<PAGE>
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 ______MARCH 31, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934.
For the transition period from ____________ to ___________
Commission File #0-14732
ADVANCED MAGNETICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2742593
(State or other jurisdiction of organization) (IRS Employer Incorporation
or Identification No.)
61 Mooney Street
Cambridge, MA 02138
(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 497-2070
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No
---------- ----------
At May 5, 2000, 6,752,027 shares of registrant's common stock (par value, $.01)
were outstanding.
<PAGE>
ADVANCED MAGNETICS, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
PART I. FINANCIAL INFORMATION
Item 1 -- Financial Statements
<PAGE>
ADVANCED MAGNETICS, INC.
BALANCE SHEETS
MARCH 31, 2000 AND SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS MARCH 31, SEPTEMBER 30,
------ 2000 1999
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 13,466,690 $ 17,052,636
Marketable securities (Note B)...................................... 6,052,493 4,804,785
Accounts receivable (Note C)........................................ 255,182 648,201
Inventories......................................................... 41,383 80,480
Prepaid expenses.................................................... 285,609 195,655
------------------ -------------------
Total current assets.............................................. 20,101,357 22,781,757
Property, plant and equipment:
Land................................................................ 360,000 360,000
Building............................................................ 4,612,172 4,610,827
Laboratory equipment................................................ 8,016,389 8,007,095
Furniture and fixtures.............................................. 781,366 760,538
------------------
-------------------
13,769,927 13,738,460
Less--accumulated depreciation and amortization..................... (9,342,501) (9,065,660)
------------------ -------------------
Net property, plant and equipment................................... 4,427,426 4,672,800
Other assets........................................................ 421,626 361,802
================== ===================
Total assets...................................................... $ 24,950,409 $ 27,816,359
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 257,662 $ 118,465
Accrued expenses.................................................... 536,542 581,534
Income taxes payable................................................ 61,651 61,651
------------------ -------------------
Total current liabilities......................................... 855,855 761,650
Commitments and Contingencies (Notes F and I) --- ---
Stockholders' equity:
Preferred stock, par value $.01 per share, authorized
2,000,000 shares; none issued.................................... --- ---
Common stock, par value $.01 per share,
authorized 15,000,000 shares; issued and
outstanding 6,752,027 shares at March 31, 2000
and 6,752,027 shares at September 30, 1999....................... 67,521 67,521
Additional paid-in capital.......................................... 44,205,370 44,205,370
Retained earnings (deficit)......................................... (19,310,849) (16,847,061)
Accumulated other comprehensive income (loss)....................... (867,488) (371,121)
------------------
-------------------
Total stockholders' equity........................................ 24,094,554 27,054,709
------------------
-------------------
Total liabilities and stockholders' equity.......................... $ 24,950,409 $ 27,816,359
================== ===================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
ADVANCED MAGNETICS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED
MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED MARCH 31, SIX-MONTH PERIOD ENDED MARCH 31,
2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Revenues:
Royalties................................. $ 260,000 $ 200,000 $ 423,246 $ 360,000
Product sales............................. 161,530 1,001,239 161,530 1,318,079
Contract research and development......... 105,393 144,856 116,388 389,758
Interest, dividends and net gains
and losses on sales of securities....... 168,588 937,638 404,433 1,130,415
--------------- --------------- --------------- ---------------
Total revenues....................... 695,511 2,283,733 1,105,597 3,198,252
Cost and expenses:
Cost of product sales..................... 62,954 155,903 62,954 268,084
Contract research and development ........
expenses................................ --- 15,815 3,195 15,815
Company-sponsored research and............
development expenses.................... 1,052,576 1,980,625 2,419,638 4,471,376
Selling, general and administrative
expenses................................ 612,129 1,346,808 1,083,598 2,268,565
--------------- --------------- --------------- ---------------
Total costs and expenses............. 1,727,659 3,499,151 3,569,385 7,023,840
Other (income) expenses................... --- (421,561) --- (421,561)
--------------- --------------- --------------- ---------------
Income (loss) before provision for
income taxes................................. (1,032,148) (793,857) (2,463,788) (3,404,027)
Provision for income taxes................ --- --- --- ---
--------------- --------------- --------------- ---------------
Net income (loss)............................ $(1,032,148) $ (793,857) $(2,463,788) $(3,404,027)
=============== =============== =============== ===============
Basic and diluted net income (loss)
per share................................. $ (0.15) $ (0.12) $ (0.36) $ (0.50)
=============== ===== =============== ===== =============== ==== ===============
Weighted average number of common
shares.................................... 6,752,027 6,767,660 6,752,027 6,767,574
Weighted average number of common
and common equivalent shares............ 6,752,027 6,767,660 6,752,027 6,767,574
--------------- --------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
ADVANCED MAGNETICS, INC.
