<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934. For the quarterly period ended JUNE 30, 1998
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)
<TABLE>
<CAPTION>
Delaware 04-2742593
<S> <C>
(State or other jurisdiction of organization) (IRS Employer Incorporation or Identification No.)
</TABLE>
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 12, 1998, 6,767,358 shares of registrant's common stock (par value,
$.01 per share) were outstanding.
Page 1 of 16
<PAGE> 2
ADVANCED MAGNETICS, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
PART I. FINANCIAL INFORMATION
Item 1 -- Financial Statements
Page 2 of 16
<PAGE> 3
ADVANCED MAGNETICS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
ASSETS JUNE 30, SEPTEMBER 30,
------ -------- -------------
1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................. $ 10,996,383 $ 10,724,740
Marketable securities (Note B) ........................ 21,427,974 27,365,765
Accounts receivable ................................... 403,094 546,807
Inventories ........................................... 466,875 113,178
Prepaid expenses ...................................... 294,522 224,868
------------ ------------
Total current assets ................................ 33,588,848 38,975,358
------------ ------------
Property, plant and equipment:
Land .................................................. 360,000 360,000
Building .............................................. 4,476,716 4,356,295
Laboratory equipment .................................. 7,962,581 7,722,445
Furniture and fixtures ................................ 721,429 645,299
------------ ------------
13,520,726 13,084,039
Less-accumulated depreciation and amortization ........ (8,086,816) (7,332,118)
------------ ------------
Net property, plant and equipment ..................... 5,433,910 5,751,921
------------ ------------
Other assets .......................................... 304,237 248,902
------------ ------------
Total assets ........................................ $ 39,326,995 $ 44,976,181
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 402,578 $ 443,925
Accrued expenses ...................................... 481,530 1,059,070
Income taxes payable .................................. 47,628 50,128
------------ ------------
Total current liabilities ........................... 931,736 1,553,123
Minority interest in subsidiary ....................... --- ---
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 6,767,358 shares at June 30, 1998
and 6,740,626 shares at September 30, 1997 ......... 67,674 67,406
Additional paid-in capital ............................ 44,277,698 44,244,558
Retained earnings (deficit) ........................... (10,383,884) (6,095,302)
Unrealized gains on market value of securities (Note B) 4,433,771 5,206,396
------------ ------------
Total stockholders' equity .......................... 38,395,259 43,423,058
------------ ------------
Total liabilities and stockholders' equity ............ $ 39,326,995 $ 44,976,181
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 3 of 16
<PAGE> 4
ADVANCED MAGNETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED
JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED JUNE 30, NINE-MONTH PERIOD ENDED JUNE 30,
--------------------------------- --------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
License fees ...................... $ --- $ --- $ --- $ 5,500,000
Royalties ......................... 60,000 85,000 800,000 305,904
Product sales ..................... 170,158 394,656 794,182 1,270,911
Interest, dividends and net gains
and losses on sales of
securities ...................... 1,263,335 705,324 3,252,325 2,510,665
----------- ----------- ----------- -----------
Total revenues ............... 1,493,493 1,184,980 4,846,507 9,587,480
Cost and expenses:
Cost of product sales ............. 28,947 83,436 138,265 259,771
Research and development expenses . 1,988,802 2,040,380 6,406,973 6,293,656
Selling, general and administrative
expenses ........................ 978,713 271,818 2,784,029 1,062,028
Other (income) expenses .............. --- (264,800) --- (264,800)
----------- ----------- ----------- -----------
Total costs and expenses ..... 2,996,462 2,130,834 9,329,267 7,350,655
----------- ----------- ----------- -----------
Income (loss) before provision for
income taxes and minority interest
in subsidiary ........................ (1,502,969) (945,854) (4,482,760) 2,236,825
Income tax provision (benefit) .... --- (379,022) --- (379,022)
----------- ----------- ----------- -----------
Income (loss) before minority interest
in subsidiary ........................ (1,502,969) (566,832) (4,482,760) 2,615,847
Minority interest in subsidiary ... 40,637 --- 194,178 ---
----------- ----------- ----------- -----------
Net income (loss) .................... $(1,462,332) $ (566,832) $(4,288,582) $ 2,615,847
