10-Q 1 a10-q.txt 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 June 30, 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 August 5, 2000, 6,773,932 shares of registrant's common stock (par value, $.01) were outstanding. Page 1 of 18 ADVANCED MAGNETICS, INC. FORM 10-Q QUARTER ENDED JUNE 30, 2000 PART I. FINANCIAL INFORMATION Item 1 -- Financial Statements Page 2 of 18 ADVANCED MAGNETICS, INC. BALANCE SHEETS JUNE 30, 2000 AND SEPTEMBER 30, 1999 (UNAUDITED)
ASSETS JUNE 30, SEPTEMBER 30, ------ -------- ------------- 2000 1999 ---- ---- Current assets: Cash and cash equivalents.......................................... $ 12,362,047 $ 17,052,636 Marketable securities (Note B)..................................... 6,089,245 4,804,785 Accounts receivable, net (Note C).................................. 772,389 648,201 Inventories........................................................ 35,296 80,480 Prepaid expenses................................................... 253,383 195,655 ------------ ------------ Total current assets............................................. 19,512,360 22,781,757 Property, plant and equipment: Land............................................................... 360,000 360,000 Building........................................................... 4,612,172 4,610,827 Laboratory equipment............................................... 8,016,339 8,007,095 Furniture and fixtures............................................. 782,150 760,538 ------------ ------------ 13,770,661 13,738,460 Less--accumulated depreciation and amortization.................... (9,480,921) (9,065,660) ------------ ------------ Net property, plant and equipment.................................. 4,289,740 4,672,800 Other assets....................................................... 421,626 361,802 ------------ ------------ Total assets..................................................... $ 24,223,726 $ 27,816,359 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................................... $ 61,493 $ 118,465 Accrued expenses.................................................... 489,958 581,534 Income taxes payable................................................ 61,651 61,651 ------------ ------------ Total current liabilities......................................... 613,102 761,650 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 6,773,932 shares at June 30, 2000 and 6,752,027 shares at September 30, 1999....................... 67,739 67,521 Additional paid-in capital.......................................... 44,267,120 44,205,370 Retained earnings (deficit)......................................... (19,893,499) (16,847,061) Accumulated other comprehensive income (loss)....................... (830,736) (371,121) ------------ ------------ Total stockholders' equity........................................ 23,610,624 27,054,709 ------------ ------------ Total liabilities and stockholders' equity.......................... $ 24,223,726 $ 27,816,359 ============ ============
The accompanying notes are an integral part of the financial statements. Page 3 of 18 ADVANCED MAGNETICS, INC. STATEMENTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
THREE-MONTH PERIOD ENDED JUNE 30, NINE-MONTH PERIOD ENDED JUNE 30, --------------------------------- -------------------------------- 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS Revenues: Royalties................................. $ 200,000 $ 100,000 $ 623,246 $ 460,000 Product sales............................. 616,911 264,113 778,441 1,582,193 Contract research and development......... --- 85,430 116,388 475,187 Interest, dividends and net gains and losses on sales of securities....... 197,122 400,982 601,555 1,531,397 --------------- --------------- --------------- --------------- Total revenues....................... 1,014,033 850,525 2,119,630 4,048,777 Cost and expenses: Cost of product sales..................... 43,195 95,604 106,149 363,688 Contract research and development expenses................................ --- 4,103 3,195 19,918 Company sponsored research and development expenses.................... 1,033,624 2,197,518 3,453,262 6,668,894 Selling, general and administrative expenses................................ 519,864 891,386 1,603,462 3,159,951 --------------- --------------- --------------- --------------- Total costs and expenses............. 1,596,683 3,188,611 5,166,068 10,212,451 Other (income) expenses................... --- --- --- (421,561) --------------- --------------- --------------- --------------- Income (loss) before provision for income taxes................................... (582,650) (2,338,086) (3,046,438) (5,742,113) Provision for income taxes................ --- --- --- --- --------------- --------------- --------------- --------------- Net income (loss)............................ $ (582,650) $(2,338,086) $(3,046,438) $(5,742,113) =============== =============== =============== =============== Basic and diluted net income (loss) per share................................. $ (0.09) $ (0.35) $ (0.45) $ (0.85) =============== =============== =============== =============== Weighted average number of common shares.................................... 6,757,691 6,768,227 6,754,293 6,767,826 Weighted average number of common and common equivalent shares............ 6,757,691 6,768,227 6,754,293 6,767,826 --------------- --------------- --------------- ---------------