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED
MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED MARCH 31, SIX-MONTH PERIOD ENDED MARCH 31,
2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMPREHENSIVE INCOME
Net income (loss)............................ $(1,032,148) $ (793,857) $(2,463,788) $(3,404,027)
Other comprehensive income (loss):
Unrealized gains (losses) on
securities.............................. (1,330,518) (2,379,173) (496,367) (232,947)
Reclassification adjustment for
gains included in net income............ --- (756,707) --- (756,707)
--------------- --------------- --------------- ---------------
Other comprehensive income (loss)............ (1,330,518) (3,135,880) (496,367) (989,654)
--------------- --------------- --------------- ---------------
Comprehensive income (loss).................. $(2,362,666) $(3,929,737) $(2,960,155) $(4,393,681)
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
ADVANCED MAGNETICS, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED
MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Six-Month Periods Ended
March 31,
--------------------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers........................................... $ 829,287 $ 1,624,917
Cash paid to suppliers and employees................................... (3,282,912) (6,255,845)
Dividends and interest received........................................ 404,433 397,568
Royalties received..................................................... 238,787 335,618
------------------ -----------------
Net cash provided by (used in) operating activities.................... (1,810,405) (3,897,742)
Cash flows from investing activities:
Proceeds from sales of securities...................................... --- 2,959,633
Proceeds from U.S. Treasury Notes maturing............................. --- 7,500,000
Purchase of securities................................................. (1,744,075) (1,082,782)
Capital expenditures................................................... (31,466) (257,386)
Net cash provided by (used in) investing activities.................... (1,775,541) 9,119,465
Cash flows from financing activities:
Proceeds from issuances of common stock................................ --- 11
- -------------------------------------------------------------------------- ------------------ -----------------
Net cash provided by (used in) financing activities.................... --- 11
------------------ -----------------
Net increase (decrease) in cash and cash equivalents................... (3,585,946) 5,221,734
Cash and cash equivalents at beginning of the period................... 17,052,636 7,704,245
------------------ -----------------
Cash and cash equivalents at end of the period......................... $ 13,466,690 $ 12,925,979
================== =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
ADVANCED MAGNETICS, INC.
RECONCILIATION OF NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
FOR THE SIX-MONTH PERIODS ENDED
MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Six-Month Periods
Ended March 31,
-------------------------------------------
2000 1999
---- ----
<S> <C> <C>
Net income (loss)......................................................... $ (2,463,788) $ (3,404,027)
------------------ ------------------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Accretion of U.S. Treasury Notes discount................................. --- (15,358)
Decrease (increase) in accounts receivable................................ 393,019 (177,861)
(Increase) decrease in inventories........................................ 39,097 103,246
(Increase) decrease in prepaid expenses and other assets.................. (149,778) 88,792
Depreciation and amortization............................................. 276,841 417,039
(Decrease) increase in accounts payable and accrued expenses............. 94,204 (151,565)
(Decrease) in income taxes payable........................................ --- (1,301)
Non-cash reduction in value of investment in subsidiary................... --- ---
Minority interest in subsidiary........................................... --- ---
Net realized (gains) losses on sales of securities........................ --- (756,707)
------------------ ------------------
Total adjustments......................................................... 653,383 (493,715)
------------------ ------------------
Net cash provided by (used in) operating activities....................... $ (1,810,405) $ (3,897,742)
================== ==================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
ADVANCED MAGNETICS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
A. SUMMARY OF ACCOUNTING POLICIES
BUSINESS
Founded in November 1981, Advanced Magnetics, Inc., a Delaware
corporation (the "Company"), is a biopharmaceutical company engaged in the
development and manufacture of compounds utilizing the Company's core
proprietary colloidal superparamagnetic particle technology and core
polysaccharide technology for magnetic resonance imaging ("MRI"). The products
developed by the Company are diagnostic imaging agents for use in conjunction
with MRI to aid in the diagnosis of cancer and other diseases.
These financial statements are unaudited and, in the opinion of
management, all adjustments necessary for a fair presentation of such financial
statements have been recorded. Such adjustments consisted only of normal
recurring items. Certain amounts in the fiscal 1999 financial statements have
been reclassified to conform with the fiscal 2000 presentation.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The year-end balance sheet data were derived from audited financial
statements, but do not include disclosures required by generally accepted
accounting principles. These interim financial statements should be read in
conjunction with the Company's most recent Form 10-K and Annual Report as of
September 30, 1999.
B. MARKETABLE SECURITIES
The cost and market value of the Company's marketable securities
portfolio are as follows:
<TABLE>
<CAPTION>
March 31, 2000 September 30, 1999
------------------------------------- --------------------------------------
Cost Fair Value Cost Fair Value
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Common stock $ 6,919,981 $ 6,052,493 $ 5,175,906 $ 4,804,785
---------------- ----------------- ----------------- -----------------
Total $ 6,919,981 $ 6,052,493 $ 5,175,906 $ 4,804,785
================ ================= ================= =================
</TABLE>
C. ACCOUNTS RECEIVABLE
Accounts receivable on March 31, 2000 and September 30, 1999 were net
of reserves of $248,239 and $166,577 respectively.
