-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PMopdn8UsCMoOeLxbTHYRAgkXMpga92i39E38wsAdEeNTTDMAKbUb8SlVKHa0Rze kGqd8OsTDEiZbgtDzLnjRg== 0000912057-00-006181.txt : 20000215 0000912057-00-006181.hdr.sgml : 20000215 ACCESSION NUMBER: 0000912057-00-006181 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE PHARMACEUTICAL CORP CENTRAL INDEX KEY: 0000736994 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 141644018 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12950 FILM NUMBER: 538816 BUSINESS ADDRESS: STREET 1: 3040 SCIENCE PARK RD CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 8584105200 MAIL ADDRESS: STREET 1: 3040 SCIENCE PARK ROAD CITY: SAN DIEGO STATE: CA ZIP: 92121 FORMER COMPANY: FORMER CONFORMED NAME: OTISVILLE BIOPHARM INC DATE OF NAME CHANGE: 19890310 FORMER COMPANY: FORMER CONFORMED NAME: OTISVILLE BIOTECH INC DATE OF NAME CHANGE: 19861216 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) - -------- OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1999 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) - -------- OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to__________ Commission File Number 0-12950 ALLIANCE PHARMACEUTICAL CORP. (Exact name of Registrant as specified in its charter) New York 14-1644018 - --------------------------------- ----------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 3040 Science Park Road San Diego, California 92121 - --------------------------------- ----------------------------------- (Address of principal Zip Code executive offices) Registrant's telephone number, including area code: 858/410-5200 ----------------------------------- Indicate by a check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes X No ------------- ------------- As of February 10, 2000, Registrant had 46,980,029 shares of its Common Stock, $.01 par value, outstanding. ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
INDEX Page No. - ----- -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II - OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities and Use of Proceeds 13 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 6. Exhibits and Reports on Form 8-K 15
2 PART I FINANCIAL INFORMATION: ITEM 1. FINANCIAL STATEMENTS
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, JUNE 30, 1999 1999 ---------------------- ---------------------- ASSETS (UNAUDITED) (NOTE) CURRENT ASSETS: Cash and cash equivalents $ 10,442,000 $ 19,081,000 Short-term investments 7,789,000 -- Research revenue receivable 1,050,000 4,875,000 Other current assets 217,000 413,000 ---------------------- ---------------------- Total current assets 19,498,000 24,369,000 PROPERTY, PLANT AND EQUIPMENT - NET 22,197,000 24,621,000 PURCHASED TECHNOLOGY - NET 10,601,000 11,361,000 RESTRICTED CASH 5,138,000 5,000,000 OTHER ASSETS - NET 675,000 633,000 ---------------------- ---------------------- $ 58,109,000 $ 65,984,000 ====================== ====================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 4,599,000 $ 4,910,000 Accrued expenses 4,564,000 4,280,000 Current portion of long-term debt 4,003,000 4,170,000 ---------------------- ---------------------- Total current liabilities 13,166,000 13,360,000 LONG-TERM DEBT 8,119,000 10,499,000 STOCKHOLDERS' EQUITY: Preferred stock - $.01 par value; 5,000,000 shares authorized; 500,000 shares of Series D issued and outstanding at December 31, 1999 and June 30, 1999 5,000 5,000 Common stock - $.01 par value; 75,000,000 shares authorized; 44,738,274 and 43,510,049 shares issued and outstanding at December 31, 1999 and June 30, 1999, respectively 447,000 435,000 Additional paid-in capital 376,905,000 368,409,000 Accumulated deficit (340,533,000) (326,724,000) ---------------------- ---------------------- Total stockholders' equity 36,824,000 42,125,000 ---------------------- ---------------------- $ 58,109,000 $ 65,984,000 ====================== ======================
Note: The balance sheet at June 30, 1999 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------------------------------------------------------------------ THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 1999 1998 1999 1998 ------------------ ------------------ ------------------ ------------------ (UNAUDITED) (UNAUDITED) REVENUES: License and research revenue $ 14,204,000 $ 1,048,000 $ 15,772,000 $ 6,148,000 OPERATING EXPENSES: Research and development 14,651,000 16,418,000 25,064,000 29,964,000 General and administrative 2,634,000 1,990,000 4,346,000 4,175,000 ------------------ ------------------ ------------------ ------------------ 17,285,000 18,408,000 29,410,000 34,139,000 ------------------ ------------------ ------------------ ------------------ LOSS FROM OPERATIONS (3,081,000) (17,360,000) (13,638,000) (27,991,000) INVESTMENT INCOME 312,000 532,000 522,000 1,167,000 INTEREST EXPENSE (320,000) (245,000) (693,000) (438,000) -------------------- ---------------- --------------- ------------------ NET LOSS (3,089,000) (17,073,000) (13,809,000) (27,262,000) IMPUTED DIVIDEND ON SERIES E-1 PREFERRED STOCK -- -- -- (483,000) ------------------ ------------------ ------------------ ------------------ NET LOSS APPLICABLE TO COMMON SHARES $ (3,089,000) $ (17,073,000) $ (13,809,000) $ (27,745,000) ================== ================== ================== ================== NET LOSS PER COMMON SHARE: BASIC AND DILUTED $ (0.07) $ (0.53) $ (0.31) $ (0.87) ================== ================== ================== ================== WEIGHTED AVERAGE SHARES OUTSTANDING: BASIC AND DILUTED 44,225,000 32,042,000 43,868,000 32,032,000 ================== ================== ================== ==================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - ---------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED DECEMBER 31, 1999 1998 ------------------- ------------------- (UNAUDITED) OPERATING ACTIVITIES: Net loss $ (13,809,000) $ (27,262,000) Adjustments to reconcile net loss to net cash used in operations: Depreciation and amortization 3,434,000 2,795,000 Expense associated with warrant issuance 441,000 -- Receipt of equity securities in exchange for technology (4,800,000) -- Issuance of common stock in exchange for technology 5,000,000 -- Changes in operating assets and liabilities: Research revenue receivable 3,825,000 3,972,000 Restricted cash and other assets 16,000 (79,000) Accounts payable and accrued expenses and other (27,000) 516,000 ------------------- ------------------- Net cash used in operating activities (5,920,000) (20,058,000) ------------------- ------------------- INVESTING ACTIVITIES: Purchases of short-term investments -- (23,711,000) Sales and maturities of short-term investments -- 38,663,000 Property, plant and equipment (123,000) (3,207,000) ------------------- ------------------- Net cash provided by (used in) investing activities (123,000) 11,745,000 ------------------- ------------------- FINANCING ACTIVITIES: Issuance of common stock 78,000 -- Issuance of convertible preferred stock -- 5,583,000 Proceeds from long-term debt -- 5,050,000 Principal payments on long-term debt (2,674,000) (357,000) ------------------- ------------------- Net cash provided by (used in) financing activities (2,596,000) 10,276,000 ------------------- ------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,639,000) 1,963,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,081,000 11,809,000 ------------------- ------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,442,000 $ 13,772,000 =================== =================== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Deferred interest expense on long-term debt $ 127,000 $ -- Imputed dividend on preferred stock -- 483,000
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5 ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Alliance Pharmaceutical Corp. and its subsidiaries (collectively, the "Company" or "Alliance") are engaged in identifying, designing, and developing novel medical products. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Alliance Pharmaceutical Corp., its wholly owned subsidiary Astral, Inc., its wholly owned subsidiary MDV Technologies, Inc. ("MDV") from the acquisition date of November 1996, its wholly owned subsidiary Alliance Pharmaceutical GmbH from its inception in December 1998, and its majority-owned subsidiary Talco Pharmaceutical, Inc. All significant intercompany accounts and transactions have been eliminated. Certain amounts in fiscal 1999 have been reclassified to conform to the current year's presentation. INTERIM CONDENSED FINANCIAL STATEMENTS The condensed consolidated balance sheet as of December 31, 1999, the condensed consolidated statements of operations for the three and six months ended December 31, 1999 and 1998, and the condensed consolidated statements of cash flows for the six months ended December 31, 1999 and 1998 are unaudited. In the opinion of management, such unaudited financial statements include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results for the periods presented. Interim results are not necessarily indicative of the results to be expected for the full year. The financial statements should be read in conjunction with the Company's consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 1999. PURCHASED TECHNOLOGY The purchased technology was primarily acquired as a result of the merger of Fluoromed Pharmaceutical, Inc. into a subsidiary of the Company in fiscal 1989. The technology acquired is the Company's core perfluorochemical ("PFC") technology and was valued based on an analysis of the present value of future earnings anticipated from this technology at that time. The Company identified alternative future uses for the PFC technology, including the OXYGENT(TM) (temporary blood substitute) and LIQUIVENT(R) (intrapulmonary oxygen carrier) products. The PFC technology is the basis for the Company's main drug development programs and is being amortized over a 20-year life. The PFC technology has a book value of $10.6 million and $11.2 million, net of accumulated amortization of $12.6 million and $12 million at December 31 and June 30, 1999, respectively. 6 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. COMPREHENSIVE INCOME AND LOSS Effective July 1, 1998, the Company adopted the Financial Accounting Standards Board's Statement No. 130, Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of SFAS No. 130 had no impact on the Company's net loss or stockholders' equity. SFAS No. 130 requires unrealized gains and losses on the Company's available-for-sale securities to be included in comprehensive income. During the three months ended December 31, 1999 and 1998, the total comprehensive loss, which includes the unrealized gain or loss on available-for-sale securities, was $100,000 and $17,079,000, respectively. During the six months ended December 31, 1999 and 1998, the total comprehensive loss, which includes the unrealized gain or loss on available-for-sale securities, was $10,820,000 and $27,285,000, respectively. NET INCOME (LOSS) PER SHARE The Company computes net loss per common share in accordance with Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 requires the presentation of basic and diluted earnings per share amounts. Basic earnings per share is calculated based upon the weighted average number of common shares outstanding during the period while diluted earnings per share also gives effect to all potential dilutive common shares outstanding during the period such as common shares underlying options, warrants, and 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. 