-----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, M+YsgDGHkA7JlXroXl1p6J2YgalLgsdR2BpZSAho/GdDnYPiQa6x/3eDGZUn1Ba5 Z5boSKs6VcKQy1ibTKwbzQ== 0000912057-00-023201.txt : 20000512 0000912057-00-023201.hdr.sgml : 20000512 ACCESSION NUMBER: 0000912057-00-023201 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000511 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: 625579 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 ______MARCH 31, 2000 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 organization) (IRS Employer Incorporation or 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 May 5, 2000, 6,752,027 shares of registrant's common stock (par value, $.01) were outstanding. ADVANCED MAGNETICS, INC. FORM 10-Q QUARTER ENDED MARCH 31, 2000 PART I. FINANCIAL INFORMATION Item 1 -- Financial Statements ADVANCED MAGNETICS, INC. BALANCE SHEETS MARCH 31, 2000 AND SEPTEMBER 30, 1999 (UNAUDITED)
ASSETS MARCH 31, SEPTEMBER 30, ------ 2000 1999 ---- ---- Current assets: Cash and cash equivalents........................................... $ 13,466,690 $ 17,052,636 Marketable securities (Note B)...................................... 6,052,493 4,804,785 Accounts receivable (Note C)........................................ 255,182 648,201 Inventories......................................................... 41,383 80,480 Prepaid expenses.................................................... 285,609 195,655 ------------------ ------------------- Total current assets.............................................. 20,101,357 22,781,757 Property, plant and equipment: Land................................................................ 360,000 360,000 Building............................................................ 4,612,172 4,610,827 Laboratory equipment................................................ 8,016,389 8,007,095 Furniture and fixtures.............................................. 781,366 760,538 ------------------ ------------------- 13,769,927 13,738,460 Less--accumulated depreciation and amortization..................... (9,342,501) (9,065,660) ------------------ ------------------- Net property, plant and equipment................................... 4,427,426 4,672,800 Other assets........................................................ 421,626 361,802 ================== =================== Total assets...................................................... $ 24,950,409 $ 27,816,359 ================== =================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................................... $ 257,662 $ 118,465 Accrued expenses.................................................... 536,542 581,534 Income taxes payable................................................ 61,651 61,651 ------------------ ------------------- Total current liabilities......................................... 855,855 761,650 Commitments and Contingencies (Notes F and I) --- --- 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 March 31, 2000 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)......................................... (19,310,849) (16,847,061) Accumulated other comprehensive income (loss)....................... (867,488) (371,121) ------------------ ------------------- Total stockholders' equity........................................ 24,094,554 27,054,709 ------------------ ------------------- Total liabilities and stockholders' equity.......................... $ 24,950,409 $ 27,816,359 ================== ===================
The accompanying notes are an integral part of the financial statements. ADVANCED MAGNETICS, INC. STATEMENTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
THREE-MONTH PERIOD ENDED MARCH 31, SIX-MONTH PERIOD ENDED MARCH 31, 2000 1999 2000 1999 - --------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS Revenues: Royalties................................. $ 260,000 $ 200,000 $ 423,246 $ 360,000 Product sales............................. 161,530 1,001,239 161,530 1,318,079 Contract research and development......... 105,393 144,856 116,388 389,758 Interest, dividends and net gains and losses on sales of securities....... 168,588 937,638 404,433 1,130,415 --------------- --------------- --------------- --------------- Total revenues....................... 695,511 2,283,733 1,105,597 3,198,252 Cost and expenses: Cost of product sales..................... 62,954 155,903 62,954 268,084 Contract research and development ........ expenses................................ --- 15,815 3,195 15,815 Company-sponsored research and............ development expenses.................... 1,052,576 1,980,625 2,419,638 4,471,376 Selling, general and administrative expenses................................ 612,129 1,346,808 1,083,598 2,268,565 --------------- --------------- --------------- --------------- Total costs and expenses............. 1,727,659 3,499,151 3,569,385 7,023,840 Other (income) expenses................... --- (421,561) --- (421,561) --------------- --------------- --------------- --------------- Income (loss) before provision for income taxes................................. (1,032,148) (793,857) (2,463,788) (3,404,027) Provision for income taxes................ --- --- --- --- --------------- --------------- --------------- --------------- Net income (loss)............................ $(1,032,148) $ (793,857) $(2,463,788) $(3,404,027) =============== =============== =============== =============== Basic and diluted net income (loss) per share................................. $ (0.15) $ (0.12) $ (0.36) $ (0.50) =============== ===== =============== ===== =============== ==== =============== Weighted average number of common shares.................................... 6,752,027 6,767,660 6,752,027 6,767,574 Weighted average number of common and common equivalent shares............ 6,752,027 6,767,660 6,752,027 6,767,574 --------------- --------------- --------------- ---------------