=========== =========== =========== ===========
Basic net income (loss) per share ... $ (0.22) $ (0.08) $ (0.64) $ 0.39
Diluted net income (loss) per share . $ (0.22) $ (0.08) $ (0.64) $ 0.38
Weighted average number of common
shares ............................ 6,762,951 6,730,188 6,748,515 6,746,482
Weighted average number of common
and common equivalent shares .... 6,762,951 6,730,188 6,748,515 6,814,887
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 4 of 16
<PAGE> 5
ADVANCED MAGNETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED
JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Nine-Month Periods Ended
June 30,
---------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from (for) operating activities:
Cash received from customers ....................... $ 1,156,116 $ 6,854,637
Cash paid to suppliers and employees ............... (9,562,818) (6,512,771)
Dividends and interest received .................... 779,332 752,206
Royalties received ................................. 681,419 183,579
Income tax refund .................................. --- 379,022
------------ ------------
Net cash provided by (used in) operating
activities ........................................ (6,945,951) 1,656,673
Cash flows from investing activities:
Proceeds from sales of securities .................. 8,993,685 7,579,147
Proceeds from U.S. Treasury Notes maturing ......... 5,000,000 ---
Purchase of securities ............................. (6,317,477) (17,966,953)
Capital expenditures ............................... (436,687) (235,628)
(Increase) in other assets ......................... (55,335) (53,045)
------------ ------------
Net cash provided by (used in) investing
activities ........................................ 7,184,186 (10,676,479)
Cash flows from financing activities:
Proceeds from issuances of common stock ............ 189,757 37,146
Purchase of treasury stock ......................... (156,349) (797,303)
------------ ------------
Net cash provided by (used in) financing
activities ........................................ 33,408 (760,157)
------------ ------------
Net increase (decrease) in cash and cash
equivalents ....................................... 271,643 (9,779,963)
Cash and cash equivalents at beginning of the
period ............................................ 10,724,740 10,805,842
------------ ------------
Cash and cash equivalents at end of the period ..... $ 10,996,383 $ 1,025,879
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 5 of 16
<PAGE> 6
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, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Nine-Month Periods
Ended June 30,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Net income (loss) ............................................................. $(4,288,582) $ 2,615,847
----------- -----------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Non-cash reduction in value of minority interest in subsidiary ................ 194,178 ---
Minority interest in subsidiary ............................................... (194,178) ---
Depreciation and amortization ................................................. 754,698 814,095
Accretion of U.S. Treasury Notes discount ..................................... (37,216) (26,632)
Decrease (increase) in accounts receivable .................................... 143,713 (321,620)
(Increase) decrease in prepaid expenses and other assets ...................... (69,654) (107,572)
(Decrease) increase in accounts payable and accrued expenses .................. (618,887) (59,146)
(Decrease) in income taxes payable ............................................ (2,500) ---
Net realized (gains) losses on sales of securities ............................ (2,473,826) (1,415,378)
(Increase) decrease in inventories ............................................ (353,697) 157,079
----------- -----------
Total adjustments ............................................................. (2,657,369) (959,174)
----------- -----------
Net cash provided by (used in) operating activities ........................... $(6,945,951) $ 1,656,673
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 6 of 16
<PAGE> 7
ADVANCED MAGNETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
A. SUMMARY OF ACCOUNTING POLICIES
BUSINESS
Founded in November 1981, Advanced Magnetics, Inc., a Delaware
corporation (the "Company"), is a biopharmaceutical company engaged in the
development and manufacture of compounds utilizing the Company's core
proprietary colloidal superparamagnetic particle technology for magnetic
resonance imaging ("MRI") and for polysaccharide directed drug delivery systems.
The initial products developed by the Company are diagnostic imaging agents for
use in conjunction with MRI to aid in the diagnosis of cancer and other
diseases.
