<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 June 30, 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 August 5, 2000, 6,773,932 shares of registrant's common stock (par value,
$.01) were outstanding.
Page 1 of 18
<PAGE>
ADVANCED MAGNETICS, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 2000
PART I. FINANCIAL INFORMATION
Item 1 -- Financial Statements
Page 2 of 18
<PAGE>
ADVANCED MAGNETICS, INC.
BALANCE SHEETS
JUNE 30, 2000 AND SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS JUNE 30, SEPTEMBER 30,
------ -------- -------------
2000 1999
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 12,362,047 $ 17,052,636
Marketable securities (Note B)..................................... 6,089,245 4,804,785
Accounts receivable, net (Note C).................................. 772,389 648,201
Inventories........................................................ 35,296 80,480
Prepaid expenses................................................... 253,383 195,655
------------ ------------
Total current assets............................................. 19,512,360 22,781,757
Property, plant and equipment:
Land............................................................... 360,000 360,000
Building........................................................... 4,612,172 4,610,827
Laboratory equipment............................................... 8,016,339 8,007,095
Furniture and fixtures............................................. 782,150 760,538
------------ ------------
13,770,661 13,738,460
Less--accumulated depreciation and amortization.................... (9,480,921) (9,065,660)
------------ ------------
Net property, plant and equipment.................................. 4,289,740 4,672,800
Other assets....................................................... 421,626 361,802
------------ ------------
Total assets..................................................... $ 24,223,726 $ 27,816,359
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 61,493 $ 118,465
Accrued expenses.................................................... 489,958 581,534
Income taxes payable................................................ 61,651 61,651
------------ ------------
Total current liabilities......................................... 613,102 761,650
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 6,773,932 shares at June 30, 2000
and 6,752,027 shares at September 30, 1999....................... 67,739 67,521
Additional paid-in capital.......................................... 44,267,120 44,205,370
Retained earnings (deficit)......................................... (19,893,499) (16,847,061)
Accumulated other comprehensive income (loss)....................... (830,736) (371,121)
------------ ------------
Total stockholders' equity........................................ 23,610,624 27,054,709
------------ ------------
Total liabilities and stockholders' equity.......................... $ 24,223,726 $ 27,816,359
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 3 of 18
<PAGE>
ADVANCED MAGNETICS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED
JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED JUNE 30, NINE-MONTH PERIOD ENDED JUNE 30,
--------------------------------- --------------------------------
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<S> <C> <C> <C> <C>
Revenues:
Royalties................................. $ 200,000 $ 100,000 $ 623,246 $ 460,000
Product sales............................. 616,911 264,113 778,441 1,582,193
Contract research and development......... --- 85,430 116,388 475,187
Interest, dividends and net gains
and losses on sales of securities....... 197,122 400,982 601,555 1,531,397
--------------- --------------- --------------- ---------------
Total revenues....................... 1,014,033 850,525 2,119,630 4,048,777
Cost and expenses:
Cost of product sales..................... 43,195 95,604 106,149 363,688
Contract research and development
expenses................................ --- 4,103 3,195 19,918
Company sponsored research and
development expenses.................... 1,033,624 2,197,518 3,453,262 6,668,894
Selling, general and administrative
expenses................................ 519,864 891,386 1,603,462 3,159,951
--------------- --------------- --------------- ---------------
Total costs and expenses............. 1,596,683 3,188,611 5,166,068 10,212,451
Other (income) expenses................... --- --- --- (421,561)
--------------- --------------- --------------- ---------------
Income (loss) before provision for
income taxes................................... (582,650) (2,338,086) (3,046,438) (5,742,113)
Provision for income taxes................ --- --- --- ---
--------------- --------------- --------------- ---------------
Net income (loss)............................ $ (582,650) $(2,338,086) $(3,046,438) $(5,742,113)
=============== =============== =============== ===============
Basic and diluted net income (loss)
per share................................. $ (0.09) $ (0.35) $ (0.45) $ (0.85)
=============== =============== =============== ===============
Weighted average number of common
shares.................................... 6,757,691 6,768,227 6,754,293 6,767,826
Weighted average number of common
and common equivalent shares............ 6,757,691 6,768,227 6,754,293 6,767,826
--------------- --------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 4 of 18
<PAGE>
ADVANCED MAGNETICS, INC.