D. INCOME TAX
There were no income tax provisions for the three and six-month periods
ended March 31, 2000 and 1999 due to net operating losses in those periods.
<PAGE>
E. EARNINGS (LOSS) PER SHARE
The weighted average common and common equivalent shares used in the
computation of basic and diluted earnings per share is presented below.
Aggregate options of 488,506 (weighted average exercise price of $8.90) and
430,320 (weighted average exercise price of $11.21) for the three and six-month
periods ended March 31, 2000 and March 31, 1999, respectively, have not been
included in the calculation of weighted average shares, since their effect would
be anti-dilutive, given the net loss in those periods.
<TABLE>
<CAPTION>
Three-Month Periods Six-Month Periods
ENDED MARCH 31, ENDED MARCH 31,
--------------- ---------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of shares
issued and outstanding.................. 6,752,027 6,767,660 6,752,027 6,767,574
Common stock equivalents --- --- --- ---
---------------------------------------------- ------------- ------ ------------- ------- ------------- ------- -------------
As adjusted................................ 6,752,027 6,767,660 6,752,027 6,767,574
============= ============= ============= =============
</TABLE>
F........LEGAL PROCEEDINGS
The Company and certain of its officers were sued in an action entitled
DAVID D. STARK, M.D. V. ADVANCED MAGNETICS. INC., JEROME GOLDSTEIN, ERNEST V.
GROMAN, AND LEE JOSEPHSON, Civil Action No. 92-12157-WGY, in the United States
District Court for the District of Massachusetts on September 3, 1992. The
plaintiff, a former consultant to the Company, claims that he was incorrectly
omitted as an inventor or joint inventor on certain of the Company's patents and
on pending applications, and seeks injunctive relief and unspecified damages. In
addition, the complaint also alleges state law claims for breach of contract,
breach of good faith and fair dealing, breach of implied contract,
misappropriation of trade secrets, conversion, negligent misrepresentation,
misrepresentation, unjust enrichment and unfair trade practices. The District
Court has stayed this federal action pending resolution of an appeal in the
State Court of summary judgment in the Company's favor as well as resolution of
a jurisdictional issue. While the outcome of the action cannot be determined,
the Company believes the action is without merit and intends to defend the
action vigorously. There can be no assurance, however, that the Company will be
able to defend successfully this action and the failure by the Company to
prevail for any reason could have an adverse effect on the Company's future
business, financial condition and results of operations.
The Company and certain of its officers were sued in an action entitled
DAVID D. STARK, M.D. V. ADVANCED MAGNETICS, INC., JEROME GOLDSTEIN, ERNEST V.
GROMAN AND LEE JOSEPHSON, Civil Action No. 93-02846-C, in the Superior Court
Department of the Massachusetts Trial Court for Middlesex County. This case
involves claims of breach of contract, breach of good faith and fair dealing,
breach of implied contract, unjust enrichment and unfair trade practices that
were originally dismissed by, but later remanded to, the Federal Court in the
above-mentioned action, as well as a new count alleging tortious interference
with contractual or advantageous relations. The Superior Court granted partial
summary judgment in the Company's favor and dismissed the unfair trade practices
and tort counts. The plaintiff's contract claims have been dismissed with
prejudice and final judgment was entered against the plaintiff. The plaintiff
filed an appeal in DAVID D. STARK, M.D. V. ADVANCED MAGNETICS, INC., JEROME
GOLDSTEIN, ERNEST V. GROMAN AND LEE JOSEPHSON, Appeal No. 98-P-1749 in the
Massachusetts Appeals Court, on January 25, 1999. While the outcome of the
action cannot be determined, the Company believes the action is without merit
and intends to defend the action vigorously. There can be no assurance, however,
that the Company will be able to defend this action successfully and the failure
by the Company to prevail for any reason could have an adverse effect on the
Company's future business, financial condition and results of operations.
<PAGE>
The Company filed suit on October 7, 1997 against Sanofi
Pharmaceuticals, Inc. (formerly known as Sanofi Winthrop, Inc.) and Sanofi SA
(collectively, the "Defendants") in the Superior Court of the Commonwealth of
Massachusetts. The action is entitled ADVANCED MAGNETICS, INC. V. SANOFI
PHARMACEUTICALS, INC. AND SANOFI SA, Civil Action No. 97-5222B. The Company
claims that the Defendants tortiously interfered with a license, supply and
marketing agreement (the "Agreement"), and seeks unspecified monetary damages.
In addition, the Company seeks a declaration that the Defendants do not have any
rights under the Agreement and that the Company has not breached the Agreement.
