-----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, TI5slETMoR5XP7vJExMnW2NwWTlx3N5W/vYXLLCvbVITnTYSo5DhV0KbpzCUcBPr /0P/eTldK1DASu1Clz/6uQ== 0000950135-99-000673.txt : 19990215 0000950135-99-000673.hdr.sgml : 19990215 ACCESSION NUMBER: 0000950135-99-000673 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 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: 99533747 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 ADVANCED MAGNETICS, INC. 1 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, 1998 ------------------------------- 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 of organization) 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 February 12, 1999, 6,767,741 shares of registrant's common stock (par value, $.01) were outstanding. Page 1 of 16 2 ADVANCED MAGNETICS, INC. FORM 10-Q QUARTER ENDED DECEMBER 31, 1998 PART I. FINANCIAL INFORMATION Item 1 -- Financial Statements Page 2 of 16 3 ADVANCED MAGNETICS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND SEPTEMBER 30, 1998 (Unaudited) ---------
ASSETS December 31, September 30, ------------ ------------- 1998 1998 ---- ---- Current assets: Cash and cash equivalents ........................... $ 4,448,190 $ 7,704,245 Marketable securities (Note B) ...................... 22,337,469 19,096,942 Accounts receivable ................................. 608,133 995,010 Inventories ......................................... 370,312 448,630 Prepaid expenses .................................... 373,576 228,985 ------------ ------------ Total current assets .............................. 28,137,680 28,473,812 Property, plant and equipment: Land ................................................ 360,000 360,000 Building ............................................ 4,632,544 4,497,005 Laboratory equipment ................................ 8,097,019 8,065,834 Furniture and fixtures .............................. 755,351 745,560 ------------ ------------ 13,844,914 13,668,399 Less-accumulated depreciation and amortization ...... (8,540,259) (8,331,740) ------------ ------------ Net property, plant and equipment ................... 5,304,655 5,336,659 Other assets ........................................ 304,237 304,237 ------------ ------------ Total assets ...................................... $ 33,746,572 $ 34,114,708 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................... $ 700,410 $ 422,993 Accrued expenses .................................... 539,946 720,266 Income taxes payable ................................ 50,751 52,051 ------------ ------------ Total current liabilities ......................... 1,291,107 1,195,310 Minority interest in subsidiary ..................... -- -- 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 6,767,741 shares at December 31, 1998 and 6,767,358 shares at September 30, 1998 ....... 67,677 67,674 Additional paid-in capital .......................... 44,277,706 44,277,698 Retained earnings (deficit) ......................... (15,014,813) (12,404,643) Accumulated other comprehensive income (Note G) ..... 3,124,895 978,669 ------------ ------------ Total stockholders' equity ........................ 32,455,465 32,919,398 ------------ ------------ Total liabilities and stockholders' equity .......... $ 33,746,572 $ 34,114,708 ============ ============ The accompanying notes are an integral part of the consolidated financial statements.
Page 3 of 16 4 ADVANCED MAGNETICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE QUARTERS ENDED DECEMBER 31, 1998 AND 1997 (Unaudited) ---------
First Quarter Ended December 31, ------------------------------- 1998 1997 ---- ---- - ---------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS Revenues: License fees .............................. $ -- $ -- Royalties ................................. 160,000 370,000 Product sales ............................. 316,841 4,560 Contract research and development ......... 244,902 -- Interest, dividends and net gains and losses on sales of securities ....... 192,776 992,013 ----------- ----------- Total revenues ....................... 914,519 1,366,573 Cost and expenses: Cost of product sales ..................... 112,181 5,805 Research and development expenses ......... 2,490,751 2,251,626 Selling, general and administrative expenses ................................ 921,757 862,874 ----------- ----------- Total costs and expenses ............. 3,524,689 3,120,305 ----------- ----------- Income (loss) before provision for income taxes and minority interest in subsidiary (2,610,170) (1,753,732) Provision for income taxes ................ -- -- ----------- ----------- Income (loss) before minority interest in subsidiary .............................. (2,610,170) (1,753,732) Minority interest in subsidiary .............. -- 73,298 ----------- ----------- Net income (loss) ............................ $(2,610,170) $(1,680,434) =========== =========== ----------- ----------- Basic and diluted net income (loss) per share $ (0.39) $ (0.25) ----------- ----------- Weighted average shares outstanding: Basic ................................... 6,767,509 6,734,589 ----------- ----------- Diluted ................................. 6,767,509 6,734,589 ----------- -----------
- -------------------------------------------------------------------------------- COMPREHENSIVE INCOME
Net income (loss) .......................... $(2,610,170) $(1,680,434) Unrealized gains (losses) on market value of Securities ............................ 2,146,226 (26,607) ----------- ----------- Comprehensive income (loss) ................ $ (463,944) $(1,707,041) =========== ===========
