-----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, PrmNvPrIVJV6FFJJVl2T3Khd7zVe6QNEyedLLdWqN0U96uGqgNQExSo8MBt6/fiQ eHhBGkVtu5XwO1Oapr0rGQ== 0000912057-97-004705.txt : 19970222 0000912057-97-004705.hdr.sgml : 19970222 ACCESSION NUMBER: 0000912057-97-004705 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970213 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-12950 FILM NUMBER: 97528579 BUSINESS ADDRESS: STREET 1: 3040 SCIENCE PARK RD CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6195584300 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, 1996 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 0-12900 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: 619-558-4300 ------------------------- 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 3, 1997, Registrant had 30,271,228 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 9 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 14 Item 6. Exhibits and Reports on Form 8-K 15 2 ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------
DECEMBER 31, JUNE 30, 1996 1996 -------------- ------------- ASSETS (UNAUDITED) (NOTE) - ------- Current assets: Cash and cash equivalents $ 19,631,000 $ 9,480,000 Short-term investments 56,099,000 61,921,000 Research revenue receivable 7,000,000 5,750,000 Inventories and other current assets 2,148,000 1,803,000 -------------- ------------- Total current assets 84,878,000 78,954,000 PROPERTY, PLANT AND EQUIPMENT - NET 13,761,000 12,390,000 PURCHASED TECHNOLOGY - NET 15,160,000 15,966,000 OTHER ASSETS - NET 1,170,000 1,033,000 -------------- ------------- $ 114,969,000 $ 108,343,000 -------------- ------------- -------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY - -------------------------------------- CURRENT LIABILITIES: Accounts payable $ 2,994,000 $ 2,189,000 Accrued expenses 2,542,000 2,801,000 Payable for acquired in-process technology 12,878,000 Current portion of long-term debt 760,000 720,000 -------------- ------------- Total current liabilities 19,174,000 5,710,000 LONG-TERM DEBT 554,000 945,000 OTHER 175,000 221,000 STOCKHOLDERS' EQUITY: Preferred stock - $.01 par value; 5,000,000 shares authorized; 200,000 shares of Series C outstanding at December 31, 1996 and June 30, 1996 2,000 2,000 Common stock - $.01 par value; 50,000,000 shares authorized; 30,259,078 and 30,001,918 shares issued and outstanding at December 31, 1996 and June 30, 1996, respectively 302,000 300,000 Additional paid-in capital 316,755,000 313,397,000 Accumulated deficit (221,993,000) (212,232,000) -------------- ------------- Total stockholders' equity 95,066,000 101,467,000 -------------- ------------- $ 114,969,000 $ 108,343,000 -------------- ------------- -------------- -------------
Note: The balance sheet at June 30, 1996 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 CONSOLIDATED FINANCIAL STATEMENTS. 3 ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 1996 1995 1996 1995 ------------- ------------ ------------- ------------- (UNAUDITED) (UNAUDITED) REVENUES: License and research revenue $ 22,121,000 $ 2,020,000 $ 27,871,000 $ 4,110,000 Product revenue - net 5,000 20,000 5,000 76,000 ------------- ------------ ------------- ------------- 22,126,000 2,040,000 27,876,000 4,186,000 Operating expenses: Research and development 10,469,000 7,351,000 19,720,000 15,562,000 General and administrative 1,923,000 1,813,000 3,869,000 3,385,000 Acquired in-process technology 16,020,000 16,020,000 ------------- ------------ ------------- ------------- 28,412,000 9,164,000 39,609,000 18,947,000 ------------- ------------ ------------- ------------- Loss from operations (6,286,000) (7,124,000) (11,733,000) (14,761,000) Investment income and other - net 938,000 177,000 1,972,000 430,000 ------------- ------------ ------------- ------------- Net loss (5,348,000) (6,947,000) (9,761,000) (14,331,000) Dividends on preferred stock - (188,000) - (375,000) ------------- ------------ ------------- ------------- Net loss applicable to common shares $ (5,348,000) $ (7,135,000) $ (9,761,000) $ (14,706,000) ------------- ------------ ------------- ------------- ------------- ------------ ------------- ------------- Net loss per common share $ (0.18) $ (0.29) $ (0.32) $ (0.59) ------------- ------------ ------------- ------------- ------------- ------------ ------------- ------------- Weighted average number of shares outstanding 30,168,000 24,884,000 30,103,000 24,851,000 ------------- ------------ ------------- ------------- ------------- ------------ ------------- -------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4 ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1996 1995 --------------- --------------- (Unaudited) Operating activities: Net loss $ (9,761,000) $ (14,331,000) Adjustments to reconcile net loss to net cash used in operations: Depreciation and amortization 1,829,000 1,520,000 Charge