2. SALE OF TECHNOLOGY In November 1999, the Company completed the sale of certain aspects of its PULMOSPHERES(R) technology to Inhale Therapeutic Systems, Inc. ("Inhale") for $15 million in cash and $5 million in common stock of Inhale, plus additional future milestone and royalty payments. In consideration for retaining certain rights to use the technology, Alliance issued $5 million in Alliance common stock to Inhale. 3. SUBSEQUENT EVENT On February 11, 2000, the Company signed an agreement with certain investors to purchase $15 million in principal amount of four-year 5% subordinated convertible debentures. When issued, the debentures will be convertible at any time at each investor's option into shares of Alliance common stock at $9.65 per share, subject to certain antidilution provisions. The Company will have certain rights to cause the debentures to convert into common stock. The investors will have the option at any time to purchase, and the Company will have certain rights to require 7 the investors to purchase, an additional $15 million of four-year 5% subordinated convertible debentures, convertible into Alliance common stock at $12.06 per share. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (References to years are to the Company's fiscal years ended June 30.) Alliance has devoted substantial resources to research and development related to its medical products. The Company has been unprofitable since inception and expects to incur operating losses for at least the next several years due to substantial spending on research and development, preclinical testing, clinical trials, regulatory activities, and commercial manufacturing start-up. The Company has collaborative research and development agreements for IMAGENT(R) and RODA(TM). Under the arrangement for IMAGENT, Schering AG, Germany ("Schering") has agreed to reimburse the Company for some of its development expenses. Schering will also make milestone payments to the Company upon the achievement of certain product development events, followed by royalties on sales at commercialization. With respect to RODA, the Company has agreed to reimburse VIA Medical Corporation ("VIA") for substantially all of its development expenses and to share revenues from the sale of products. 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 December 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 January 1997, the Company entered into a loan and security agreement with a bank under which the Company received $3.5 million. In June 1998, the Company restructured the loan to provide for up to $15 million. Amounts borrowed are secured by a $5 million restricted certificate of deposit, by certain fixed assets and patents, and are to be repaid over four years. If certain financial covenants are not satisfied, the outstanding balance may become due and payable. On December 31, 1999, the balance outstanding on this loan was approximately $10.9 million. In May 1999, the Company issued $1.8 million in principal amount of subordinated convertible notes. On February 8, 2000, the Company caused the notes to be converted into 900,000 shares of common stock of the Company. In November 1999, the Company completed the sale of certain aspects of its PULMOSPHERES technology to Inhale for $15 million in cash and $5 million in common stock (180,099 shares) of Inhale, plus the right to receive additional future milestone and royalty payments. In consideration for retaining certain rights to use the technology, Alliance issued $5 million in Alliance common stock to Inhale. As of December 31, 1999, the value of the common stock received from Inhale was recorded as $7 million after an adjustment to reflect the market value, however; the shares have not yet been registered for resale with the Securities and Exchange Commission. In September 1997, the Company entered into a license agreement (the "Schering License Agreement") with Schering, which provides Schering with worldwide exclusive marketing and manufacturing rights to Alliance's drug compounds, drug compositions, and medical devices and systems related to perfluorocarbon ultrasound imaging products, including IMAGENT. The product 8 is being developed jointly by Alliance and Schering. Under the Schering License Agreement, Schering paid to Alliance in 1998 an initial license fee of $4 million, and agreed to pay further milestone payments and royalties on product sales. Schering is also providing funding to Alliance for some of its development expenses related to IMAGENT. In conjunction with the Schering License Agreement, Schering Berlin Venture Corp., an affiliate of Schering, purchased 500,000 shares of the Company's convertible Series D Preferred Stock for $10 million, which was converted on February 2, 2000 into 1,000,000 shares of common stock of the Company. In June 1997, the Company sold $2.5 million in clinical trial supplies to Hoescht Marion Roussel, Inc. ("HMRI") and recorded it as deferred revenue. In September 1999, HMRI agreed to sell and Alliance agreed to purchase the clinical trial supplies for up to $3 million over time and under certain circumstances. The Company had net working capital of $6.3 million at December 31, 1999, compared to $11 million at June 30, 1999. The Company's cash, cash equivalents, and short-term investments decreased to $18.2 million at December 31, 1999 from $19.1 million at June 30, 1999. The decrease resulted primarily from net cash used in operations of $5.9 million and principal payments on long-term debt of $2.7 million, partially offset by the equity securities received from the sale of technology to Inhale. 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 and estimated net proceeds of $14.5 million from the convertible debenture offering will be adequate to satisfy its capital requirements through at least fiscal 2000. The Company's future capital requirements will depend on many factors, including, but not 9 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 U.S. Food and Drug Administration ("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 computer systems and software products created prior to January 1, 2000 were coded to accept only two-digit entries in the date code field. Beginning in the year 2000, these date code fields need to accept four-digit entries to distinguish the 21st century dates from 20th century dates. As a result, computer systems and/or software used by many companies needed to be upgraded to comply with such "Year 2000" requirements. Management has a continuing Year 2000 program. Although the Company had no material problems in the rollover from December 31, 1999 to January 1, 2000, the program will continue to monitor internal systems for future dates in 2000 which could cause system failures. As of December 31, 1999, the Company determined that all critical and most non-critical internal systems, software and embedded chips were compliant or replaced those that were not compliant. The Company received compliance confirmations from over 75% of its critical third-party suppliers, contractors and vendors (collectively, "contractors") with respect to their computers, software and systems, and it believes that none of its contractors had material problems in the rollover from December 31, 1999 to January 1, 2000. However, no assurances can be given that the Company's internal systems or contractors' systems will not have operational problems in the future or be compliant. The Company's costs for its Year 2000 program to date have not been material and are expected to total less than $400,000. 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 not fail in the future and 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 10 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 SIX MONTHS ENDED DECEMBER 31, 1999 AS COMPARED WITH SIX MONTHS ENDED DECEMBER 31, 1998 The Company's license and research revenue increased by $9.6 million to approximately $15.8 million for the six months ended December 31, 1999, compared to $6.1 million for the six months ended December 31, 1998. The increase is primarily a result of the proceeds from the sale of technology to Inhale. The Company expects research revenue for fiscal 2000 to increase when compared to fiscal 1999, due to the revenue from the Inhale transaction. Research and development expenses decreased by 16% to $25.1 million for the six months ended December 31, 1999, compared to $30 million for the six months ended December 31, 1998. The decrease in expenses was primarily due to a $2.8 million decrease in payments to 11 outside researchers for preclinical and clinical trials and other product development work, a $1.6 million decrease in staffing costs for employees engaged in research and development activities, as well as other decreases related to the Company's research and development activities. General and administrative expenses increased by approximately 4% to $4.3 million for the six months ended December 31, 1999, compared to $4.2 million for the six months ended December 31, 1998. The increase in general and administrative expenses was primarily due to increased professional fees resulting from partnering activities. Investment income was $522,000 for the six months ended December 31, 1999, compared to $1.2 million for the six months ended December 31, 1998. The decrease was primarily a result of lower average cash and short-term investment balances. Interest expense was $693,000 for the six months ended December 31, 1999, compared to $438,000 for the six months ended December 31, 1998. The increase was primarily a result of higher average long-term debt balances. THREE MONTHS ENDED DECEMBER 31, 1999 AS COMPARED WITH THREE MONTHS ENDED DECEMBER 31, 1998 The Company's license and research revenue increased by $13.2 million to $14.2 million for the three months ended December 31, 1999, compared to $1 million for the three months ended December 31, 1998. The increase is primarily a result of the proceeds from the sale of technology to Inhale. The Company expects research revenue for fiscal 2000 to increase when compared to fiscal 1999, due to the revenue from the Inhale transaction. Research and development expenses decreased by approximately 11% to $14.7 million for the three months ended December 31, 1999, compared to $16.4 million for the three months ended December 31, 1998. The decrease in expenses was primarily due to a $1.2 million decrease in payments to outside researchers for preclinical and clinical trials and other product development work, a $380,000 decrease in supplies and chemical costs, as well as other decreases related to the Company's research and development activities. General and administrative expenses were $2.6 million for the three months ended December 31, 1999, compared to $2 million for the three months ended December 31, 1998. The increase in general and administrative expenses was primarily due to increased salaries and wages and increased professional fees resulting from partnering activities. Investment income was $312,000 for the three months ended December 31, 1999, compared to $532,000 for the three months ended December 31, 1998. The decrease was primarily a result of lower average cash and short-term investment balances. Interest expense was $320,000 for the three months ended December 31, 1999, compared to $245,000 for the three months ended December 31, 1998. The increase was primarily a result of higher average long-term debt balances. 