Sanofi Pharmaceuticals, Inc., filed counterclaims against the Company on
February 4, 1998 seeking compensatory damages of $11,500,000 and multiple
damages as a result of the Company's alleged breach of the Agreement. Sanofi
Pharmaceuticals, Inc. also filed a motion to dismiss the Company's tortious
interference claim, which the Court denied on July 3, 1998. On October 26, 1998,
the Company served a motion for partial summary judgment which, among other
things, requests judgment in its favor on all of Sanofi Pharmaceuticals, Inc.'s
counterclaims. On November 13, 1998 the Company filed an amended complaint
adding claims for unfair competition and breach of contract against the
Defendants. On November 23, 1998, the Defendants answered the Company's amended
complaint, and Sanofi Pharmaceuticals, Inc. served a new set of counterclaims
seeking compensatory damages of $15,000,000 and multiple damages as a result of
the Company's alleged conduct. On December 18, 1998, the court held a hearing on
the Company's motion for partial summary judgment. On June 15, 1999, the court
granted partial summary 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. On October 29, 1999, the Company served a motion for partial summary
judgement which, among other things, requests judgement in its favor on Sanofi
Pharmaceuticals, Inc.'s remaining counterclaims against the Company and for
judgement in its favor on the Company's breach of contract claim against Sanofi
Pharmaceuticals, Inc. Also on October 29, 1999, Sanofi Pharmaceuticals, Inc.
served a motion for partial summary judgement which, among other things,
requests judgement in its favor on the Company's remaining claims. The Court
held a hearing on these motions on March 21, 2000. The parties await a decision.
While the final outcome of these claims and counterclaims cannot be determined,
the Company will pursue its claims vigorously, and believes that the Sanofi
Pharmaceuticals, Inc. counterclaims are without merit and intends to defend them
vigorously.
G. BUSINESS SEGMENTS
During fiscal 1999, the Company adopted FASB Statement No. 131 ("SFAS
131"), "Disclosures about Segments of an Enterprise and Related Information".
This Statement changes the way public companies report information about
segments. Prior to the deconsolidation of Kalisto in July of 1999, the Company
had two business segments under the "management approach" as defined in SFAS
131, the original business and the majority-owned subsidiary.
<PAGE>
Information concerning the operations in these reportable segments
is as follows:
<TABLE>
<CAPTION>
Three-Month Periods Six-Month Periods
ENDED MARCH 31, ENDED MARCH 31,
--------------- ---------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Advanced Magnetics, Inc.............................. $ 695,511 $ 1,932,899 $ 1,105,597 $ 2,528,469
Kalisto Biologicals Inc.............................. --- 350,834 --- 669,783
------------- ----------- ------------- -----------
Total............................................ $ 695,511 $ 2,283,733 $ 1,105,597 $ 3,198,252
DEPRECIATION EXPENSE:
Advanced Magnetics, Inc.............................. $ 138,421 $ 190,800 $ 276,841 $ 381,600
Kalisto Biologicals Inc.............................. --- 17,720 --- 35,439
------------- ----------- ------------- -----------
Total............................................ $ 138,421 $ 208,520 $ 276,841 $ 417,039
NET INCOME (LOSS):
Advanced Magnetics, Inc.............................. $ (1,032,148) $ (472,808) $ (2,463,788) $ (2,784,526)
Kalisto Biologicals Inc.............................. --- (321,050) --- (619,502)
------------- ----------- ------------- -------------
Total............................................ $ (1,032,148) $ (793,858) $ (2,463,788) $ (3,404,028)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
--------- -------------
2000 1999
---- ----
<S> <C> <C>
SEGMENT ASSETS:
Advanced Magnetics, Inc.............................. $ 24,950,409 $ 27,816,359
Kalisto Biologicals Inc.............................. --- ---
------------ ------------
Total............................................ $ 24,950,409 $ 27,816,359
</TABLE>
H. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for fiscal years beginning after June 15, 2000. The statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability,
measured at its fair value. SFAS No. 133 also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Adoption of this standard is not expected to
have a material impact on the financial position or results of operations of the
Company.
In December 1999, the Staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements". SAB 101 summarizes some of the staff's
interpretations of the application of generally accepted accounting principles
("GAAP") to revenue recognition. Application of the accounting and disclosure
requirements of SAB 101 is not expected to have a material impact on the
financial position or the results of operations of the Company.
I. COMMITMENTS AND CONTINGENCIES
The Company is a guarantor on a lease for office space for Kalisto in
the event Kalisto defaults on its obligation. The Company is currently assessing
Kalisto's ability to pay its obligation under the lease and the consequences to
the Company of any default by Kalisto. As of May 2000, the Company's potential
obligation relating to this guarantee cannot be predicted with certainty. The
lease term runs through October 31, 2002. The ultimate liability of the Company,
if any, in connection with this guaranty, could have a material adverse impact
on the statement of operations in any one accounting period.