for acquired in-process technology 16,020,000 757,000 Non-cash compensation - 163,000 Changes in operating assets and liabilities: Research revenue receivable (1,250,000) 40,000 Inventories and other (273,000) 172,000 Accounts payable and accrued expenses and other 500,000 (434,000) --------------- --------------- Net cash provided by (used in) operating activities 7,065,000 (12,113,000) --------------- --------------- FINANCING ACTIVITIES: Issuance of common stock and preferred stock 350,000 675,000 Proceeds from long-term debt - 2,208,000 Principal payments on long-term debt (351,000) (212,000) --------------- --------------- Net cash provided by (used in) financing activities (1,000) 2,671,000 --------------- --------------- Investing activities: Short-term investments 6,157,000 3,042,000 Property, plant and equipment (2,603,000) (1,356,000) Payment for acquired in-process technology (467,000) --------------- --------------- Net cash provided by investing activities 3,087,000 1,686,000 --------------- --------------- Increase (decrease) in cash and cash equivalents 10,151,000 (7,756,000) Cash and cash equivalents at beginning of period 9,480,000 12,519,000 --------------- --------------- Cash and cash equivalents at end of period $ 19,631,000 $ 4,763,000 --------------- --------------- --------------- --------------- Supplemental disclosure of noncash investing and financing activities: Payable for acquired in-process technology $ 12,878,000 Issuance of common stock in connection with acquired in-process technology $ 2,675,000 Issuance of common stock and warrants in connection with acquisition of patent rights and related documents $ 757,000 Preferred stock dividends $ 375,000
SEE ACCOMPANYING NOTES TO 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. ("Alliance") and its subsidiaries (collectively, the "Company") are engaged in identifying, designing, and developing novel medical and pharmaceutical products. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Alliance, the accounts of its wholly owned subsidiary, Astral, Inc. and its recently acquired subsidiary MDV Technologies, Inc. from the acquisition date of November 1996, and its majority-owned subsidiaries, Talco Pharmaceutical, Inc. and Applications et Transferts de Technologies Avancees. All significant intercompany accounts and transactions have been eliminated. INTERIM CONDENSED FINANCIAL STATEMENTS The condensed consolidated balance sheet as of December 31, 1996, the condensed consolidated statements of operations for the three and six months ended December 31, 1996 and 1995, and the condensed consolidated statements of cash flows for the three and six months ended December 31, 1996 and 1995 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, 1996. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the consolidated financial statements. Actual results could differ from those estimates. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS Cash, cash equivalents, and short-term investments consist of highly liquid debt instruments. The Company considers instruments with an original maturity of three months or less to be cash equivalents. Management has classified the Company's cash equivalents and short-term investments as available-for-sale securities in the accompanying financial statements. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in stockholders' equity. INVENTORIES Inventories, which consist primarily of raw materials, are stated at the lower of cost (first-in, first-out basis) or market. 6 CONCENTRATION OF CREDIT RISK Cash, cash equivalents, and short-term investments are financial instruments which potentially subject the Company to concentration of credit risk. The Company invests its excess cash primarily in U.S. government securities and marketable debt securities of financial institutions and corporations with strong credit ratings. The Company has established guidelines relative to diversification and maturities to maintain safety and liquidity. These guidelines are reviewed periodically and modified to take advantage of trends in yields and interest rates. The Company has not experienced any material losses on its investments. PROPERTY, PLANT, EQUIPMENT, AND OTHER ASSETS Buildings, furniture, and equipment are stated at cost and depreciation is computed using the straight-line method over the estimated useful lives of 3 to 25 years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the lease term. Technology and patent rights are amortized using the straight-line method over 5 to 20 years. PURCHASED TECHNOLOGY The purchased technology was primarily acquired as a result of the merger of Fluoromed Pharmaceutical, Inc. into a subsidiary of the Company in 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 OXYGENT-TM- (temporary blood substitute) and LIQUIVENT-Registered Trademark- (intrapulmonary oxygen