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED
JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED JUNE 30, NINE-MONTH PERIOD ENDED JUNE 30,
--------------------------------- --------------------------------
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME
<S> <C> <C> <C> <C>
Net income (loss)............................ $(582,650) $(2,338,086) $(3,046,438) $(5,742,113)
Other comprehensive income (loss):
Unrealized gains (losses) on
securities.............................. 36,752 1,541,465 (459,615) 1,308,518
Reclassification adjustment for
gains included in net income............ --- (256,898) --- (1,013,605)
--------------- --------------- --------------- ---------------
Other comprehensive income (loss)............ 36,752 1,284,567 (459,615) 294,913
--------------- --------------- --------------- ---------------
Comprehensive income (loss).................. $(545,898) $(1,053,519) $(3,506,053) $(5,447,200)
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 5 of 18
<PAGE>
ADVANCED MAGNETICS, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED
JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Nine-Month Periods Ended
June 30,
--------------------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers........................................... $ 982,594 $ 2,714,250
Cash paid to suppliers and employees................................... (4,899,133) (9,304,349)
Dividends and interest received........................................ 601,556 541,621
Royalties received..................................................... 398,525 469,558
Income tax refund...................................................... --- 10,000
------------------ -----------------
Net cash provided by (used in) operating activities.................... (2,916,458) (5,568,920)
Cash flows from investing activities:
Proceeds from sales of securities...................................... --- 3,398,422
Proceeds from U.S. Treasury Notes maturing............................. --- 7,500,000
Purchase of securities................................................. (1,744,075) (1,620,035)
Capital expenditures................................................... (32,200) (260,590)
(Increase) in other assets............................................. (59,824) (59,824)
------------------ -----------------
Net cash provided by (used in) investing activities.................... (1,836,099) 8,957,973
Cash flows from financing activities:
Proceeds from issuances of common stock................................ 61,968 7,469
------------------ -----------------
Net cash provided by (used in) financing activities.................... 61,968 7,469
------------------ -----------------
Net increase (decrease) in cash and cash equivalents................... (4,690,589) 3,396,522
Cash and cash equivalents at beginning of the period................... 17,052,636 7,704,245
------------------ -----------------
Cash and cash equivalents at end of the period......................... $ 12,362,047 $ 11,100,767
================== =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 6 of 18
<PAGE>
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, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Nine-Month Periods
Ended June 30,
-------------------------------------------
2000 1999
---- ----
<S> <C> <C>
Net income (loss)......................................................... $ (3,046,438) $ (5,742,113)
------------------ ------------------
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, net........................... (124,188) 581,864
(Increase) decrease in inventories........................................ 45,184 99,653
(Increase) decrease in prepaid expenses................................... (57,728) 158,534
Depreciation and amortization............................................. 415,260 611,599
(Decrease) increase in accounts payable and accrued expenses.............. (148,548) (258,194)
(Decrease) in income taxes payable........................................ --- 8,700
Net realized (gains) losses on sales of securities........................ --- (1,013,605)
------------------ ------------------
Total adjustments......................................................... 129,980 173,193
------------------ ------------------
Net cash provided by (used in) operating activities....................... $ (2,916,458) $ (5,568,920)
================== ==================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 7 of 18
<PAGE>
ADVANCED MAGNETICS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 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>
June 30, 2000 September 30, 1999
------------------------------------- --------------------------------------
Cost Fair Value Cost Fair Value
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Common stock $ 6,919,981 $ 6,089,245 $ 5,175,906 $ 4,804,785
---------------- ----------------- ----------------- -----------------
Total $ 6,919,981 $ 6,089,245 $ 5,175,906 $ 4,804,785
================ ================= ================= =================
</TABLE>
C. ACCOUNTS RECEIVABLE, NET
Accounts receivable on June 30, 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 nine-month
periods ended June 30, 2000 and 1999 due to net operating losses in those
periods.
