-----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, Nn6ig4ywBNh7eKB/zWVpnx1CUGEYUtlxHRkGH4ezmC7ddemQGbSzxxuXA1K7Byrj aGRivTCEt5pzZj4Mb3Q34g== 0000912057-00-004461.txt : 20000209 0000912057-00-004461.hdr.sgml : 20000209 ACCESSION NUMBER: 0000912057-00-004461 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000208 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED MAGNETICS INC CENTRAL INDEX KEY: 0000792977 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 042742593 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14732 FILM NUMBER: 526980 BUSINESS ADDRESS: STREET 1: 61 MOONEY ST CITY: CAMBRIDGE STATE: MA ZIP: 02138 BUSINESS PHONE: 6173543929 MAIL ADDRESS: STREET 1: 61 MOONEY ST CITY: CAMBRIDGE STATE: MA ZIP: 02138 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 (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 #0-14732 ADVANCED MAGNETICS, INC. (Exact name of registrant as specified in its charter) Delaware 04-2742593 (State or other jurisdiction of (IRS Employer Incorporation or organization) Identification No.) 61 Mooney Street Cambridge, MA 02138 (Address of principal executive offices) Registrant's telephone number, including area code: (617) 497-2070 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No ---------- ---------- At February 1, 2000, 6,752,027 shares of registrant's common stock (par value, $.01) were outstanding. Page 1 of 17 ADVANCED MAGNETICS, INC. FORM 10-Q QUARTER ENDED DECEMBER 31, 1999 PART I. FINANCIAL INFORMATION Item 1 -- Financial Statements Page 2 of 17 ADVANCED MAGNETICS, INC. BALANCE SHEETS DECEMBER 31, 1999 AND SEPTEMBER 30, 1999 (UNAUDITED)
ASSETS DECEMBER 31, SEPTEMBER 30, 1999 1999 ---- ---- Current assets: Cash and cash equivalents........................................... $ 14,567,868 $ 17,052,636 Marketable securities (Note B)...................................... 7,383,011 4,804,785 Accounts receivable................................................. 141,684 648,201 Inventories......................................................... 80,480 80,480 Prepaid expenses.................................................... 149,884 195,655 ---------------- ------------------- Total current assets.............................................. 22,322,927 22,781,757 Property, plant and equipment: Land................................................................ 360,000 360,000 Building............................................................ 4,612,172 4,610,827 Laboratory equipment................................................ 7,994,846 8,007,095 Furniture and fixtures.............................................. 774,066 760,538 ---------------- ------------------- 13,741,084 13,738,460 Less-accumulated depreciation and amortization...................... (9,204,080) (9,065,660) ---------------- ------------------- Net property, plant and equipment................................... 4,537,004 4,672,800 Other assets........................................................ 361,802 361,802 ---------------- ------------------- Total assets...................................................... $ 27,221,733 $ 27,816,359 ================ =================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................................... $ 157,345 $ 118,465 Accrued expenses.................................................... 545,517 581,534 Income taxes payable................................................ 61,651 61,651 ---------------- ------------------- Total current liabilities......................................... 764,513 761,650 Commitments and contingencies (Notes E and H)....................... Stockholders' equity: Preferred stock, par value $.01 per share, authorized 2,000,000 shares; none issued.................................... --- --- Common stock, par value $.01 per share, authorized 15,000,000 shares; issued and outstanding 6,752,027 shares at December 31, 1999 and 6,752,027 shares at September 30, 1999....................... 67,521 67,521 Additional paid-in capital.......................................... 44,205,370 44,205,370 Retained earnings (deficit)......................................... (18,278,701) (16,847,061) Accumulated other comprehensive income.............................. 463,030 (371,121) ------------------ ------------------- Total stockholders' equity........................................ 26,457,220 27,054,709 ------------------ ------------------- Total liabilities and stockholders' equity.......................... $ 27,221,733 $ 27,816,359 ================== ===================
The accompanying notes are an integral part of the financial statements. Page 3 of 17 ADVANCED MAGNETICS, INC. STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE QUARTERS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