carrier) products. Purchased technology also includes $2 million for technology capitalized as a result of the acquisition of BioPulmonics, Inc. ("BioPulmonics") in December 1991. Since the acquisition, an alternative future use of the purchased technology has been pursued by the Company. An intrapulmonary drug delivery system using the PFC-based liquid as a carrier (or dispersing agent) is being developed by Alliance from the liquid ventilation technology. BioPulmonics was merged into Alliance in March 1996. The PFC technology is the basis for the Company's main drug development programs and is being amortized over a 20-year life. Accumulated amortization for this PFC technology was $9,097,000 and $8,516,000 at December 31, 1996 and June 30, 1996, respectively. The technology purchased with the acquisition of BioPulmonics is being amortized over five to seven years, and accumulated amortization was $1,014,000 and $843,000 at December 31, 1996 and June 30, 1996, respectively. Amortization of purchased technology is included in research and development expense. 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. LONG-TERM DEBT The Company entered into a loan and security agreement in August 1995 under which the Company received $2.2 million at an interest rate of 10.84%. Amounts borrowed under the 7 agreement are secured by fixed assets, and are being repaid over three years. If certain financial covenants are not satisfied, the note may become due and payable. On December 31, 1996, the balance outstanding on this loan was approximately $1.3 million The Company entered into two loan and security agreements with a bank in January 1997 under which the Company received $3.5 million at the bank's prime rate plus 1.5%. Amounts borrowed under the two agreements are $2 million and $1.5 million, are secured by certain fixed assets and are to be repaid over three and four years, respectively. If certain financial covenants are not satisfied, the notes may become due and payable. PREFERRED STOCK On December 31, 1996, the Company had 200,000 shares of its Series C Convertible Preferred Stock outstanding. The Series C shares do not have dividend or voting rights. The Series C shares convert automatically on June 30, 1997, into 345,327 common shares. Prior to June 29, 1997, Hoechst Marion Roussel, Inc. ("HMRI"), the holder of Series C shares, may, if the license agreement between the Company and HMRI is terminated, cause the Company to redeem the Series C Preferred Stock for $15 million, payable in cash or the Company's common stock at Alliance's election, any time on or before the expiration of five years following the redemption date. REVENUE RECOGNITION Revenue under collaborative license and research agreements is recognized as services are provided under such agreements. Revenue from product sales is recognized as products are shipped. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenditures are charged to expense as incurred. NET LOSS PER COMMON SHARE Net loss per common share is based on the weighted average number of shares outstanding during the respective periods and does not include common stock equivalents since their effect on the net loss per common share would be anti- dilutive. NEW ACCOUNTING STANDARDS In November 1995, the Financial Accounting Standards Board issued SFAS 123, "Accounting for Stock-Based Compensation," effective for fiscal years beginning after December 15, 1995. SFAS 123 establishes and encourages the use of the fair-value-based method of accounting for stock-based compensation arrangements under which compensation cost is determined using the fair value of stock-based compensation determined as of the grant date, and is recognized over the periods in which the related services are rendered. The statement also permits companies to elect to continue using the current implicit value-accounting method specified in APBO No. 25 to account for stock-based compensation. The Company has elected to retain its current implicit value-based method and will be required to disclose the pro forma effect of using the fair value-based method to account for its stock-based compensation in its fiscal 1997 financial statements. 