Page 8 of 18
<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 483,256 as of June 30, 2000 (weighted average exercise
price of $8.95) and 547,820 as of June 30, 1999 (weighted average exercise price
of $9.67) for the three and nine-month periods ended June 30, 2000 and June 30,
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 Nine-Month Periods
Ended June 30, Ended June 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of shares
issued and outstanding.................. 6,757,691 6,768,227 6,754,293 6,767,826
Common stock equivalents --- --- --- ---
--------------------------------------------------------------------------------------------------------------------------
As adjusted................................ 6,757,691 6,768,227 6,754,293 6,767,826
============= ============= ============= =============
</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 9 of 18
<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 judgment in favor of the Company and against the Defendants, declared
that the Company did not breach the Agreement, was not unjustly enriched, and
did not violate Mass. Gen. Laws ch. 93A, and dismissed Sanofi Pharmaceuticals,
Inc.'s counterclaims for breach of contract, unjust enrichment, conversion,
account annexed and violation of Mass. Gen. Laws ch. 93A. On October 29, 1999,
the Company served a motion for partial summary judgment which, among other
things, requests judgment in its favor on Sanofi Pharmaceuticals, Inc.'s
remaining counterclaims against the Company and for judgment 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 judgment which, among other things, requests judgment 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 10 of 18
<PAGE>
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.
Information concerning the operations in these reportable segments is
as follows:
<TABLE>
<CAPTION>
Three-Month Periods Nine-Month Periods
Ended June 30, Ended June 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Advanced Magnetics, Inc.............................. $ 1,014,033 $ 601,907 $ 2,119,630 $ 3,130,376
Kalisto Biologicals Inc.............................. --- 248,618 --- 918,401
----------- ------------- ------------ ------------
Total............................................ $ 1,014,033 $ 850,525 $ 2,119,630 $ 4,048,777
DEPRECIATION EXPENSE:
Advanced Magnetics, Inc.............................. $ 138,420 $ 191,550 $ 415,261 $ 559,161
Kalisto Biologicals Inc.............................. --- 3,011 --- 52,438
----------- ------------- ------------ ------------
Total............................................ $ 138,420 $ 194,561 $ 415,261 $ 611,599
NET INCOME (LOSS):
Advanced Magnetics, Inc.............................. $ (582,650) $ (1,991,912) $ (3,046,438) $ (4,776,437)
Kalisto Biologicals Inc.............................. --- (346,174) --- (965,676)
----------- ------------- ------------ ------------
Total............................................ $ (582,650) $ (2,338,086) $ (3,046,438) $ (5,742,113)
JUNE 30, SEPTEMBER 30,
-------- -------------
2000 1999
---- ----
SEGMENT ASSETS:
Advanced Magnetics, Inc.............................. $ 24,223,726 $ 27,816,359
Kalisto Biologicals Inc.............................. --- ---
------------- ------------
Total............................................ $ 24,223,726 $ 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" which is effective no later than the fourth
fiscal quarter for fiscal years beginning after December 15, 1999. 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.
Page 11 of 18
<PAGE>
I. COMMITMENTS AND CONTINGENCIES
The Company was a guarantor on a lease for office space for Kalisto in
the event Kalisto defaulted on its obligation. During the quarter ended June 30,
2000, the lease was formally assigned to the Company. Kalisto remains a tenant
of the office space under a sub-lease arrangement. Portions of the office space
have also been sub-leased to other third parties. The lease term runs through
October 31, 2002. Should Kalisto or the other sub-tenants default on their lease
payments, the Company would be liable to the owner of the property for rent and
other maintenance expenses. The ultimate liability of the Company, if any, in
connection with this lease, could have a material adverse impact on the
statement of operations in any one accounting period.
J. SUBSEQUENT EVENT
On July 7, 2000, the Company entered into an Agreement and Plan of
Merger with Cytogen Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of Cytogen Corporation, and Cytogen Corporation, a Delaware
corporation.