The accompanying notes are an integral part of the financial statements. Page 4 of 16 5 ADVANCED MAGNETICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997 (Unaudited) ---------
Three-Month Periods Ended December 31, ------------------------------------- 1998 1997 ---- ---- Cash flows from (for) operating activities: Cash received from customers ....................... $ 1,106,712 $ 493,205 Cash paid to suppliers and employees ............... (3,307,916) (3,474,377) Dividends and interest received .................... 87,508 145,261 Royalties received ................................. 116,927 80,018 ------------ ------------ Net cash provided by (used in) operating activities (1,996,769) (2,755,893) Cash flows from investing activities: Proceeds from sales of securities .................. -- 4,201,416 Proceeds from U.S. Treasury Notes maturing ......... -- 5,000,000 Purchase of securities ............................. (1,082,782) (3,114,620) Capital expenditures ............................... (176,515) (194,099) ------------ ------------ Net cash provided by (used in) investing activities (1,259,297) 5,892,697 Cash flows from financing activities: Proceeds from issuances of common stock ............ 11 19,500 Purchase of treasury stock ......................... -- (156,349) ------------ ------------ Net cash provided by (used in) financing activities 11 (136,849) ------------ ------------ Net increase (decrease) in cash and cash equivalents (3,256,055) 2,999,955 Cash and cash equivalents at beginning of the period 7,704,245 10,724,740 ------------ ------------ Cash and cash equivalents at end of the period ..... $ 4,448,190 $ 13,724,695 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. Page 5 of 16 6 ADVANCED MAGNETICS, INC. RECONCILIATION OF CONSOLIDATED NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997 (Unaudited)
Three-Month Periods Ended December 31, ------------------------------- 1998 1997 ---- ---- Net income (loss) ............................................................. $(2,610,170) $(1,680,434) ----------- ----------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Non-cash reduction in value of minority interest in subsidiary ................ -- 194,177 Minority interest in subsidiary ............................................... -- (73,298) Depreciation and amortization ................................................. 208,519 249,316 Accretion of U.S. Treasury Notes discount ..................................... (11,519) (6,500) Decrease (increase) in accounts receivable .................................... 386,877 82,210 (Increase) decrease in prepaid expenses and other assets ...................... (144,591) (356,908) (Decrease) increase in accounts payable and accrued expenses .................. 97,097 (336,274) (Decrease) in income taxes payable ............................................ (1,300) -- Net realized (gains) losses on sales of securities ............................ -- (767,030) (Increase) decrease in inventories ............................................ 78,318 (61,152) ----------- ----------- Total adjustments ............................................................. 613,401 (1,075,459) ----------- ----------- Net cash provided by (used in) operating activities ........................... $(1,996,769) $(2,755,893) =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. Page 6 of 16 7 ADVANCED MAGNETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 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 for magnetic resonance imaging ("MRI") and for polysaccharide directed drug delivery systems. 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. In October 1997, the Company acquired approximately 80.7% of the issued and outstanding capital stock of Kalisto Biologicals, Inc. ("Kalisto"). Since that date the consolidated balance sheet of the Company, and the consolidated statements of operations and cash flows include the accounts of Kalisto. All significant intercompany balances and transactions have been eliminated. 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 1998 financial statement have been reclassified to conform with the fiscal 1999 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, 1998. B. MARKETABLE SECURITIES The cost and market value of the Company's marketable securities portfolio are as follows:
December 31, 1998 September 30, 1998 ------------------------------- ------------------------------- Cost Fair Value Cost Fair Value ----------- ----------- ----------- ----------- U. S. government securities Due in one year or less $ 7,496,161 $ 7,500,000 $ 7,484,642 $ 7,513,215 Corporate bonds ........... 482,403 523,125 482,403 582,500 Preferred stock ........... 543,003 657,510 543,003 570,000 Common stock .............. 10,691,007 13,656,834 9,608,225 10,431,227 ----------- ----------- ----------- ----------- Totals .................... $19,212,574 $22,337,469 $18,118,273 $19,096,942 =========== =========== =========== ===========
Page 7 of 16 8 C. INCOME TAX There were no income tax provisions for the three month periods ended December 31, 1998 and 1997 due to net operating losses in those periods. D. EARNINGS (LOSS) PER SHARE The weighted average common and common equivalent shares used in the computation of basic and diluted earnings per share is presented below. Aggregate options of 430,320 (weighted average exercise price of $11.21) and 446,645 (weighted average exercise price of $10.68) for the quarters ending December 31, 1998 and December 31, 1997, 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 ------------------------------- 1998 1997 ---- ---- Weighted average number of shares issued and outstanding........ 6,767,509 6,734,589 Common stock equivalents ....................................... -- -- --------- --------- As adjusted .................................................... 6,767,509 6,734,589 ========= =========
