were approximately
$2.3 million. In December 1997, the HMRI License Agreement was terminated.
Therefore, since July 1, 1997 Alliance has been responsible for all LIQUIVENT
development expenses worldwide. HMRI has no continuing rights to the
development or marketing of LIQUIVENT. In September 1999, HMRI dismissed an
arbitration proceeding filed against Alliance in September 1998 and Alliance
agreed to repurchase the clinical trial supplies from HMRI for up to $3
million over time and under certain circumstances.
In September 1997, the Company entered into the Schering License
Agreement, which provides Schering with worldwide exclusive marketing and
manufacturing rights to Alliance's drug compounds, drug compositions, and
medical devices and systems related to perfluorocarbon ultrasound imaging
products, including IMAGENT. In conjunction with the Schering License
Agreement, Schering Berlin Venture Corp., an affiliate of Schering, purchased
500,000 shares of the Company's convertible Series D Preferred Stock for $10
million. The product is being developed jointly by Alliance and Schering.
Under the Schering License Agreement, Schering paid to Alliance in 1998 an
initial license fee of $4 million, and agreed to pay further milestone
payments and royalties on product sales. Schering is also providing funding
to Alliance for some of its development expenses related to IMAGENT. Because
of changes in the development of the field of ultrasound contrast agents and
in the parties' development plans, Alliance and Schering amended the Schering
License Agreement as of December 30, 1998. Under the original arrangement,
royalty rates were based upon the development of specific medical uses for
IMAGENT, which placed limitations on the development effort. The parties
elected to revise the royalty calculation which is now based on sales of
IMAGENT, a more traditional method of determining royalties. This
modification permits the parties to be flexible in developing IMAGENT.
Although the method of calculating royalties has been changed, the Company
believes that there will be no material difference in the amount of royalties
to be earned by the Company under the Schering License Agreement.
Additionally, the parties reduced ongoing development reimbursements and
added new milestone payments.
6. INCOME TAXES
Significant components of the Company's deferred tax assets as of
June 30, 1999 are shown below. A valuation allowance of $121,401,000, of
which $25,199,000 is related to 1999, has been recognized to offset the
deferred tax assets as realization of such assets is uncertain.
F-14
Deferred tax assets consist of the following:
June 30,
---------------------------
1999 1998
------------ ------------
Net operating loss carryforwards $ 93,497,000 $ 74,481,000
Research and development credits 12,423,000 8,571,000
Capitalized research expense 12,047,000 10,744,000
Other - net 3,434,000 2,406,000
------------ ------------
Total deferred tax assets 121,401,000 96,202,000
Valuation allowance for deferred tax assets (121,401,000) (96,202,000)
------------ ------------
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, 1999, the Company had federal and various state net
operating loss carryforwards of approximately $260,336,000 and $41,375,000,
respectively. The difference between the federal and state tax loss
carryforwards is primarily attributable to the capitalization of research and
development expenses for California tax purposes and the fifty percent
limitation on California loss carryforwards. Approximately $2,718,000 of
California tax loss carryforwards expired in fiscal 1999 and will continue to
expire (approximately $1,457,000 in fiscal 2000) unless previously utilized.
Approximately $1,724,000 of federal tax loss carryforwards expired in fiscal
1999 and will continue to expire (approximately $1,273,000 in fiscal 2000)
unless previously utilized. The Company also has federal and state research
and development tax credit carryforwards of $10,251,000 and $3,342,000,
respectively, which will begin expiring in fiscal 2000 unless previously
utilized.
Pursuant to Sections 382 and 383 of the Internal Revenue Code,
annual use of the Company's net operating loss and credit carryforwards may
be limited because of cumulative changes in ownership of more than 50% which
have occurred; however, the Company does not believe such limitation will
have a material impact upon the utilization of these carryforwards.
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, 1999 are as follows:
YEARS ENDING JUNE 30,
---------------------
2000 $ 2,406,000
2001 2,262,000
2002 2,331,000
2003 1,617,000
2004 1,216,000
Thereafter 3,089,000
------------
Total $ 12,921,000
------------
------------
Rent expense for fiscal 1999, 1998 and 1997 was $4.1 million, $3.4
million and $2.6 million, respectively.
F-15
EXHIBIT INDEX
Certain exhibits to this Report on Form 10-K have been incorporated by
reference. For a list of exhibits, see Item 14 hereof.
The following exhibits are being filed herewith:
Number Document
- -------- -----------------------------------------------------------------
10(u) Security Purchase Agreement dated May 20, 1999 between the Company
and Harris & Harris Group, Inc, Jan A. Dekker and Stephen McGrath
with forms of the 6% Convertible Subordinated Note Due May 20,
2002 and Warrant
10(v) Form of Amended 1991 Stock Option Plan
10(w) Agreement to Waive Covenant Violation and Modify Loan dated May
17, 1999 between the Company and Imperial Bank
10(x) Intellectual Property Security Agreement dated May 17, 1999
between the Company and Imperial Bank (3)
10(y) First Amendment to Credit Agreement dated June 17, 1999 among the
Company, MDV Technologies, Inc., a wholly-owned subsidiary of the
Company ("MDV"), and Imperial Bank (3)
10(z) Intellectual Property Security Agreement dated August 2, 1999
between MDV and Imperial Bank
10(aa) Commercial Security Agreement dated August 3, 1999 among the
Company, MDV and Imperial Bank
10(bb) Promissory Note dated August 2, 1999 in the amount of $5,000,000
executed by the Company and MDV in favor of Imperial Bank
10(cc) Promissory Note dated August 2, 1999 in the amount of
$8,422,619.04 executed by the Company and MDV in favor of Imperial
Bank
10(dd) Warrant for 180,000 shares to Purchase Common Stock dated March
30, 1999 issued to Imperial Bancorp
21 Subsidiary List
23.1 Consent of Ernst & Young LLP, Independent Auditors
(3) A request for confidential treatment of certain portions of
this exhibit has been filed with the Securities and Exchange
Commission.