In October 1997, the Company acquired approximately 80.7% of the
issued and outstanding capital stock of Kalisto Biologicals, Inc. ("Kalisto").
Since that date the consolidated balance sheet of the Company, and the
consolidated statements of operations and cash flows include the accounts of
Kalisto. All significant intercompany balances and transactions have been
eliminated. 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 1997 financial statement have
been reclassified to conform with the fiscal 1998 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, 1997.
B. MARKETABLE SECURITIES
The cost and market value of the Company's marketable securities
portfolio are as follows:
<TABLE>
<CAPTION>
June 30, 1998 September 30, 1997
----------------------------- -----------------------------
Cost Fair Value Cost Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U. S. government securities
Due in one year or less $ 7,469,284 $ 7,478,925 $ 5,000,000 $ 4,998,900
Due after one through five years --- --- 7,438,569 7,429,650
Preferred stock 1,025,406 1,242,500 2,604,711 3,092,335
Common stock 8,499,513 12,706,549 7,116,089 11,844,880
----------- ----------- ----------- -----------
$16,994,203 $21,427,974 $22,159,369 $27,365,765
=========== =========== =========== ===========
</TABLE>
Page 7 of 16
<PAGE> 8
C. INCOME TAX
There were no income tax provisions for the three and nine month
periods ended June 30, 1998 and 1997 due to a net operating loss in the three
and nine months ended June 30, 1998 and the three months ended June 30, 1997,
and a net loss carry-forward for the nine months ended June 30, 1997. A tax
refund of $379,022 was received during the three-month period ended June 30,
1997.
D. EARNINGS (LOSS) PER SHARE
Effective December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128 (SFAS 128) "Earnings per Share" which
requires disclosure of Basic Earnings per Common Share and Diluted Earnings per
Common Share for all periods presented. The financial statement data has been
restated to reflect adoption of this statement. The weighted average common and
common equivalent shares used in the computation of basic and diluted earnings
per share is presented below. As a result of a net loss in the three and nine
months ended June 30, 1998 and the three months ended June 30, 1997, common
stock equivalents are not included in the calculation of weighted average shares
since their effect would be antidilutive.
<TABLE>
<CAPTION>
Three-Month Periods Nine-Month Periods
Ended June 30, Ended June 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of shares
issued and outstanding ......... 6,762,951 6,730,188 6,748,515 6,746,482
Assumed exercise of options reduced
by the number of shares which
could have been purchased with
the proceeds of those options .. --- --- --- 68,405
--------- --------- --------- ---------
As adjusted ....................... 6,762,951 6,730,188 6,748,515 6,814,887
========= ========= ========= =========
</TABLE>
E. LEGAL PROCEEDINGS
The Company and certain of its officers were sued in David D. Stark,
M.D. v. Advanced Magnetics, Inc., Jerome Goldstein, Ernest V. Groman and Lee
Josephson, Civil Action No. 93-02846-C, in the Superior Court Department of the
Massachusetts Trial Court for Middlesex County. This case involves claims of
breach of contract, breach of good faith and fair dealing, breach of implied
contract, unjust enrichment and unfair trade practices that were dismissed by
the United States Court for the District of Massachusetts in David D. Stark, M.D
v. Advanced Magnetics, Inc., Jerome Goldstein, Ernest V. Groman and Lee
Josephson, Civil Action No. 92-12157-WGY, 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.
Page 8 of 16
<PAGE> 9
The Company and certain of its officers were sued in David D. Stark,
M.D. v. Advanced Magnetics, Inc., Jerome Goldstein, Ernest V. Groman, and Lee
Josephson, Civil Action No. 98-2097, in the Superior Court Department of the
Massachusetts Trial Court for Middlesex County. This case involves claims for
misappropriation of trade secrets, conversion, negligent misrepresentation and
misrepresentation that were dismissed on March 31, 1998 by the Federal Court in
the above-mentioned action. The Superior Court consolidated the two State Court
actions, and entered final judgement in the consolidated action on June 29,
1998. The Superior Court dismissed as time barred Plaintiff's consolidated
claims for misappropriation of trade secrets, conversion and negligent
misrepresentation. The Superior Court also dismissed the plaintiff's claim for
tortious interference with contractual or advantageous relations and claim for
unjust enrichment. In addition, the Superior Court dismissed with prejudice and
without right of appeal plaintiff's claims for breach of contract, breach of
good faith and fair dealing, breach of implied contract and misrepresentation.
