10-Q 1 a2037416z10-q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 (MARK ONE) [X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934. For the quarterly period ended December 31, 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 (IRS Employer Incorporation or of organization) Identification No.) 61 Mooney Street Cambridge, MA 02138 (Address of principal executive offices) Registrant's telephone number, including area code: (617) 497-2070 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No ---------- ---------- At February 7, 2001, 6,737,232 shares of registrant's common stock (par value, $.01) were outstanding. Page 1 of 16 ADVANCED MAGNETICS, INC. FORM 10-Q QUARTER ENDED DECEMBER 31, 2000 PART I. FINANCIAL INFORMATION Item 1 -- Financial Statements Page 2 of 16 ADVANCED MAGNETICS, INC. BALANCE SHEETS DECEMBER 31, 2000 AND SEPTEMBER 30, 2000 (UNAUDITED)
ASSETS DECEMBER 31, SEPTEMBER 30, ------ ------------ ------------- 2000 2000 ------------ ------------ Current assets: Cash and cash equivalents ........................... $ 6,151,455 $ 16,120,738 Marketable securities (Note C) ...................... 18,687,638 14,051,850 Accounts receivable ................................. 776,987 639,740 Inventories ......................................... 86,011 91,456 Prepaid expenses .................................... 283,216 187,481 ------------ ------------ Total current assets .............................. 25,985,307 31,091,265 Property, plant and equipment: Land ................................................ 360,000 360,000 Building ............................................ 4,618,296 4,618,296 Laboratory equipment ................................ 8,014,576 8,013,973 Furniture and fixtures .............................. 783,687 782,525 ------------ ------------ 13,776,559 13,774,794 Less-accumulated depreciation and amortization ...... (9,720,697) (9,620,094) ------------ ------------ Net property, plant and equipment ................... 4,055,862 4,154,700 Other assets ........................................ 421,626 421,626 ------------ ------------ Total assets ...................................... $ 30,462,795 $ 35,667,591 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................... $ 340,162 $ 611,891 Accrued expenses .................................... 644,440 786,832 Income taxes payable ................................ 61,651 61,651 Deferred revenues ................................... 3,945,925 3,923,986 ------------ ------------ Total current liabilities ......................... 4,992,178 5,384,360 Deferred revenues ................................... 14,993,749 15,977,599 ------------ ------------ Total liabilities ................................. 19,985,927 21,361,959 Commitments and contingencies (Note F) 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 6,746,232 shares at December 31, 2000 and 6,773,932 shares at September 30, 2000 ....... 67,462 67,739 Additional paid-in capital .......................... 44,198,223 44,267,120 Retained earnings (deficit) ......................... (28,652,716) (28,110,546) Accumulated other comprehensive income .............. (5,136,101) (1,918,681) ------------ ------------ Total stockholders' equity ........................ 10,476,868 14,305,632 ------------ ------------ Total liabilities and stockholders' equity .......... $ 30,462,795 $ 35,667,591 ============ ============
The accompanying notes are an integral part of the financial statements. Page 3 of 16 ADVANCED MAGNETICS, INC. STATEMENTS OF OPERATIONS FOR THE QUARTERS ENDED DECEMBER 31, 2000 AND 1999 (UNAUDITED)
FIRST QUARTER ENDED DECEMBER 31, -------------------------------- 2000 1999* ----------- ----------- ----------------------------------------------------------------------------------- Revenues: License fees .................................. $ 1,083,660 $ 183,894 Royalties ..................................... 200,000 163,246 Product sales ................................. 265,044 -- Contract research and development ............. -- 10,995 Interest, dividends and net gains and losses on sales of securities ........... (886,085) 235,845 ----------- ----------- Total revenues ........................... 662,619 593,980 Cost and expenses: Cost of product sales ......................... 46,415 -- Cost of contract research and development ..... -- 3,195 Research and development expenses ............. 820,812 1,367,062 Selling, general and administrative expenses .................................... 337,562 471,469 ----------- ----------- Total costs and expenses ................. 1,204,789 1,841,726 ----------- ----------- Loss before cumulative effect of accounting change (542,170) (1,247,746) Cumulative effect of accounting change (Note B) .. -- (7,457,717) ----------- ----------- Net income (loss) ................................ $ (542,170) $(8,705,463) =========== =========== Basic and diluted loss before cumulative effect of accounting change ........................ $ (0.08) $ (0.18) Cumulative effect of accounting change ........... -- (1.11) ----------- ----------- $ (0.08) $ (1.29) =========== =========== Weighted average shares outstanding: Basic ....................................... 6,767,007 6,752,027 Diluted ..................................... 6,767,007 6,752,027