The accompanying notes are an integral part of the financial statements. Page 4 of 18 ADVANCED MAGNETICS, INC. STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
THREE-MONTH PERIOD ENDED JUNE 30, NINE-MONTH PERIOD ENDED JUNE 30, --------------------------------- -------------------------------- 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME Net income (loss)............................ $(582,650) $(2,338,086) $(3,046,438) $(5,742,113) Other comprehensive income (loss): Unrealized gains (losses) on securities.............................. 36,752 1,541,465 (459,615) 1,308,518 Reclassification adjustment for gains included in net income............ --- (256,898) --- (1,013,605) --------------- --------------- --------------- --------------- Other comprehensive income (loss)............ 36,752 1,284,567 (459,615) 294,913 --------------- --------------- --------------- --------------- Comprehensive income (loss).................. $(545,898) $(1,053,519) $(3,506,053) $(5,447,200) =============== =============== =============== ===============
The accompanying notes are an integral part of the financial statements. Page 5 of 18 ADVANCED MAGNETICS, INC. STATEMENTS OF CASH FLOWS FOR THE NINE-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
Nine-Month Periods Ended June 30, -------------------------------------------- 2000 1999 ---- ---- Cash flows from operating activities: Cash received from customers........................................... $ 982,594 $ 2,714,250 Cash paid to suppliers and employees................................... (4,899,133) (9,304,349) Dividends and interest received........................................ 601,556 541,621 Royalties received..................................................... 398,525 469,558 Income tax refund...................................................... --- 10,000 ------------------ ----------------- Net cash provided by (used in) operating activities.................... (2,916,458) (5,568,920) Cash flows from investing activities: Proceeds from sales of securities...................................... --- 3,398,422 Proceeds from U.S. Treasury Notes maturing............................. --- 7,500,000 Purchase of securities................................................. (1,744,075) (1,620,035) Capital expenditures................................................... (32,200) (260,590) (Increase) in other assets............................................. (59,824) (59,824) ------------------ ----------------- Net cash provided by (used in) investing activities.................... (1,836,099) 8,957,973 Cash flows from financing activities: Proceeds from issuances of common stock................................ 61,968 7,469 ------------------ ----------------- Net cash provided by (used in) financing activities.................... 61,968 7,469 ------------------ ----------------- Net increase (decrease) in cash and cash equivalents................... (4,690,589) 3,396,522 Cash and cash equivalents at beginning of the period................... 17,052,636 7,704,245 ------------------ ----------------- Cash and cash equivalents at end of the period......................... $ 12,362,047 $ 11,100,767 ================== =================
The accompanying notes are an integral part of the financial statements. Page 6 of 18 ADVANCED MAGNETICS, INC. RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES FOR THE NINE-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
Nine-Month Periods Ended June 30, ------------------------------------------- 2000 1999 ---- ---- Net income (loss)......................................................... $ (3,046,438) $ (5,742,113) ------------------ ------------------ 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, net........................... (124,188) 581,864 (Increase) decrease in inventories........................................ 45,184 99,653 (Increase) decrease in prepaid expenses................................... (57,728) 158,534 Depreciation and amortization............................................. 415,260 611,599 (Decrease) increase in accounts payable and accrued expenses.............. (148,548) (258,194) (Decrease) in income taxes payable........................................ --- 8,700 Net realized (gains) losses on sales of securities........................ --- (1,013,605) ------------------ ------------------ Total adjustments......................................................... 129,980 173,193 ------------------ ------------------ Net cash provided by (used in) operating activities....................... $ (2,916,458) $ (5,568,920) ================== ==================