12 Alliance expects to continue to incur substantial expenses associated with its research and development programs. Operating losses may fluctuate from quarter to quarter as a result of differences in the timing of revenues earned and expenses incurred and such fluctuations may be substantial. The Company's historical results are not necessarily indicative of future results. PART II OTHER INFORMATION: ITEM 1. LEGAL PROCEEDINGS In the quarterly report on Form 10-Q for the period ended September 30, 1999, the Company announced that HMRI dismissed arbitration proceedings filed against the Company in September 1998 in connection with its termination of the license agreement with HMRI and agreed to sell certain raw materials to Alliance. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On November 4, 1999, the Company issued 1,134,738 shares of common stock to Inhale in exchange for the right, valued at $5 million, to use certain technology sold by the Company to Inhale. The stock was issued in a transaction exempt from registration with the Securities and Exchange Commission ("SEC") and under Section 4(2) of the Securities Act of 1933, as amended (the "Act"). On November 15, 1999, the Company issued to Burrill & Company a warrant for 250,000 shares exercisable at $4.375 per share at any time before November 15, 2004. 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) of the Act. 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS An annual meeting of shareholders was held on December 10, 1999. The following directors were re-elected for the following year and until the election and qualification of their respective successors:
Broker Director For Against Withheld Non-votes -------- --- ------- -------- --------- Pedro Cuatrecasas, M.D. 32,687,988 0 5,414,703 0 Carroll O. Johnson 32,684,135 0 5,418,556 0 Stephen M. McGrath 32,687,688 0 5,415,003 0 Donald E. O'Neill 32,681,568 0 5,421,123 0 Helen M. Ranney, M.D. 32,681,288 0 5,421,403 0 Jean G. Riess, Ph.D. 32,684,383 0 5,418,308 0 Duane J. Roth 32,686,405 0 5,416,286 0 Theodore D. Roth 32,680,405 0 5,422,286 0 Thomas F. Zuck, M.D. 32,686,642 0 5,416,049 0
The shareholders of the Company voted to amend the 1991 Stock Option Plan of the Company to increase the number of shares available for issuance thereunder in accordance with the following vote: 25,615,052 For 10,578,028 Against 697,801 Withheld 1,211,810 Broker Non-Votes ---------------- --------------- -------------- --------------
The shareholders of the Company voted to ratify the appointment of Ernst & Young LLP as independent auditors of the Company for its fiscal year ending June 30, 2000 in accordance with the following vote: 37,869,030 For 155,783 Against 77,878 Withheld 0 Broker Non-Votes ---------------- --------------- -------------- --------------
14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10. Supply Agreement dated as of July 9, 1999 between the Company and Fluoromed L.P. (b) Reports on Form 8-K The Company filed a current report on Form 8-K dated November 4, 1999 stating that it had completed the transfer to Inhale Therapeutic Systems, Inc. of Alliance's PulmoSpheres particle and particle-processing technology and other related assets for use in respiratory drug delivery. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALLIANCE PHARMACEUTICAL CORP. (Registrant) \s\ TIM T. HART ----------------------------- Tim T. Hart Chief Financial Officer and Treasurer Date: February 11, 2000 16 Alliance Pharmaceutical Corp. Form 10-Q EXHIBIT INDEX The following exhibits are being filed herewith:
Number Document ------ ----------------------------------------------------------------- 10. Supply Agreement dated as of July 9, 1999 between the Company and Fluoromed L.P. *
* A request for confidential treatment of certain portions of this exhibit has been filed with the Securities and Exchange Commission. 17 EX-10 2 EXHIBIT 10 Exhibit 10 SUPPLY AGREEMENT THIS SUPPLY AGREEMENT ("this Agreement"), effective as of the date of the latest signature below, is entered into by ALLIANCE PHARMACEUTICAL CORP. ("APC"), located at 3040 Science Park Road, San Diego, California 92121 and FLUOROMED L.P. ("FMLP"), located at 2350 Double Creek Drive, Round Rock, Texas 78664. RECITALS A. APC is developing a proprietary ultrasound contrast agent for use in echocardiological and radiological diagnostic applications ("the Product"), a key component of which is neat medical-grade perfluorohexane ("MG-PFH"), as more particularly described in Exhibit A. B. FMLP possesses the expertise to manufacture neat medical-grade perfluorohexane and has developed the processes necessary to manufacture MG-PFH in commercial quantities from chemical raw materials. C. APC and FMLP desire to enter into this Agreement to provide for FMLP's supply of MG-PFH to meet APC's clinical research, regulatory and commercial manufacturing requirements. THEREFORE, in consideration of the mutual promises contained in the following provisions, the parties agree as follows: Article 1. DEFINITIONS The following terms have these definitions and are incorporated in this Agreement by this reference: 1.1 CONTRACT YEAR. "Contract Year" means (a) the four-Quarter year beginning with the first Quarter following the FDA Approval Quarter or (b) any subsequent four-Quarter year beginning on the anniversary of the first day of the first Contract Year. 1.2 FDA APPROVAL. "FDA Approval" means the FDA's approval of APC's NDA (New Drug Application) for the Product. 1.3 FDA APPROVAL QUARTER. "FDA Approval Quarter" means the Quarter in which FDA Approval occurs. 1.4 APC means collectively APC and APC Affiliates. 1.5 APC AFFILIATE. "APC Affiliate", means (a) any wholly-owned direct or indirect subsidiary of APC, (b) any other corporation in which APC directly or indirectly owns more than 50% of the voting stock or (c) any partnership or joint venture in which APC directly or indirectly owns more than a 50% interest. * INDICATES CONFIDENTIAL INFORMATION WHICH HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 1.6 PRODUCT LAUNCH. "Product Launch" means the first commercial sale of the Product following FDA Approval and test marketing, if any. 1.7 PFH MICROBUBBLE. "PFH Microbubble" means any discrete entity containing gaseous or vaporous PFH dispersed in a liquid continuous phase. 1.8 QUARTER. "Quarter" means (a) the three-month period ending with the month in which FDA Approval occurs or (b) any prior or subsequent three-month period. 1.9 FDA. The United States Food and Drug Administration. 2.0 OTHER. The following terms have the meanings given in the designated paragraphs:
Term Paragraph No. ---- ------------- FMLP Claims and Losses 8.6 CDA 6.1 Field 2.8 First Renewal Term 7.1 Foreign DMF 5.3 Initial Term 7.1 Pre-Launch Period 2.2 Price Schedule 3.3 Release 3.5 Renewal Term 6.1 Second Renewal Term 6.1 Specification 3.1 Supply Cylinder 3.8 Unspecified Constituents 8.1
Article 2. SUPPLY OF MG-PFH 2.1 DEVELOPMENT QUANTITIES. Until the start of the Pre-Launch Period, FMLP shall supply MG-PFH to APC as follows: (a) GENERAL. FMLP shall use its best efforts to supply MG-PFH in such reasonable quantities as APC reasonably orders to enable it to perform preclinical and clinical trials of the Product. (b) SHIPMENT. FMLP shall use its best efforts to supply MG-PFH to APC under this Paragraph 2.1 in accordance with APC firm written purchase orders, and shall ship each order on or before the date specified in APC's purchase order, provided such date is agreeable to both parties, but no later than 90 days after the date of receipt of APC's purchase order. In no event, however, shall FMLP be required to ship an order earlier than 30 days after the date of receipt of APC's purchase order. 2 2.2 PRODUCT LAUNCH QUANTITIES. APC wants to be in a position to initiate Product Launch as soon as practicable following FDA Approval. To this end, during the period (the "Pre-Launch Period") from completion of a successful pre-approval inspection ("PAI") by the FDA, if any, of FMLP's facility to ensure that it is in compliance with good manufacturing practices with respect to the MG-PFH production, through the end of FDA Approval Quarter, and subject to the final paragraph of this Paragraph 2.2, FMLP shall supply MG-PFH to APC as follows: (a) GENERAL. FMLP shall use all reasonable efforts to supply MG-PFH in such quantities as APC orders to enable APC to have an inventory of Product on hand that it determines to be adequate to meet anticipated demand following the Product Launch. (b) SHIPMENT. FMLP shall use all reasonable efforts to supply MG-PFH to APC under this Paragraph 2.2 in accordance with APC's written purchase orders issued at any time during the Pre-Launch Period (or prior to such Pre-Launch Period as the parties may mutually agree), and shall use all reasonable efforts to ship each order on or before the date specified in APC's purchase order, as agreed to between the parties, but no later than 90 days after the date of receipt of APC's purchase order. In no event, however, shall FMLP be required to ship an order earlier than 45 days after the date of receipt of APC's purchase order. (c) MAXIMUM REQUIRED SUPPLY. At the time of APC's New Drug Application APC will forecast its requirements for MG-PFH supply during the Pre-Launch Period and FMLP shall not be required to supply * of such APC forecast during the Pre-Launch Period. The parties acknowledge that the period during which PAI approval, FDA Product Approval, and Product Launch takes place is one of uncertainty and rapidly changing strategies, forecasts, and production plans. The parties acknowledge that it is extremely difficult to predict APC's MG-PFH requirements and FMLP's MG-PFH capacity and processing time during this period of high uncertainty and evolving plans. Accordingly, they agree that this Paragraph 2.2 shall strictly be treated as a general guideline to be observed under reasonable circumstances. Otherwise, the parties shall reasonably consult and cooperate with respect to APC's needs and FMLP's capacity in advance of Product Launch to ensure that APC's requirements may be met in a timely fashion. 2.3 COMMERCIAL QUANTITIES. Each Quarter beginning with the first Quarter following the FDA Approval Quarter, FMLP shall supply MG-PFH to APC as follows: (a) GENERAL. Subject to Paragraph 2.7, FMLP shall supply, and if FMLP is not in Default (as defined in Section 7.2(c) or otherwise failed to deliver the quantity of MG-PFH ordered (notwithstanding the * limitation) APC shall purchase from FMLP, * * of MG-PFH for the Product. FMLP shall not be required to supply a greater amount of MG-PFH during the Quarter than * of APC's first estimate of its requirements for the Quarter provided to FMLP pursuant to Paragraph 2.6. 