The accompanying notes are an integral part of the financial statements. ADVANCED MAGNETICS, INC. STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
THREE-MONTH PERIOD ENDED MARCH 31, SIX-MONTH PERIOD ENDED MARCH 31, 2000 1999 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME Net income (loss)............................ $(1,032,148) $ (793,857) $(2,463,788) $(3,404,027) Other comprehensive income (loss): Unrealized gains (losses) on securities.............................. (1,330,518) (2,379,173) (496,367) (232,947) Reclassification adjustment for gains included in net income............ --- (756,707) --- (756,707) --------------- --------------- --------------- --------------- Other comprehensive income (loss)............ (1,330,518) (3,135,880) (496,367) (989,654) --------------- --------------- --------------- --------------- Comprehensive income (loss).................. $(2,362,666) $(3,929,737) $(2,960,155) $(4,393,681) =============== =============== =============== ===============
The accompanying notes are an integral part of the financial statements. ADVANCED MAGNETICS, INC. STATEMENTS OF CASH FLOWS FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
Six-Month Periods Ended March 31, -------------------------------------------- 2000 1999 ---- ---- Cash flows from operating activities: Cash received from customers........................................... $ 829,287 $ 1,624,917 Cash paid to suppliers and employees................................... (3,282,912) (6,255,845) Dividends and interest received........................................ 404,433 397,568 Royalties received..................................................... 238,787 335,618 ------------------ ----------------- Net cash provided by (used in) operating activities.................... (1,810,405) (3,897,742) Cash flows from investing activities: Proceeds from sales of securities...................................... --- 2,959,633 Proceeds from U.S. Treasury Notes maturing............................. --- 7,500,000 Purchase of securities................................................. (1,744,075) (1,082,782) Capital expenditures................................................... (31,466) (257,386) Net cash provided by (used in) investing activities.................... (1,775,541) 9,119,465 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................... (3,585,946) 5,221,734 Cash and cash equivalents at beginning of the period................... 17,052,636 7,704,245 ------------------ ----------------- Cash and cash equivalents at end of the period......................... $ 13,466,690 $ 12,925,979 ================== =================
The accompanying notes are an integral part of the financial statements. ADVANCED MAGNETICS, INC. RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
Six-Month Periods Ended March 31, ------------------------------------------- 2000 1999 ---- ---- Net income (loss)......................................................... $ (2,463,788) $ (3,404,027) ------------------ ------------------ Adjustments to reconcile net income to net cash provided by (used in) operating activities: Accretion of U.S. Treasury Notes discount................................. --- (15,358) Decrease (increase) in accounts receivable................................ 393,019 (177,861) (Increase) decrease in inventories........................................ 39,097 103,246 (Increase) decrease in prepaid expenses and other assets.................. (149,778) 88,792 Depreciation and amortization............................................. 276,841 417,039 (Decrease) increase in accounts payable and accrued expenses............. 94,204 (151,565) (Decrease) in income taxes payable........................................ --- (1,301) Non-cash reduction in value of investment in subsidiary................... --- --- Minority interest in subsidiary........................................... --- --- Net realized (gains) losses on sales of securities........................ --- (756,707) ------------------ ------------------ Total adjustments......................................................... 653,383 (493,715) ------------------ ------------------ Net cash provided by (used in) operating activities....................... $ (1,810,405) $ (3,897,742) ================== ==================
The accompanying notes are an integral part of the financial statements. ADVANCED MAGNETICS, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 2000 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. 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:
March 31, 2000 September 30, 1999 ------------------------------------- -------------------------------------- Cost Fair Value Cost Fair Value ---------------- ----------------- ----------------- ----------------- Common stock $ 6,919,981 $ 6,052,493 $ 5,175,906 $ 4,804,785 ---------------- ----------------- ----------------- ----------------- Total $ 6,919,981 $ 6,052,493 $ 5,175,906 $ 4,804,785 ================ ================= ================= =================
C. ACCOUNTS RECEIVABLE Accounts receivable on March 31, 2000 and September 30, 1999 were net of reserves of $248,239 and $166,577 respectively. D. INCOME TAX There were no income tax provisions for the three and six-month periods ended March 31, 2000 and 1999 due to net operating losses in those periods. E. 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 488,506 (weighted average exercise price of $8.90) and 430,320 (weighted average exercise price of $11.21) for the three and six-month periods ended March 31, 2000 and March 31, 1999, respectively, have not been included in the calculation of weighted average shares, since their effect would be anti-dilutive, given the net loss in those periods.