<PAGE>
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 TIMING AND RESULT OF FDA ACTION, SUCH
AS THE APPROVAL OF COMBIDEX(R), THE ABILITY TO SUCCESSFULLY MARKET FERIDEX
I.V.(R), GASTROMARK(R) AND ANY FUTURE PRODUCTS THAT RECEIVE FDA APPROVAL, THE
COMPANY'S DEPENDENCE ON ITS CORPORATE PARTNERS, DELAYS IN ARRANGEMENTS WITH
CLINICAL INVESTIGATIONS, UNCERTAINTIES RELATING TO RESULTS OF THE CLINICAL
TRIALS OF THE COMPANY'S PRODUCT CANDIDATES, ACHIEVING PROJECTED EXPENSE
REDUCTIONS, THE NEED FOR ADDITIONAL COST REDUCTION MEASURES, THE COMPANY'S
ABILITY TO OBTAIN FUTURE FINANCING, UNCERTAINTIES RELATING TO PATENTS AND
PROPRIETARY RIGHTS, THE ABILITY OF THE COMPANY TO COMPETE SUCCESSFULLY IN THE
FUTURE AND THE RISKS IDENTIFIED IN THE COMPANY'S SECURITIES AND EXCHANGE
COMMISSION FILINGS, INCLUDING BUT NOT LIMITED TO ITS FORM 10-K FOR THE YEAR
ENDED SEPTEMBER 30, 1999.
OVERVIEW
Advanced Magnetics, Inc. ("Advanced Magnetics" or the "Company") is a
biopharmaceutical company dedicated to the development and commercialization of
novel products for the diagnosis of cancer and other diseases. Since its
inception in November 1981, Advanced Magnetics has focused its efforts on
developing applications of its core magnetic particle technology. This focus has
led to the development of magnetic resonance imaging (MRI) contrast agents. The
Company has funded its operations with cash from license fees from corporate
partners, royalties, sales of its products, fees from contract research
performed for third parties, the proceeds of financings and income earned on
invested cash. The Company's success in the market for diagnostic products will
depend, in part, on the Company's ability to successfully develop, test, produce
and market its products; obtain necessary governmental approvals in a timely
manner; attract and maintain key employees; and successfully respond to
technological changes in its marketplace.
The Company's operating results may continue to vary significantly from
quarter to quarter, or from year to year, depending on a number of factors,
including: (i) the timing of payments from corporate partners and research
grants; (ii) the introduction of new products; (iii) the timing and size of
orders from customers; (iv) the general level of acceptance of the Company's
products; and (v) increases or decreases in, and timing of, research and
development, clinical trials and other expenses. A substantial portion of the
Company's expenses consist of research and development costs. The Company's
current planned expense levels are based in part upon expectations as to future
revenue. Consequently, profits may vary significantly from quarter to quarter or
year to year based on the timing of revenue. Revenue or profits in any period
will not necessarily be indicative of results in subsequent periods and there
can be no assurance that the Company will be profitable or that revenue growth
will be achieved in the future.
In December 1999, the Company submitted a New Drug Application
("NDA") with the U.S. Food and Drug Administration ("FDA") for Combidex(R)
Magnetic Resonance Imaging ("MRI") contrast agent. The NDA covers two
indications. The principle indication is for the diagnosis of lymph node
disease to assist in directing biopsy and surgery and to aid in the staging
of metastatic lymph node involvement for a variety of cancers, including
breast and prostate cancer.
<PAGE>
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, replaced both these systems. The Company obtained
written confirmation that the new software applications are Year 2000 compliant.
The Company's computer hardware platforms, on which these systems run, have been
confirmed as Year 2000 compliant by their manufacturers and the Company
completed testing of them in September 1999.
In addition to evaluating its computer systems, the Company recognized
that the Year 2000 issue could impact machines or equipment that rely on
embedded microchips. The Company evaluated and tested such equipment used in its
manufacturing facilities and believed that it did not have a material risk of
disruptions in manufacturing due to a Year 2000 failure. The Company also
evaluated 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 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 obtained assurances from its significant raw material
suppliers that there would be no interruption of service as a result of the Year
2000 issue and, to the extent such assurances were not given, the Company
devised contingency plans to ameliorate the potential negative effects in the
event of the unavailability of materials.
A failure of any contingency plan developed by the Company may result
in 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.
As of May 2000, the Company is not aware of any material problems due
to the Year 2000 issue. However, problems may still arise which could have a
material adverse impact on the Company. All expenses related to determining and
addressing Year 2000 readiness have been expensed as incurred and have amounted
to roughly $100,000 to date. If, however, compliance efforts of which the
Company is not currently aware are required, or if the cost of any required
updating or modification of the Company's IT systems exceeds the Company's
estimates, the Year 2000 issue could have a material adverse impact on the
Company.
<PAGE>
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 has attempted to reduce the risks by utilizing an organized
approach, extensive testing, and allowance of ample contingency time to address
issues identified by tests.