On July 28, 1998, the plaintiff filed a notice of appeal to the Massachusetts
Appeals Court. 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
successfully defend this action and the failure by the Company to prevail for
any reason could have an adverse effect on the Company's business, financial
condition and results of operations.
The Company filed suit on October 7, 1997 against Sanofi Winthrop,
Inc. and Sanofi SA (collectively, "Defendants") in the Superior Court of the
Commonwealth of Massachusetts. 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 Winthrop, 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. While the final outcome of these claims and
counterclaims cannot be determined, the Company will pursue its claims
vigorously, and believes that the Sanofi Winthrop, Inc. counterclaims are
without merit and intends to defend them vigorously.
F. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement
No. 130 ("SFAS 130"), "Reporting Comprehensive Income". This statement requires
changes in comprehensive income to be shown in a financial statement that is
displayed with the same prominence as other financial statements. The Statement
is effective for fiscal years beginning after December 15, 1997. The Company
believes the implementation of SFAS 130 will not impact net loss from
operations.
The FASB also issued Statement No. 131 ("SFAS 131"), "Disclosures
about Segments of an Enterprise and Related Information". This statement, which
supersedes Statement No. 14, "Financial Reporting for Segments of a Business
Enterprise", changes the way public companies report information about segments.
The Statement, which is based on the management approach to segment reporting,
includes requirements to report segment information quarterly and entity-wide
disclosures about products and services, major customers, and the material
countries in which the entity holds assets and reports revenues. The Statement
is effective for fiscal years beginning after December 15, 1997. The Company is
currently evaluating this Statement and its effect on financial statement
disclosures.
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, 1999. 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.
Page 9 of 16
<PAGE> 10
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 facts
that could cause actual results to differ materially from current expectations
include the following: the ability to successfully market Feridex I.V.(R),
GastroMARK(R) and the EndoCheck Plus(R) analyzer, the timing and result of FDA
action, delays in arrangements with clinical investigations, uncertainties
relating to results of the clinical trials of Combidex(R) and other product
candidates, the Company's dependence on its corporate partners, the Company's
ability to obtain future financing, uncertainties relating to patents and
proprietary rights, the ability of the Company to compete successfully in the
future and the risks identified in the Company's Securities and Exchange
Commission filings, including but not limited to its Form 10-K for the year
ended September 30, 1997.
OVERVIEW
Since its inception in November 1981, Advanced Magnetics, Inc.
("Advanced Magnetics" or the "Company") has focused its efforts on developing
applications of its core magnetic particle technology. This focus has led to the
development of magnetic resonance imaging (MRI) contrast agents as well as
polysaccharide technology for targeted delivery of antiviral therapeutics. The
Company has funded its operations with cash from license fees from corporate
partners, royalties, sales of its products, fees from contract research
performed for third parties, the proceeds of financings and income earned on
invested cash. The Company's success in the market for diagnostic and
therapeutic products will depend, in part, on the Company's ability to:
successfully develop, test, produce and market its products; obtain necessary
governmental approvals in a timely manner; attract and maintain key employees;
and successfully respond to technological changes in its marketplace.
The Company's operating results may continue to vary significantly
from quarter to quarter or from year to year depending on a number of factors,
including: (i) the timing of payments from corporate partners; (ii) the
introduction of new products; (iii) the timing and size of orders from
customers; (iv) the general level of acceptance of the Company's products; and
(v) increases or decreases in, and timing of, research and development, clinical
trials and other expenses. The Company's current planned expense levels are
based in part upon expectations as to future revenue. Consequently, profits and
losses may vary significantly from quarter to quarter or year to year based on
the timing of revenue. Revenue or profits in any period will not necessarily be
indicative of results in subsequent periods and there can be no assurance that
the Company will be profitable or that revenue growth will be achieved in the
future.