3 (b) SHIPMENT. FMLP shall supply MG-PFH to APC under this Paragraph 2.3 in accordance with this Agreement and APC's written purchase orders issued at any time following FDA Approval, and shall ship each order on or before the date 120 days from the date of order placement or earlier as agreed to between the parties and subsequently specified on the purchase order. In no event, however, shall FMLP be required to ship an order earlier than 45 days after the date of receipt of APC's purchase order, if such order quantities are not in inventory on the date of order. (c) MINIMUM ORDER. Each APC purchase order shall be for a minimum of * of MG-PFH. 2.4 FMLP INVENTORY. Each Quarter beginning with the first Quarter following FDA Approval Quarter, unless APC is in default, FMLP shall maintain a finished inventory of MG-PFH equal at all times to * during the preceding four Quarters (whether or not in fact supplied by FMLP in a timely manner). The risk of inventory becoming unusable as a result of changes in Specifications, cGMP, or APC demand for said inventory shall be born entirely by APC. Inventory shall be rotated on a "First in First Out" basis by FMLP to reduce such aforementioned risks of said inventory becoming unusable. APC agrees that with respect to any finished inventory required to be maintained by FMLP hereunder and which has been maintained by FMLP for in excess of * , APC shall purchase such inventory within thirty (30) days of a written request by FMLP. 2.5 FMLP SUPPLY CAPACITY. FMLP represents and warrants that its existing facility has and will maintain the capacity to produce * of MG-PFH per month, and, unless APC is in default under this Agreement, within ninety (90) days of a written request by APC, said request based upon APC's estimated needs for additional manufacturing capacity, such capacity will be increased and maintained at up to * of MG-PPH per month. Each Quarter beginning with the first Quarter following the FDA Approval Quarter, FMLP shall maintain the capacity to supply, during the current Quarter and each of the next three Quarters, * of APC's first estimate of its requirements for each of those Quarters provided to FMLP pursuant to Paragraph 2.6. 2.6 APC FORECASTS. No later than 30 days after submission of the NDA for the Product, APC shall Provide FMLP with an estimate of APC's expected requirements of MG-PFH during the first Quarter following the FDA Approval Quarter and each of the next three Quarters. At least 30 days prior to the start of the next Quarter (the second Quarter following the FDA Approval Quarter) and each subsequent Quarter, APC shall provide FMLP with an estimate of APC's expected requirements of MG-PFH during that Quarter and each of the next three Quarters. Each four-Quarter estimate after the first one may revise the estimates that APC previously made in respect of the first three Quarters. During APC's early Quarters of commercial manufacturing of the Product, APC, as reasonable, shall consult more frequently with FMLP concerning its expected requirements and changes to APC's prior forecasts. Such forecasts shall be made in good faith but shall not be regarded as firm purchase orders pursuant to Paragraph 3.5. 4 2.7 APC PURCHASE REQUIREMENTS. APC shall purchase MG-PFH from FMLP as follows: (a) PURCHASE OBLIGATION. Unless FMLP is in Default under this Agreement APC shall purchase * of MG-PFH for the Product from FMLP in accordance with this Agreement. (b) RIGHTS TO MANUFACTURE. Provided there has been no Default by FMLP under this Agreement APC agrees, during the term hereof that it will * for MG-PFH from FMLP on the same terms contained in this Agreement. (c) COMPLIANCE. APC's compliance at any time with this Purchase obligation shall be determined by reference to the aggregate quantity of MG-PFH that APC has ordered from FMLP and all other sources during the current Quarter to date and the preceding three Quarters. (d) MODIFICATION. APC's purchase obligation under Subparagraph (a) may be terminated by APC by written notice; (1) If and when, for any reason, FMLP is in Default or unable to supply all of APC's requirements of MG-PFH in the amounts and by the delivery dates specified in APC's purchase orders (subject to the limitations in Paragraphs 2.1, 2.2 and 2.3 on the earliest date that FMLP may be required to ship any order); provided that the purchase obligation may be terminated only after a Default has occurred more than once (1) per year: provided further that if orders exceed the maximum amounts FMLP is required to deliver (i.e. * of previous estimate), FMLP shall be given a reasonable time to produce or increase capacity as may be necessary to provide the requested orders. However, FMLP shall be given a reasonable time as may be necessary to make changes to comply with any changes in the MG-PFH manufacturing techniques, specifications or analytical procedures requested or mandated by APC or any federal agency. (2) At such time as FMLP may give formal notice of termination under Paragraph 7.2(d). Upon the giving of such notice, the aforementioned purchase obligation is reduced * in the first two (2) years after notice and to * in the third year. (e) RESEARCH AMOUNTS. Notwithstanding anything herein to the contrary, APC may purchase MG-PFH from other parties for internal research purposes. 2.8 APC MINIMUM PURCHASES. Pursuant to APC purchase forecasts pursuant to Paragraph 2.6, APC shall purchase from FMLP a minimum amount * (pro rata for partial years) until FDA Approval and * thereafter. Additionally, FMLP shall not sell or otherwise provide MG-PFH to any person or entity for any intravenous formulation comprising PFH Microbubbles or formulations capable of forming PFH Microbubbles upon intravenous administration as long as all minimum purchase 5 amounts in above are purchased by APC and/or APC licensees from FMLP. Should the above minimum purchases not be maintained for reasons other than a Default by FMLP, FMLP shall not be restricted in any manner in its sales and supply of MG-PFH to others. APC's obligation to purchase these minimum purchase amounts is subject to the following conditions and limitations: (a) COMPLIANCE. The determination whether APC has purchased the minimum amount of MG-PFH each year until FDA Approval and each Contract Year thereafter shall be determined by each year's cumulative shipments of MG-PFH that are shipped in compliance with APC's purchase order shipment dates and volumes (pounds of MG-PFH) from FMLP. FMLP shipments that are shipped later than APC requested shipment dates and would result in APC not complying with the annual minimum purchase amounts will, for the purposes of calculating minimum purchase, be deemed to have been shipped on the requested delivery date. Said purchase order shipment dates shall comply with paragraphs 2.2(b), and 2.3(b) and (c). (b) PURCHASE OF REQUIRED BALANCE. If APC fails to issue purchase orders for the required minimum amount of MG-PFH during any year, APC shall issue a purchase order for the balance of the MG-PFH that it was required to purchase no later than 30 days after the end of the year. This purchase order shall not be considered to relate to the then current year and shall not be taken into account in determining whether APC has issued purchase orders for the required minimum amount of MG-PFH during such current year (except to the extent that it orders a quantity of MG-PFH in excess of the balance of MG-PFH that APC is required to purchase). The price at which MG-PFH shall be sol- d to APC pursuant to this purchase order for required minimum amount of MG-PFH purchase order shall be the price in effect as of the last day of the year to which the purchase order relates (except, again, to the extent that it orders a quantity of MG-PFH in excess of the balance that APC is required to purchase, for which the price shall be the price in effect at the time that the purchase order is issued). Said purchase order shall have a delivery date of the earliest date that FMLP can ship the MG-PFH. (c) EQUITABLE REDUCTION. If during any year APC's purchase obligation under Paragraph 2.7(a) is suspended for any reason for any period, the minimum amount of MG-PFH that APC is required to purchase during the year shall be reduced as appropriate to reflect such suspension. (d) NO APPROVAL. If, by * , the Product has not received FDA Approval, APC's minimum purchase obligations shall terminate and FMLP shall be free without the limitations set forth earlier in this Paragraph 2.8 to sell MG-PFH to others, even if sale of MG-PFH to "others" includes "others" usage of MG-PFH for any intravenous formulation comprising PFH Microbubbles or formulations capable of forming PFH Microbubbles upon intravenous administration. Nothing herein shall be deemed to be a grant of any license or other right to any party, including FMLP, to any patents, patent applications, know-how or other technology of APC. 6 2.9 APC LICENSEES. If any current or future licensee of APC desires under the terms of its license the right to manufacture the Product utilizing MG-PFH as a key ingredient (either for sale to APC or for sale to sublicensees, distributors or directly to end users), APC shall: (a) * , (b) Notify FMLP of any such licensee(s)' intent to exercise the right to manufacture the Product utilizing MG-PFH, (c) Obtain a meeting for FMLP with such licensee(s) and/or sublicensee(s) to discuss MG-PFH supply, and (d) Recommend the merits of FMLP MG-PFH to its licensee(s) and/or sublicensee(s) if consistent with APC's actual experience of FMLP's performance of this Agreement. Article 3. TERMS OF SUPPLY 3.1 SPECIFICATION. All MG-PFH which FMLP supplies shall meet or exceed the specification set forth in Exhibit A (the "Specification"). 