E. LEGAL PROCEEDINGS The Company and certain of its officers were sued in an action entitled David D. Stark, M.D. v. Advanced Magnetics. Inc., Jerome Goldstein, Ernest V. Groman, and Lee Josephson, Civil Action No. 92-12157-WGY, in the United States District Court for the District of Massachusetts on September 3, 1992. The plaintiff, a former consultant to the Company, claims that he was incorrectly omitted as an inventor or joint inventor on certain of the Company's patents and on pending applications, and seeks injunctive relief and unspecified damages. In addition, the complaint also alleges state law claims for breach of contract, breach of good faith and fair dealing, breach of implied contract, misappropriation of trade secrets, conversion, negligent misrepresentation, misrepresentation, unjust enrichment and unfair trade practices. The District Court has stayed this federal action pending resolution of an appeal in the State Court of summary judgment in the Company's favor as well as resolution of a jurisdictional issue. While the outcome of the action cannot be determined, the Company believes the action is without merit and intends to defend the action vigorously. There can be no assurance, however, that the Company will be able to defend successfully this action and the failure by the Company to prevail for any reason could have an adverse effect on the Company's future business, financial condition and results of operations. The Company and certain of its officers were sued in David D. Stark, M.D. v. Advanced Magnetics, Inc., Jerome Goldstein, Ernest V. Groman and Lee Josephson, Civil Action No. 93-02846-C, in the Superior Court Department of the Massachusetts Trial Court for Middlesex County. This case involves claims of breach of contract, breach of good faith and fair dealing, breach of implied contract, unjust enrichment and unfair trade practices that were originally dismissed by, but later remanded to, the Federal Court in the above-mentioned action, as well as a new count alleging tortious interference with contractual or advantageous relations. The Superior Court granted partial summary judgment in the Company's favor and dismissed the unfair trade practices and tort counts. The plaintiff's contract claims have been dismissed with prejudice and final judgment was entered against the plaintiff. The plaintiff filed an appeal in David D. Stark, M.D. v. Advanced Magnetics, Inc., Jerome Goldstein, Ernest V. Groman and Lee Josephson, Appeal No. 98-P-1749 in the Massachusetts Appeals Court, on January 25, 1999. While the outcome of the action cannot be determined, the Company believes the action is without merit and intends to defend the action vigorously. There can be no assurance, however, that the Company will be able to defend successfully this action and the failure by the Company to prevail for any reason could have an adverse effect on the Company's future business, financial condition and results of operations. Page 8 of 16 9 The Company filed suit on October 7, 1997 against Sanofi Pharmaceuticals, Inc. (formerly known as Sanofi Winthrop, Inc.) and Sanofi SA (collectively, "Defendants") in the Superior Court of the Commonwealth of Massachusetts. The action is entitled Advanced Magnetics, Inc. v. Sanofi Pharmaceuticals, Inc. and Sanofi SA, Civil Action No. 97-5222B. The Company claims that the Defendants tortiously interfered with a license, supply and marketing agreement (the "Agreement"), and seeks unspecified monetary damages. In addition, the Company seeks a declaration that the Defendants do not have any rights under the Agreement and that the Company has not breached the Agreement. Sanofi Pharmaceuticals, Inc., filed counterclaims against the Company on February 4, 1998 seeking compensatory damages of $11,500,000 and multiple damages as a result of the Company's alleged breach of the Agreement. Sanofi Pharmaceuticals, Inc. also filed a motion to dismiss the Company's tortious interference claim, which the Court denied on July 3, 1998. On October 26, 1998, the Company served a motion for partial summary judgment which, among other things, requests judgment in its favor on all of Sanofi Pharmaceuticals, Inc.'s counterclaims. On November 13, 1998 the Company filed an amended complaint adding claims for unfair competition and breach of contract against the Defendants. On November 23, 1998, Defendants answered the Company's amended complaint, and Sanofi Pharmaceuticals, Inc. served a new set of counterclaims seeking compensatory damages of $15,000,000 and multiple damages as a result of the Company's alleged conduct. On December 18, 1998, the court held a hearing on the Company's motion for partial summary judgment, and at that time, ordered all discovery stayed until a ruling on the pending summary judgment motion. 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. F. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In 1997, the FASB issued Statement No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information". This Statement, which supersedes Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," changes the way public companies report information about segments. The Statement, which is based on the management approach to segment reporting, includes requirements to report segment information quarterly and entity-wide disclosures about products and services, major customers, and the material countries in which the entity holds assets and reports revenues. The Statement is effective for periods beginning after December 15, 1997. Restatement for earlier years is required for comparative purposes unless impracticable. In addition, SFAS 131 need not be applied to interim periods in the initial year, however, in subsequent years, interim period information must be presented on a comparative basis. The Company is continuing to evaluate this Statement and its effect on financial statement disclosures. 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, 1999. 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. G. COMPREHENSIVE INCOME. Effective December 31, 1998, the Company has adopted FASB Statement 130 ("SFAS 130"), "Reporting Comprehensive Income". This statement required changes in comprehensive income to be shown in a financial statement that is displayed with the same prominance as other financial statements. Accordingly, the Company has provided a statement of comprehensive income and has reclassified earlier periods for comparative purposes. Page 9 of 16 10 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 facts that could cause actual results to differ materially from current expectations include the following: the ability to successfully market Feridex I.V.(R), GastroMARK(R) and the EndoCheck Plus(R) analyzer, the timing and result of FDA action, delays in arrangements with clinical investigations, uncertainties relating to results of the clinical trials of Combidex(R) and other product candidates, the Company's dependence on its corporate partners, 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, 1998. 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 as well as polysaccharide technology for targeted delivery of antiviral therapeutics. 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 and therapeutic 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; (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. The Company's current planned expense levels are based in part upon expectations as to future revenue. Consequently, profits and losses may vary significantly from quarter to quarter or year to year based on the timing of revenue. Revenue or profits in any period will not necessarily be indicative of results in subsequent periods and there can be no assurance that the Company will be profitable or that revenue growth will be achieved in the future. In October 1997, the Company acquired approximately 80.7% of the issued and outstanding capital stock of Kalisto Biologicals Inc. ("Kalisto"), an early-stage company that intends to develop, manufacture and market veterinary laboratory diagnostic products. The Company's results of operations and cash flows reflect the activities of Kalisto for the period from the date of acquisiton. Page 10 of 16 11 YEAR 2000 READINESS DISCLOSURE STATEMENT The widely publicized Year 2000 issue arose because many existing computer programs use only the last two digits to define the applicable year. As a result, such computer programs may misinterpret "00" as the year 1900 rather than the year 2000. The consequences of such a misinterpretation could range from a simple miscalculation to a system failure that might cause a disruption of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Since computer and microprocessor use is so widespread, the issue has become a societal concern, the potential impact of which is not yet known. Under the auspices of the Audit Committee, the Company conducted and completed an assessment of its exposure to potential disruptions caused by the Year 2000 issue. In the first phase of its readiness investigation the Company identified its Clinical Data Network (which tracks and analyzes the results of product trials in support of FDA approvals) and its accounting system as mission-critical components that required protection from Year 2000 related disruption. The Company, in order to address Year 2000 concerns and as part of a general systems upgrade, has determined to replace both of these systems. The Company has obtained written confirmation that the new software applications are Year 2000 compliant. The Company expects that both of these third party applications will be installed and operational by the end of September 1999. The Company's computer hardware platforms, on which these systems run, have been confirmed as Year 2000 compliant by their manufacturers and the Company expects to have completed testing of them by the end of September 1999. In addition to evaluating its computer systems, the Company recognizes that the Year 2000 issue may impact machines or equipment that rely on embedded microchips. The Company has evaluated and tested such equipment used in its manufacturing facilities and believes that it does not have a material risk of disruptions in manufacturing due to a Year 2000 failure. The Company is in the process of evaluating 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 has 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 is currently obtaining assurances from its significant raw material suppliers that there will be no interruption of service as a result of the Year 2000 issue, and to the extent such assurances are not given, the Company intends to devise