*See Annual Report on Form 10-K for the fiscal year ended September 30, 2000 The accompanying notes are an integral part of the financial statements. Page 4 of 16 ADVANCED MAGNETICS, INC. STATEMENTS OF COMPREHENSIVE INCOME FOR THE QUARTERS ENDED DECEMBER 31, 2000 AND 1999 (UNAUDITED)
FIRST QUARTER ENDED DECEMBER 31, -------------------------------- 2000 1999* ----------- ----------- ------------------------------------------------------------------------------------- Net income (loss) ................................. $ (542,170) $(8,705,463) Other comprehensive income (loss): Unrealized gains (losses) on securities ...... (4,329,952) 834,151 Reclassification adjustment for (gains) losses included in net income (loss) ........... 1,112,532 -- ----------- ----------- Other comprehensive income (loss) ................. (3,217,420) 834,151 ----------- ----------- Comprehensive income (loss) ....................... $(3,759,590) $(7,870,312) =========== ===========
*See Annual Report on Form 10-K for the fiscal year ended September 30, 2000 The accompanying notes are an integral part of the financial statements. Page 5 of 16 ADVANCED MAGNETICS, INC. STATEMENTS OF CASH FLOWS FOR THE QUARTERS ENDED DECEMBER 31, 2000 AND 1999 (UNAUDITED)
QUARTERS ENDED DECEMBER 31, --------------------------- 2000 1999* ------------ ------------ Cash flows from operating activities: Cash received from customers ....................... $ 395,968 $ 534,399 Cash paid to suppliers and employees ............... (1,738,373) (1,680,788) Dividends and interest received .................... 144,213 235,845 Royalties received ................................. 183,355 172,475 ------------ ------------ Net cash provided by (used in) operating activities (1,014,837) (738,069) Cash flows from investing activities: Proceeds from sales of marketable securities ....... 5,002,279 -- Purchase of marketable securities .................. (13,885,786) (1,744,075) Capital expenditures ............................... (38,205) (2,624) Proceeds from sale of property, plant and equipment 36,440 -- ------------ ------------ Net cash provided by (used in) investing activities (8,885,272) (1,746,699) Cash flows from financing activities: Proceeds from issuances of common stock ............ -- -- Purchase of treasury stock ......................... (69,174) -- ------------ ------------ Net cash provided by (used in) financing activities (69,174) -- ------------ ------------ Net increase (decrease) in cash and cash equivalents (9,969,283) (2,484,768) Cash and cash equivalents at beginning of the period 16,120,738 17,052,636 ------------ ------------ Cash and cash equivalents at end of the period ..... $ 6,151,455 $ 14,567,868 ============ ============
*See Annual Report on Form 10-K for the fiscal year ended September 30, 2000 The accompanying notes are an integral part of the financial statements. Page 6 of 16 ADVANCED MAGNETICS, INC. RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES FOR THE QUARTERS ENDED DECEMBER 31, 2000 AND 1999 (UNAUDITED)
QUARTERS ENDED DECEMBER 31, --------------------------- 2000 1999* ----------- ----------- Net income (loss) ........................................... $ (542,170) $(8,705,463) ----------- ----------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Non-cash license fee revenue ................................ (1,029,248) (183,894) Accretion of U.S. Treasury Notes discount ................... (82,234) -- Cumulative effect of accounting change ...................... -- 7,457,717 Decrease (increase) in accounts receivable .................. (137,247) 506,517 (Increase) decrease in inventories .......................... 5,445 -- (Increase) decrease in prepaid expenses and other assets .... (95,735) 45,771 Depreciation and amortization ............................... 100,603 138,420 (Decrease) increase in accounts payable and accrued expenses (414,121) 2,863 Increase in deferred revenues ............................... 67,338 -- Net realized (gains) losses on sales of marketable securities 1,112,532 -- ----------- ----------- Total adjustments ........................................... (472,667) 7,967,394 ----------- ----------- Net cash provided by (used in) operating activities ......... $(1,014,837) $ (738,069) =========== ===========
*See Annual Report on Form 10-K for the fiscal year ended September 30, 2000 The accompanying notes are an integral part of the financial statements. Page 7 of 16 ADVANCED MAGNETICS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 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 initial 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 2000 financial statements have been reclassified to conform with the fiscal 2001 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, 2000. B. CUMULATIVE EFFECT OF ACCOUNTING CHANGE In fiscal 2000, the Company adopted SEC Staff Accounting Bulletin No. 101 ("SAB 101"). The effect of applying this change in accounting principle was a cumulative charge of $7,457,717, or $1.11 per share, in the first quarter ended December 31, 1999. This cumulative change in accounting principle reflected the reversal of license fees and milestone payments that had been recognized in prior years. Previously, the Company had recognized license fee revenue when the fees were non-refundable, a technology transfer occurred, no explicit commitment or obligation for scientific achievement existed, and the other portions of the agreement, principally supply and royalty, were priced at fair value. Under the new accounting method applied retroactively to October 1, 1999, these payments are recorded as deferred revenue to be recognized over the remaining term of the related agreement. During the quarters ended December 31, 2000 and 1999, the Company recognized $182,450 and $183,894, respectively, in revenue that was included in the cumulative effect adjustment as of October 1, 1999. C. MARKETABLE SECURITIES The cost and market value of the Company's marketable securities portfolio are as follows:
DECEMBER 31, 2000 SEPTEMBER 30, 2000 ----------------- ------------------ COST FAIR VALUE COST FAIR VALUE ---- ---------- ---- ---------- Common stock ...... $15,926,027 $10,777,478 $15,970,531 $14,051,850 U.S. Treasury notes 7,897,712 7,910,160 -- -- ----------- ----------- ----------- ----------- Totals ............ $23,823,739 $18,687,638 $15,970,531 $14,051,850 =========== =========== =========== ===========
Page 8 of 16 D. INCOME TAX There were no income tax provisions for the three-month periods ended December 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 617,650 (weighted average exercise price of $7.55) and 490,506 (weighted average exercise price of $8.90) for the quarters ending December 31, 2000 and December 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 both periods.
DECEMBER 31 ----------- 2000 1999 --------- --------- Weighted average number of shares issued and outstanding 6,767,007 6,752,027 Common stock equivalents ............................... -- -- --------- --------- As adjusted ............................................ 6,767,007 6,752,027 ========= =========
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. As noted below, the Massachusetts Appeals Court has decided the appeal, but the federal action remains stayed as of this date. While the outcome of the action cannot be determined, the Company believes the action is without merit and intends to defend the action vigorously. The Company may not be able to successfully defend this action and the failure by the Company to prevail for any reason could have an adverse effect on it's future business, financial condition and results of operations. The Company and certain of its officers were sued in 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. On October 13, 2000, the Massachusetts Appeals Court reversed the grant of partial summary judgment in the Company's favor and ordered that the unfair trade practice and tort claims be reinstated. The Superior Court has redocketed the claims as directed by the Appeals Court, and it is anticipated that the litigation in state court will now move forward. While the outcome of the action cannot be determined, the Company believes the action is without merit and intends to defend the action vigorously. The Company may not be able to successfully defend this action and the failure by the Company to prevail for any reason could have an adverse effect on its future business, financial condition and results of operations. Page 9 of 16 The Company filed suit on October 7, 1997 against Sanofi Pharmaceuticals, Inc. (formerly known as Sanofi Winthrop, Inc.) and Sanofi SA (collectively, "Defendants") in the Superior Court of the Commonwealth of Massachusetts. The action is entitled ADVANCED MAGNETICS, INC. V. SANOFI PHARMACEUTICALS, INC. AND SANOFI SA, Civil Action No. 97-5222B. The Company claims that the Defendants tortiously interfered with a license, supply and marketing agreement (the "Agreement"), and seeks unspecified monetary damages. In addition, the Company seeks a declaration that the Defendants do not have any rights under the Agreement and that the Company has not breached the Agreement. Sanofi Pharmaceuticals, Inc., filed counterclaims against the Company on February 4, 1998 seeking compensatory damages of $11,500,000 and multiple damages as a result of the Company's alleged breach of the Agreement. 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 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 second 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 the Defendants. Also on October 29, 1999, the Defendants served a motion for partial summary judgement which, among other things, requests judgement in its favor on the Company's remaining claims. On October 4, 2000, the Court granted the Company's motion and entered judgment on all remaining claims brought by Sanofi Pharmaceuticals, Inc. In addition, the Court granted in part, and denied in part, Defendants' motion for summary judgment. Only the Company's breach of contract claim against Sanofi SA remains in the case. On December 26, 2000, the Court denied Sanofi SA and Sanofi Pharmaceuticals, Inc.'s Motion for Entry of Separate and Final Judgment, seeking to have the Court certify final judgment on all issues decided on summary judgment, except for the Company's breach of contract claim against Sanofi SA. On December 5, 2000, the Court had set a trial date for March 19, 2001 on the Company's remaining claim. While the final outcome of this litigation cannot be determined, the Company intends to pursue its remaining