-----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, PCUC9T11nv0UWTPop1CxFgRYPN+FlyxARwd3AkQMUDj1G5kwMlHbmAWjPQZt9DLE FPXDcA2IHESN2vcgrDrFpg== 0000950135-99-004010.txt : 19990816 0000950135-99-004010.hdr.sgml : 19990816 ACCESSION NUMBER: 0000950135-99-004010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99687386 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 FORM 10-Q 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 June 30, 1999 --------------------------------------- OR [ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934. For the transition period from _________________ to _________________ Commission File #0-14732 ADVANCED MAGNETICS, INC. (Exact name of registrant as specified in its charter) Delaware 04-2742593 (State or other jurisdiction (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 August 11, 1999, 6,769,927 shares of registrant's common stock (par value, $.01 per share) were outstanding. Page 1 of 20 2 ADVANCED MAGNETICS, INC. FORM 10-Q QUARTER ENDED JUNE 30, 1999 PART I. FINANCIAL INFORMATION Item 1 -- Financial Statements Page 2 of 20 3 ADVANCED MAGNETICS, INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 1999 AND SEPTEMBER 30, 1998 (UNAUDITED)
June 30, September 30, 1999 1998 ------------ ------------ ASSETS Current assets: Cash and cash equivalents ......................................... $ 11,100,767 $ 7,704,245 Marketable securities (Note B) .................................... 11,142,431 19,096,942 Accounts receivable ............................................... 413,146 995,010 Inventories ....................................................... 348,977 448,630 Prepaid expenses .................................................. 70,451 228,985 ------------ ------------ Total current assets ............................................ 23,075,772 28,473,812 ------------ ------------ Property, plant and equipment: Land .............................................................. 360,000 360,000 Building .......................................................... 4,702,955 4,497,005 Laboratory equipment .............................................. 8,093,769 8,065,834 Furniture and fixtures ............................................ 772,265 745,560 ------------ ------------ 13,928,989 13,668,399 Less-accumulated depreciation and amortization .................... (8,943,339) (8,331,740) ------------ ------------ Net property, plant and equipment ................................. 4,985,650 5,336,659 ------------ ------------ Other assets ...................................................... 364,061 304,237 ------------ ------------ Total assets .................................................... $ 28,425,483 $ 34,114,708 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................................. $ 316,686 $ 422,993 Accrued expenses .................................................. 568,379 720,266 Income taxes payable .............................................. 60,751 52,051 ------------ ------------ Total current liabilities ....................................... 945,816 1,195,310 Commitments and contingencies ..................................... -- -- 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 6,769,927 shares at June 30, 1999 and 6,767,358 shares at September 30, 1998 ..................... 67,700 67,674 Additional paid-in capital ........................................ 44,285,142 44,277,698 Retained earnings (deficit) ....................................... (18,146,757) (12,404,643) Accumulated other comprehensive income (Note B) ................... 1,273,582 978,669 ------------ ------------ Total stockholders' equity ...................................... 27,479,667 32,919,398 ------------ ------------ Total liabilities and stockholders' equity ........................ $ 28,425,483 $ 34,114,708 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. Page 3 of 20 4 ADVANCED MAGNETICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
Three-Month Period Ended Nine-Month Period Ended June 30, June 30, -------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Revenues: Royalties ............................................ $ 100,000 $ 60,000 $ 460,000 $ 800,000 Product sales ........................................ 264,113 170,158 1,582,193 794,182 Contract research and development .................... 85,430 -- 475,187 -- Interest, dividends and net gains and losses on sales of securities .................. 400,982 1,263,335 1,531,397 3,252,325 ----------- ----------- ----------- ----------- Total revenues .................................. 850,525 1,493,493 4,048,777 4,846,507 Cost and expenses: Cost of product sales ................................ 95,604 28,947 363,688 138,265 Contract research and development expenses ........... 4,103 -- 19,918 -- Company sponsored research and development expenses ............................... 2,197,518 1,988,802 6,668,894 6,406,973 Selling, general and administrative expenses ......... 891,386 978,713 3,159,951 2,784,029 ----------- ----------- ----------- ----------- Total costs and expenses ........................ 