In October 1997, the Company acquired approximately 80.7% of the
issued and outstanding capital stock of Kalisto Biologicals Inc. ("Kalisto"), an
early-stage company that intends to develop, manufacture and market veterinary
laboratory diagnostic products. The Company's results of operations and cash
flows reflect the activities of Kalisto for the period from the date of
acquisiton until June 30, 1998.
As part of its normal internal auditing procedures, the Company has
been evaluating its preparedness for potential issues related to the Year 2000
problem. The Company estimates that this review is approximately 50% complete.
Based on the review so far, the Company does not believe that Year 2000 issues
will have a material impact upon the Company's results of operations or
financial condition. As part of a general upgrade to the Company's computing
resources, the Company is planning to install new accounting software that will
be Year 2000 compliant in the first quarter of fiscal year 1999 and new clinical
data-related software that will be Year 2000 compliant in the first half of
fiscal 1999.
Page 10 of 16
<PAGE> 11
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998 AS COMPARED TO THE
QUARTER ENDED JUNE 30, 1997
REVENUES
Total revenues for the third fiscal quarter ended June 30, 1998 were
$1,493,493 compared to $1,184,980 for the third fiscal quarter ended June 30,
1997. The increase in revenues in the third quarter ended June 30, 1998 compared
to the third fiscal quarter ended June 30, 1997 was primarily due to an increase
in gains on sales of securities offset by a decline in product sales. Royalties
earned on sales of the Company's products by its marketing partners for the
fiscal quarter ended June 30, 1998 were $60,000 as compared to $85,000 for the
third fiscal quarter ended June 30, 1997, reflecting a decline in sales since
the initial launch of Feridex I.V. in Japan and the United States in 1997.
Product sales for the third fiscal quarter ended June 30, 1998 were
$170,158 compared to $394,656 for the third fiscal quarter ended June 30, 1997,
primarily consisting of reorders of Feridex I.V. and GastroMARK for sale in the
United States and Europe, compared to higher product sales from the initial
product launch of Feridex I.V.(R) in the United States in 1997.
Interest, dividends and gains on sales of securities resulted in
revenues of $1,263,335 in the fiscal quarter ended June 30, 1998 compared to
$705,324 for the fiscal quarter ended June 30, 1997. Interest, dividends and net
gains on sales of securities consisted of the following:
Third Quarter Ended June 30,
----------------------------
1998 1997
---- ----
Interest income $ 239,498 $242,884
Dividend income 49,386 65,937
Net gains on sales of securities 974,451 396,503
---------- --------
Total $1,263,335 $705,324
========== ========
There was no license fee revenue during the quarters ended June 30,
1998 and June 30, 1997.
COSTS AND EXPENSES
The Company incurred costs of $28,947 for products sold in the third
fiscal quarter ended June 30, 1998 compared to $83,436 for the third fiscal
quarter ended June 30, 1997. The cost of product sales for the quarter ended
June 30, 1998 was 17% of product sales compared with 21% for the quarter ended
June 30, 1997. The cost of manufacturing the contrast agents has decreased due
to product mix.
Research and development expenses for the third fiscal quarter ended
June 30, 1998 remained relatively consistent at $1,988,802 compared to
$2,040,380 for third fiscal quarter ended June 30, 1997. Selling, general and
administrative expenses were $978,713 for third fiscal quarter ended June 30,
1998 compared to $271,818 for the third fiscal quarter ended June 30, 1997. The
increase of $706,895 during the third fiscal quarter 1998 was primarily related
to the inclusion of costs from Kalisto, increased legal expenses and costs
associated with a flood of the research and development laboratory in June 1998.
Other income of $264,800 was recognized during the third fiscal
quarter ended June 30, 1997 due to an insurance settlement.