Under the terms of the merger agreement, and subject to the conditions
set forth therein (including approval by the stockholders of the Company),
Cytogen Acquisition will be merged with and into Advanced Magnetics. At the
effective time of the merger, the separate existence of Cytogen Acquisition will
cease to exist and the Company will continue as the surviving corporation and as
a wholly-owned subsidiary of Cytogen. In exchange for their shares of common
stock, par value $.01 per share, the stockholders of the Company will receive
shares of common stock, par value $.01 per share, of Cytogen. The number of
shares of Cytogen common stock exchanged for each share of Advanced Magnetics
common stock will be equal to $8.75 divided by the average closing price of
Cytogen common stock for the 20 trading days ending three days prior to the
closing of the merger. The number of shares of Cytogen common stock exchanged
per share of Advanced Magnetics common stock will not, however, be less than
0.7566 shares or more than 1.0237 shares. In addition, Cytogen will assume all
outstanding options to purchase the Company's common stock and will assume all
purchase rights outstanding under the Company's employee stock purchase plan.
If the merger is consummated, the Company's common stock will be
deregistered under the Securities Exchange Act of 1934, as amended, and delisted
from the American Stock Exchange.
Page 12 of 18
<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 ABILITY TO SATISFY THE CONDITIONS
SPECIFIED FOR FINAL APPROVAL OF COMBIDEX(R) FOR IMAGING LYMPH NODES AND TO
RESOLVE THE FINAL LABELING FOR COMBIDEX WITH THE FDA, THE ABILITY TO
SUCCESSFULLY MARKET FERIDEX I.V.(R), GASTROMARK(R) AND ANY FUTURE PRODUCTS THAT
RECEIVE FDA APPROVAL, THE COMPANY'S DEPENDENCE ON ITS CORPORATE PARTNERS, DELAYS
IN ARRANGEMENTS WITH CLINICAL INVESTIGATIONS, UNCERTAINTIES RELATING TO RESULTS
OF THE CLINICAL TRIALS OF THE COMPANY'S PRODUCT CANDIDATES, ACHIEVING PROJECTED
EXPENSE REDUCTIONS, THE NEED FOR ADDITIONAL COST REDUCTION MEASURES, DISCOVERY
OF LATENT YEAR 2000 RELATED ISSUES IN THE SYSTEMS OR EQUIPMENT OF THE COMPANY OR
ITS SUPPLIERS, 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 aid in the staging of metastatic lymph node
involvement for a variety of cancers, including breast and prostate cancer. The
second indication is for the detection, diagnosis and characterization of benign
versus malignant lesions of the liver and spleen. In June 2000, the Company
received an "Approvable Letter" from the FDA regarding Combidex. This letter
indicated that the FDA considered Combidex approvable for its principal
indication, but not approvable at that time for its secondary indication. In
addition, the letter stipulated that approval was contingent upon the Company's
satisfactory completion of additional conditions.
Page 13 of 18
<PAGE>
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2000 AS COMPARED TO THE
QUARTER ENDED JUNE 30, 1999
REVENUES
Total revenues for the third fiscal quarter ended June 30, 2000 were
$1,104,033 compared to $850,525 for the third fiscal quarter ended June 30,
1999. The increase in revenues in the third quarter ended June 30, 2000 compared
to the third quarter ended June 30, 1999 was primarily due to increases in
product sales, royalties and higher interest and dividend income, offset by
reduced gains on sales of securities and contract research and development
revenues.
Royalties for the third fiscal quarter ended June 30, 2000 of $200,000
were $100,000 higher than in the third fiscal quarter ended June 30, 1999.
Royalties have increased, in general, due to increased sales by the Company's
Japanese marketing and distribution partner, Eiken Chemical Co., Ltd.
Product sales for the third fiscal quarter ended June 30, 2000 were
$616,911 compared to $264,113 for the third fiscal quarter ended June 30,1999.
Sales of the former subsidiary, Kalisto, which were $248,618 in the fiscal
quarter ended June 30, 1999, were not repeated in the financial statements as a
result of deconsolidation. There was an increase of $601,416 in sales of
contrast agents by the Company. The increase in sales of contrast agents is due
entirely to the timing of orders from the Company's marketing partners.
