On March
27, 2008, Aeolus Pharmaceuticals, Inc. (“Aeolus” or the “Company”) entered into
a secured credit agreement (the “Margin Agreement”) in amount up to $230,000
with UBS Financial Services, Inc. On March 28, 2008, the Company
received $230,000 under the Margin Agreement. The Margin Agreement
bears interest at the per annum rate of LIBOR plus 0.25
percent. Availability of the line of credit is subject to the
Company’s compliance with certain financial and other
covenants. Borrowings under the Margin Agreement are secured by
the Company’s investments held by UBS Financial Services, Inc. The
proceeds of the Margin Agreement will be used to provide working capital for the
Company and its subsidiaries.
Item
2.02 Results
of Operations and Financial Condition.
Reference
is made to Item 7.01 of this report for a description of the other than
temporary impairment charge that the Company expects to take during the quarter
ended March 31, 2008.
Item
2.03 Creation
of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet
Arrangement of a Registrant.
Reference
is made to Item 1.01 of this report for a description of an agreement between
the Company and UBS Financial Services regarding the Margin
Agreement.
Item
2.06 Material
Impairments.
Reference
is made to Item 7.01 of this report for a description of the other than
temporary impairment charge that the Company expects to take during the quarter
ended March 31, 2008.
Item
7.01 Regulation
FD Disclosure.
The
Company has auction-rate securities with a par value of $525,000 included in its
investment portfolio. The auction-rate securities are AAA rated, long-term debt
obligations secured by student loans, which loans are generally guaranteed by
the U.S. Government under the Federal Family Education Loan Program (FFELP). In
addition to the U.S. Government guarantee on such student loans, many of the
securities also have separate insurance policies guaranteeing both the principal
and accrued interest. Liquidity for these securities has historically been
provided by an auction process that resets the applicable interest rate at
pre-determined intervals for up to 35 days. In the past, the auction process has
generally allowed investors to obtain immediate liquidity if so desired by
selling the securities at their face amounts. However, as has been recently
reported in the financial press, the current disruptions in the credit markets
have adversely affected the auction market for these types of securities. From
February 26, 2008 to March 31, 2008, all auctions scheduled with respect to the
Company’s auction-rate securities failed to close. This is the first time the
Company has experienced this type of event for its holdings of auction-rate
securities and the Company believes that prior to February 13, 2008, the
Company’s investment advisor, UBS Financial Services, had not had a failed
auction. The Company understands that the failure of auctions is
broad based and not limited to those securities held by the Company. The
auction-rate securities continue to pay interest and there has been no change in
the rating of these securities to date.
As a
result of the failed auctions, these auction-rate securities held by the Company
are currently not liquid. Furthermore, the Company cannot predict how long they
will remain illiquid. As such, at least in the near term, the Company believes
it may not be able to liquidate some or all of its remaining auction-rate
securities prior to their maturities at prices approximating their face amounts.
The final maturity dates of the auction-rate securities which the Company owns
is between 2029 and 2038.
We expect
to take an other-than-temporary impairment charge during the quarter ended March
31, 2008 of approximately $49,000 based upon reduced market values as determined
based upon investments statements as of March 31, 2008 received from UBS
Financial Services, Inc. The amount of this charge is subject to
change as we complete the preparation of our financial results in connection
with the filing of our quarterly report on Form 10-Q for the quarter ended March
31, 2008.
Taking
into account this other-than-temporary impairment charge, our auction-rate
securities had an estimated fair value of approximately $476,000 as of March 31,
2008. The estimated fair value of the auction-rate securities we hold
could decrease or increase significantly in the future based on market
conditions. We will continue to assess the fair value of our auction-rate
securities based on our analysis of account statements and other correspondence
we receive from UBS Financial Services, Inc.
The
current market for the auction-rate securities held by the Company is uncertain
and we will continue to monitor and evaluate the market for these securities to
determine if further impairment of the carrying value of the securities has
occurred due to the loss of liquidity or for other reasons. If the credit
ratings of the security issuers deteriorate or if normal market conditions do
not return in the near future, the Company may be required to further reduce the
value of these securities through an impairment charge against net
income.
As a
result, for a period of time, the Company may not be able to liquidate some or
all of its remaining auction-rate securities prior to their maturities at prices
approximating their face amounts. Further impairment of the carrying value of
these securities could cause us to recognize additional material charges to the
Company's net income for the period ended March 31, 2008 or thereafter. However,
the Company believes that based on its current estimated cash balances of
$407,000 (exclusive of auction-rate securities), the current lack of liquidity
in the auction-rate market will not have a material impact on its ability to
fund its operations until the fourth quarter of fiscal 2008. However,
if current conditions in the auction-rate securities market continue into the
fourth quarter of fiscal 2008 or other unanticipated events occur prior to such
time, the Company’s financial condition and operations could be impacted until
other sources of capital are obtained, which may not be available to the Company
on favorable terms or at all.
The Company has also filed a complaint
regarding its investments in auction-rate securities with UBS Financial
Services, Inc. and is considering further actions against UBS Financial
Services, including but not limited to a mediation or arbitration filing with
the Financial Industry Regulatory Authority, the governing body over financial
institutions, or other legal remedies.
Statements in the preceding
paragraphs and all other statements that are not strictly historical are
“forward-looking” and involve a high degree of risk and uncertainty. These
statements include, but are not limited to, those related to: disruption in the
credit markets and in particular, the market for auction-rate securities,
including the Company's auction-rate securities; whether the Company will be
able to sell its auction-rate securities; the estimated amount of the Company's
impairment charge for the quarter ended March 31, 2008; the estimated value of
the auction-rate securities as of March 31, 2008; the Company's cash
projections; and other matters discussed in the Company's filings with the
Securities and Exchange Commission. Such statements are only
predictions, and actual events or results may differ materially from those
projected in such forward-looking statements. Factors that could cause or
contribute to differences include, but are not limited to, risks related to: the
current financial market generally; the market for auction-rate securities; and
changes to the Company's projected cash requirements. Certain of these factors
and others are more fully described in the Company’s filings with the Securities
and Exchange Commission, including, but not limited to, the Company’s Annual
Report on Form 10-K for the year ended September 30, 2007. These forward-looking
statements speak only as of the date hereof. The Company expressly disclaims any
intent or obligation to update these forward-looking statements.