Three-Month Periods Six-Month Periods ENDED MARCH 31, ENDED MARCH 31, --------------- --------------- 2000 1999 2000 1999 ---- ---- ---- ---- Weighted average number of shares issued and outstanding.................. 6,752,027 6,767,660 6,752,027 6,767,574 Common stock equivalents --- --- --- --- ---------------------------------------------- ------------- ------ ------------- ------- ------------- ------- ------------- As adjusted................................ 6,752,027 6,767,660 6,752,027 6,767,574 ============= ============= ============= =============
F........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 this action successfully 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 filed suit on October 7, 1997 against Sanofi Pharmaceuticals, Inc. (formerly known as Sanofi Winthrop, Inc.) and Sanofi SA (collectively, the "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, the 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. The Court held a hearing on these motions on March 21, 2000. The parties await a decision. While the final outcome of these claims and counterclaims cannot be determined, the Company will pursue its claims vigorously, and believes that the Sanofi Pharmaceuticals, Inc. counterclaims are without merit and intends to defend them vigorously. G. 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. Information concerning the operations in these reportable segments is as follows:
Three-Month Periods Six-Month Periods ENDED MARCH 31, ENDED MARCH 31, --------------- --------------- 2000 1999 2000 1999 ---- ---- ---- ---- REVENUES: Advanced Magnetics, Inc.............................. $ 695,511 $ 1,932,899 $ 1,105,597 $ 2,528,469 Kalisto Biologicals Inc.............................. --- 350,834 --- 669,783 ------------- ----------- ------------- ----------- Total............................................ $ 695,511 $ 2,283,733 $ 1,105,597 $ 3,198,252 DEPRECIATION EXPENSE: Advanced Magnetics, Inc.............................. $ 138,421 $ 190,800 $ 276,841 $ 381,600 Kalisto Biologicals Inc.............................. --- 17,720 --- 35,439 ------------- ----------- ------------- ----------- Total............................................ $ 138,421 $ 208,520 $ 276,841 $ 417,039 NET INCOME (LOSS): Advanced Magnetics, Inc.............................. $ (1,032,148) $ (472,808) $ (2,463,788) $ (2,784,526) Kalisto Biologicals Inc.............................. --- (321,050) --- (619,502) ------------- ----------- ------------- ------------- Total............................................ $ (1,032,148) $ (793,858) $ (2,463,788) $ (3,404,028)
MARCH 31, SEPTEMBER 30, --------- ------------- 2000 1999 ---- ---- SEGMENT ASSETS: Advanced Magnetics, Inc.............................. $ 24,950,409 $ 27,816,359 Kalisto Biologicals Inc.............................. --- --- ------------ ------------ Total............................................ $ 24,950,409 $ 27,816,359
H. 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. I. 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 May 2000, the Company's potential obligation relating to this guarantee cannot be predicted with certainty. The lease term runs through October 31, 2002. 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. 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, SUCH AS THE APPROVAL OF COMBIDEX(R), THE ABILITY TO SUCCESSFULLY MARKET FERIDEX I.V.(R), GASTROMARK(R) 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, ACHIEVING PROJECTED EXPENSE REDUCTIONS, THE NEED FOR ADDITIONAL COST REDUCTION MEASURES, 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 Advanced Magnetics, Inc. ("Advanced Magnetics" or the "Company") is a biopharmaceutical company dedicated to the development and commercialization of novel products for the diagnosis of cancer and other diseases. Since its inception in November 1981, Advanced Magnetics 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 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 December 1999, the Company submitted a New Drug Application ("NDA") with the U.S. Food and Drug Administration ("FDA") for Combidex(R) 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 and to aid in the staging of metastatic lymph node involvement for a variety of cancers, including breast and prostate cancer. 