FIRST QUARTER ENDED DECEMBER 31, ---------------------------------- 1999 1998 ---- ---- STATEMENT OF OPERATIONS Revenues: Royalties......................................... $ 163,246 $ 157,892 Product sales..................................... --- 318,949 Contract research and development................. 10,995 244,902 Interest, dividends and net gains and losses on sales of securities............... 235,845 192,776 ----------------- ----------------- Total revenues............................... 410,086 914,519 Cost and expenses: Cost of product sales............................. --- 112,181 Cost of contract research and development......... 3,195 --- Research and development expenses................. 1,367,062 2,490,751 Selling, general and administrative Expenses........................................ 471,469 921,757 ----------------- ----------------- Total costs and expenses..................... 1,841,726 3,524,689 ----------------- ----------------- Net income (loss).................................... $ (1,431,640) $ (2,610,170) ================= ================= Basic and diluted net income (loss) per share........ $ (0.21) $ (0.39) ----------------- ----------------- Weighted average shares outstanding: Basic........................................... 6,752,027 6,767,509 ----------------- ----------------- Diluted......................................... 6,752,027 6,767,509 ----------------- ----------------- COMPREHENSIVE INCOME (LOSS) Net income (loss).................................... $ (1,431,640) $ (2,610,170) Unrealized gains (losses) on market value of Securities...................................... 834,151 2,146,226 ----------------- ----------------- Comprehensive income (loss).......................... $ (597,489) $ (463,944) ================= =================
The accompanying notes are an integral part of the financial statements. Page 4 of 17 ADVANCED MAGNETICS, INC. STATEMENTS OF CASH FLOWS FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
THREE-MONTH PERIODS ENDED DECEMBER 31, ----------------------------------- 1999 1998 ---- ---- Cash flows from (for) operating activities: Cash received from customers........................................... $ 534,399 $ 1,106,712 Cash paid to suppliers and employees................................... (1,680,788) (3,307,916) Dividends and interest received........................................ 235,845 87,508 Royalties received..................................................... 172,475 116,927 ------------------ ---------------- Net cash provided by (used in) operating activities.................... (738,069) (1,996,769) Cash flows from investing activities: Purchase of securities................................................. (1,744,075) (1,082,782) Capital expenditures................................................... (2,624) (176,515) ------------------ ---------------- Net cash provided by (used in) investing activities.................... (1,746,699) (1,259,297) Cash flows from financing activities: Proceeds from issuances of common stock................................ --- 11 ------------------ ---------------- Net cash provided by (used in) financing activities.................... --- 11 ------------------ ---------------- Net increase (decrease) in cash and cash equivalents................... (2,484,768) (3,256,055) Cash and cash equivalents at beginning of the period................... 17,052,636 7,704,245 ------------------ ---------------- Cash and cash equivalents at end of the period......................... $ 14,567,868 $ 4,448,190 ================== ================
The accompanying notes are an integral part of the consolidated financial statements. Page 5 of 17 ADVANCED MAGNETICS, INC. RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
THREE-MONTH PERIODS ENDED DECEMBER 31, -------------------------------- 1999 1998 ---- ---- Net income (loss)......................................................... $ (1,431,640) $ (2,610,170) ------------------ --------------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Accretion of U.S. Treasury Notes discount................................. --- (11,519) Decrease (increase) in accounts receivable................................ 506,517 386,877 (Increase) decrease in inventories........................................ --- 78,318 (Increase) decrease in prepaid expenses and other assets.................. 45,771 (144,591) Depreciation and amortization............................................. 138,420 208,519 (Decrease) increase in accounts payable and accrued expenses.............. 2,863 97,097 (Decrease) in income taxes payable........................................ --- (1,300) ------------------ --------------------- Total adjustments......................................................... 693,571 613,401 ------------------ --------------------- Net cash provided by (used in) operating activities....................... $ (738,069) $ (1,996,769) ================== =====================