contingency plans to ameliorate the potential negative effects in the event of the unavailability of materials. The Company also intends to increase inventory levels prior to December 1999 as a contingency against possible disruptions anywhere in its supply chain. A failure of any contingency plan developed by the Company may not prevent 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. Page 11 of 16 12 All expenses related to determining and addressing Year 2000 readiness have been expensed as incurred and have amounted to roughly $60,000 to date. The Company has provided $200,000 for the enhancement of its systems in its operating and capital budgets for the current fiscal year. However, if compliance efforts of which the Company is not currently aware are required and are not completed on time, or if the cost of any required updating, modification or replacement 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 is attempting to reduce the risks by utilizing an organized approach, extensive testing, and allowance of ample contingency time to address issues identified by tests. Page 12 of 16 13 RESULTS OF OPERATIONS FOR THE QUARTER ENDED DECEMBER 31, 1998 AS COMPARED TO THE QUARTER ENDED DECEMBER 31, 1997 REVENUES Total revenues for the first fiscal quarter ended December 31, 1998 were $914,519 compared to $1,366,573 for the first fiscal quarter ended December 31, 1997. The decrease in revenues in the first quarter ended December 31, 1998 compared to the first fiscal quarter ended December 31, 1997 was primarily due to a decrease in gains on sales of securities and royalties earned on sales of the Company's products by its marketing partners. Royalties for the fiscal quarter ended December 31, 1998 were $160,000 as compared to $370,000 for the fiscal quarter ended December 31, 1997, reflecting a decline in sales since the initial launch of Feridex I.V. in Japan. Product sales for the first fiscal quarter ended December 31, 1998 were $316,841 compared to $4,560 for the first fiscal quarter ended December 31, 1997, which reflects increased sales by Kalisto during the quarter ended December 31, 1998 due to the market launch of the Endocheck Plus product. Contract research and development services revenues were $244,902 for the first fiscal quarter ended December 31, 1998. There were no contract research and development services revenues during the first fiscal quarter ended December 31, 1997. Contract research and development services revenues are reimbursements of expenditures for clinical trials. Interest, dividends and gains on sales of securities resulted in revenues of $192,776 in the fiscal quarter ended December 31, 1998 compared to $992,013 for the fiscal quarter ended December 31, 1997. The decline was due primarily to the fact that no securities were sold during the quarter ended December 31, 1998 compared to a gain of $767,030 for the fiscal quarter ended December 31, 1997. Interest, dividends and net gains on sales of securities consisted of the following:
First Quarter Ended December 31, -------------------------------- 1998 1997 ---- ---- Interest income $181,076 $201,093 Dividend income 11,700 23,890 Net gains on sales of securities -- 767,030 -------- -------- Total $192,776 $992,013 ======== ========
There was no license fee revenue during the quarters ended December 31, 1998 and December 31, 1997. COSTS AND EXPENSES The Company incurred costs of $112,181 for products sold in the first fiscal quarter ended December 31, 1998 compared to $5,805 for the first fiscal quarter ended December 31, 1997. The increase reflects the increase of Kalisto product sales in the current quarter compared to the quarter ended December 31, 1997. Research and development expenses for the first fiscal quarter ended December 31, 1998 increased by $239,125 over the same period last year, reflecting increased activity on several research and development projects. Selling, general and administrative expenses were $921,757 for first fiscal quarter ended December 31, 1998 compared to $862,874 for the first fiscal quarter ended December 31, 1997. The increase of $58,883 was mostly due to an increase of expenses related to the data conversion and training on the new accounting computer system. Page 13 of 16 14 INCOME TAXES There were no income tax provisions for the fiscal quarters ended December 31, 1998 and December 31, 1997 due to operating losses for both periods. EARNINGS For the reasons stated above, there was a net loss of $2,610,170 or $(0.39) per share for the quarter ended December 31, 1998 compared to a net loss of $1,680,434 or $(0.25) per share for the fiscal quarter ended December 31, 1997. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, the Company's cash and cash equivalents totaled $4,448,190 compared to $7,704,245 at September 30, 1998. In addition, the Company had marketable securities of $22,337,469 at December 31, 1998 compared to $19,096,942 on September 30, 1998. Net cash used in operating activities was $1,996,769 in the three-month period ended December 31, 1998 compared to net cash used in operating activities of $2,755,893 in the three-month period ended December 31, 1997. Cash used in investing activities was $1,259,297 for the three-month period ended December 31, 1998 compared to $5,892,697 provided by investing activities in the three-month period ended December 31, 1997. Cash used in investing activities in the three-month period ended December 31, 1998 included the purchase of marketable securities of $1,082,782. There were no funds generated by