<PAGE>
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2000 AS COMPARED TO THE
QUARTER ENDED MARCH 31, 1999
REVENUES
Total revenues for the second fiscal quarter ended March 31, 2000 were
$695,511 compared to $2,283,733 for the second fiscal quarter ended March 31,
1999. The decrease in revenues in the second quarter ended March 31, 2000
compared to the second quarter ended March 31, 1999 was primarily due to a
decrease in both product sales and lower interest, dividends and gains on sales
of securities.
Royalties for the second fiscal quarter ended March 31, 2000 of
$260,000 were $60,000 higher than in the second fiscal quarter ended March 31,
1999. Royalties, in general, increased, primarily due to sales by our
Japanese partner, Eiken Chemical Co., Ltd.
Product sales for the second fiscal quarter ended March 31, 2000
were $161,530 compared to $1,001,239 for the second fiscal quarter ended
March 31,1999. The decrease of $839,709 was primarily due to the inclusion of
sales of the former subsidiary, Kalisto, in the prior fiscal year's financial
statements. The Company also had decreased sales of product of $488,875 due
to the timing of sales.
Contract research and development revenues were $105,393 for the
second fiscal quarter ended March 31, 2000 compared with $144,856 for the
second fiscal quarter ended March 31, 1999. Contract research and development
revenues are reimbursements of expenditures for clinical trials. The decrease
reflects the completion in fiscal 2000 of certain development projects which
were reimbursed to the Company under an agreement with Berlex Laboratories,
Inc.
Interest, dividends and gains on sales of securities resulted in
revenues of $168,588 in the fiscal quarter ended March 31, 2000 compared to
$937,638 for the fiscal quarter ended March 31, 1999. Interest, dividends and
net gains on sales of securities consisted of the following:
<TABLE>
<CAPTION>
Second Quarter Ended March 31,
----------------------------------------
2000 1999
---- ----
<S> <C> <C>
Interest income $ 144,088 $ 124,436
Dividend income 24,500 56,495
Net gains on sales of securities --- 756,707
================== =================
Total $ 168,588 $ 937,638
================== =================
</TABLE>
COSTS AND EXPENSES
As a result of decreased product sales, the Company incurred costs of
$62,954 for products sold in the quarter ended March 31, 2000 compared to
$155,903 for the second fiscal quarter ended March 31, 1999. The cost of product
sales for the three-month period ended March 31, 2000 was 39% of product sales
compared with 16% for the three-month period ended March 31, 1999. The change is
due to the product mix of the sales, with an unusually high percentage of the
sales in fiscal 2000 being GastroMARK sales, which have a higher cost of sales
than Feridex I.V. There were no direct costs for contract sponsored research and
development in the three-month period ended March 31, 2000, while there were
direct costs of $15,815 during the three-month period ended March 31, 1999.
Company sponsored research and development expenses for the second
fiscal quarter ended March 31, 2000 were $1,052,576 compared to $1,980,625
for the second fiscal quarter ended March 31, 1999. The decrease in fiscal
2000 was due to the reduction of costs in clinical trials for Combidex during
fiscal 2000 and the exclusion of costs incurred by Kalisto.
Selling, general and administrative expenses were $612,129 for the
second fiscal quarter ended March 31, 2000 compared to $1,346,808 for the second
fiscal quarter ended March 31, 1999. The decrease of $734,679 in fiscal 2000 was
primarily due to the exclusion of costs incurred by Kalisto.
<PAGE>
The Company had $421,561 in other income during the second fiscal
quarter ended March 31, 1999. There was no other income during the same period
in fiscal 2000.
INCOME TAXES
There were no income tax provisions for the fiscal quarters ended March
31, 2000 and March 31, 1999 due to operating losses for both periods.
EARNINGS
For the reasons stated above, there was a net loss of $1,032,148 or
$(0.15) per share for the quarter ended March 31, 2000 compared to a net loss of
$793,857 or $(0.12) per share for the fiscal quarter ended March 31, 1999.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2000 AS COMPARED TO
THE SIX MONTHS ENDED MARCH 31, 1999
REVENUES
Total revenues for the six-month period ended March 31, 2000 were
$1,105,597 compared to $3,198,252 for the six-month period ended March 31, 1999.
The decrease in revenues in the six-month period ended March 31, 2000 compared
to the six-month period ended March 31, 1999 was primarily due to a decrease in
both product sales and lower interest, dividends and gains on sales of
securities.
Royalties for the six-month period ended March 31, 2000 were $423,246
compared with royalties for the six-month period ended March 31, 1999 of
$360,000. Royalties, in general, increased, primarily due to sales by
our Japanese partner, Eiken Chemical Co., Ltd.
Product sales for the six-month period ended March 31, 2000 were
$161,530 compared to $1,318,079 for the six-month period ended March 31,
1999. The decrease was due, in part, to sales of Kalisto no longer being
included in the financial statements and $486,766 of the decrease was due to
the timing of sales.