claim. In the event that the judgments in the Company's favor are reversed on appeal, the Company intends to defend those claims vigorously. However, in such an event, the Company may not be able to successfully defend those claims and the failure of the Company to prevail for any reason could impair the Company's financial resources and disrupt the Company's future operating plans. G. BUSINESS SEGMENTS For all periods presented in this Form 10-Q, the Company no longer has business segments as defined in FASB Statement No. 131 ("SFAS 131"), "Disclosures about segments of an Enterprise and Related Information". H. DERIVATIVE FINANCIAL INSTRUMENTS Beginning in the first quarter ended December 31, 2000, the Company has adopted the provisions of FASB Statement No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities". 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 133 also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company has included the fair value of derivative instruments, principally a written call option on an equity security, in marketable securities on the balance sheets. The change in the fair value of the open derivatives at December 31, 2000 has been recorded in interest, dividends and net gains and losses on sales of securities on the statement of operations. The written call options held at December 31, 2000 are intended to assist the Company in taking advantage of opportunities in the domestic equity markets. Page 10 of 16 There was no derivative trading activity during the quarter ended December 31, 1999, nor were any derivative instruments held at the end of the quarter ended December 31, 1999. 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, 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, 2000. THE COMPANY CAUTIONS READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE THEY ARE MADE. THE COMPANY DISCLAIMS ANY OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY SUCH STATEMENTS TO REFLECT ANY CHANGE IN COMPANY EXPECTATIONS OR IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENTS MAY BE BASED, OR THAT MAY AFFECT THE LIKELIHOOD THAT ACTUAL RESULTS WILL DIFFER FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS. OVERVIEW Since its inception in November 1981, Advanced Magnetics, Inc. ("Advanced Magnetics" or the "Company") has focused its efforts on developing applications of its core magnetic particle technology. This focus has led to the development of magnetic resonance imaging ("MRI") contrast agents. The Company has funded its operations with cash from license fees from corporate partners, royalties, sales of its products, fees from contract research performed for third parties, the proceeds of financings and income earned on invested cash. The Company's success in the market for diagnostic products will depend, in part, on the Company's ability to successfully develop, test, produce and market its products; obtain necessary governmental approvals in a timely manner; attract and maintain key employees; and successfully respond to technological changes in its marketplace. The Company's operating results may continue to vary significantly from quarter to quarter, or from year to year, depending on a number of factors, including: (i) the timing of payments from corporate partners and research grants; (ii) the introduction of new products; (iii) the timing and size of orders from customers; (iv) the general level of acceptance of the Company's products; and (v) increases or decreases in, and timing of, research and development, clinical trials and other expenses. A substantial portion of the Company's expenses consists of research and development costs. The Company's current planned expense levels are based in part upon expectations as to future revenue. Consequently, profits and losses may vary significantly from quarter to quarter or year to year based on the timing of revenue. Revenue or profits in any period will not necessarily be indicative of results in subsequent periods and there can be no assurance that the Company will be profitable or that revenue growth will be achieved in the future. Page 11 of 16 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. In fiscal 2000, the Company adopted SEC Staff Accounting Bulletin No. 101 ("SAB 101"). The effect of applying this change in accounting principle was a cumulative charge of $7,457,717, or $1.11 per share, in the first quarter ended December 31, 1999. This cumulative change in accounting principle reflected the reversal of license fees and milestone payments that had been recognized in prior years. Recognition of these deferred payments is expected to occur over the remaining life of the agreement. A substantial portion of the Company's expenses consists of research and development expenses. In an effort to reduce expenditures and improve efficiency, the Company closed its Princeton, New Jersey office and reduced the number of employees engaged in clinical development activities. All of the Company's operating activities have been consolidated into the Cambridge office in order to improve managerial oversight and inter-departmental coordination and cooperation. The Company may rely to a greater degree on contract research and development providers in the future and expects that research and development expenses will