The accompanying notes are an integral part of the financial statements. Page 7 of 18 ADVANCED MAGNETICS, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 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:
June 30, 2000 September 30, 1999 ------------------------------------- -------------------------------------- Cost Fair Value Cost Fair Value ---------------- ----------------- ----------------- ----------------- Common stock $ 6,919,981 $ 6,089,245 $ 5,175,906 $ 4,804,785 ---------------- ----------------- ----------------- ----------------- Total $ 6,919,981 $ 6,089,245 $ 5,175,906 $ 4,804,785 ================ ================= ================= =================
C. ACCOUNTS RECEIVABLE, NET Accounts receivable on June 30, 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 nine-month periods ended June 30, 2000 and 1999 due to net operating losses in those periods. Page 8 of 18 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 483,256 as of June 30, 2000 (weighted average exercise price of $8.95) and 547,820 as of June 30, 1999 (weighted average exercise price of $9.67) for the three and nine-month periods ended June 30, 2000 and June 30, 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 Nine-Month Periods Ended June 30, Ended June 30, -------------- -------------- 2000 1999 2000 1999 ---- ---- ---- ---- Weighted average number of shares issued and outstanding.................. 6,757,691 6,768,227 6,754,293 6,767,826 Common stock equivalents --- --- --- --- -------------------------------------------------------------------------------------------------------------------------- As adjusted................................ 6,757,691 6,768,227 6,754,293 6,767,826 ============= ============= ============= =============
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. Page 9 of 18 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 judgment 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 judgment which, among other things, requests judgment in its favor on Sanofi Pharmaceuticals, Inc.'s remaining counterclaims against the Company and for judgment 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 judgment which, among other things, requests judgment 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. Page 10 of 18 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 Nine-Month Periods Ended June 30, Ended June 30, -------------- -------------- 2000 1999 2000 1999 ---- ---- ---- ---- REVENUES: Advanced Magnetics, Inc.............................. $ 1,014,033 $ 601,907 $ 2,119,630 $ 3,130,376 Kalisto Biologicals Inc.............................. --- 248,618 --- 918,401 ----------- ------------- ------------ ------------ Total............................................ $ 1,014,033 $ 850,525 $ 2,119,630 $ 4,048,777 DEPRECIATION EXPENSE: Advanced Magnetics, Inc.............................. $ 138,420 $ 191,550 $ 415,261 $ 559,161 Kalisto Biologicals Inc.............................. --- 3,011 --- 52,438 ----------- ------------- ------------ ------------ Total............................................ $ 138,420 $ 194,561 $ 415,261 $ 611,599 NET INCOME (LOSS): Advanced Magnetics, Inc.............................. $ (582,650) $ (1,991,912) $ (3,046,438) $ (4,776,437) Kalisto Biologicals Inc.............................. --- (346,174) --- (965,676) ----------- ------------- ------------ ------------ Total............................................ $ (582,650) $ (2,338,086) $ (3,046,438) $ (5,742,113) JUNE 30, SEPTEMBER 30, -------- ------------- 2000 1999 ---- ---- SEGMENT ASSETS: Advanced Magnetics, Inc.............................. $ 24,223,726 $ 27,816,359 Kalisto Biologicals Inc.............................. --- --- ------------- ------------ Total............................................ $ 24,223,726 $ 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" which is effective no later than the fourth fiscal quarter for fiscal years beginning after December 15, 1999. 