3.2 MANUFACTURING. All MG-PFH that FMLP supplies shall be manufactured as follows: (a) EARLY DEVELOPMENT QUANTITIES. All MG-PFH which FMLP supplies pursuant to orders under Paragraph 2.1 prior to establishment of a DMF as described in Article 5 shall be manufactured in compliance with or pursuant to such process methodologies, standards, and controls and the like as APC and FMLP shall jointly determine to be required or appropriate, and in compliance with or pursuant to all required regulatory validations, permits, registrations, licenses and approvals. (b) DEVELOPMENT, PRODUCT LAUNCH AND COMMERCIAL QUANTITIES. All MG-PFH which FMLP supplies pursuant to orders under Paragraphs 2.1, (subsequent to the filing of a DMF) 2.2 or 2.3 shall be manufactured in compliance with or pursuant to (i) FMLP's DMF for MG-PFH, (ii) all applicable current good manufacturing practices, (iii) all other applicable FDA regulations or requirements, (iv) all other applicable federal, state and local laws and regulations and (v) all required FDA and other regulatory validations, permits, registrations, licenses and approvals. (c) SUBCONTRACTOR. If, after the Product Launch, FMLP desires to subcontract the manufacturing of commercial quantities of MG-PFH to a qualified subcontractor with special expertise in current good manufacturing practice procedures and specialty chemical manufacturing, then FMLP shall request that APC authorize the proposed subcontracting arrangement sufficiently in advance of the proposed effective date of the subcontracting arrangement so that there will be no interruption in the supply of MG-PFH. APC will not 7 unreasonably withhold or delay its authorization so long as APC is not required to amend its NDA or IND due to the proposed subcontracting (or if APC elects to amend such filings, the FDA approves such amendments) and APC is furnished reasonably in advance of the proposed effective date of the subcontract with the following: (1) evidence of a technology transfer to the proposed subcontractor; (2) evidence of the proposed subcontractor's experience and qualifications; (3) adequate assurances that APC can continue, without interruption, to reference an accepted DMF in accordance with Paragraph 5.2, notwithstanding the subcontracting arrangement; (4) an agreement by the subcontractor to abide by all of the terms and conditions of this Agreement; and (5) any other agreement from the subcontractor required by APC to ensure compliance with this Agreement and APC's right to inspect the subcontractor's facilities and perform vendor audits. If any Subcontracting arrangement is authorized, FMLP shall remain primarily responsible for the performance of this Agreement and shall be responsible for supervising the subcontractor. This Section 3.2 does not authorize FMLP to disclose any confidential information of APC to any party without the prior written consent of APC. 3.3 PRICE. The price of each order of MG-PFH shall be as follows: (a) DEVELOPMENT QUANTITIES, For orders of MG-PFH under Paragraph 2.1 the price shall be * . (b) PRODUCT LAUNCH QUANTITIES. For orders of MG-PFH under Paragraph 2.2, the price shall be determined in accordance with the Price Schedule attached as Exhibit B ("Price Schedule"). * . (c) COMMERCIAL QUANTITIES. For orders of MG-PFH under Paragraph 2.3, the price during the first Contract Year shall be determined in accordance with the Price Schedule that was in effect for Product Launch quantities on the last day of the Pre-Launch Period. The Price Schedule is subject to increase after the first Contract Year as provided in Paragraph 3.4. 3.4 PRICE CHANGES. (a) After * , whichever is earlier, FMLP may increase the price for commercial quantities of MG-PFH * since the effective date of the last price change. Price increases are meant to * and shall be deemed a reasonable manner of price change. FMLP shall determine * . FMLP shall give APC written notice of any price change, which shall be effective as of the date specified in FMLP's notice or 30 days after APC's receipt of the notice, whichever is later, and shall provide with its notice an explanation in reasonable detail of the manner in which the price increase was determined. Should any FMLP price increase pursuant to this Paragraph 3.4 * 8 * . Upon APC's submission,* and this agreement shall continue until its defined expiration in Article 7. * . Upon APC's purchase of commercial quantities exceeding * from another company, * (b) In the event that FMLP should sell * . 3.5 APC PURCHASE ORDERS. A specific commitment to purchase MG-PFH shall be established by APC's issuance of a Purchase Order against this Agreement ("Release"). A Release will, by reference, incorporate the pricing, delivery, Specification and other terms and conditions contained herein. The parties hereto agree that the supply of MG-PFH by FMLP hereunder shall be subject to and governed by the terms and conditions herein. None of the prices, specifications, terms or conditions set forth on any purchase or order form, invoice or like document shall change, modify, delete or add to the provisions of this Agreement, unless mutually agreed to by the parties in writing. Each APC Release shall be considered firm, and shall not be subject to change or cancellation without FMLP's written consent. For purposes of determining when a Release has been issued, it shall be considered to have been issued on the date that it bears if it is received by FMLP no later than the fourth business day following that date; if it is received later than the fourth business day, it shall be considered to have been issued when received by FMLP. The orders will be binding upon acceptance by FMLP; such acceptance not to be unreasonably withheld or delayed. FMLP shall give APC prompt notice in writing of its rejection of any Release. FMLP's failure to give such notice within 30 days after issuance of the Release or its commencement of any work on the Release shall constitute its acceptance of the order. 3.6 PAYMENT. APC's payment for all orders of MG-PFH and other charges agreed to in this Agreement shall be paid within 30 days after receipt of FMLP's invoice, payable to FMLP's office in Round Rock, Texas. FMLP shall not invoice APC for MG-PFH until the MG-PFH has been shipped from FMLP to the address specified in APC's purchase order. In the event overdue invoices are outstanding, FMLP will not be required to make additional shipments. Payment shall be made in U.S. dollars. In the event APC fails at any time to pay any amount owing under this Agreement when due, in addition to any rights FMLP may have at law or in equity, after ten days written notice, FMLP shall have the right to require full or partial payment in advance on all future orders and/or revoke any credit previously extended and require immediate payment of any 9 outstanding invoices from FMLP. In addition, overdue amounts shall accrue interest at a rate of 2% per month or the maximum legal rate, if lower. 3.7 SHIPMENT. FMLP shall ship, FOB FMLP shipping point, each order of MG-PFH to the destination specified in APC's Release, or if no destination is specified, to APC at 6175 Lusk Boulevard, San Diego, California 92121. APC may specify in its Release the common carrier to be used, subject to FMLP's approval in its reasonable discretion. If APC fails to specify a common carrier, or if FMLP, in its reasonable discretion, does not approve of the common carrier specified, FMLP shall select the common carrier. All freight and insurance charges on each order of MG-PFH shall be paid by APC as "Collect" or "Third Party Billing" freight charges. 3.8 Supply CYLINDERS. FMLP shall ship all orders of MG-PFH in FMLP's own reusable stainless steel cylinders holding * (the "Supply Cylinder"). FMLP shall dedicate these Supply Cylinders to the purpose of supplying MG-PFH to APC and shall clean and prepare each cylinder before use to prevent contamination or loss of contents. APC shall promptly return each cylinder, with valves securely closed to FMLP when empty, in substantially the same condition in which it was received, reasonable wear and tear excepted, and shall prepay the related freight and insurance charges. All Supply Cylinders shall be returned to FMLP within six months to avoid cylinder rental charges, per Exhibit B. Lost or severely damaged Supply Cylinders shall be subject to replacement at APC's expense, per rates shown in Exhibit B. APC shall take reasonable precautions to prevent material of any type from being introduced into the cylinder while it is in APC's possession. Lost Supply Cylinders are cylinders that have not been returned to FMLP within one year of APC's receipt thereof. If foreign matter is introduced to the Supply Cylinders, APC will pay * for cleaning the contaminated Supply Cylinders, and if the contaminated Supply Cylinders cannot be cleaned for continued MG-PFH service for APC, the Supply Cylinders will be charged to APC per rates shown in Exhibit B. 3.9 TAXES AND DUTIES. APC shall pay any and all applicable sales or use taxes in connection with any order of MG-PFH. Any other tax (other than income taxes), howsoever denominated and howsoever measured, imposed upon the sale, transportation, delivery, use or consumption of MG-PFH shall be paid directly by APC, or if paid by FMLP shall be invoiced to APC as a separate item and paid by APC to FMLP within 30 days of FMLP's invoice. APC shall also pay all applicable export, import or excise taxes, clearance, handling and brokerage fees, customs duties and other cost of delivery incurred in connection with any order delivered to APC outside of the United States. FMLP may add the amount of these taxes, duties and handling fees to its invoice to APC for the order. 3.10 TITLE AND RISK OF LOSS. Title to and risk of loss for each shipment of MG-PFH shall pass to APC when the shipment is duly tendered to the air, motor freight, or delivery service at the FMLP shipping dock for shipment. 3.11 CERTIFICATE OF ANALYSIS. FMLP shall test (using its own approved validated methods) and inspect each Supply Cylinder of MG-PFH prior to shipment for conformity to the Specification and, upon shipment, shall provide APC with a certificate of analysis reporting the results of the analytical test or tests performed for each specification. FMLP shall continuously 10 consult with APC regarding any change in the selection, design and method of conducting these analytical tests so that APC is reasonably assured of their accuracy, reliability, and can replicate the tests for its own use. FMLP shall not ship any Supply Cylinder of MG-PFH that does not conform to the Specification and that has not been analyzed in accordance with the required methods of analysis applicable to MG-PFH. Changes in analytical tests, whether imposed by APC or others, may result in higher costs for FMLP which will be passed on to APC at cost and not trigger the price change arrangement as stated in Paragraph 3. 