<PAGE> 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
<PAGE> 2
ADVANCED MAGNETICS, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
PART I. FINANCIAL INFORMATION
Item 1 -- Financial Statements
Page 2 of 20
<PAGE> 3
ADVANCED MAGNETICS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 3 of 20
<PAGE> 4
ADVANCED MAGNETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED
JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three-Month Period Ended Nine-Month Period Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 4 of 20
<PAGE> 5
ADVANCED MAGNETICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED
JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three-Month Period Ended Nine-Month Period Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 5 of 20
<PAGE> 6
ADVANCED MAGNETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED
JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Nine-Month Periods Ended
June 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 6 of 20
<PAGE> 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)
<TABLE>
<CAPTION>
Nine-Month Periods Ended
June 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
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)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 7 of 20
<PAGE> 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:
<TABLE>
<CAPTION>
June 30, 1999 September 30, 1998
------------------------- -------------------------
Cost Fair Value Cost Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
=========== =========== =========== ===========
</TABLE>
Page 8 of 20
<PAGE> 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.
<TABLE>
<CAPTION>
Three-Month Periods Nine-Month Periods
Ended June 30, Ended June 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Third Quarter Ended
June 30,
----------------------
1999 1998
-------- ----------
<S> <C> <C>
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
======== ==========
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000792977
<NAME> ADVANCED MAGNETICS, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> SEP-30-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 11,100,767
<SECURITIES> 11,142,431
<RECEIVABLES> 413,146
<ALLOWANCES> 0
<INVENTORY> 348,977
<CURRENT-ASSETS> 23,075,772
<PP&E> 13,928,986
<DEPRECIATION> 8,943,339
<TOTAL-ASSETS> 28,425,483
<CURRENT-LIABILITIES> 945,813
<BONDS> 0
0
0
<COMMON> 67,700
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 28,425,483
<SALES> 264,113
<TOTAL-REVENUES> 850,525
<CGS> 95,604
<TOTAL-COSTS> 3,188,611
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,338,086)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,338,086)
<EPS-BASIC> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