2. ACQUIRED IN-PROCESS TECHNOLOGY 8 In November 1996, the Company acquired MDV Technologies, Inc. ("MDV") by a merger (the "MDV Merger") of a wholly owned subsidiary of the Company into MDV. MDV is engaged in the development of a thermo-reversible gel (FLOGEL-Registered Trademark-) intended for use as an anti-adhesion treatment for persons undergoing abdominal or pelvic surgeries. FLOGEL is applied in a cold, liquid form and becomes a gel at body temperature. MDV has obtained preliminary human safety data with the product's current formulation, and has performed preclinical studies on additional formulations. The consideration payable in the MDV Merger consists of $15.5 million, $3 million of which was paid on November 13, 1996 (the "Effective Date"), $2.5 million which will be paid on each of February 13, June 13, and September 13, 1997, and $5 million which will be paid on November 13, 1997. The initial $3 million payment, which was partially made through the delivery of 178,082 shares of common stock, of the Company, included approximately $2 million in repayment of outstanding MDV debt. Additionally, the Company will pay up to $20 million if advanced clinical development or licensing milestones are achieved in connection with MDV's technology. The Company will also make certain royalty payments on the sales of products, if any, developed from such technology. The Company may buy out its royalty obligation for $10 million at any time prior to the first anniversary of the approval by U.S. regulatory authorities of any products based upon MDV technology (increasing thereafter over time). All of such payments to the former MDV shareholders may be made in cash or, at the Company's option, shares of the Company's common stock, except for the royalty obligations which will be payable only in cash. The Company has not determined whether subsequent payments (other than royalties) will be made in cash or in common stock or, if made in cash, the source of such payments. There can be no assurance that any of the contingent payments will be made, because they are dependent on future developments which are inherently uncertain. The Company has accounted for the MDV Merger as a purchase, and has recorded a one-time charge in the second quarter ended December 31, 1996 for $16 million, including the $15.5 million scheduled payments described above and related transaction costs. 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 pharmaceutical products. The Company has been unprofitable since inception and expects to continue to spend substantial amounts on research and development, preclinical testing and clinical trials, regulatory activities, and commercial manufacturing start-up. The Company has entered into collaborative research and development agreements with pharmaceutical companies for OXYGENT and LIQUIVENT, and is actively searching for a similar arrangement for IMAGENT- Registered Trademark- US. The arrangements with its existing partners require them to reimburse the Company for substantially all of its development expenses incurred for the respective products and to make milestone payments to the Company upon the achievement of certain product development events, followed by royalties on sales at commercialization. If the Company enters into a similar arrangement for IMAGENT US, and some of the development events under its existing agreements are achieved and the relevant payments made, the Company could become profitable on a periodic basis over the next two years, prior to the commercialization of products. However, the timing and amounts of such license fees and milestone payments, if any, cannot be predicted with 9 certainty and may not occur if product development events are not achieved. There can be no assurance that the Company will be able to achieve profitability at all or on a sustained basis. See Note 2 to the Condensed Consolidated Financial Statements for information related to the November 1996 acquisition of MDV Technologies, Inc. by the Company. LIQUIDITY AND CAPITAL RESOURCES Through December 1996, 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 April 1996, the Company completed a public offering of 2.9 million shares of newly issued common stock, resulting in net proceeds to the Company of approximately $44 million. In February 1996, the Company entered into an license agreement with HMRI, which provides HMRI with exclusive worldwide development and marketing rights to the intratracheal administration of liquids, including LIQUIVENT, which perform bronchoalveolar lavage or liquid ventilation. The product is being developed jointly by Alliance and HMRI, with HMRI responsible for substantially all of the costs of development and marketing. In conjunction with the HMRI license agreement, HMRI purchased shares of Series B Preferred Stock and Series C Preferred Stock for $22 million. In addition, HMRI paid Alliance an initial license fee of $5 million and agreed to pay further license fees, milestone payments, and royalties on product sales. HMRI also received a five-year warrant to acquire 300,000 shares of common stock at $20 per share. In June 1996, the Series B Preferred Stock and accumulated dividends thereon were converted into 759,375 shares of common stock of the Company. In August 1995, the Company entered into a loan and security agreement under which the Company received $2.2 million. Amounts borrowed under the agreement are secured by property and equipment, and are being repaid over three years. If certain financial covenants are not satisfied, the debt may become due and