3,188,611 2,996,462 10,212,451 9,329,267 Other (income) expenses -- -- (421,561) -- ----------- ----------- ----------- ----------- Income (loss) before minority interest in subsidiary ........................................... (2,338,086) (1,502,969) (5,742,113) (4,482,760) Minority interest in subsidiary ...................... -- 40,637 -- 194,178 =========== =========== =========== =========== Net income (loss) ....................................... $(2,338,086) $(1,462,332) $(5,742,113) $(4,288,582) =========== =========== =========== =========== Basic net income (loss) per share ....................... $ (0.35) $ (0.22) $ (0.85) $ (0.64) Diluted net income (loss) per share ..................... $ (0.35) $ (0.22) $ (0.85) $ (0.64) Weighted average number of common shares ................ 6,768,227 6,762,951 6,767,826 6,748,515 Weighted average number of common and common equivalent shares ................................................ 6,768,227 6,762,951 6,767,826 6,748,515 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial statements. Page 4 of 20 5 ADVANCED MAGNETICS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
Three-Month Period Ended Nine-Month Period Ended June 30, June 30, -------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Net income (loss) .............................. $(2,338,086) $(1,462,332) $(5,742,113) $(4,288,582) Other comprehensive income: Unrealized gains (losses) on securities ..... 1,541,465 (632,836) 1,308,518 1,701,201 Reclassification adjustment for gains included in net income .................... (256,898) (974,451) (1,013,605) (2,473,826) ----------- ----------- ----------- ----------- Other comprehensive income ..................... 1,284,567 (1,607,287) 294,913 (772,625) =========== =========== =========== =========== Comprehensive income (loss) .................... $(1,053,519) $(3,069,619) $(5,447,200) $(5,061,207) =========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. Page 5 of 20 6 ADVANCED MAGNETICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
Nine-Month Periods Ended June 30, -------------------------- 1999 1998 ----------- ----------- Cash flows from (for) operating activities: Cash received from customers ..................................... $ 2,714,250 $ 1,156,116 Cash paid to suppliers and employees ............................. (9,304,349) (9,562,818) Dividends and interest received .................................. 541,621 779,332 Royalties received ............................................... 469,558 681,419 Income tax refund ................................................ 10,000 -- ----------- ----------- Net cash provided by (used in) operating activities .............. (5,568,920) (6,945,951) Cash flows from investing activities: Proceeds from sales of securities ................................ 3,398,422 8,993,685 Proceeds from U.S. Treasury Notes maturing ....................... 7,500,000 5,000,000 Purchase of securities ........................................... (1,620,035) (6,317,477) Capital expenditures ............................................. (260,590) (436,687) (Increase) in other assets ....................................... (59,824) (55,335) ----------- ----------- Net cash provided by (used in) investing activities .............. 8,957,973 7,184,186 Cash flows from financing activities: Proceeds from issuances of common stock .......................... 7,469 189,757 Purchase of treasury stock ....................................... -- (156,349) ----------- ----------- Net cash provided by (used in) financing activities .............. 7,469 33,408 ----------- ----------- Net increase (decrease) in cash and cash equivalents ............. 3,396,522 271,643 Cash and cash equivalents at beginning of the period ............. 7,704,245 10,724,740 ----------- ----------- Cash and cash equivalents at end of the period ................... $11,100,767 $10,996,383
The accompanying notes are an integral part of the consolidated financial statements. Page 6 of 20 7 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, 1999 AND 1998 (UNAUDITED)
Nine-Month Periods Ended June 30, -------------------------- 1999 1998 ----------- ----------- Net income (loss) ...................................................... $(5,742,113) $(4,288,582) ----------- ----------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Accretion of U.S. Treasury Notes discount .............................. (15,358) (37,216) Decrease (increase) in accounts receivable ............................. 581,864 143,713 (Increase) decrease in inventories ..................................... 99,653 (353,697) (Increase) decrease in prepaid expenses ................................ 158,534 (69,654) Depreciation and amortization .......................................... 611,599 754,698 (Decrease) increase in accounts payable and accrued expenses ........... (258,194) (618,887) (Decrease) increase in income taxes payable ............................ 8,700 (2,500) Net realized (gains) losses on sales of securities ..................... (1,013,605) (2,473,826) ----------- ----------- Total adjustments ...................................................... 