There were no revenues from contract research and development for the
third fiscal quarter ended June 30, 2000 compared with revenues of $85,430 for
the third fiscal quarter ended June 30,1999. Contract research and development
revenues are reimbursements of expenditures for clinical trials. The decrease
reflects the completion in early 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 $197,122 in the fiscal quarter ended June 30, 2000 compared to
$400,982 for the fiscal quarter ended June 30, 1999. Interest, dividends and net
gains on sales of securities consisted of the following:
<TABLE>
<CAPTION>
Third Quarter Ended June 30,
-----------------------------------------
2000 1999
---- ----
<S> <C> <C>
Interest income $ 172,497 $ 127,103
Dividend income 24,625 16,981
Net gains on sales of securities --- 256,898
------------------ -----------------
Total $ 197,122 $ 400,982
================== =================
</TABLE>
COSTS AND EXPENSES
Because product sales by Kalisto are no longer consolidated in the
financial statements, the Company incurred reduced costs of $43,195 for products
sold in the quarter ended June 30, 2000 compared to $95,604 for the third fiscal
quarter ended June 30, 1999. The cost of product sales for the quarter ended
June 30, 2000 was 7% of product sales compared with 36% for the quarter ended
June 30, 1999. The change is due to the product mix of the sales, with Kalisto's
higher percentage cost of sales in fiscal 1999 no longer a factor in fiscal
2000. The Company's contrast agents, in general, have a lower cost of sales than
Kalisto's product line. There were no direct costs for contract sponsored
research and development in the quarter ended June 30, 2000, while there were
direct costs of $4,103 during the quarter ended June 30, 1999. The decrease
reflects the completion of the development projects sponsored by Berlex.
Company sponsored research and development expenses for the third
fiscal quarter ended June 30, 2000 were $1,033,624 compared to $2,197,518 for
the third fiscal quarter ended June 30, 1999. The decrease was due to the
reduction of trials for Combidex during fiscal 2000 and the exclusion of costs
incurred by Kalisto.
Page 14 of 18
<PAGE>
Selling, general and administrative expenses were $519,864 for the
third fiscal quarter ended June 30, 2000 compared to $891,386 for the third
fiscal quarter ended June 30, 1999. The decrease of $371,522 was primarily due
to the deconsolidation of costs incurred by Kalisto, plus cost cutting efforts
employed by the Company.
INCOME TAXES
There were no income tax provisions for the fiscal quarters ended June
30, 2000 and June 30, 1999 due to operating losses for both periods.
EARNINGS
For the reasons stated above, there was a net loss of $582,650 or
$(0.09) per share for the quarter ended June 30, 2000 compared to a net loss of
$2,338,086 or $(0.35) per share for the fiscal quarter ended June 30, 1999.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2000 AS COMPARED TO THE
NINE MONTHS ENDED JUNE 30, 1999
REVENUES
Total revenues for the nine-month period ended June 30, 2000 were
$2,119,630 compared to $4,048,777 for the nine-month period ended June 30, 1999.
The decrease in revenues in the nine-month period ended June 30, 2000 compared
to the nine-month period ended June 30, 1999 was due to decreases in product
sales, contract research and development revenues and gains on the sale of
securities, offset by higher royalties and interest and dividend income.
Royalties for the nine-month period ended June 30, 2000 were $623,246
compared with royalties for the nine-month period ended June 30, 1999 of
$460,000. Royalties increased due to sales increases by the Company's Japanese
marketing and distribution partner, Eiken Chemical Co., Ltd.
Product sales for the nine-month period ended June 30, 2000 were
$778,441 compared to $1,582,193 for the nine-month period ended June 30, 1999.
The decrease results from sales of Kalisto, which were $918,402 for the
nine-month period ended June 30, 1999, no longer being consolidated in the
financial statements, partially offset by an increase of the Company's sales of
contrast agents of $114,650 for the nine-month period ended June 30, 2000. The
increase in sales of contrast agents is due entirely to the timing of orders
from the Company's marketing partners.
Contract research and development revenues were $116,388 for the
nine-month period ended June 30, 2000 compared with $475,187 for the nine-month
period ended June 30,1999. Contract research and development revenues are
reimbursements of expenditures for clinical trials. The decrease reflects the
completion in early fiscal 2000 of certain development projects which were
reimbursed to the Company under an agreement with Berlex Laboratories, Inc. and
the completion of certain development projects for Guerbet.