INCOME TAXES
There were no income tax provisions for the fiscal quarters ended
June 30, 1998 and June 30, 1997 due to operating losses for both periods. A tax
refund of $379,022 was received during the three-month period ended June 30,
1997.
Page 11 of 16
<PAGE> 12
EARNINGS
For the reasons stated above, there was a net loss of $1,462,332 or
$(0.22) per share for the quarter ended June 30, 1998 compared to a net loss of
$566,832 or $(0.08) per share for the fiscal quarter ended June 30, 1997.
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS 128) "Earnings per Share" which requires
disclosure of Basic Earnings per Common Share and Diluted Earnings per Common
Share for all periods presented. Adoption of this statement has not affected the
amounts presented in either quarter.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 1998 AS COMPARED TO THE
NINE MONTHS ENDED JUNE 30, 1997
REVENUES
Total revenues for the nine-month period ended June 30, 1998 were
$4,846,507 compared to $9,587,480 for the nine-month period ended June 30, 1997.
There were no license fee revenues for the nine-month period ended
June 30, 1998 compared to license fee revenues of $5,500,000 for the nine-month
period ended June 30, 1997. The Company received a non-refundable $5,000,000
license fee on October 15, 1996 from Berlex Laboratories, Inc. ("Berlex") as a
result of Berlex's market launch of the Company's Feridex I.V. (R) MRI contrast
agent in the United States. The Company also received approval from the FDA for
GastroMARK(R) on December 6, 1996 and received a milestone payment of $500,000
from its marketing partner Mallinckrodt, Inc.
Royalties for the nine-month period ended June 30, 1998 were $800,000
compared with royalties of $305,904 for the nine-month period ended June 30,
1997. The increase in royalties is associated with the product launch of Feridex
I.V. in Japan.
Product sales for the nine-month period ended June 30, 1998 were
$794,182 compared to $1,270,911 for the nine-month period ended June 30, 1997.
Sales during the period ended June 30, 1997 were higher because of the product
launch of Feridex I.V. in the United States.
Interest, dividends and gains and losses on sales of securities
resulted in revenues of $3,252,325 for the nine-month period ended June 30, 1998
compared to $2,510,665 for the nine-month period ended June 30, 1997. The
increase compared to the nine-month period ended June 30, 1997 reflects the
increase of $1,058,445 in gains on sales of securities offset by a decrease of
$244,831 in interest income associated with the maturities of U.S. Treasury
Notes and a decrease of $71,954 in dividend income due to a reduction in
dividend bearing securities.
COSTS AND EXPENSES
The cost of product sales for the nine-month period ended June 30,
1998 was $138,265 compared to $259,771 for the nine-month period ended June 30,
1997. The decrease in cost of sales reflects the decrease in product sales
during the period. The cost of product sales for the nine-month period ended
June 30, 1998 was 17.4% of product sales compared with 20% for the nine-month
period ended June 30, 1997. The cost of product sales, as a percentage of
product sales, decreased because of the lower cost of manufacturing contrast
agents due to product mix.
Page 12 of 16
<PAGE> 13
Research and development expenses for the nine-month period ended
June 30, 1998 were $6,406,973 compared to $6,293,656 for the same period in
1997. The increase was due primarily to the inclusion of research and
development costs associated with Kalisto in fiscal 1998. Selling, general and
administrative expenses increased to $2,784,029 for the nine-month period ended
June 30, 1998 from $1,062,028 for the nine-month period ended June 30, 1997. The
increase was due to the inclusion of expenses for Kalisto in fiscal 1998,
increased legal expenses and costs associated with a flood of the research and
development laboratory in June of 1998.
Other income of $264,800 was recognized during the third fiscal
quarter ended June 30, 1997 due to an insurance settlement.
INCOME TAXES
There was no income tax provision for the nine-month period ended
June 30, 1998 due to an operating loss for the period. There was no income tax
provision for the nine-month period ended June 30, 1997 due to a net operating
loss carry-forward for the period. A tax refund of $379,022 was received during
the nine-month period ended June 30, 1997.