The accompanying notes are an integral part of the financial statements. Page 6 of 17 ADVANCED MAGNETICS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 A. SUMMARY OF ACCOUNTING POLICIES BUSINESS Founded in November 1981, Advanced Magnetics, Inc., a Delaware corporation (the "Company"), is a biopharmaceutical company engaged in the development and manufacture of compounds utilizing the Company's core proprietary colloidal superparamagnetic particle technology and core polysaccharide technology for magnetic resonance imaging ("MRI"). The products developed by the Company are diagnostic imaging agents for use in conjunction with MRI to aid in the diagnosis of cancer and other diseases. The Company consolidated its majority-owned subsidiary, Kalisto Biologicals Inc. ("Kalisto") until June 30, 1999 and all intercompany transactions until that time have been eliminated. On July 1, 1999, the Company reduced its ownership in Kalisto to 19.5% and accordingly has not consolidated Kalisto from that date forward. These financial statements are unaudited and in the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been recorded. Such adjustments consisted only of normal recurring items. Certain amounts in the fiscal 1999 financial statements have been reclassified to conform with the fiscal 2000 presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The year-end balance sheet data were derived from audited financial statements, but do not include disclosures required by generally accepted accounting principles. These interim financial statements should be read in conjunction with the Company's most recent Form 10-K and Annual Report as of September 30, 1999. B. MARKETABLE SECURITIES The cost and market value of the Company's marketable securities portfolio are as follows:
DECEMBER 31, 1999 SEPTEMBER 30, 1999 ----------------- ------------------ COST FAIR VALUE COST FAIR VALUE ---- ---------- ---- ---------- Common stock................................ $ 6,919,981 $ 7,383,011 $ 5,175,906 $ 4,804,785 ----------------- ------------------- ------------------- ------------------- Totals...................................... $ 6,919,981 $ 7,383,011 $ 5,175,906 $ 4,804,785 ================= =================== =================== ===================
C. INCOME TAX There were no income tax provisions for the three-month periods ended December 31, 1999 and 1998 due to net operating losses in those periods. Page 7 of 17 D. EARNINGS (LOSS) PER SHARE The weighted average common and common equivalent shares used in the computation of basic and diluted earnings per share is presented below. Aggregate options of 490,506 (weighted average exercise price of $8.90) and 430,320 (weighted average exercise price of $11.21) for the quarters ending December 31, 1999 and December 31, 1998, respectively, have not been included in the calculation of weighted average shares, since their effect would be anti-dilutive, given the net loss in both periods.
DECEMBER 31 ----------- 1999 1998 ---- ---- Weighted average number of shares issued and outstanding............... 6,752,027 6,767,509 Common stock equivalents............................................... --- --- ------------- ------------- As adjusted............................................................ 6,752,027 6,767,509 ============= =============
E. LEGAL PROCEEDINGS The Company and certain of its officers were sued in an action entitled DAVID D. STARK, M.D. V. ADVANCED MAGNETICS. INC., JEROME GOLDSTEIN, ERNEST V. GROMAN, AND LEE JOSEPHSON, Civil Action No. 92-12157-WGY, in the United States District Court for the District of Massachusetts on September 3, 1992. The plaintiff, a former consultant to the Company, claims that he was incorrectly omitted as an inventor or joint inventor on certain of the Company's patents and on pending applications, and seeks injunctive relief and unspecified damages. In addition, the complaint also alleges state law claims for breach of contract, breach of good faith and fair dealing, breach of implied contract, misappropriation of trade secrets, conversion, negligent misrepresentation, misrepresentation, unjust enrichment and unfair trade practices. The District Court has stayed this federal action pending resolution of an appeal in the State Court of summary judgment in the Company's favor as well as resolution of a jurisdictional issue. While the outcome of the action cannot be determined, the Company believes the action is without merit and intends to defend the action vigorously. There can be no assurance, however, that the Company will be able to defend successfully this action and the failure by the Company to prevail for any reason could have an adverse effect on the Company's future business, financial condition and results of operations. The Company and certain of its officers were sued in an action entitled DAVID D. STARK, M.D. V. ADVANCED MAGNETICS, INC., JEROME GOLDSTEIN, ERNEST V. GROMAN AND LEE JOSEPHSON, Civil Action No. 93-02846-C, in the Superior Court Department of the Massachusetts Trial Court for Middlesex County. This case involves claims of breach of contract, breach of good faith and fair dealing, breach of implied contract, unjust enrichment and unfair trade practices that were originally dismissed by, but later remanded to, the Federal Court in the