3.12 ACCEPTANCE OF MG-PFH BY APC. APC shall inspect each shipment of MG-PFH as follows: (a) INCOMING INSPECTION. APC shall weigh each cylinder promptly upon receipt to confirm the amount of MG-PFH delivered. APC shall inspect and analyze each delivered Supply Cylinder at any time after delivery as APC determines; provided, however, APC, at a minimum, shall analyze each Supply Cylinder in accordance with the methods of analysis attached to the Specifications. (b) NOTICE OF REJECTION. APC may reject any Supply Cylinder, because it does not conform to the Specification or because it was not manufactured in compliance with the requirements of Paragraph 3.2, by written notice of rejection to FMLP given at any time during the 45 day period following delivery of the Supply Cylinder and describing in reasonable detail the basis of APC's rejection. If APC does not give written notice of rejection during this 45 day period following delivery of the supply cylinder, or if it gives written notice of rejection after the expiration of this period, APC shall be considered to have accepted the Supply Cylinder. (c) INFORMATION AND ASSISTANCE. FMLP shall make available to APC all appropriate validated analytical methods and associated records and data, including technical assistance, for the express purpose of allowing APC to consistently inspect deliveries of MG-PFH for conformance to the Specification. All such analytical techniques, data, assistance, etc. shall be regarded as Confidential Information and fall under the duty of confidentiality of Article 6. In the event of non-conformance to the Specification, APC and FMLP shall consult with each other in order to explain and resolve the discrepancy between each other's determinations. If such consultation does not resolve the discrepancy, the parties agree to nominate and procure an independent, reputable laboratory, acceptable to both parties, which shall carry out determinations based on samples taken from such shipment, using the methods of analysis attached to the Specifications, and the resulting determinations shall be binding on APC and FMLP for the purposes hereof. APC and FMLP shall share equally the expenses of such independent analysis. In the event it is determined pursuant to the provisions of this subsection (c) that the rejected Supply Cylinder met the Specification, APC shall reimburse FMLP for any return freight incurred under this subsection (c). (d) Replacement. FMLP shall refund the purchase price and all other costs of shipment paid by APC, or at APC's option, replace any rejected order of MG-PFH, at no additional cost to APC, with a like amount of MG-PFH conforming to the Specification and manufactured in compliance with all of the requirements of Paragraph 3.2. FMLP shall deliver this 11 replacement MG-PFH no later than 45 days after APC's notice of rejection regarding the rejected order. (e) RETURN. At FMLP's written request for any rejected order of MG-PFH to be returned, APC shall ship the rejected order back to FMLP, freight collect. If FMLP does not make such a request within 30 days after APC's notice of rejection, APC, in its discretion, may either dispose of the MG-PFH (but not the Supply Cylinder) at FMLP's expense or ship the rejected order back to FMLP, freight collect. 3.13 CONFLICTING TERMS. The terms of this Agreement shall control in the event of any contrary, additional or inconsistent terms in any purchase order, acceptance, order acknowledgment, confirmation or like document issued by either APC or FMLP in connection with any order of MG-PFH, unless mutually agreed in writing. 3.14 CHANGES IN FMLP'S MANUFACTURING. FMLP shall consult with and must obtain written consent from APC reasonably in advance of making any changes in the facility, materials, equipment, methods, or procedures used in the manufacturing, storage, containing, transporting, or other aspect of the production, storage, and transport of MG-PFH which would or might: (a) Cause a potential change in the MG-PFH purity profile; (b) Require FMLP to revalidate its own process or methods; (c) Require APC to re-audit FMLP; (d) Require APC or FMLP to submit or resubmit any documentation to the FDA. 3.15 APPLICATIONS FOR FDA APPROVALS. APC shall be responsible for the preparation and submission of any and all applications to the FDA as may be required by law and for all marketing clearances, approvals, and/or licenses from the appropriate regulatory agencies necessary in connection with the sale and shipment of Product hereunder, including, without limitation, any investigational new drug application required in order for FMLP to make shipments hereunder, except for the filing of the Drug Master File. Article 4. INSPECTIONS 4.1 APC PURCHASES. APC shall maintain accurate records relating to its purchases of MG-PFH from FMLP and other sources for purposes of showing APC's compliance with its purchase obligation under Paragraph 2.7. FMLP shall have the right to have these records inspected once each calendar year, during normal business hours and on ten days' prior notice, by an independent certified public accountant retained by FMLP and approved by APC (which shall not unreasonably withhold its approval) for the purpose of verifying APC's compliance with its purchase obligation. APC may take reasonable steps to provide FMLP's accountant only with such information as may be necessary to this verification, and FMLP's accountant shall report to FMLP only that APC has complied with the terms of this Agreement. As a condition of the 12 inspection, APC may require FMLP's accountant to sign a confidentiality agreement to this effect. The report to FMLP by its accountant shall be considered confidential Information. 4.2 FMLP AGREEMENT COMPLIANCE. FMLP shall maintain accurate records relating to APC's purchases of MG-PFH, FMLP's pricing and invoice costs, and FMLP's compliance with respect to limitations on the sale of MG-PFH to other parties pursuant to Section 2.8. APC shall have the right to have these records inspected once each calendar year, during normal business hours and on 10 days' prior notice, by an independent certified public accountant retained by APC and approved by FMLP (which shall not unreasonably withhold its approval) for the purpose of verifying FMLP's compliance with the terms of this Agreement. FMLP may take reasonable steps to provide APC's accountant only with such information as may be necessary to this verification, and APC's accountant shall report to APC only that FMLP has complied with the terms of this Agreement or the extent to which it has failed to do so. As a condition of the inspection, FMLP may require APC's accountant to sign a confidentiality agreement to this effect. The report to APC by its accountant shall be considered confidential Information. Any amounts owed to APC as a result of the audit shall accrue interest from the date such amount was paid by APC to FMLP at a rate equal to the current prime rate quoted in the Eastern edition of the Wall Street Journal. Any amount owed to APC as a result of such inspection shall be paid within thirty (30) days of such inspection. 4.3 MANUFACTURING COMPLIANCE. APC shall have the right to reasonably inspect each FMLP MG-PFH manufacturing facility, during normal business hours and on 10 days' prior notice, for the purpose of conducting a quality assurance audit (described generally in Exhibit C) to verify FMLP's compliance with the manufacturing requirements under Paragraphs 3.1 and 3.2. These audits may be conducted by APC or by a consultant retained by APC and approved by FMLP (which shall not unreasonably withhold its approval) or both. FMLP may take reasonable steps to provide APC or its consultant only with such information as may be necessary to verify FMLP's compliance and shall not be required to provide any proprietary information which is not necessary for this verification. The information obtained by APC in the course of the audit shall be considered Confidential Information. As a condition of the audit by any consultant retained by APC, FMLP may require the consultant to sign an appropriate confidentiality agreement. 4.4 FDA INSPECTION. FMLP shall give APC reasonable notice under the circumstances of any impending inspection of an FMLP MG-PFH manufacturing facility by the FDA or any such governmental agency of which it has advance notice. FMLP shall advise APC promptly of any other FDA inspections of FMLP relating to or that affect MG-PFH and their results, including copies (purged of confidential or proprietary information, if any) of any FDA form 483s and other FDA communications. The parties agree that any proprietary information presented to the FDA as part of an FDA inspection may be withheld from APC or its representative. The information obtained by APC in the course of any such audit shall be considered Confidential Information. 13 Article 5. DRUG MASTER FILE (DMF) 5.1 DRUG MASTER FILE REPRESENTATION. FMLP represents and warrants that it has a complete DMF in compliance with all applicable FDA laws, regulations, requirements, and guidelines. 5.2 SUPPORT BY FMLP. FMLP shall maintain and support the DMF in compliance with all applicable FDA regulations, requirements and guidelines. FMLP shall give the FDA any required notice and file any required report to permit APC to reference the DMF as provided in Paragraph 5.3. 5.3 REFERENCE BY APC. APC shall have the right to reference the DMF in APC's own submissions to the FDA in connection with the development, testing, manufacture and approval for sale of the Product. FMLP shall notify APC of changes to the DMF in such a manner as not to compromise confidentiality desired by FMLP. 5.4 FOREIGN REGISTRATION. APC may seek to have the Product approved for sale by the appropriate regulatory authorities in one or more other countries. If APC seeks to have the Product approved for sale in another country and this approval requires submission of data and information substantially the same as all or part of the data and information constituting the DMF (a "Foreign DMF"), FMLP shall retain a qualified third-party consultant acceptable to APC at APC's expense to work with FMLP in assembling the appropriate data and information for submission of the Foreign DMF in FMLP's name to the appropriate regulatory authority. The consultant shall be responsible for obtaining any necessary translation into the local language. FMLP shall engage the consultant on a confidential basis, and the consultant shall not reveal any of the contents of the submission or proposed submission to APC. APC shall have the right to reference the Foreign DMF in APC's own submissions to the foreign regulatory authority in connection with obtaining the Product's approval for sale. In a similar manner (i.e., protection of FMLP proprietary information), FMLP shall cooperate with APC, as necessary, to facilitate the foreign use of the Product. APC shall pay all submission fees required for the aforementioned, * this Agreement. Article 6. CONFIDENTIALITY 6.1 CONFIDENTIAL INFORMATION. Each party is in possession of certain proprietary information (such party, a "Discloser"). Discloser is willing to disclose certain information it possesses to the other party (such party, a "Recipient") under the terms and conditions as set forth below. (a) The term "Confidential Information" shall mean any and all information, business plans or projections, customer lists, agreements, testing protocols, test results, data or know-how, whether in written or in oral form and whether technical or non-technical, as well as any sample, which relates to the Products, provided, however, that the oral disclosure to 14 RECIPIENT of any information, data or know-how must be followed within thirty (30) days by a writing substantially disclosing the same if such information, data or know-how is to be considered as being Confidential Information. All matters to be considered confidential shall be clearly marked with the legend "Confidential and Proprietary Information," or a legend equivalent thereto. (b) Discloser warrants that it has the full and unconditional right to disclose to Recipient the Confidential Information covered by this Agreement. (c) For a period of five (5) years from the receipt of such Confidential Information, Recipient agrees: (i) to treat the Confidential Information which it receives as it would its own proprietary information; (ii) to prevent the disclosure of the Confidential Information which it receives to any third party