payable. On December 31, 1996, the balance outstanding on this loan was approximately $1.3 million. The Company has financed substantially all of its office and research facilities and related leasehold improvements under operating lease arrangements. In April 1995, the Company completed offerings of 3.2 million shares of newly issued common stock, resulting in net proceeds to the Company of approximately $14.3 million. In August 1994, the Company entered into a license agreement with Ortho Biotech, Inc. and The R.W. Johnson Pharmaceutical Research Institute, affiliates of Johnson & Johnson (collectively, "Ortho"), which provides Ortho with exclusive worldwide development and marketing rights to the Company's injectable PFC emulsions capable of transporting oxygen for therapeutic use, including OXYGENT. Under the Ortho license agreement, Ortho paid to Alliance an initial fee of $4 million and agreed to make other payments upon the achievement of certain milestones. Ortho is responsible for substantially all the remaining costs of developing and marketing the products and will pay Alliance a royalty based upon sales of products after commercialization. In conjunction with the Ortho license agreement, Johnson & Johnson Development Corporation ("J&JDC"), an affiliate of Johnson & Johnson, purchased Series A Preferred Stock for $15 million and obtained a three-year warrant to purchase 300,000 shares of common stock at $15 per share. In June 1996, the Series A Preferred Stock and accumulated 10 dividends thereon were converted into 815,625 shares of common stock of the Company, and J&JDC exercised its warrant for 300,000 shares. In December 1996, Ortho paid to Alliance a $15 million milestone payment pursuant to the Ortho license agreement. The Company had net working capital of $65.7 million at December 31, 1996 compared to $73.2 million at June 30, 1996. The Company's cash, cash equivalents, and short-term investments increased to $75.7 million at December 31, 1996 from $71.4 million at June 30, 1996. The increase resulted primarily from cash provided by operations of $7.1 million, net of equipment additions of $2.6 million. The Company's operations to date have consumed substantial amounts of cash, and are expected to continue to do so for the foreseeable future. In December 1993, in order to obtain a commitment for a long-term supply of raw material for both clinical trials and anticipated future production requirements, the Company entered into an agreement with a supplier under which the Company was obligated to make payments to the supplier through May 1997 based, in part, upon the achievement of certain milestones. Based upon the supplier's intent to negotiate directly with the Company's existing and future collaborative partners, that agreement was modified in July 1995 to terminate certain commitments by both parties. Some or all of the Company's payment obligations that remain may be reimbursed to the Company by existing collaborative partners. 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 health care 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. The Company will seek additional collaborative research and development relationships with suitable corporate partners for its non-licensed products. There can be no assurance that such relationships, if any, will successfully reduce the Company's funding requirements. Additional equity or debt financing may be required, and there can be no assurance that funds from these sources will be available on reasonable terms, if at all. If adequate funds are not available, the Company may be required to delay, scale back, or eliminate one or more of its product development programs, or obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates, or products that the Company would not otherwise relinquish. Alliance anticipates that its current capital resources, expected revenues from the Ortho license agreement, HMRI license agreement, and investments, will be adequate to satisfy its capital requirements for at least the next 24 months. The Company's future capital requirements will depend on many factors, including 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 11 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 at its existing San Diego, California facility and for LIQUIVENT at its Otisville, New York facility, it may need to expand its commercial manufacturing capabilities for these products in the future. The Company is currently manufacturing IMAGENT US for clinical trials at its San Diego facility and will need to design and prepare a larger facility to accommodate initial market launch of IMAGENT US. Expansion of manufacturing capacity 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 or obtained any regulatory approvals for construction of a commercial production facility for its products, nor can there be any assurance that it will be