above-mentioned action, as well as a new count alleging tortious interference with contractual or advantageous relations. The Superior Court granted partial summary judgment in the Company's favor and dismissed the unfair trade practices and tort counts. The plaintiff's contract claims have been dismissed with prejudice and final judgment was entered against the plaintiff. The plaintiff filed an appeal in David D. Stark, M.D. v. Advanced Magnetics, Inc., Jerome Goldstein, Ernest V. Groman and Lee Josephson, Appeal No. 98-P-1749 in the Massachusetts Appeals Court, on January 25, 1999. While the outcome of the action cannot be determined, the Company believes the action is without merit and intends to defend the action vigorously. There can be no assurance, however, that the Company will be able to defend successfully this action and the failure by the Company to prevail for any reason could have an adverse effect on the Company's future business, financial condition and results of operations. Page 8 of 17 The Company filed suit on October 7, 1997 against Sanofi Pharmaceuticals, Inc. (formerly known as Sanofi Winthrop, Inc.) and Sanofi SA (collectively, "Defendants") in the Superior Court of the Commonwealth of Massachusetts. The action is entitled ADVANCED MAGNETICS, INC. V. SANOFI PHARMACEUTICALS, INC. AND SANOFI SA, Civil Action No. 97-5222B. The Company claims that the Defendants tortiously interfered with a license, supply and marketing agreement (the "Agreement"), and seeks unspecified monetary damages. In addition, the Company seeks a declaration that the Defendants do not have any rights under the Agreement and that the Company has not breached the Agreement. Sanofi Pharmaceuticals, Inc., filed counterclaims against the Company on February 4, 1998 seeking compensatory damages of $11,500,000 and multiple damages as a result of the Company's alleged breach of the Agreement. Sanofi Pharmaceuticals, Inc. also filed a motion to dismiss the Company's tortious interference claim, which the Court denied on July 3, 1998. On October 26, 1998, the Company served a motion for partial summary judgment which, among other things, requests judgment in its favor on all of Sanofi Pharmaceuticals, Inc.'s counterclaims. On November 13, 1998 the Company filed an amended complaint adding claims for unfair competition and breach of contract against the Defendants. On November 23, 1998, Defendants answered the Company's amended complaint, and Sanofi Pharmaceuticals, Inc. served a new set of counterclaims seeking compensatory damages of $15,000,000 and multiple damages as a result of the Company's alleged conduct. On December 18, 1998, the court held a hearing on the Company's motion for partial summary judgment. On June 15, 1999, the court granted partial summary judgement in favor of the Company and against the Defendants, declared that the Company did not breach the Agreement, was not unjustly enriched, and did not violate Mass. Gen. Laws ch. 93A, and dismissed Sanofi Pharmaceuticals, Inc.'s counterclaims for breach of contract, unjust enrichment, conversion, account annexed and violation of Mass. Gen. Laws ch. 93A. On October 29, 1999, the Company served a motion for partial summary judgement which, among other things, requests judgement in its favor on Sanofi Pharmaceuticals, Inc.'s remaining counterclaims against the Company and for judgement in its favor on the Company's breach of contract claim against Sanofi Pharmaceuticals, Inc. Also on October 29, 1999, Sanofi Pharmaceuticals, Inc. served a motion for partial summary judgement which, among other things, requests judgement in its favor on the Company's remaining claims. While the final outcome of the remaining claims and counterclaims cannot be determined, the Company will pursue its claims vigorously, and believes that Sanofi Pharmaceuticals, Inc.'s remaining counterclaims are equally without merit and intends to defend them vigorously. The Company may not be able to successfully defend the counterclaims and the failure by the Company to prevail for any reason could have an adverse effect on its future business, financial condition or results of operations. F. BUSINESS SEGMENTS: During fiscal 1999, the Company adopted FASB Statement No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information". This Statement changes the way public companies report information about segments. Prior to the deconsolidation of Kalisto in July of 1999, the Company had two business segments under the "management approach" as defined in SFAS 131, the original business and the majority-owned subsidiary. Page 9 of 17 Information concerning the operations in these reportable segments is as follows:
FIRST QUARTER ENDED DECEMBER 31, ------------ 1999 1998 ---- ---- REVENUES: Advanced Magnetics, Inc.............................. $ 410,086 $ 595,570 Kalisto Biologicals Inc.............................. --- 318,949 ------------- ------------ Total............................................ $ 410,086 $ 914,519 DEPRECIATION EXPENSE: Advanced Magnetics, Inc.............................. $ 138,420 $ 190,800 Kalisto Biologicals Inc.............................. --- 17,719 ------------- ------------ Total............................................ $ 138,420 $ 208,519 NET INCOME (LOSS): Advanced Magnetics, Inc.............................. $ (1,431,640) $ (2,311,718) Kalisto Biologicals Inc.............................. --- (298,452) ------------- ------------ Total............................................ $ (1,431,640) $ (2,610,170) DECEMBER 31, SEPTEMBER 30, 1999 1999 ---- ---- SEGMENT ASSETS: Advanced Magnetics, Inc.............................. $ 27,221,733 $ 27,816,359 Kalisto Biologicals Inc.............................. --- --- ------------- ------------ Total............................................ $ 27,221,733 $ 27,816,359
G. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities" which is effective for fiscal years beginning after June 15, 2000. The statement establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability, measured at its fair value. SFAS No. 133 also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Adoption of this standard is not expected to have a material impact on the financial position or results of operations of the Company. In December 1999, the Staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements". SAB 101 summarizes some of the staff's interpretations of the application of generally accepted accounting principles (GAAP) to revenue recognition. Application of the accounting and disclosure requirements of SAB 101 is not expected to have a material impact on the financial position or the results of operations of the Company. H. COMMITMENTS AND CONTINGENCIES The Company is a guarantor on a lease for office space for Kalisto in the event Kalisto defaults on its obligation. The Company is currently assessing Kalisto's ability to pay its obligation under the lease and the consequences to the Company of any default by Kalisto. As of February 2000, the Company's potential obligation relating to this guarantee cannot be predicted with certainty. However, the ultimate liability of the Company, if any, in connection with this guaranty, could have a material adverse impact on the statement of operations in any one accounting period. Page 10 of 17 ITEM 2 -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS. ANY STATEMENTS CONTAINED HEREIN THAT DO NOT DESCRIBE HISTORICAL FACTS ARE FORWARD LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE BASED ON CURRENT EXPECTATIONS, BUT ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES. THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM CURRENT EXPECTATIONS INCLUDE THE FOLLOWING: THE TIMING AND RESULT OF FDA ACTION, THE ABILITY TO SUCCESSFULLY MARKET FERIDEX I.V.-Registered Trademark- OR GASTROMARK-Registered Trademark- AND ANY FUTURE PRODUCTS THAT RECEIVE FDA APPROVAL, THE COMPANY'S DEPENDENCE ON ITS CORPORATE PARTNERS, DELAYS IN ARRANGEMENTS WITH CLINICAL INVESTIGATIONS, UNCERTAINTIES RELATING TO RESULTS OF THE CLINICAL TRIALS OF THE COMPANY'S PRODUCT CANDIDATES, THE COMPANY'S ABILITY TO OBTAIN FUTURE FINANCING, UNCERTAINTIES RELATING TO PATENTS AND PROPRIETARY RIGHTS, THE ABILITY OF THE COMPANY TO COMPETE SUCCESSFULLY IN THE FUTURE AND THE RISKS IDENTIFIED IN THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS, INCLUDING BUT NOT LIMITED TO ITS FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1999. OVERVIEW Since its inception in November 1981, Advanced Magnetics, Inc. ("Advanced Magnetics" or the "Company") has focused its efforts on developing applications of its core magnetic particle technology. This focus has led to the development of magnetic resonance imaging (MRI) contrast agents. The Company has funded its operations with cash from license fees from corporate partners, royalties, sales of its products, fees from contract research performed for third parties, the proceeds of financings and income earned on invested cash. The Company's success in the market for diagnostic products will depend, in part, on the Company's ability to successfully develop, test, produce and market its products; obtain necessary governmental approvals in a timely manner; attract and maintain key employees; and successfully respond to technological changes in its marketplace. The Company's operating results may continue to vary significantly from quarter to quarter, or from year to year, depending on a number of factors, including: (i) the timing of payments from corporate partners and research grants; (ii) the introduction of new products; (iii) the timing and size of orders from customers; (iv) the general level of acceptance of the Company's products; and (v) increases or decreases in, and timing of, research and development, clinical trials and other expenses. A substantial portion of the Company's expenses consist of research and development costs. The Company's current planned expense levels are based in part upon expectations as to future revenue. Consequently, profits and losses may vary significantly