absent the prior written consent of Discloser; (iii) not to use the Confidential Information for any reason other than the purposes of accomplishing this Agreement or as may be agreed in writing by Discloser. (d) Recipient shall be relieved of any and all obligations under Paragraph (c) of this Agreement regarding Confidential Information which: (i) was known to Recipient prior to receipt hereunder or is generated for Recipient by persons who have not had access to or knowledge of the Confidential Information disclosed hereunder, as documented, in either case, by written records; (ii) at the time of disclosure to Recipient was generally available to the public, or which after disclosure hereunder becomes generally available to the public through no fault attributable to Recipient or (iii) is hereafter made available to Recipient for use or disclosure by Recipient from any third party having a right to do so. (e) Recipient may disclose information required by applicable law, rule or judicial order to be disclosed, provided that prompt notice of a request for such disclosure is given to Discloser prior to such disclosure. Such disclosed information shall remain Confidential Information. APC may disclose information to applicable regulatory authorities in connection with obtaining regulatory approval for the Product or to licensees of the Product. Article 7. TERM AND TERMINATION 7.1 TERM. This Agreement shall remain in effect through the last day of * * (the "Initial Term"). The term of this Agreement shall be automatically extended for a renewal term of * (the "First Renewal Term") unless, at least * 15 * prior to the expiration of the Initial Term, either APC or FMLP gives the other notice that it does not want the First Renewal Term to go into effect (in which case this Agreement shall expire at the end of the Initial Term), provided that if FMLP is the party desiring not to renew the Agreement at that time, its notice shall be deemed a notice pursuant to 7.2(d), and the "exit" provisions shall apply. If the term of this Agreement is extended for the First Renewal Term, the term of this Agreement shall be automatically extended for a second renewal term of * (the "Second Renewal Term") unless, at least * prior to the expiration of the First Renewal Term, either APC or FMLP gives the other notice that it does not want the Second Renewal Term to go into effect (in which case this Agreement shall expire at the end of the First Renewal Term), provided that if FMLP is the party desiring not to renew the Agreement at that time, its notice shall be deemed a notice pursuant to 7.2(d), and the "exit" provisions shall apply. This Agreement is subject to early termination, as provided in Paragraph 7.2. 7.2 TERMINATION. This Agreement may be terminated earlier than Paragraph 7.1 provides under the following circumstances: (a) AGREEMENT. This Agreement may be terminated at any time by the written agreement of APC and FMLP. (b) INSOLVENCY. This Agreement may be terminated by either party by notice to the other in the event such other party shall dissolve, cease active business operations or liquidate, or in the event such other party shall have been determined to be insolvent by a court of competent jurisdiction, or insolvency or reorganization proceedings shall have been commenced by such other party, or such proceedings shall have been brought against such other party and remained undismissed for a period of 60 days, or such other party shall have made a general assignment for the benefit of creditors, or a receiver of all or substantially all of such other party's assets shall have been appointed and not discharged within 60 days. (c) PARTY'S DEFAULT. This Agreement may be terminated by either party if the other materially breaches any provision of this Agreement ("Default"), PROVIDED THAT a party shall not be deemed in default unless (i) the claiming party has given the breaching party written notice specifying the respects in which the claiming party claims the Agreement has been breached, and (ii) the breaching party fails to remedy such breach, or fails to provide information to the claiming party sufficient to show that it has not breached this Agreement within the 60 day period following written notice or with respect to breaches of Section 3.6, ten business days following written notice (the "Cure Period"). Within one hundred twenty (120) days following the expiration of Cure Period, the claiming party may serve final written notice of termination. (d) FMLP'S EXIT FROM MEDICAL FLUOROCHEMICALS BUSINESS. This Agreement * , without the sale of assets and/or intellectual property to a qualified third party or the spin-off or sale of a division or subsidiary engaged in this business to a qualified third party, in which case the following conditions and procedures shall apply: 16 (1) FMLP shall continue to supply MG-PFH to APC pursuant to the terms of this Agreement * . Notwithstanding any prior history of orders or terms of this Agreement limiting the amount of MG-PFH APC has or might order, APC may order and FMLP shall reasonably supply sufficient quantities of MG-PFH to permit APC to maintain a substantial inventory of MG-PFH in the event it is not able to qualify an alternate supplier * . (2) FMLP shall provide any reasonable assistance at APC's expense that APC reasonably requests to establish an alternate supplier for MG-PFH. (3) FMLP shall support the DMF as required in Paragraph 5.1 during * , and until APC receives all MG-PFH pursuant to Section 7.3(b) but shall have no obligation to support it thereafter. (e) NO FDA APPROVAL. If, by * , APC has not received FDA Approval for the Product, either party may terminate this Agreement on ninety (90) days notice. 7.3 CONSEQUENCES OF EXPIRATION OR TERMINATION. (a) ALTERNATE SUPPLIER. If APC terminates this Agreement under Paragraph 7.2(c) by reason of FMLP's Default, or FMLP otherwise terminates this Agreement in breach of the terms herein, FMLP shall provide reasonable assistance at APC's expense that APC reasonably requests to establish an alternate supplier of MG-PFH. This assistance shall include describing and explaining FMLP's process for manufacturing MG-PFH in such detail (including the disclosure of FMLP proprietary technology, if necessary) as the alternate supplier may require to manufacture MG-PFH in conformity to the Specification. (b) APC PURCHASES. Upon the expiration of this Agreement, APC shall be required to purchase FMLP's finished inventory of MG-PFH on hand at the time of expiration and its inventory of MG-PFH and MG-PFH work-in-progress as and when completed, such work-in-progress authorized by issued purchase orders or maintained pursuant to the requirements of this Agreement; provided FMLP is not in default hereunder. Article 8. INSURANCE AND WARRANTY 8.1 WARRANTY. The MG-PFH supplied under this Agreement by FMLP shall conform to the Specification and shall be manufactured in compliance with Paragraph 3.2. In accordance with Paragraph 3.12, FMLP shall analyze shipments of MG-PFH to APC for conformance with these requirements. However, APC shall have the responsibility to conduct its own analysis on each shipment of MG-PFH received from FMLP to check for conformance with the Specification. FMLP shall replace any MG-PFH that does not conform to the Specification or is not manufactured in compliance with Paragraph 3.2, or refund the purchase price at APC's option; such replacement or refund shall constitute APC's sole and exclusive remedy with respect to such non-conformance. FMLP makes no representation regarding any ingredient, chemical or constituent of a shipment of MG-PFH that is not specified in the Specification as being an 17 impermissible ingredient, chemical or constituent of MG-PFH or impermissible concentration of any of the foregoing ("Unspecified Constituents"). APC agrees to assume all responsibility for Unspecified Constituents and the biological consequences thereof in the medical applications of MG-PFH by APC, except that APC assumes no responsibility for any Unspecified Constituents of the MG-PFH that are present as a result of FMLP's failure to manufacture the MG-PFH in compliance with Paragraph 3.2. As between FMLP and APC, APC shall be responsible for providing reasonable evidence to FMLP that an Unspecified Constituent was present due to FMLP's failure to manufacture the MG-PFH in compliance with this Agreement. As between APC and FMLP, any liability shall be allocated based upon applicable principles of comparative negligence, except FMLP's liability to APC shall be limited to the value of the MG-PFH that was not manufactured in compliance with Paragraphs 3.1 and 3.2. With regard to the Specification's applicability to the medical application of APC, APC agrees and acknowledges that FMLP does not have expertise in that field and that APC does have expertise in that field, and APC shall be solely responsible for the suitability of MG-PFH and the Specification for the medical application(s) that APC contemplates under this Agreement. FMLP further warrants that it shall convey good title to all MG-PFH supplied hereunder free and clear of any security interest, lien, or other encumbrance. THE FOREGOING ARE FMLP's SOLE WARRANTIES HEREUNDER AND APC's SOLE REMEDY FOR BREACH OF SUCH WARRANTIES, AND IS IN LIEU OF ANY AND ALL IMPLIED OR STATUTORY WARRANTIES, INCLUDING WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 8.2 RISK OF LOSS. APC is solely responsible for testing MG-PFH to determine its physical or health hazards and for evaluating the methods by which it may safely store, handle, transport, process, sell, dispose of or in any way use, misuse or otherwise treat the MG-PFH supplied hereunder either singly or in combination with other materials and FMLP shall have no liability to APC or any third party for any claims by APC or any third party for losses or injury incurred by APC or any third party relating to such testing, evaluation and subsequent uses as a result of such testing and evaluation or non-comprehensiveness of such testing and evaluation. 8.3 INDEMNIFICATION. Except as set forth below or in Paragraph 8.6, APC agrees to indemnity, defend and hold FMLP harmless from and against any claim, demand, suit, loss, damage or injury of any kind whatsoever, including attorneys' fees and expenses, regardless of where located, and regardless of whether based upon negligence, strict liability, defective design, failure to warn or otherwise(collectively "Claims"), resulting or arising directly or indirectly from: (a) APC's or APC's customer(s)' receipt or use of MG-PFH (including storage, handling, transportation, processing, sale, disposal, use, misuse or other treatment of MG-PFH); or (b) the use of MG-PFH for the medical application(s) for which APC utilizes MG-PFH, including, without limitation, claims based upon defects in the Specification or claims based upon any Unspecified Constituent other than Unspecified Constituents of the MG-PFH that are present as a result of FMLP's failure to manufacture the MG-PFH in compliance with Paragraph 3.2. 