Contract research and development revenues were $116,388 for the
six-month period ended March 31, 2000 compared with $389,758 for the
six-month period ended March 31,1999. Contract research and development
revenues are reimbursements of expenditures for clinical trials. The decrease
reflects the completion of certain clinical trials.
Interest, dividends and gains and losses on sales of securities
resulted in revenues of $404,433 for the six-month period ended March 31, 2000
compared to $1,130,415 for the six-month period ended March 31, 1999. The
decrease was due to no gains on the sale of securities during the six-month
period ended March 31, 2000 compared with a gain of $756,707 realized on the
sale of securities during the six-month period ended March 31, 1999.
COSTS AND EXPENSES
The cost of product sales for the six-month period ended March 31, 2000
was $62,954 compared to $268,084 for the six-month period ended March 31, 1999.
The cost of product sales for the six-month period ended March 31, 2000 was
39.4% of product sales compared with 20.3% for the six-month period ended March
31, 1999. The change is due to the product mix of the sales, with an unusually
high percentage of the sales in fiscal 2000 being GastroMARK sales, which have a
higher cost of sales than Feridex I.V. sales. There were $3,195 in direct costs
for contract sponsored research and development in the six-months ended March
31, 2000, while there were direct costs of $15,815 during the six-month
period ended March 31, 1999. The reduction is due to the completion of
contracted research and development for our marketing partner, Guerbet.
<PAGE>
Company sponsored research and development expenses for the
six-month period ended March 31, 2000 were $2,419,638 compared to $4,471,376
for the same period in 1999. The decrease reflected the completion of certain
clinical trials for Combidex in the first half of fiscal 2000. Selling,
general and administrative expenses decreased to $1,083,598 for the six-month
period ended March 31, 2000 from $2,268,565 for the six-month period ended
March 31, 1999. The decrease in expenses in fiscal 2000 was due to Kalisto
expenses not being included in the financial statements and an emphasis on
cost reduction by the Company in general.
The Company had $421,560 in other income during the six-month period
ended March 31, 1999. There was no other income during the same period in
fiscal 2000.
INCOME TAXES
There was no income tax provision for the six-month periods ended March
31, 2000 and March 31, 1999 due to operating losses for both periods.
EARNINGS
For the reasons stated above, there was a net loss of $2,463,788 or
$(0.36) per share for the six-month period ended March 31, 2000 compared to a
net loss for the six-month period ended March 31, 1999 of $3,404,027 or $(0.50)
per share.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company's cash and cash equivalents totaled
$13,466,690 compared to $17,052,636 at September 30, 1999. In addition, the
Company had marketable securities of $6,052,493 at March 31, 2000 compared to
$4,804,785 on September 30, 1999. Net cash used in operating activities was
$1,810,405 in the six-month period ended March 31, 2000 compared to net cash
used in operating activities of $3,897,742 in the six-month period ended March
31, 1999. Cash used in investing activities was $1,775,541 for the six-month
period ended March 31, 2000 compared to $9,119,465 provided by investing
activities in the six-month period ended March 31, 1999. The cash used in
investing activities during the six-month period ended March 31, 2000
consisted primarily of $1,744,075 for the purchase of securities. The
proceeds in the six-month period ended March 31, 1999 included $2,959,633 from
the sale of marketable securities and $7,500,000 from the maturing of a U.S.
Treasury Note. Offsetting those proceeds was the purchase of marketable
securities of $1,082,782 during the same period. There was no cash used in or
provided by financing activities in the six-month period ended March 31, 2000
compared with $11 provided by financing activities in the six-month period
ended March 31, 1999.
Capital expenditures during the six-month period ended March 31, 2000
were $31,466 compared to $257,386 in the six-month period ended March 31, 1999.
This reflects a reduced level of expenditures on upgrades to existing property,
plant and equipment.
Management believes that existing cash balances, cash generated from
investing activities and cash generated from operations will be sufficient to
meet cash and working capital requirements for the foreseeable future. In
addition, the Company will consider from time to time various financing
alternatives and may seek to raise additional capital through equity or debt
financing or to enter into corporate partnering arrangements. However, such
funding may not be available on terms acceptable to the Company, if at all.
<PAGE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for fiscal years beginning after June 15, 2000. The statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability,
measured at its fair value. SFAS No. 133 also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Adoption of this standard is not expected to
have a material impact on the financial position or results of operations of the
Company.
In December 1999, the Staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements". SAB 101 summarizes some of the staff's
interpretations of the application of generally accepted accounting principles
("GAAP") to revenue recognition. Application of the accounting and disclosure
requirements of SAB 101 is not expected to have a material impact on the
financial position or the results of operations of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change to the information concerning the
Company's market risk sensitive instruments as set forth in the Company's 10-K
for the period ended September 30, 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company filed suit on October 7, 1997 against Sanofi
Pharmaceuticals, Inc. (formerly known as Sanofi Winthrop, Inc.) and Sanofi SA
(collectively, the "Defendants") in the Superior Court of the Commonwealth of
Massachusetts. The action is entitled ADVANCED MAGNETICS, INC. V. SANOFI
PHARMACEUTICALS, INC. AND SANOFI SA, Civil Action No. 97-5222B. The Company
claims that the Defendants tortiously interfered with a license, supply and
marketing agreement (the "Agreement"), and seeks unspecified monetary damages.