from quarter to quarter or year to year based on the timing of revenue. Revenue or profits in any period will not necessarily be indicative of results in subsequent periods and there can be no assurance that the Company will be profitable or that revenue growth will be achieved in the future. In October 1997, the Company acquired approximately 80.7% of the issued and outstanding capital stock of Kalisto Biologicals Inc. ("Kalisto"). The Company's results of operations and cash flows reflect the activities of Kalisto for the period from the date of acquisition through June 30, 1999. On July 1, 1999, the Company reduced its ownership in Kalisto Biologicals to 19.5%. In December 1999, the Company submitted a New Drug Application (NDA) with the U.S. Food and Drug Administration (FDA) for Combidex-Registered Trademark- Magnetic Resonance Imaging (MRI) contrast agent. The NDA covers two indications. The principle indication is for the diagnosis of lymph node disease to assist in directing biopsy and surgery as well as to aid in the staging of metastatic lymph node involvement for a variety of cancers, including breast and prostate cancer. Page 11 of 17 YEAR 2000 READINESS DISCLOSURE STATEMENT The widely publicized Year 2000 issue arose because many existing computer programs use only the last two digits to define the applicable year. As a result, such computer programs may misinterpret "00" as the year 1900 rather than the year 2000. The consequences of such a misinterpretation could range from a simple miscalculation to a system failure that might cause a disruption of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Since computer and microprocessor use is so widespread, the issue has become a societal concern, the potential impact of which is not yet known. Under the auspices of the Audit Committee, the Company conducted and completed an assessment of its exposure to potential disruptions caused by the Year 2000 issue. In the first phase of its readiness investigation the Company identified its Clinical Data Network (which tracks and analyzes the results of product trials in support of FDA approvals) and its accounting system as mission-critical components that required protection from Year 2000 related disruption. The Company, in order to address Year 2000 concerns and as part of a general systems upgrade, has replaced both of these systems. The Company has obtained written confirmation that the new software applications are Year 2000 compliant. The Company's computer hardware platforms, on which these systems run, have been confirmed as Year 2000 compliant by their manufacturers and the Company completed testing of them in September 1999. In addition to evaluating its computer systems, the Company recognized that the Year 2000 issue may impact machines or equipment that rely on embedded microchips. The Company evaluated and tested such equipment used in its manufacturing facilities and believed that it did not have a material risk of disruptions in manufacturing due to a Year 2000 failure. The Company also evaluated its non-manufacturing equipment. In addition to the Company's critical systems, the Company recognized that it relies on third party service providers and suppliers in the conduct of its business and that there was potential exposure to Year 2000 related business disruptions as a result. For example, third party service providers handle the payroll function for the Company, and the Company also relies on the services of telecommunication companies, banks, and utility companies, among others. The Company contacted all of its significant service providers and obtained assurances that they were addressing Year 2000 issues in a prudent fashion. However, the Company, like all others, is subject to exposure to disruptions in the generic systems that all businesses and consumers rely on generally. The Company obtained assurances from its significant raw material suppliers that there would be no interruption of service as a result of the Year 2000 issue and, to the extent such assurances were not given, the Company devised contingency plans to ameliorate the potential negative effects in the event of the unavailability of materials. A failure of any contingency plan developed by the Company may result in a business interruption caused by one or more of the Company's third party service providers or suppliers, and such a failure may have a material adverse effect on the Company. In addition, the failure on the part of the accounting systems of the Company's customers due to the Year 2000 issue could result in a delay in the payment of invoices issued by the Company. A failure of the accounting systems of a significant number of the Company's customers would have a material adverse effect on the Company. As of February 2000, the Company is not aware of any material problems due to the Year 2000 issue. However, problems may still arise which could have a material adverse impact on the Company. All expenses related to determining and addressing Year 2000 