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 11 of 18 I. COMMITMENTS AND CONTINGENCIES The Company was a guarantor on a lease for office space for Kalisto in the event Kalisto defaulted on its obligation. During the quarter ended June 30, 2000, the lease was formally assigned to the Company. Kalisto remains a tenant of the office space under a sub-lease arrangement. Portions of the office space have also been sub-leased to other third parties. The lease term runs through October 31, 2002. Should Kalisto or the other sub-tenants default on their lease payments, the Company would be liable to the owner of the property for rent and other maintenance expenses. The ultimate liability of the Company, if any, in connection with this lease, could have a material adverse impact on the statement of operations in any one accounting period. J. SUBSEQUENT EVENT On July 7, 2000, the Company entered into an Agreement and Plan of Merger with Cytogen Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Cytogen Corporation, and Cytogen Corporation, a Delaware corporation. Under the terms of the merger agreement, and subject to the conditions set forth therein (including approval by the stockholders of the Company), Cytogen Acquisition will be merged with and into Advanced Magnetics. At the effective time of the merger, the separate existence of Cytogen Acquisition will cease to exist and the Company will continue as the surviving corporation and as a wholly-owned subsidiary of Cytogen. In exchange for their shares of common stock, par value $.01 per share, the stockholders of the Company will receive shares of common stock, par value $.01 per share, of Cytogen. The number of shares of Cytogen common stock exchanged for each share of Advanced Magnetics common stock will be equal to $8.75 divided by the average closing price of Cytogen common stock for the 20 trading days ending three days prior to the closing of the merger. The number of shares of Cytogen common stock exchanged per share of Advanced Magnetics common stock will not, however, be less than 0.7566 shares or more than 1.0237 shares. In addition, Cytogen will assume all outstanding options to purchase the Company's common stock and will assume all purchase rights outstanding under the Company's employee stock purchase plan. If the merger is consummated, the Company's common stock will be deregistered under the Securities Exchange Act of 1934, as amended, and delisted from the American Stock Exchange. Page 12 of 18 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 ABILITY TO SATISFY THE CONDITIONS SPECIFIED FOR FINAL APPROVAL OF COMBIDEX(R) FOR IMAGING LYMPH NODES AND TO RESOLVE THE FINAL LABELING FOR COMBIDEX WITH THE FDA, 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, DISCOVERY OF LATENT YEAR 2000 RELATED ISSUES IN THE SYSTEMS OR EQUIPMENT OF THE COMPANY OR ITS SUPPLIERS, 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 aid in the staging of metastatic lymph node involvement for a variety of cancers, including breast and prostate cancer. The second indication is for the detection, diagnosis and characterization of benign versus malignant lesions of the liver and spleen. In June 2000, the Company received an "Approvable Letter" from the FDA regarding Combidex. This letter indicated that the FDA considered Combidex approvable for its principal indication, but not approvable at that time for its secondary indication. In addition, the letter stipulated that approval was contingent upon the Company's satisfactory completion of additional conditions. Page 13 of 18 RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2000 AS COMPARED TO THE QUARTER ENDED JUNE 30, 1999 REVENUES Total revenues for the third fiscal quarter ended June 30, 2000 were $1,104,033 compared to $850,525 for the third fiscal quarter ended June 30, 1999. The increase in revenues in the third quarter ended June 30, 2000 compared to the third quarter ended June 30, 1999 was primarily due to increases in product sales, royalties and higher interest and dividend income, offset by reduced gains on sales of securities and contract research and development revenues. Royalties for the third fiscal quarter ended June 30, 2000 of $200,000 were $100,000 higher than in the third fiscal quarter ended June 30, 1999. Royalties have increased, in general, due to increased sales by the Company's Japanese marketing and distribution partner, Eiken Chemical Co., Ltd. Product sales for the third fiscal quarter ended June 30, 2000 were $616,911 compared to $264,113 for the third fiscal quarter ended June 30,1999. Sales of the former subsidiary, Kalisto, which were $248,618 in the fiscal quarter ended June 30, 1999, were not repeated in the financial statements as a result of deconsolidation. There was an increase of $601,416 in sales of contrast agents by the Company. The increase in sales of contrast agents is due entirely to the timing of orders from the Company's marketing partners. There were no revenues from contract research and development for the third fiscal quarter ended June 30, 2000 compared with revenues of $85,430 for the third fiscal quarter ended June 30,1999. Contract research and development revenues are reimbursements of expenditures for clinical trials. The decrease reflects the completion in early 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 $197,122 in the fiscal quarter ended June 30, 2000 compared to $400,982 for the fiscal quarter ended June 30, 1999. Interest, dividends and net gains on sales of securities consisted of the following:
Third Quarter Ended June 30, ----------------------------------------- 2000 1999 ---- ---- Interest income $ 172,497 $ 127,103 Dividend income 24,625 16,981 Net gains on sales of securities --- 256,898 ------------------ ----------------- Total $ 197,122 $ 400,982 ================== =================
COSTS AND EXPENSES Because product sales by Kalisto are no longer consolidated in the financial statements, the Company incurred reduced costs of $43,195 for products sold in the quarter ended June 30, 2000 compared to $95,604 for the third fiscal quarter ended June 30, 1999. The cost of product sales for the quarter ended June 30, 2000 was 7% of product sales compared with 36% for the quarter ended June 30, 1999. The change is due to the product mix of the sales, with Kalisto's higher percentage cost of sales in fiscal 1999 no longer a factor in fiscal 2000. The Company's contrast agents, in general, have a lower cost of sales than Kalisto's product line. There were no direct costs for contract sponsored research and development in the quarter ended June 30, 2000, while there were direct costs of $4,103 during the quarter ended June 30, 1999. The decrease reflects the completion of the development projects sponsored by Berlex. Company sponsored research and development expenses for the third fiscal quarter ended June 30, 2000 were $1,033,624 compared to $2,197,518 for the third fiscal quarter ended June 30, 1999. The decrease was due to the reduction of trials for Combidex during fiscal 2000 and the exclusion of costs incurred by Kalisto. Page 14 of 18 Selling, general and administrative expenses were $519,864 for the third fiscal quarter ended June 30, 2000 compared to $891,386 for the third fiscal quarter ended June 30, 1999. The decrease of $371,522 was primarily due to the deconsolidation of costs incurred by Kalisto, plus cost cutting efforts employed by the Company. INCOME TAXES There were no income tax provisions for the fiscal quarters ended June 30, 2000 and June 30, 1999 due to operating losses for both periods. EARNINGS For the reasons stated above, there was a net loss of $582,650 or $(0.09) per share for the quarter ended June 30, 2000 compared to a net loss of $2,338,086 or $(0.35) per share for the fiscal quarter ended June 30, 1999. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2000 AS COMPARED TO THE NINE MONTHS ENDED JUNE 30, 1999 REVENUES Total revenues for the nine-month period ended June 30, 2000 were $2,119,630 compared to $4,048,777 for the nine-month period ended June 30, 1999. The decrease in revenues in the nine-month period ended June 30, 2000 compared to the nine-month period ended June 30, 1999 was due to decreases in product sales, contract research and development revenues and gains on the sale of securities, offset by higher royalties and interest and dividend income. Royalties for the nine-month period ended June 30, 2000 were $623,246 compared with royalties for the nine-month period ended June 30, 1999 of $460,000. Royalties increased due to sales increases by the Company's Japanese marketing and distribution partner, Eiken Chemical Co., Ltd. Product sales for the nine-month period ended June 30, 2000 were $778,441 compared to $1,582,193 for the nine-month period ended June 30, 1999. The decrease results from sales of Kalisto, which were $918,402 for the nine-month period ended June 30, 1999, no longer being consolidated in the financial statements, partially offset by an increase of the Company's sales of contrast agents of $114,650 for the nine-month period ended June 30, 2000. The increase in sales of contrast agents is due entirely to the timing of orders from the Company's marketing partners. Contract research and development revenues were $116,388 for the nine-month period ended June 30, 2000 compared with $475,187 for the nine-month period ended June 30,1999. Contract research and development revenues are reimbursements of expenditures for clinical trials. The decrease reflects the completion in early fiscal 2000 of certain development projects which were reimbursed to the Company under an agreement with Berlex Laboratories, Inc. and the completion of certain development projects for Guerbet. Interest, dividends and gains and losses on sales of securities resulted in revenues of $601,555 for the nine-month period ended June 30, 2000 compared to $1,531,397 for the nine-month period ended June 30, 1999. The decrease was due to no gains realized on the sale of securities during the nine-month period ended June 30, 2000 compared with a gain of $1,013,605 realized on the sale of securities during the nine-month period ended June 30, 