the sale of marketable securities during that period. Cash provided by financing activities in the three-month period ended December 31, 1998 was $11 compared to $136,849 used in financing activities in the three-month period ended December 31, 1997. The cash provided by financing activities in the three-month period ended December 31, 1998 was generated by the exercise of stock options. In November 1997, the Board of Directors authorized the purchase of up to 250,000 shares of the Company's common stock on the open market, from time to time, at prevailing market prices. There were no funds used in the purchase of the Company's common stock during the three-month period ended December 31, 1998. Capital expenditures in the three-month period ended December 31, 1998 were $176,515 compared to $194,099 in the three-month period ended December 31, 1997. This reflects a continuing upgrade to existing property, plant and equipment. Future expenditures should continue at the present levels. Management believes that funds for future needs can be generated from existing cash balances, cash generated from investing activities and cash generated from operations. In addition, the Company will consider from time to time various financing alternatives and may seek to raise additional capital through equity or debt financing or to enter into corporate partnering arrangements. However, such funding may not be available on terms acceptable to the Company, if at all. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In 1997, the FASB issued Statement No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information". This Statement, which supersedes Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," changes the way public companies report information about segments. The Statement, which is based on the management approach to segment reporting, includes requirements to report segment information quarterly and entity-wide disclosures about products and services, major customers, and the material countries in which the entity holds assets and reports revenues. The Statement is effective for periods beginning after December 15, 1997. Restatement for earlier years is required for comparative purposes unless impracticable. In addition, SFAS 131 need not be applied to interim periods in the initial year, however, in subsequent years, interim period information must be presented on a comparative basis. The Company is continuing to evaluate this Statement and its effect on financial statement disclosures. Page 14 of 16 15 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, 1999. 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. 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, 1998. 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, "Defendants") in the Superior Court of the Commonwealth of Massachusetts. The action is entitled Advanced Magnetics, Inc. v. Sanofi Pharmaceuticals, Inc. and Sanofi SA, Civil Action No. 97-5222B. The Company claims that the Defendants tortiously interfered with a license, supply and marketing agreement (the "Agreement"), and seeks unspecified monetary damages. In addition, the Company seeks a declaration that the Defendants do not have any rights under the Agreement and that the Company has not breached the Agreement. Sanofi Pharmaceuticals, Inc., filed counterclaims against the Company on February 4, 1998 seeking compensatory damages of $11,500,000 and multiple damages as a result of the Company's alleged breach of the Agreement. Sanofi Pharmaceuticals, Inc. also filed a motion to dismiss the Company's tortious interference claim, which the Court denied on July 3, 1998. On October 26, 1998, the Company served a motion for partial summary judgment which, among other things, requests judgment in its favor on all of Sanofi Pharmaceuticals, Inc.'s counterclaims. On November 13, 1998 the Company filed an amended complaint adding claims for unfair competition and breach of contract against the Defendants. On November 23, 1998, Defendants answered the Company's amended complaint, and Sanofi Pharmaceuticals, Inc. served a new set of counterclaims seeking compensatory damages of $15,000,000 and multiple damages as a result of the Company's alleged conduct. On December 18, 1998, the court held a hearing on the Company's motion for partial summary judgment, and at that time, ordered all discovery stayed until a ruling on the pending summary judgment motion. 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. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit 27.1 Financial Data Schedule (EDGAR filing only) The Company did not file any current reports on Form 8-K during the quarter ended December 31, 1998. Page 15 of 16 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 12, 1999 By /s/ Jerome Goldstein -------------------------------- ---------------------------------- Jerome Goldstein, Chief Executave Officer, Treasurer and Chairman of the Board of Directors Date February 12, 1999 By /s/ James A. Matheson -------------------------------- ---------------------------------- James A. Matheson, Vice President and Principal Accounting Officer Page 16 of 16 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 0000792977 ADVANCED MAGNETICS, INC. 1 USD 3-MOS SEP-30-1999 OCT-01-1998 DEC-31-1998 1 4,448,190 22,337,469 608,133 0 370,312 28,137,680 13,844,914 (8,540,259) 33,746,572 1,291,107 0 0 0 67,677 3,124,895 33,746,572 316,841 914,519 112,181 3,524,689 0 0 0 (2,610,170) 0 0 0 0 0 (2,610,170) (0.39) (0.39)
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