readiness have been expensed as incurred and have amounted to roughly $100,000 to date. If, however, compliance efforts of which the Company is not currently aware are required, or if the cost of any required updating or modification of the Company's IT systems exceeds the Company's estimates, the Year 2000 issue could have a material adverse impact on the Company. Page 12 of 17 Various statements in this discussion of Year 2000 issues are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include statements of the Company's expectation, statements with regard to schedules and expected completion dates and statements regarding expected Year 2000 compliance. These forward-looking statements are subject to various risk factors which may materially affect the Company's efforts to achieve Year 2000 compliance. These risk factors include the inability of the Company to complete the plans and modifications that it has identified, the wide variety of information systems and components, both hardware and software, that must be evaluated, the variety, number and complexity of equipment used in the Company's operations and the large number of vendors and customers with which the Company interacts. The Company's assessments of the effect of Year 2000 on the Company are based, in part, upon information received from third parties and the Company's reasonable reliance on that information. Therefore, the risk that inaccurate information is supplied by third parties upon which the Company reasonably relied must be considered as a risk factor that might affect the Company's Year 2000 efforts. The Company has attempted to reduce the risks by utilizing an organized approach, extensive testing, and allowance of ample contingency time to address issues identified by tests. Page 13 of 17 RESULTS OF OPERATIONS FOR THE QUARTER ENDED DECEMBER 31, 1999 AS COMPARED TO THE QUARTER ENDED DECEMBER 31, 1998 REVENUES Total revenues for the first fiscal quarter ended December 31, 1999 were $410,086 compared to $914,519 for the first fiscal quarter ended December 31, 1998. The decrease in revenues was primarily due to the absence of sales from the Company's formerly consolidated subsidiary, Kalisto Biologicals Inc. and a reduction in research and development services revenue provided by the Company to third parties. Royalties for the fiscal quarter ended December 31, 1999 were $163,246 as compared to $157,892 for the fiscal quarter ended December 31, 1998. There was no gain or loss on the sale of securities in either quarter. There were no product sales during the fiscal quarter ended December 31, 1999. Included in product sales during the first fiscal quarter ended December 31, 1998 were $318,949 in sales by Kalisto. Contract research and development services revenues were $10,995 for the first fiscal quarter ended December 31, 1999 compared with $244,902 for the first fiscal quarter ended December 31, 1998. Contract research and development services revenues are reimbursements of expenditures for clinical trials. The decrease reflects the completion of certain clinical trials. Interest, dividends and gains on sales of securities resulted in revenues of $235,845 in the fiscal quarter ended December 31, 1999 compared to $192,776 for the fiscal quarter ended December 31, 1998. There were no gains or losses on the sale of securities in either quarter. Interest, dividends and net gains on sales of securities consisted of the following:
FIRST QUARTER ENDED DECEMBER 31, -------------------------------- 1999 1998 ---- ---- Interest income $ 212,220 $ 181,076 Dividend income 23,625 11,700 Net gains on sales of securities --- --- ------------------ ----------------- Total $ 235,845 $ 192,776 ------------------ -----------------
COSTS AND EXPENSES Due to the absence of product sales, the Company incurred no costs for products sold in the first fiscal quarter ended December 31, 1999. Included in product sales for the quarter ended December 31, 1998 were cost of sales of $112,181 from Kalisto. A cost of $3,195 was incurred on contract research and development for the first fiscal quarter ended December 31, 1999, while no costs were incurred in the quarter ended December 31, 1998. Research and development expenses decreased $1,123,689 to $1,367,062 for the first fiscal quarter ended December 31, 1999 as compared to the same period in the prior fiscal year. This decrease arises from reduced activity on clinical trials associated with Combidex-Registered Trademark- that occurred during the quarter ended December 31, 1998 and the exclusion of Kalisto research and development. Selling, general and administrative expenses were $471,469 for first fiscal quarter ended December 31, 1999 compared to $921,757 for the first fiscal quarter ended December 31, 1998. The decrease of $450,288 was mostly due to the exclusion of $351,464 in Kalisto costs for the three month period ended December 31,1998 that are no longer consolidated. The reduced levels of expenditures are expected to continue for the foreseeable future. Page 14 of 17 INCOME TAXES There were no income tax provisions for the fiscal quarters ended December 31, 1999 and December 31, 1998 due to operating losses for both periods. EARNINGS For the reasons stated above, there was a net loss of $(1,431,640) or $(0.21) per share for the quarter ended December 31, 1999 compared to a net loss of $(2,610,170) or $(0.39) per share for the quarter ended December 31, 1998. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, the Company's cash and cash equivalents totaled $14,567,868 compared to $17,052,636 at September 30, 1999. In addition, the Company had marketable securities of $7,383,011 at December 31, 1999 compared to $4,804,785 on September 30, 1999. Net cash used in operating activities was $738,069 in the three-month period ended December 31, 1999 compared to net cash used in operating activities of $1,996,769 in the three-month period ended December 31, 1998. Cash used in investing activities was $1,746,699 for the three-month period ended December 31, 1999 compared to $1,259,297 provided by investing activities in the three-month period ended December 31, 1998. Cash used in investing activities in the three-month period ended December 31, 1999 included the purchase of marketable securities of $1,744,075. There were no funds generated by the sale of marketable securities during that period. There was no cash used in or provided by financing activities in the three-month period ended December 31, 1999, compared to $11 provided by financing activities in the three-month period ended December 31, 1998. In May 1996, the Board of Directors authorized the purchase of up to 250,000 shares of the Company's common stock on the open market, from time to time, at prevailing market prices. This authorization was extended in November 1997. There were no funds used in the purchase of the Company's common stock during the three-month periods ended December 31, 1999 and December 31, 1998. Capital expenditures in the three-month period ended December 31, 1999 were $2,625 compared to $176,515 in the three-month period ended December 31, 1998. The capital expenditures in the quarter ended December 31, 1998 reflected upgrades to existing property, plant and equipment. Future expenditures should continue at the reduced levels. Management believes that funds for future needs can be generated from existing cash balances, cash generated from investing activities and cash generated from operations. In addition, the Company will consider from time to time various financing alternatives and may seek to raise additional capital through equity or debt financing or to enter into corporate partnering arrangements. However, such funding may not be available on terms acceptable to the Company, if at all. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities" which is effective for fiscal years beginning after June 15, 2000. The statement establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability, measured at its fair value. SFAS No. 133 also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Adoption of this standard is not expected to have a material impact on the financial position or results of operations of the Company. In December 1999, the Staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements". SAB 101 summarizes some of the staff's interpretations of the application of generally accepted accounting principles (GAAP) to revenue recognition. Application of the accounting and disclosure requirements of SAB 101 is not expected to have a material impact on the financial position or the results of operations of the Company. Page 15 of 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change to the information concerning the Company's market risk sensitive instruments as set forth in the Company's 10-K for the period ended September 30, 1999. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no material changes to the information concerning the Company's legal proceedings as set forth in the Company's Form 10-K for the period ended September 30, 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit 27.1 Financial Data Schedule (EDGAR filing only) The Company did not file any current reports on Form 8-K during the quarter ended December 31, 1999. Page 16 of 17 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. ADVANCED MAGNETICS, INC. Date February 4, 2000 By /s/ Jerome Goldstein ------------------ ----------------------------------- Jerome Goldstein, Chief Executive Officer, Treasurer and Chairman of the Board of Directors Date February 4, 2000 By /s/ James A. Matheson ------------------ ----------------------------------- James A. Matheson, Vice President and Principal Accounting Officer Page 17 of 17 EX-27.1 2 EXHIBIT 27.1
5 3-MOS SEP-30-1999 OCT-01-1999 DEC-31-1999 14,567,868 7,383,011 308,261 (166,577) 80,480 22,322,927 13,741,084 (9,204,080) 27,221,733 764,513 0 0 0 67,521 26,389,699 27,221,733 0 410,086 0 1,841,726 0 0 0 0 0 0 0 0 0 (1,431,640) (0.21) (0.21)
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