173,193 (2,657,369) ----------- ----------- Net cash provided by (used in) operating activities .................... $(5,568,920) $(6,945,951) =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. Page 7 of 20 8 ADVANCED MAGNETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 A. SUMMARY OF ACCOUNTING POLICIES BUSINESS Founded in November 1981, Advanced Magnetics, Inc., a Delaware corporation (the "Company"), is a biopharmaceutical company engaged in the development and manufacture of compounds utilizing the Company's core proprietary colloidal superparamagnetic particle technology 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 inter-company balances and transactions have been eliminated. See Note H. for subsequent event. 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 were as follows:
June 30, 1999 September 30, 1998 ------------------------- ------------------------- Cost Fair Value Cost Fair Value ----------- ----------- ----------- ----------- U. S. government securities Due in one year or less .......... $ -- $ -- $ 7,484,642 $ 7,513,215 Corporate bonds ...................... -- -- 482,403 582,500 Preferred stock ...................... -- -- 543,003 570,000 Common stock ......................... 9,868,849 11,142,431 9,608,225 10,431,227 ----------- ----------- ----------- ----------- $ 9,868,849 $11,142,431 $18,118,273 $19,096,942 =========== =========== =========== ===========
Page 8 of 20 9 C. INCOME TAX There were no income tax provisions for the three and nine month periods ended June 30, 1999 and 1998 due to a net operating loss in the three and nine months ended June 30, 1999 and the three and nine months ended June 30, 1998. 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. Common equivalent shares are not included in the per share calculations because the effect of their inclusion would be anti-dilutive, given the net loss in all periods presented. Aggregate options of 547,820 (weighted average exercise price of $9.67) and 413,049 (weighted average exercise price of $11.30) were outstanding as of June 30, 1999 and June 30, 1998.
Three-Month Periods Nine-Month Periods Ended June 30, Ended June 30, --------------------- --------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Weighted average number of shares issued and outstanding ................ 6,768,227 6,762,951 6,767,826 6,748,515 Common stock equivalents ................. -- -- -- -- --------- --------- --------- --------- As adjusted .............................. 6,768,227 6,762,951 6,767,826 6,748,515 ========= ========= ========= =========
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. Page 9 of 20 10 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 this action successfully and the failure by the Company to prevail for any reason could have an adverse effect on the Company's future business, financial condition and results of operations. The Company filed suit on October 7, 1997 against Sanofi Pharmaceuticals, Inc. (formerly known as Sanofi Winthrop, Inc.) and Sanofi SA (collectively, "Defendants") in the Superior Court of the Commonwealth of Massachusetts. The action is entitled Advanced Magnetics, Inc. v. Sanofi Pharmaceuticals, Inc. and Sanofi SA, Civil Action No. 97-5222B. The Company claims that the Defendants tortiously interfered with a license, supply and marketing agreement (the "Agreement"), and seeks unspecified monetary damages. In addition, the Company seeks a declaration that the Defendants do not have any rights under the Agreement and that the Company has not breached the Agreement. Sanofi Pharmaceuticals, Inc., filed counterclaims against the Company on February 4, 1998 seeking compensatory damages of $11,500,000 and multiple damages as a result of the Company's alleged breach of the Agreement. Sanofi Pharmaceuticals, Inc. also filed a motion to dismiss the Company's tortious interference claim, which the Court denied on July 3, 1998. On October 26, 1998, the Company served a motion for partial summary judgment which, among other things, requests judgment in its favor on all of Sanofi Pharmaceuticals, Inc.'s counterclaims. On November 13, 1998 the Company filed an amended complaint adding claims for unfair competition and breach of contract against the Defendants. On November 23, 1998, Defendants answered the Company's amended complaint, and Sanofi Pharmaceuticals, Inc. served a new set of counterclaims seeking compensatory damages of $15,000,000 and multiple damages as a result of the Company's alleged conduct. On December 18, 1998, the court held a hearing on the Company's motion for partial summary judgment. On June 15, 1999, the court granted partial summary judgement in favor of the Company and against the Defendants, declared that the Company did not breach the Agreement, was not unjustly enriched, and did not violate Mass. Gen. Laws ch. 93A, and dismissed Sanofi Pharmaceuticals, Inc.'s counterclaims for breach of contract, unjust enrichment, conversion, account annexed and violation of Mass. Gen. Laws ch. 93A. While the final outcome of the remaining claims and newly-asserted counterclaims cannot be determined, the Company will pursue its claims vigorously, and believes that Sanofi Pharmaceuticals, Inc.'s remaining counterclaims are equally without merit and intends to defend them vigorously. Page 10 of 20 11 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. 