able to do so. The projected location and completion date of any production facility will depend upon regulatory and development activities and other factors. The Company cannot predict the amount that it will expend for the construction of such a production facility, and there can be no assurance as to when or whether the U.S. Food and Drug Administration will determine that such facility complies with Good Manufacturing Practices. Construction of a facility will depend on regulatory approvals, product development, and capital resources, among other things. The Ortho license agreement provides an option to Ortho to elect to manufacture the emulsion products referred to therein, or to require the Company to manufacture such products at a negotiated price. The HMRI license agreement requires the Company to manufacture LIQUIVENT at its Otisville facility for a period of time after market launch and to sell the product to HMRI at a negotiated price. HMRI will be responsible for establishing production capacity beyond the maximum capacity of the Otisville facility. Except for historical information, the statements made herein and elsewhere are forward looking. The Company wishes to caution readers that these statements are only predictions and that the Company's business is subject to significant risks. The factors discussed herein and other important factors, in some cases have affected, and in the future could affect, the Company's actual results and could cause the Company's actual consolidated results for 1997, and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. These risks include the inability to enter into collaborative relationships to further develop and commercialize the Company's products, changes in any such relationships, or the inability of any collaborative partner to adequately commercialize any of the Company's products; the uncertainties associated with the lengthy regulatory approval process; obtaining and enforcing patents important to the Company's business; and possible competition from other products. Furthermore, even if the Company's products appear promising at an early stage of development, they may not reach the market for a number of important reasons. Such reasons include, but are not limited to, the possibilities that the potential products will be found ineffective during clinical trials, failure to receive necessary regulatory approvals, difficulties in manufacturing on a large scale, failure to obtain market acceptance, and the inability to commercialize because of proprietary rights of third parties. The research, development, and market introduction of new products will require the application of considerable technical and financial resources, while revenues generated from such products, assuming they are developed successfully, may not be realized for several years. Other material and unpredictable factors which could affect operating results include, without limitation, the uncertainty of the timing of product approvals and 12 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 health care costs and potential legislation or regulation of health care pricing. RESULTS OF OPERATIONS SIX MONTHS ENDED DECEMBER 31, 1996 AS COMPARED WITH SIX MONTHS ENDED DECEMBER 31, 1995 The Company's license and research revenue increased by $23.8 million to $27.9 million for the six months ended December 31, 1996, compared to $4.1 million for the six months ended December 31, 1995, primarily as a result of the $15 million milestone payment from Ortho under the Ortho license agreement, and research revenue from the HMRI license agreement. The Company expects research revenue to continue at the higher levels in 1997 compared to 1996. Research and development expenses increased by 26% to $19.7 million for the six months ended December 31, 1996, compared to $15.6 million for the six months ended December 31, 1995. The increase in expenses was primarily due to a $2.3 million increase in payments to outside researchers for pre-clinical and clinical trials and other product development work, a $1 million increase in staffing costs, a $400,000 increase in the usage of raw materials and supplies, a $400,000 increase in depreciation expense, and a $250,000 increase in repairs and maintenance expenses, as well as other increases related to the Company's increased research and development activities. The expenses for the six months ended December 31, 1995 included a $757,000 charge arising from the acquisition of certain PFC patents, patent rights, and related documents in exchange for 50,000 shares of the Company's common stock and a five-year warrant to purchase up to an additional 100,000 shares of the Company's common stock at $10 per share. General and administrative expenses increased by 14% to $3.9 million for the six months ended December 31, 1996, compared to $3.4 million for the six months ended