Interest, dividends and gains and losses on sales of securities
resulted in revenues of $601,555 for the nine-month period ended June 30, 2000
compared to $1,531,397 for the nine-month period ended June 30, 1999. The
decrease was due to no gains realized on the sale of securities during the
nine-month period ended June 30, 2000 compared with a gain of $1,013,605
realized on the sale of securities during the nine-month period ended June 30,
1999. Interest and dividend income for the nine-month period ended June 30, 2000
increased by $83,763 compared to the nine-month period ended June 30, 1999
because of an increase in interest bearing investments.
Page 15 of 18
<PAGE>
COSTS AND EXPENSES
The cost of product sales for the nine-month period ended June 30, 2000
was $106,149 compared to $363,688 for the nine-month period ended June 30, 1999.
The cost of product sales for the nine-month period ended June 30, 2000 was
13.6% of product sales compared with 23% for the nine-month period ended June
30, 1999. The change is due primarily to the fact that Kalisto product sales,
which had a higher cost of sales, as a percentage, than the Company's contrast
agents are no longer consolidated in the financial statements.
There were $3,195 in direct costs for contract sponsored research and
development in the nine-months ended June 30, 2000, while there were direct
costs of $19,918 during the nine-month period ended June 30, 1999. The reduction
is due to the completion of contracted research and development for our
marketing partners, Guerbet and Berlex.
Company sponsored research and development expenses for the nine-month
period ended June 30, 2000 were $3,453,262 compared to $6,668,894 for the same
period in 1999. The decrease reflected the completion of certain clinical trials
for Combidex in the first nine months of fiscal 2000 and the exclusion, in
fiscal 2000, of Kalisto research and development expenses.
Selling, general and administrative expenses decreased to $1,603,462
for the nine-month period ended June 30, 2000 from $3,159,951 for the nine-month
period ended June 30, 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 reductions within the Company.
The Company had $421,561 in other income related to a tax refund and an
insurance settlement during the nine-month period ended June 30, 1999. There was
no other income during the same period in fiscal 2000.
INCOME TAXES
There was no income tax provision for the nine-month periods ended June
30, 2000 and June 30, 1999 due to operating losses for both periods.
EARNINGS
For the reasons stated above, there was a net loss of $3,046,438 or
$(0.45) per share for the nine-month period ended June 30, 2000 compared to a
net loss for the nine-month period ended June 30, 1999 of $5,742,113 or $(0.85)
per share.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company's cash and cash equivalents totaled
$12,362,047 compared to $17,052,636 at September 30, 1999. In addition, the
Company had marketable securities of $6,089,245 at June 30, 2000 compared to
$4,804,785 at September 30, 1999. Net cash used in operating activities was
$2,916,458 in the nine-month period ended June 30, 2000 compared to net cash
used in operating activities of $5,568,920 in the nine-month period ended June
30, 1999. Cash used in investing activities was $1,836,099 for the nine-month
period ended June 30, 2000 compared to $8,957,973 provided by investing
activities in the nine-month period ended June 30, 1999. The cash used in
investing activities during the nine-month period ended June 30, 2000 consisted
primarily of $1,744,075 for the purchase of securities. The proceeds in the
nine-month period ended June 30, 1999 included $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 during the same period. There was $61,968 in cash provided by
financing activities in the nine-month period ended June 30, 2000 compared with
$7,469 provided by financing activities in the nine-month period ended June 30,
1999. Cash provided by financing activities in each period consisted of proceeds
from the exercise of stock options by Company employees.
Page 16 of 18
<PAGE>
Capital expenditures during the nine-month period ended June 30, 2000
were $32,200 compared to $260,590 in the nine-month period ended June 30, 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.
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" which is effective no later than the fourth
fiscal quarter for fiscal years beginning after December 15, 1999. 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
There have been no material changes to the information concerning the
Company's legal proceedings as set forth in the Company's Form 10-K for the
fiscal year ended September 30, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27.1 Financial Data Schedule (EDGAR filing only)
The Company filed a current report on Form 8-K on July 10, 2000.
Page 17 of 18
<PAGE>
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 14, 2000 By /s/ Jerome Goldstein
--------------------------- ---------------------------------------
Jerome Goldstein, Treasurer
and Chairman of the Board of Directors
Date August 14, 2000 By /s/ James A. Matheson
--------------------------- ---------------------------------------
James A. Matheson, Vice President
and Principal Accounting Officer
Page 18 of 18