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. 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 prominence as other financial statements. Accordingly, the Company has provided a statement of comprehensive income and has reclassified earlier periods for comparative purposes. H. SUBSEQUENT EVENT. On July 1, 1999, the Company divested its majority interest in Kalisto Biologicals, Inc. Terms of the divestiture included the Company relinquishing control of Kalisto by the resignation of the Company's representatives from Kalisto's Board of Directors and the sale by Advanced Magnetics of approximately 63% of Kalisto's stock to Kalisto's founder. The Company retains a 19.5% ownership position in Kalisto. Accordingly, Kalisto will no longer be consolidated with Advanced Magnetics from July 1, 1999 forward. A loss on the transaction of approximately $350,000 will be recognized in the fourth quarter of 1999. Kalisto generated revenues of $248,618 and $918,401 for the three and nine months ended June 30, 1999. Kalisto recorded net losses of $(346,173) and $(965,676) for the three and nine months ended June 30, 1999. Kalisto had net assets of $(1,341,311) as of June 30, 1999. Page 11 of 20 12 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 successfully market Feridex I.V.(R) and GastroMARK(R), 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, achieving projected expense reductions, the need for additional cost reduction measures, 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"). The Company's results of operations and cash flows reflect the activities of Kalisto for the period from the date of acquisition until June 30, 1999. See "Liquidity and Capital Resources" for further information on changes in Advanced Magnetics' ownership of Kalisto. Page 12 of 20 13 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 modify the Clinical Data Network and replace the accounting system. The Company has obtained written confirmation that the new software applications are Year 2000 compliant. The accounting system has been replaced at this time and the Company expects that the necessary Clinical Data Network modifications will be installed and operational by the end of November 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 moderately 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 13 of 20 14 All expenses related to determining and addressing Year 2000 readiness have been expensed as incurred and have amounted to roughly $80,000 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 Information Technology 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 14 of 20 15 RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1999 AS COMPARED TO THE QUARTER ENDED JUNE 30, 1998 REVENUES Total revenues for the third fiscal quarter ended June 30, 1999 were $850,525 compared to $1,493,493 for the third fiscal quarter ended June 30, 1998. The decrease in revenues in the third fiscal quarter ended June 30, 1999 compared to the third fiscal quarter ended June 30, 1998 was primarily due to a decrease in gains on sales of securities. Royalties earned on sales of the Company's products by its marketing partners for the fiscal quarter ended June 30, 1999 were $100,000 as compared to $60,000 for the third fiscal quarter ended June 30, 1998, reflecting increased sales of the Company's contrast agents. Product sales for the third fiscal quarter ended June 30, 1999 were $264,113 compared to $170,158 for the third fiscal quarter ended June 30, 1998, primarily due to higher sales by Kalisto Biologicals, Inc. Contract research and development revenues were $85,430 for the third fiscal quarter ended June 30, 1999 compared with none for the third fiscal quarter ended June 30, 1998. The increase reflects the reimbursement of certain development costs under an agreement with Berlex Laboratories, Inc. and development work done for Guerbet S.A. Interest, dividends and gains on sales of securities resulted in revenues of $400,982 in the fiscal quarter ended June 30, 1999 compared to $1,263,335 for the fiscal quarter ended June 30, 1998. Interest, dividends and net gains on sales of securities consisted of the following:
Third Quarter Ended June 30, ---------------------- 1999 1998 -------- ---------- Interest income ................................... $127,103 $ 239,498 Dividend income ................................... 16,981 49,386 Net gains on sales of securities .................. 256,898 974,451 -------- ---------- Total ............................................. $400,982 $1,263,335 ======== ==========