continue to be a significant portion of the Company's total expenses. RESULTS OF OPERATIONS FOR THE QUARTER ENDED DECEMBER 31, 2000 AS COMPARED TO THE QUARTER ENDED DECEMBER 31, 1999 REVENUES Total revenues for the first fiscal quarter ended December 31, 2000 were $662,619 compared to $593,980 for the first fiscal quarter ended December 31, 1999. The increase in revenues in the first fiscal quarter ended December 31, 2000, compared to the first fiscal quarter ended December 31, 1999, was primarily due to increases in license fees, product sales and royalties, offset by losses on sales of securities and reduced contract research and development revenues. License fee revenue increased to $1,083,660 in the first fiscal quarter ended December 31, 2000 from $183,984 in the first fiscal quarter ended December 31, 1999. The increase is primarily related to the recognition in the period of approximately $853,000 in license fee revenue from a license and marketing arrangement signed with Cytogen Corp. which had been deferred. Royalties for the fiscal quarter ended December 31, 2000 were $200,000 as compared to $163,246 for the fiscal quarter ended December 31, 1999. The increase in royalty revenue reflects increased sales of GASTROMARK(R) in Europe. Product sales in the first fiscal quarter ended December 31, 2000 were $265,044, consisting of sales of contrast agents, compared to no product sales in the first fiscal quarter ended December 31, 1999. This increase is due to the uneven demand for contrast agents by the Company's marketing partners. There was no research and development services revenue in the first fiscal quarter ended December 31, 2000, compared with $10,995 in the first fiscal quarter ended December 31, 1999. Contract research and development services revenues are reimbursements of expenditures for clinical trials. The decrease reflects the completion of certain clinical trials. Page 12 of 16 Interest and dividends resulted in revenues of $226,447 in the fiscal quarter ended December 31, 2000 compared to $235,845 for the fiscal quarter ended December 31, 1999. There were losses on the sale of securities of $1,112,532 in the first fiscal quarter ended December 31, 2000 compared with no gain or loss on the sale of securities in the first fiscal quarter ended December 31, 1999. The increase in losses on sales of marketable securities is mainly due to the Company's sale of approximately 480,500 of 1,500,000 shares of Cytogen Corp. common stock received as a license fee under a license and marketing agreement signed in fiscal 2000. In addition, pursuant to the Company's adoption of SFAS 133 in the quarter ended December 31, 2000, the Company recognized approximately $89,600 in net gains associated with trading derivative instruments, principally call options, during the quarter ended December 31, 2000. There was no derivative activity as of or during the quarter ended December 31, 1999. Interest, dividends and net losses on sales of securities consisted of the following:
FIRST QUARTER ENDED DECEMBER 31, -------------------------------- 2000 1999 ----------- -------- Interest income $ 217,047 $212,220 Dividend income 9,400 23,625 Net losses on sales of securities (1,112,532) -- ----------- -------- Total $ (886,085) $235,845 ----------- --------
COSTS AND EXPENSES The cost of product sales for the quarter ended December 31, 2000 was 17% of product sales. Due to the absence of product sales, the Company incurred no costs for products sold in the first fiscal quarter ended December 31, 1999. A cost of $3,195 was incurred on contract research and development for the first fiscal quarter ended December 31, 1999, while no costs were incurred in the quarter ended December 31, 2000 because there was no such revenue. Research and development expenses decreased to $820,812 from $1,367,062 for the first fiscal quarter ended December 31, 2000 as compared to the same period in the prior fiscal year. This decrease arises from reduced activity on clinical trials associated with Combidex(R). Selling, general and administrative expenses were $337,562 for first fiscal quarter ended December 31, 2000 compared to $471,469 for the first fiscal quarter ended December 31, 1999. The reduced levels of expenditures, for both research and development and selling, general and administrative costs, are a result of the closing of the Company's Princeton, New Jersey office. INCOME TAXES There were no income tax provisions for the fiscal quarters ended December 31, 2000 and December 31, 1999 due to operating losses for both periods. CUMULATIVE EFFECT OF ACCOUNTING CHANGE In fiscal 2000, the Company adopted SEC Staff Accounting Bulletin No. 101 ("SAB 101"). The effect of applying this change in accounting principle was a cumulative charge of $7,457,717, or $1.11 per share, in the first quarter ended December 31, 1999. This cumulative change in accounting principle reflected the reversal of license fees and milestone payments that had been recognized in prior years. Previously, the Company had recognized license fee revenue when the fees were non-refundable, a technology transfer occurred, no explicit commitment or obligation for scientific achievement existed, and the other portions of the agreement, principally supply and royalty, were priced at fair value. Under the new accounting method applied retroactively to October 1, 1999, these payments are recorded as deferred revenue to be recognized over the remaining term of the related agreement. During the quarters ended December 31, 2000 and 1999, the Company recognized $182,450 and $183,894, respectively, in revenue that was included in the cumulative effect adjustment as of October 1, 1999. Page 13 of 16 EARNINGS For the reasons stated above, there was a net loss of $(542,170) or $(0.08) per share for the quarter ended December 31, 2000 compared to a net loss from operations of $(1,247,746) or $(0.18) per share and a total loss of $(8,705,463) or $(1.29) for the quarter ended December 31, 1999. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, the Company's cash and cash equivalents totaled $6,151,455 compared to $16,120,738 at September 30, 2000. In addition, the Company had marketable securities of $18,687,638 at December 31, 2000 compared to $14,051,850 on September 30, 2000. The decrease in cash and cash equivalents, and the corresponding increase in marketable securities, primarily represents the deployment of excess cash into marketable securities. Net cash used in operating activities was $1,014,837 in the three-month period ended December 31, 2000 compared to net cash used in operating activities of $738,069 in the three-month period ended December 31, 1999. The increase of cash used in operating activities is attributable to a decrease in cash received from customers of approximately $138,000 and a decrease in dividends and interest received on securities of approximately $92,000. Cash used in investing activities was $8,885,272 for the three-month period ended December 31, 2000 compared to $1,746,699 used in investing activities in the three-month period ended December 31, 1999. Cash used in investing activities in the three-month period ended December 31, 2000 included the purchase of marketable securities of $13,885,786, offset by the sale of $5,002,279 in marketable securities. There was no cash provided by financing activities during the three-month period ended December 31, 2000, but $69,174 in cash was used to purchase shares of the Company's common stock. No cash was used in or provided by financing activities in the three-month period ended December 31, 1999. In November 2000, the Board of Directors authorized the purchase of up to 1,000,000 shares of the Company's common stock on the open market at prevailing market prices. Capital expenditures in the three-month period ended December 31, 2000 were $38,205, offset by sales of capital equipment of $36,440, for a net expenditure of $1,765. This compares with $2,624 spent in the three-month period ended December 31, 1999. The capital expenditures in both quarters reflected upgrades to existing property, plant and equipment. Future expenditures are expected to continue at the reduced levels. Management believes that funds for future needs can be generated from existing cash balances, cash generated from investing activities and cash generated from operations. In addition, the Company will consider from time to time various financing alternatives and may seek to raise additional capital through equity or debt financing or to enter into corporate partnering arrangements. However, such funding may not be available on terms acceptable to the Company, if at all. DERIVATIVE FINANCIAL INSTRUMENTS Beginning in the first quarter ended December 31, 2000, the Company has adopted the provisions of FASB Statement No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities". 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 133 also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company has included the fair value of derivative instruments, principally a written call option on an equity security, in marketable securities on the balance sheets. The change in the fair value of the open derivatives at December 31, 2000 has been recorded in interest, dividends and net gains and losses on sales of securities on the statement of operations. The written call options held at December 31, 2000 are intended to assist the Company in taking advantage of opportunities in the domestic equity markets. There was no derivative trading activity during the quarter ended December 31, 1999, nor were any derivative instruments held at the end of the quarter ended December 31, 1999. Page 14 of 16 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, 2000. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no material changes to the information concerning the Company's legal proceedings as set forth in the Company's Form 10-K for the period ended September 30, 2000. 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 November 17, 2000 reporting the announcement of a stock repurchase program (Item 5: Other Event). Page 15 of 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ADVANCED MAGNETICS, INC. Date February 13, 2001 By /s/ Jerome Goldstein ---------------------------- ------------------------------------- Jerome Goldstein, Chief Executive Officer, Treasurer and Chairman of the Board of Directors Date February 13, 2001 By /s/ James A. Matheson ---------------------------- ------------------------------------- James A. Matheson, Vice President and Principal Accounting Officer Page 16 of 16