1999. Interest and dividend income for the nine-month period ended June 30, 2000 increased by $83,763 compared to the nine-month period ended June 30, 1999 because of an increase in interest bearing investments. Page 15 of 18 COSTS AND EXPENSES The cost of product sales for the nine-month period ended June 30, 2000 was $106,149 compared to $363,688 for the nine-month period ended June 30, 1999. The cost of product sales for the nine-month period ended June 30, 2000 was 13.6% of product sales compared with 23% for the nine-month period ended June 30, 1999. The change is due primarily to the fact that Kalisto product sales, which had a higher cost of sales, as a percentage, than the Company's contrast agents are no longer consolidated in the financial statements. There were $3,195 in direct costs for contract sponsored research and development in the nine-months ended June 30, 2000, while there were direct costs of $19,918 during the nine-month period ended June 30, 1999. The reduction is due to the completion of contracted research and development for our marketing partners, Guerbet and Berlex. Company sponsored research and development expenses for the nine-month period ended June 30, 2000 were $3,453,262 compared to $6,668,894 for the same period in 1999. The decrease reflected the completion of certain clinical trials for Combidex in the first nine months of fiscal 2000 and the exclusion, in fiscal 2000, of Kalisto research and development expenses. Selling, general and administrative expenses decreased to $1,603,462 for the nine-month period ended June 30, 2000 from $3,159,951 for the nine-month period ended June 30, 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 reductions within the Company. The Company had $421,561 in other income related to a tax refund and an insurance settlement during the nine-month period ended June 30, 1999. There was no other income during the same period in fiscal 2000. INCOME TAXES There was no income tax provision for the nine-month periods ended June 30, 2000 and June 30, 1999 due to operating losses for both periods. EARNINGS For the reasons stated above, there was a net loss of $3,046,438 or $(0.45) per share for the nine-month period ended June 30, 2000 compared to a net loss for the nine-month period ended June 30, 1999 of $5,742,113 or $(0.85) per share. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2000, the Company's cash and cash equivalents totaled $12,362,047 compared to $17,052,636 at September 30, 1999. In addition, the Company had marketable securities of $6,089,245 at June 30, 2000 compared to $4,804,785 at September 30, 1999. Net cash used in operating activities was $2,916,458 in the nine-month period ended June 30, 2000 compared to net cash used in operating activities of $5,568,920 in the nine-month period ended June 30, 1999. Cash used in investing activities was $1,836,099 for the nine-month period ended June 30, 2000 compared to $8,957,973 provided by investing activities in the nine-month period ended June 30, 1999. The cash used in investing activities during the nine-month period ended June 30, 2000 consisted primarily of $1,744,075 for the purchase of securities. The proceeds in the nine-month period ended June 30, 1999 included $3,398,422 from the sale of marketable securities and $7,500,000 from the maturing of a U.S. Treasury Note. Offsetting these proceeds was the purchase of marketable securities of $1,620,035 during the same period. There was $61,968 in cash provided by financing activities in the nine-month period ended June 30, 2000 compared with $7,469 provided by financing activities in the nine-month period ended June 30, 1999. Cash provided by financing activities in each period consisted of proceeds from the exercise of stock options by Company employees. Page 16 of 18 Capital expenditures during the nine-month period ended June 30, 2000 were $32,200 compared to $260,590 in the nine-month period ended June 30, 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" which is effective no later than the fourth fiscal quarter for fiscal years beginning after December 15, 1999. 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 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 fiscal year ended September 30, 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit 27.1 Financial Data Schedule (EDGAR filing only) The Company filed a current report on Form 8-K on July 10, 2000. Page 17 of 18 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 August 14, 2000 By /s/ Jerome Goldstein --------------------------- --------------------------------------- Jerome Goldstein, Treasurer and Chairman of the Board of Directors Date August 14, 2000 By /s/ James A. Matheson --------------------------- --------------------------------------- James A. Matheson, Vice President and Principal Accounting Officer Page 18 of 18