COSTS AND EXPENSES The Company incurred costs of $95,604 for products sold in the third fiscal quarter ended June 30, 1999 compared to $28,947 for the third fiscal quarter ended June 30, 1998. The cost of product sales for the quarter ended June 30, 1999 was 36% of product sales compared with 17% for the quarter ended June 30, 1998. Almost all of the sales in the third fiscal quarter ended June 30, 1999 were sales by Kalisto which have a higher cost of sales than Advanced Magnetics' products. Contract sponsored research and development costs of $4,103 were incurred during the quarter ended June 30, 1999, compared to none in the quarter ended June 30, 1998. Research and development expenses for the third fiscal quarter ended June 30, 1999 increased slightly to $2,197,518 compared to $1,988,802 for third fiscal quarter ended June 30, 1998. The increase was caused by increases for the completion of clinical trials for Combidex. Selling, general and administrative expenses were $891,386 for third fiscal quarter ended June 30, 1999 compared to $978,713 for the third fiscal quarter ended June 30, 1998. The decrease of $87,327 for the third fiscal quarter 1999 was due to higher sales and marketing expenses being more than offset by lower legal expenses for Advanced Magnetics. Page 15 of 20 16 INCOME TAXES There were no income tax provisions for the fiscal quarters ended June 30, 1999 and June 30, 1998 due to operating losses for both periods. EARNINGS For the reasons stated above, there was a net loss of $2,338,086 or $(0.35) basic and diluted earnings per share for the quarter ended June 30, 1999 compared to a net loss of $1,462,332 or $(0.22) basic and diluted earnings per share for the fiscal quarter ended June 30, 1998. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 1999 AS COMPARED TO THE NINE MONTHS ENDED JUNE 30, 1998 REVENUES Total revenues for the nine-month period ended June 30, 1999 were $4,048,777 compared to $4,846,507 for the nine-month period ended June 30, 1998. Royalties for the nine-month period ended June 30, 1999 were $460,000 compared with royalties for the nine-month period ended June 30, 1998 of $800,000. The decrease in royalties is associated with the non-recurring product launch of Feridex I.V. in Japan that occurred during the nine-month period ended June 30, 1998. Product sales for the nine-month period ended June 30, 1999 were $1,582,193 compared to $794,182 for the nine-month period ended June 30, 1998. Sales during the nine-month period ended June 30, 1999 were higher because of increased sales by Kalisto Biologicals. Contract research and development revenues were $475,187 for the nine-month period ended June 30, 1999 compared with none for the nine-month period ended June 30, 1998. The increase reflects the reimbursement of certain development costs under an agreement with Berlex Laboratories, Inc. and development work done for Guerbet S.A. Interest, dividends and gains and losses on sales of securities resulted in revenues of $1,531,397 for the nine-month period ended June 30, 1999 compared to $3,252,325 for the nine-month period ended June 30, 1998. The decrease of $1,720,928 compared to the nine-month period ended June 30, 1998 reflects the decrease of $1,460,221 in gains on sales of securities, a decrease of $210,808 in interest income associated with the maturities of U.S. Treasury Notes and a decrease of $49,899 in dividend income due to a reduction in dividend bearing securities. COSTS AND EXPENSES The cost of product sales for the nine-month period ended June 30, 1999 was $363,688 compared to $138,265 for the nine-month period ended June 30, 1998. The increase in cost of sales is a result of the increase in product sales in general, and an increase in the proportion of sales coming from the Kalisto product line during the nine-month period. The cost of product sales for the nine-month period ended June 30, 1999 was 23.0% of product sales compared with 17.4% for the nine-month period ended June 30, 1998. The cost of product sales, as a percentage of product sales, increased because of a change in product mix during the quarter. Contract research and development costs of $19,918 were incurred during the nine-month period ended June 30, 1999, compared to none in the nine-month period ended June 30, 1998. Page 16 of 20 17 Research and development expenses for the nine-month period ended June 30, 1999 remained relatively constant at $6,668,894 compared to $6,406,973 for the same period in 1998. The increase was caused by increases for the completion of clinical trials for Combidex. Selling, general and administrative expenses increased to $3,159,951 for the nine-month period ended June 30, 1999 from $2,784,029 for the nine-month period ended June 30, 1998. The increase was due primarily to the increase in sales and marketing expenses for Kalisto in fiscal 1999. The Company had $421,561 in other income during the nine-month period ended June 30, 1999. An excise tax claim against the Commonwealth of Massachusetts was settled in the amount of $50,000 and an insurance settlement in the amount of $371,561 was made for damages to research facilities caused by a flood in June 1998. INCOME TAXES There was no income tax provision for the nine-month period ended June 30, 1999 or the nine-month period ended June 30, 1998 due to operating losses for both periods. EARNINGS For the reasons stated above, there was a net loss of $5,742,113 or $(0.85) basic and diluted earnings per share for the nine-month period ended June 30, 1999 compared to a net loss for the nine-month period ended June 30, 1998 of $4,288,582 or ($0.64) basic and diluted earnings per share. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1999, the Company's cash and cash equivalents totaled $11,100,767 compared to $7,704,245 at September 30, 1998. In addition, the Company had marketable securities of $11,142,431 at June 30, 1999 compared to $19,096,942 on September 30, 1998. Net cash used in operating activities was $5,568,920 in the nine-month period ended June 30, 1999 compared to net cash used in operating activities of $6,945,951 in the nine-month period ended June 30, 1998. Cash provided by investing activities was $8,957,973 for the nine-month period ended June 30, 1999 compared to $7,184,186 provided by investing activities in the nine-month period ended June 30, 1998. Cash provided by investing activities in the nine-month period ended June 30, 1999 included the proceeds of $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 in the nine-month period ended June 30, 1999. Cash provided by financing activities in the nine-month period ended June 30, 1999 was $7,469 compared to $33,408 provided by financing activities in the nine-month period ended June 30, 1998. Cash used in financing activities in the nine-month period ended June 30, 1998 included $156,349 for the purchase of the Company's stock on the open market. Capital expenditures in the nine-month period ended June 30, 1999 were $260,590 compared to $436,687 in the nine-month period ended June 30, 1998. This reflects a continuing upgrade to existing property, plant and equipment. Capital expenditures are projected to remain the same for the foreseeable future. During the third fiscal quarter of 1999, the Company reduced its overhead by decreasing the number of its employees, excluding Kalisto, from 61 to 49 and made, and will continue to make, cutbacks in discretionary expenditures. These efforts are expected to significantly reduce the Company's cash expenditures in what has been a difficult financing environment for small biopharmaceutical companies. The Company is being careful to retain all of its critical capabilities, including research and development, and to ensure that headcount reductions will reduce capacity rather than core competencies. Page 17 of 20 18 On July 1, 1999, the Company divested its majority interest in Kalisto Biologicals, Inc. Terms of the divestiture included the Company relinquishing control of Kalisto by the Company's resignation from Kalisto's Board of Directors and the sale by Advanced Magnetics of approximately 63% of Kalisto's stock to Kalisto's founder. The Company retains a 19.5% ownership position in Kalisto. Accordingly, Kalisto will no longer be consolidated with Advanced Magnetics from July 1, 1999 forward. A loss on the transaction of approximately $350,000 will be recognized in the fourth quarter of 1999. Kalisto generated revenues of $248,618 and $918,401 for the three and nine months ended June 30, 1999. Kalisto recorded net losses of $(346,173) and $(965,676) for the three and nine months ended June 30, 1999. Kalisto had net assets of $(1,341,311) as of June 30, 1999. 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. There can be no assurance, however, that such funding will 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. 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. 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. Page 18 of 20 19 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. On June 15, 1999, the court granted partial summary judgement in favor of the Company and against the Defendants, declared that the Company did not breach the Agreement, was not unjustly enriched, and did not violate Mass. Gen. Laws ch. 93A, and dismissed Sanofi Pharmaceuticals, Inc.'s counterclaims for breach of contract, unjust enrichment, conversion, account annexed and violation of Mass. Gen. Laws ch. 93A. While the final outcome of the remaining claims and newly-asserted counterclaims cannot be determined, the Company will pursue its claims vigorously, and believes that Sanofi Pharmaceuticals, Inc.'s remaining counterclaims are equally without merit and intends to defend them vigorously. 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 June 30, 1999. Page 19 of 20 20 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 12, 1999 By: /s/ Jerome Goldstein ------------------------ ------------------------------------------ Jerome Goldstein, Treasurer and Chairman of the Board of Directors Date August 12, 1999 By: /s/ James A. Matheson ------------------------ ------------------------------------------ James A. Matheson, Vice President and Principal Accounting Officer Page 20 of 20 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 0000792977 ADVANCED MAGNETICS, INC. 1 U.S. DOLLARS 3-MOS SEP-30-1999 SEP-30-1998 JUN-30-1999 1 11,100,767 11,142,431 413,146 0 348,977 23,075,772 13,928,986 8,943,339 28,425,483 945,813 0 0 0 67,700 0 28,425,483 264,113 850,525 95,604 3,188,611 0 0 0 (2,338,086) 0 0 0 0 0 (2,338,086) (0.35) (0.35)
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