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, replaced both these systems. The Company 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 could 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 are 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 May 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. 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. RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2000 AS COMPARED TO THE QUARTER ENDED MARCH 31, 1999 REVENUES Total revenues for the second fiscal quarter ended March 31, 2000 were $695,511 compared to $2,283,733 for the second fiscal quarter ended March 31, 1999. The decrease in revenues in the second quarter ended March 31, 2000 compared to the second quarter ended March 31, 1999 was primarily due to a decrease in both product sales and lower interest, dividends and gains on sales of securities. Royalties for the second fiscal quarter ended March 31, 2000 of $260,000 were $60,000 higher than in the second fiscal quarter ended March 31, 1999. Royalties, in general, increased, primarily due to sales by our Japanese partner, Eiken Chemical Co., Ltd. Product sales for the second fiscal quarter ended March 31, 2000 were $161,530 compared to $1,001,239 for the second fiscal quarter ended March 31,1999. The decrease of $839,709 was primarily due to the inclusion of sales of the former subsidiary, Kalisto, in the prior fiscal year's financial statements. The Company also had decreased sales of product of $488,875 due to the timing of sales. Contract research and development revenues were $105,393 for the second fiscal quarter ended March 31, 2000 compared with $144,856 for the second fiscal quarter ended March 31, 1999. Contract research and development revenues are reimbursements of expenditures for clinical trials. The decrease reflects the completion in fiscal 2000 of certain development projects which were reimbursed to the Company under an agreement with Berlex Laboratories, Inc. Interest, dividends and gains on sales of securities resulted in revenues of $168,588 in the fiscal quarter ended March 31, 2000 compared to $937,638 for the fiscal quarter ended March 31, 1999. Interest, dividends and net gains on sales of securities consisted of the following:
Second Quarter Ended March 31, ---------------------------------------- 2000 1999 ---- ---- Interest income $ 144,088 $ 124,436 Dividend income 24,500 56,495 Net gains on sales of securities --- 756,707 ================== ================= Total $ 168,588 $ 937,638 ================== =================
COSTS AND EXPENSES As a result of decreased product sales, the Company incurred costs of $62,954 for products sold in the quarter ended March 31, 2000 compared to $155,903 for the second fiscal quarter ended March 31, 1999. The cost of product sales for the three-month period ended March 31, 2000 was 39% of product sales compared with 16% for the three-month period ended March 31, 1999. The change is due to the product mix of the sales, with an unusually high percentage of the sales in fiscal 2000 being GastroMARK sales, which have a higher cost of sales than Feridex I.V. There were no direct costs for contract sponsored research and development in the three-month period ended March 31, 2000, while there were direct costs of $15,815 during the three-month period ended March 31, 1999. Company sponsored research and development expenses for the second fiscal quarter ended March 31, 2000 were $1,052,576 compared to $1,980,625 for the second fiscal quarter ended March 31, 1999. The decrease in fiscal 2000 was due to the reduction of costs in clinical trials for Combidex during fiscal 2000 and the exclusion of costs incurred by Kalisto. Selling, general and administrative expenses were $612,129 for the second fiscal quarter ended March 31, 2000 compared to $1,346,808 for the second fiscal quarter ended March 31, 1999. The decrease of $734,679 in fiscal 2000 was primarily due to the exclusion of costs incurred by Kalisto. The Company had $421,561 in other income during the second fiscal quarter ended March 31, 1999. There was no other income during the same period in fiscal 2000. INCOME TAXES There were no income tax provisions for the fiscal quarters ended March 31, 2000 and March 31, 1999 due to operating losses for both periods. EARNINGS For the reasons stated above, there was a net loss of $1,032,148 or $(0.15) per share for the quarter ended March 31, 2000 compared to a net loss of $793,857 or $(0.12) per share for the fiscal quarter ended March 31, 1999. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2000 AS COMPARED TO THE SIX MONTHS ENDED MARCH 31, 1999 REVENUES Total revenues for the six-month period ended March 31, 2000 were $1,105,597 compared to $3,198,252 for the six-month period ended March 31, 1999. The decrease in revenues in the six-month period ended March 31, 2000 compared to the six-month period ended March 31, 1999 was primarily due to a decrease in both product sales and lower interest, dividends and gains on sales of securities. Royalties for the six-month period ended March 31, 2000 were $423,246 compared with royalties for the six-month period ended March 31, 1999 of $360,000. Royalties, in general, increased, primarily due to sales by our Japanese partner, Eiken Chemical Co., Ltd. Product sales for the six-month period ended March 31, 2000 were $161,530 compared to $1,318,079 for the six-month period ended March 31, 1999. The decrease was due, in part, to sales of Kalisto no longer being included in the financial statements and $486,766 of the decrease was due to the timing of sales. Contract research and development revenues were $116,388 for the six-month period ended March 31, 2000 compared with $389,758 for the six-month period ended March 31,1999. Contract research and development revenues are reimbursements of expenditures for clinical trials. The decrease reflects the completion of certain clinical trials. Interest, dividends and gains and losses on sales of securities resulted in revenues of $404,433 for the six-month period ended March 31, 2000 compared to $1,130,415 for the six-month period ended March 31, 1999. The decrease was due to no gains on the sale of securities during the six-month period ended March 31, 2000 compared with a gain of $756,707 realized on the sale of securities during the six-month period ended March 31, 1999. COSTS AND EXPENSES The cost of product sales for the six-month period ended March 31, 2000 was $62,954 compared to $268,084 for the six-month period ended March 31, 1999. The cost of product sales for the six-month period ended March 31, 2000 was 39.4% of product sales compared with 20.3% for the six-month period ended March 31, 1999. The change is due to the product mix of the sales, with an unusually high percentage of the sales in fiscal 2000 being GastroMARK sales, which have a higher cost of sales than Feridex I.V. sales. There were $3,195 in direct costs for contract sponsored research and development in the six-months ended March 31, 2000, while there were direct costs of $15,815 during the six-month period ended March 31, 1999. The reduction is due to the completion of contracted research and development for our marketing partner, Guerbet. Company sponsored research and development expenses for the six-month period ended March 31, 2000 were $2,419,638 compared to $4,471,376 for the same period in 1999. The decrease reflected the completion of certain clinical trials for Combidex in the first half of fiscal 2000. Selling, general and administrative expenses decreased to $1,083,598 for the six-month period ended March 31, 2000 from $2,268,565 for the six-month period ended March 31, 1999. The decrease in expenses in fiscal 2000 was due to Kalisto expenses not being included in the financial statements and an emphasis on cost reduction by the Company in general. The Company had $421,560 in other income during the six-month period ended March 31, 1999. There was no other income during the same period in fiscal 2000. INCOME TAXES There was no income tax provision for the six-month periods ended March 31, 2000 and March 31, 1999 due to operating losses for both periods. EARNINGS For the reasons stated above, there was a net loss of $2,463,788 or $(0.36) per share for the six-month period ended March 31, 2000 compared to a net loss for the six-month period ended March 31, 1999 of $3,404,027 or $(0.50) per share. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2000, the Company's cash and cash equivalents totaled $13,466,690 compared to $17,052,636 at September 30, 1999. In addition, the Company had marketable securities of $6,052,493 at March 31, 2000 compared to $4,804,785 on September 30, 1999. Net cash used in operating activities was $1,810,405 in the six-month period ended March 31, 2000 compared to net cash used in operating activities of $3,897,742 in the six-month period ended March 31, 1999. Cash used in investing activities was $1,775,541 for the six-month period ended March 31, 2000 compared to $9,119,465 provided by investing activities in the six-month period ended March 31, 1999. The cash used in investing activities during the six-month period ended March 31, 2000 consisted primarily of $1,744,075 for the purchase of securities. The proceeds in the six-month period ended March 31, 1999 included $2,959,633 from the sale of marketable securities and $7,500,000 from the maturing of a U.S. Treasury Note. Offsetting those proceeds was the purchase of marketable securities of $1,082,782 during the same period. There was no cash used in or provided by financing activities in the six-month period ended March 31, 2000 compared with $11 provided by financing activities in the six-month period ended March 31, 1999. Capital expenditures during the six-month period ended March 31, 2000 were $31,466 compared to $257,386 in the six-month period ended March 31, 1999. This reflects a reduced level of expenditures on upgrades to existing property, plant and equipment. Management believes that existing cash balances, cash generated from investing activities and cash generated from operations will be sufficient to meet cash and working capital requirements for the foreseeable future. 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. 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 The Company filed suit on October 7, 1997 against Sanofi Pharmaceuticals, Inc. (formerly known as Sanofi Winthrop, Inc.) and Sanofi SA (collectively, the "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, the 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. The Court held a hearing on these motions on March 21, 2000. The parties await a decision. While the final outcome of these claims and counterclaims cannot be determined, the Company will pursue its claims vigorously, and believes that the Sanofi Pharmaceuticals, Inc. counterclaims are without merit and intends to defend them vigorously. There have been no material changes to the information concerning the Company's other legal proceedings as set forth in the Company's Form 10-K for the fiscal year ended September 30, 1999. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On February 1, 2000, the Company held its Annual Meeting of Stockholders. At the meeting, the stockholders acted upon the election of directors. Votes "FOR" represent affirmative votes and do not include abstentions or broker non-votes. In cases where a signed proxy was submitted without designation, the shares represented by the proxy were voted "FOR" the proposal to elect directors in the manner described in the Proxy Statement. On the record date (December 7, 1999), 6,752,027 shares of the Company's common stock were issued and outstanding. Voting results were as follows: MATTER FOR AGAINST WITHHELD ABSTAIN 1. Election of Directors Leonard M. Baum 5,776,640 N/A 106,036 N/A Jerome Goldstein 5,776,640 N/A 106,036 N/A Joseph B. Lassiter III 5,777,290 N/A 105,386 N/A Michael D. Loberg 5,777,140 N/A 105,536 N/A Edward B. Roberts 5,777,290 N/A 105,386 N/A George M. Whitesides 5,777,290 N/A 105,386 N/A 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 March 31, 2000. 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 May 10, 2000 By /s/ Jerome Goldstein ------------ ------------------------------------------------ Jerome Goldstein, Treasurer and Chairman of the Board of Directors Date May 10, 2000 By /s/ James A. Matheson ------------ ------------------------------------------------ James A. Matheson, Vice President and Principal Accounting Officer EX-27.1 2 EXHIBIT 27.1
5 3-MOS 6-MOS SEP-30-2000 SEP-30-2000 JAN-01-2000 OCT-01-1999 MAR-31-2000 MAR-31-2000 13,466,690 0 6,052,493 0 255,182 0 0 0 41,383 0 20,101,357 0 13,769,927 0 (9,342,501) 0 24,950,409 0 855,622 0 0 0 0 0 0 0 67,521 0 0 0 24,950,409 0 0 0 695,511 1,105,597 62,954 62,954 1,727,659 3,569,385 0 0 0 0 0 0 (1,032,148) (2,463,788) 0 0 0 0 0 0 0 0 0 0 (1,032,148) (2,463,788) (0.15) (0.36) (0.15) (0.36)
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