December 31, 1995. The increase in general and administrative expenses was primarily due to increases in staffing costs and professional fees. The Company has accounted for the acquisition of MDV as a purchase, and has recorded a one-time charge in the six months ended December 31, 1996 of $16 million, including the $15.5 million scheduled payments and related transaction costs. Investment income and other was $2 million for the six months ended December 31, 1996, compared to $430,000 for the six months ended December 31, 1995. The increase in investment revenue was primarily a result of higher average cash balances as a result of the Ortho milestone payment received, the February 1996 HMRI transaction, and the April 1996 stock offering. Alliance expects to continue to incur substantial and increasing 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. 13 THREE MONTHS ENDED DECEMBER 31, 1996 AS COMPARED WITH THREE MONTHS ENDED DECEMBER 31, 1995 The Company's license and research revenue increased by $20.1 million to $22.1 million for the three months ended December 31, 1996, compared to $2 million for the three months ended December 31, 1995, primarily as a result of the $15 million milestone payment from Ortho under the Ortho license agreement, and research revenue from the HMRI license agreement. The Company expects research revenue to continue at the higher levels in 1997 compared to 1996. Research and development expenses increased by 42% to $10.5 million for the three months ended December 31, 1996, compared to $7.4 million for the three months ended December 31, 1995. The increase in expenses was primarily due to a $1.4 million increase in payments to outside researchers for pre-clinical and clinical trials and other product development work, a $600,000 increase in staffing costs, a $400,000 increase in the usage of raw materials and supplies, and a $200,000 increase in depreciation expense, as well as other increases related to the Company's increased research and development activities. General and administrative expenses increased by 6% to $1.9 million for the three months ended December 31, 1996, compared to $1.8 million for the three months ended December 31, 1995. The increase in general and administrative expenses was primarily due to increases in staffing costs and professional fees. The Company has accounted for the acquisition of MDV as a purchase, and has recorded a one-time charge in the three months ended December 31, 1996 of $16 million, including the $15.5 million scheduled payments and related transaction costs. Investment income and other was $938,000 for the three months ended December 31, 1996, compared to $177,000 for the three months ended December 31, 1995. The increase in investment revenue was primarily a result of higher average cash balances as a result of the Ortho milestone payment received, the February 1996 HMRI transaction, and the April 1996 stock offering. PART II OTHER INFORMATION: Item 4. Submission of Matters to a Vote of Security Holders An annual meeting of shareholders was held on November 13, 1996. The following directors were re-elected for the following year and until the election and qualification of their respective successors: Broker Director For Against Abstentions Non-Votes Pedro Cuatrecasas, M.D. 21,576,634 0 165,818 0 Carroll O. Johnson 21,547,842 0 194,610 0 Stephen M. McGrath 21,575,751 0 166,701 0 Donald E. O'Neill 21,574,609 0 167,843 0 14 Helen M. Ranney, M.D. 21,575,334 0 167,118 0 Jean G. Riess, Ph.D. 21,575,959 0 166,493 0 Duane J. Roth 21,574,259 0 168,193 0 Thomas F. Zuck, M.D. 21,572,759 0 169,693 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: 18,369,850 For 3,236,687 Against 135,915 Withheld 0 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, 1997 in accordance with the following vote: 18,854,198 For 2,783,332 Against 104,922 Withheld 0 Broker Non-Votes - ---------------- ------------------ ----------------- ------------------- Item 6. Exhibits and Reports on Form 8-K (a) There are no exhibits. (b) During the quarter for which this report is filed, a report dated November 13, 1996 was filed on Form 8-K and subsequently amended in January 1997. The amended report stated that the Company acquired MDV through the merger of a wholly owned subsidiary into MDV as further described elsewhere in this report. 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\ Theodore D. Roth -------------------------------- Theodore D. Roth Executive Vice President and Chief Financial Officer Date: February 12, 1997 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS JUN-30-1997 OCT-01-1996 DEC-31-1996 19,631,000 56,099,000 7,000,000 0 0 84,878,000 13,761,000 0 114,969,000 19,174,000 0 0 2,000 302,000 0 114,969,000 5,000 22,126,000 0 0 28,412,000 0 0 (5,348,000) 0 (5,348,000) 0 0 0 (5,348,000) (0.18) 0
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