18 The foregoing does not apply for Claims arising out of the gross negligence or willful misconduct of FMLP or an intentional breach by FMLP of the terms of this Agreement. FMLP agrees to defend, indemnify and hold harmless APC from and against any and all Claims resulting from or arising out of the gross negligence or willful misconduct of FMLP or its agents or employees or any intentional breach by FMLP of the representations, warranties, or terms set forth in this Agreement; provided that in the event FMLP fails to conform to the Specifications and APC reasonably should have discovered such failure, FMLP shall not indemnify APC. 8.4 INSURANCE. (a) APC agrees to obtain from responsible carriers and to maintain in force during the term of this Agreement and for a period of five years thereafter, commercial general liability insurance and excess liability insurance policies (or the equivalent), including products liability coverage, with contractual liability coverage, and limits of not less than * * combined single limit per occurrence for bodily injury and property damage. APC agrees to provide to FMLP certificates evidencing this coverage, and further, agrees to name FluoroMed, L.P., FMLP, and its subsidiaries, directors, and employees, as additional insured on the policy(ies) of insurance evidenced by certificates and endorsements to the policy(ies) in a form to be approved by FMLP. With respect to the insurance coverage afforded FMLP as contemplated by this Paragraph 8.4 and in recognition of assumption of risk as provided for in Paragraph 8.2, APC will require its insurers to provide a waiver of subrogation in favor of FMLP. (b) FMLP represents to APC that it maintains and agrees it shall continue to maintain in force, during the term of this Agreement and for a period of two years thereafter, commercial general liability insurance and excess liability policies (or the equivalent), with contractual liability coverage, and limits in excess of * combined single limit per occurrence for bodily injury and property damage, FMLP agrees to provide to APC certificates evidencing this coverage. (c) The parties agree that to the extent liability for an insured claim is allocated to APC under this Agreement, then APC's insurance shall be primary to the insurance of FMLP, and, to the extent liability for an insured claim is allocated to FMLP under this Agreement, then FMLP's insurance shall be primary to the insurance of APC, and the other party's insurance shall be considered as excess of and not contributing to the primary insurance or deductible or of the party with primary liability. 8.5 CLAIMS. NO CLAIM FOR BREACH OF THE WARRANTIES IN PARAGRAPH 8.1 OR FOR NON-DELIVERY OF AN ORDER OF MG-PFH SHALL BE GREATER IN AMOUNT THAN THE PURCHASE VALUE OF MG-PFH TO WHICH SUCH CLAIM RELATES EXCEPT THIS LIMITATION SHALL NOT APPLY IN THE CASE OF FMLP's GROSS NEGLIGENCE, WILLFUL MISCONDUCT OR INTENTIONAL BREACH OF A MATERIAL PROVISION OF THIS AGREEMENT. Any claims by APC must be received by FMLP in writing within 60 days of the date of APC's actual discovery of the claim. 8.6 FMLP'S LIABILITY. FMLP shall be liable for all losses occurring to its own employees, property, and business as result of its performance of this Agreement, including but 19 not limited, to personal injury, property damage, regulatory (including but not limited to OSHA and EPA) and other legal compliance, and other business injury or liability, regardless of whether based upon negligence, strict liability or otherwise ("FMLP Claims and Losses"). Except to the extent that APC has agreed to indemnify FMLP under this Agreement, FMLP shall indemnify, defend and hold APC harmless from and against any claim demand, suit, loss, damage or injury of any kind whatsoever, including attorneys' fees and expenses, regardless of where located, and regardless of whether based upon negligence, strict liability or otherwise, resulting or arising directly or indirectly from FMLP Claims and Losses. 8.7 Limitation. FMLP shall not be liable to APC in contract or tort, including negligence and strict liability, for any indirect, special, incidental or consequential damages arising out of FMLP's performance or non-performance hereunder. Article 9. GENERAL PROVISIONS 9.1 YEAR 2000 COMPLIANCE. FMLP has (i) initiated a review and assessment of all areas within its business and operations (including those affected by suppliers, vendors and customers) that could be adversely affected by the "Year 2000 Problem" ( that is, the risk that computer applications used by FMLP (or suppliers, vendors and customers) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan in accordance with the timetable. FMLP represents that its computer applications (including those of its suppliers, vendors and customers) that are material to its business and operations will be able to perform properly date-sensitive functions for all dates before and after January 1, 2000, except to the extent that a failure to do so could not reasonably be expected to materially and adversely affect the condition (financial or otherwise) or operations of FMLP. 9.2 ASSIGNMENT. This Agreement may not be assigned by either party without the prior written consent of the other. Notwithstanding the foregoing, either party may assign this Agreement without such consent to a wholly-owned subsidiary or, in the case of APC, to a transferee of substantially all of the assets of its business unit dedicated to the Product. Notwithstanding the foregoing, APC may assign this Agreement without the consent of FMLP to a licensee or sublicensee of its rights to make, use, manufacture or sell the Product. 9.3 NOTICE. ANY notices permitted or required to be given hereunder shall be effective upon receipt of the receiving party if they are delivered personally, by certified mail (return receipt requested), by overnight air courier (with return receipt), or by facsimile machine (with proof of transmission): 20 (a) in the case of APC, to: Duane J. Roth President and CEO ALLIANCE PHARMACEUTICAL CORP. 3040 Science Park Road San Diego, CA 92121 FAX: 619/558-5306 with required copies to: General Counsel ALLIANCE PHARMACEUTICAL CORP. 3040 Science Park Road San Diego, CA 92121 FAX: 619/678-4133 (b) in the case of FMLP, to: William S. Brown Vice President FLUOROMED L.P. 2350 Double Creek Drive Round Rock, TX 78664 FAX: 512/255-8298 Notices may be sent to any changed address or changed title holder of the above of which the sender has actual knowledge. 9.4 INTEGRATION. This Agreement and the CDA represents the entire agreement of the parties with respect to its subject matter, and supersedes any and all prior agreements, understandings, promises and representations by any party to any other respecting its subject matter. 9.5 NO BROKERS. No party to this Agreement employed any broker or agent in connection with this transaction or its subject matter. 9.6 CAPTIONS; EXHIBITS. All captions contained in this Agreement are inserted for convenience of reference only and shall not be deemed a part of this Agreement. The Exhibits are incorporated into and deemed a part of this Agreement. 9.7 SEVERABILITY. If any provision of this Agreement is held unenforceable, the provision shall be regarded as severable from this Agreement and the remaining provisions shall remain in full force and effect. 21 9.8 STATUS OF THE PARTIES. APC and FMLP shall not be deemed to be partners, joint venturers or one another's agents, and neither shall have the right to act on behalf the other except as expressly provided herein or otherwise expressly agreed in writing. 9.9 WAIVER. The failure or neglect of APC or FMLP to enforce the terms and conditions of this Agreement shall not be deemed a waiver thereof nor shall it be deemed a condonation of any breach. Such failure or neglect shall not be deemed a waiver or condonation of any later breach. All remedies under this Agreement are cumulative and are not exclusive of other remedies. 9.10 AMENDMENT. This Agreement may only be amended by a writing signed by the parties hereto and expressly designated as an amendment to this Agreement. 9.11 BINDING; EFFECT: Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto, their subsidiaries, divisions, business units, successors and permitted assigns, including without limitation, the APC Affiliates. 9.12 FORCE MAJEURE. A party shall not be liable to the other for inability to perform any of its obligations under this Agreement when its inability is the result of an act of God, earthquake, epidemic, order of civil or military authorities, flood, tornado, wind storm, fire, war, civil disturbance, strike or other labor dispute, inability to obtain raw materials, vandalism, or other natural, civil or commercial disturbance, or any other occurrence, over which the party has no reasonable control, whether similar or dissimilar to the causes listed above. Lack of finances shall not be deemed a circumstance not within a party's control. 9.13 CHOICE OF LAW. This Agreement shall be construed in accordance with the laws of Texas without giving effect to its choice of law provisions. 9.14 COUNTERPARTS. This agreement may be executed in counterparts, to be evidenced by the simultaneous (within physical limits) exchange of signature pages (telefaxed, if necessary) and confirmatory cover letters, and the counterparts together shall be regarded as a single instrument binding on the parties. 22 WHEREFORE, the parties have executed this Agreement as of the date of the latest signature below. ALLIANCE PHARMACEUTICAL CORP. By: ------------------------------------- Harold W. DeLong Executive Vice President, Business Development Date: June 25, 1999 ------------------------------------- FLUOROMED L.P. By: ------------------------------------- Name: William S. Brown ------------------------------------- Title: President ------------------------------------- Date: July 9, 1999 ------------------------------------- 23 EXHIBIT A ALLIANCE PHARMACEUTICAL CORP. CONFIDENTIAL COMPONENT PURCHASE SPECIFICATIONS PURIFIED PERFLUOROHEXANE * EXHIBIT "B" PRICE SCHEDULE Medical Grade Perfluorohexane, as described in Exhibit A - --------------------------------------------- ------------------------------------------- * * - --------------------------------------------- ------------------------------------------- * * - --------------------------------------------- ------------------------------------------- * * - --------------------------------------------- ------------------------------------------- * * - --------------------------------------------- ------------------------------------------- * * - --------------------------------------------- -------------------------------------------
Supply Cylinder Charges (Refer to Paragraph 3.8) Supply Cylinder rental charges: * . Supply Cylinder Replacement charges: * . EXHIBIT C VENDOR QUALITY EVALUATION PROGRAM * EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. U.S. DOLLARS 6-MOS JUN-30-2000 JUL-01-1999 DEC-31-1999 1 10,442,000 7,789,000 0 0 0 19,498,000 0 0 58,109,000 13,166,000 0 0 5,000 447,000 36,372,000 58,109,000 0 15,772,000 0 0 29,410,000 0 693,000 (13,809,000) 0 (13,809,000) 0 0 0 (13,809,000) (0.31) (0.31)
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