In addition, the Company seeks a declaration that the Defendants do not have any
rights under the Agreement and that the Company has not breached the Agreement.
Sanofi Pharmaceuticals, Inc., filed counterclaims against the Company on
February 4, 1998 seeking compensatory damages of $11,500,000 and multiple
damages as a result of the Company's alleged breach of the Agreement. Sanofi
Pharmaceuticals, Inc. also filed a motion to dismiss the Company's tortious
interference claim, which the Court denied on July 3, 1998. On October 26, 1998,
the Company served a motion for partial summary judgment which, among other
things, requests judgment in its favor on all of Sanofi Pharmaceuticals, Inc.'s
counterclaims. On November 13, 1998 the Company filed an amended complaint
adding claims for unfair competition and breach of contract against the
Defendants. On November 23, 1998, the Defendants answered the Company's amended
complaint, and Sanofi Pharmaceuticals, Inc. served a new set of counterclaims
seeking compensatory damages of $15,000,000 and multiple damages as a result of
the Company's alleged conduct. On December 18, 1998, the court held a hearing on
the Company's motion for partial summary judgment. On June 15, 1999, the court
granted partial summary 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. On October 29, 1999, the Company served a motion for partial summary
judgement which, among other things, requests judgement in its favor on Sanofi
Pharmaceuticals, Inc.'s remaining counterclaims against the Company and for
judgement in its favor on the Company's breach of contract claim against Sanofi
Pharmaceuticals, Inc. Also on October 29, 1999, Sanofi Pharmaceuticals, Inc.
served a motion for partial summary judgement which, among other things,
requests judgement in its favor on the Company's remaining claims. The Court
held a hearing on these motions on March 21, 2000. The parties await a decision.
While the final outcome of these claims and counterclaims cannot be determined,
the Company will pursue its claims vigorously, and believes that the Sanofi
Pharmaceuticals, Inc. counterclaims are without merit and intends to defend them
vigorously.
<PAGE>
There have been no material changes to the information concerning the
Company's other legal proceedings as set forth in the Company's Form 10-K for
the fiscal year ended September 30, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 1, 2000, the Company held its Annual Meeting of
Stockholders. At the meeting, the stockholders acted upon the election of
directors.
Votes "FOR" represent affirmative votes and do not include abstentions
or broker non-votes. In cases where a signed proxy was submitted without
designation, the shares represented by the proxy were voted "FOR" the proposal
to elect directors in the manner described in the Proxy Statement. On the record
date (December 7, 1999), 6,752,027 shares of the Company's common stock were
issued and outstanding.
Voting results were as follows:
MATTER FOR AGAINST WITHHELD ABSTAIN
1. Election of Directors
Leonard M. Baum 5,776,640 N/A 106,036 N/A
Jerome Goldstein 5,776,640 N/A 106,036 N/A
Joseph B. Lassiter III 5,777,290 N/A 105,386 N/A
Michael D. Loberg 5,777,140 N/A 105,536 N/A
Edward B. Roberts 5,777,290 N/A 105,386 N/A
George M. Whitesides 5,777,290 N/A 105,386 N/A
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 March 31, 2000.
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 May 10, 2000 By /s/ Jerome Goldstein
------------ ------------------------------------------------
Jerome Goldstein, Treasurer
and Chairman of the Board of Directors
Date May 10, 2000 By /s/ James A. Matheson
------------ ------------------------------------------------
James A. Matheson, Vice President
and Principal Accounting Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> SEP-30-2000 SEP-30-2000
<PERIOD-START> JAN-01-2000 OCT-01-1999
<PERIOD-END> MAR-31-2000 MAR-31-2000
<CASH> 13,466,690 0
<SECURITIES> 6,052,493 0
<RECEIVABLES> 255,182 0
<ALLOWANCES> 0 0
<INVENTORY> 41,383 0
<CURRENT-ASSETS> 20,101,357 0
<PP&E> 13,769,927 0
<DEPRECIATION> (9,342,501) 0
<TOTAL-ASSETS> 24,950,409 0
<CURRENT-LIABILITIES> 855,622 0
<BONDS> 0 0
0 0
0 0
<COMMON> 67,521 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 24,950,409 0
<SALES> 0 0
<TOTAL-REVENUES> 695,511 1,105,597
<CGS> 62,954 62,954
<TOTAL-COSTS> 1,727,659 3,569,385
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (1,032,148) (2,463,788)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,032,148) (2,463,788)
<EPS-BASIC> (0.15) (0.36)
<EPS-DILUTED> (0.15) (0.36)
</TABLE>