EARNINGS
For the reasons stated above, there was a net loss of $4,288,582 or
$(0.64) basic and diluted earnings per share for the nine-month period ended
June 30, 1998 compared to net income for the nine-month period ended June 30,
1997 of $2,615,847 or $0.38 diluted earnings per share and $0.39 basic earnings
per share.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company's cash and cash equivalents totaled
$10,996,383 compared to $10,724,740 at September 30, 1997. In addition, the
Company had marketable securities of $21,427,974 at June 30, 1998 compared to
$27,365,765 on September 30, 1997. Net cash used in operating activities was
$6,945,951 in the nine-month period ended June 30, 1998 compared to net cash
provided by operating activities of $1,656,673 in the nine-month period ended
June 30, 1997. Cash provided by investing activities was $7,184,186 for the
nine-month period ended June 30, 1998 compared to $10,676,479 used in investing
activities in the nine-month period ended June 30, 1997. Cash provided by
investing activities in the nine-month period ended June 30, 1998 included the
proceeds of $8,993,685 from the sale of marketable securities and $5,000,000
from the maturing of a U.S. Treasury Note. Offsetting these proceeds was the
purchase of marketable securities of $6,317,477 in the nine-month period ended
June 30, 1998. Cash provided by financing activities in the nine-month period
ended June 30, 1998 was $33,408 compared to $760,157 used in financing
activities in the nine-month period ended June 30, 1997. Cash used in financing
activities in the nine-month period ended June 30, 1998 included $156,349 for
the purchase of the Company's stock on the open market. In November 1997, the
Board of Directors authorized the purchase of up to an additional 250,000 shares
of the Company's common stock on the open market, from time to time, at
prevailing market prices.
Capital expenditures in the nine-month period ended June 30, 1998
were $436,687 compared to $235,628 in the nine-month period ended June 30, 1997.
This reflects a continuing upgrade to existing property, plant and equipment and
purchases to support the research facilities of Kalisto.
Management believes that funds for future needs can be generated from
existing cash balances, cash generated from investing activities and cash
generated from operations. In addition, the Company will consider from time to
time various financing alternatives and may seek to raise additional capital
through equity or debt financing or to enter into corporate partnering
arrangements. There can be no assurance, however, that such funding will be
available on terms acceptable to the Company, if at all.
Page 13 of 16
<PAGE> 14
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement
No. 130 ("SFAS 130"), "Reporting Comprehensive Income". This statement requires
changes in comprehensive income to be shown in a financial statement that is
displayed with the same prominence as other financial statements. The Statement
is effective for fiscal years beginning after December 15, 1997. The Company
believes the implementation of SFAS 130 will not impact net loss from
operations.
The FASB also issued Statement No. 131 ("SFAS 131"), "Disclosures
about Segments of an Enterprise and Related Information". This statement, which
supersedes Statement No. 14, "Financial Reporting for Segments of a Business
Enterprise", changes the way public companies report information about segments.
The Statement, which is based on the management approach to segment reporting,
includes requirements to report segment information quarterly and entity-wide
disclosures about products and services, major customers, and the material
countries in which the entity holds assets and reports revenues. The Statement
is effective for fiscal years beginning after December 15, 1997. The Company is
currently evaluating this Statement and its effect on financial statement
disclosures.
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, 1999. 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.
Page 14 of 16
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and certain of its officers were sued in David D.
Stark, M.D. v. Advanced Magnetics, Inc., Jerome Goldstein, Ernest V. Groman and
Lee Josephson, Civil Action No. 93-02846-C, in the Superior Court Department of
the Massachusetts Trial Court for Middlesex County. This case involves claims of
breach of contract, breach of good faith and fair dealing, breach of implied
contract, unjust enrichment and unfair trade practices that were dismissed by
the United States Court for the District of Massachusetts in David D. Stark, M.D
v. Advanced Magnetics, Inc., Jerome Goldstein, Ernest V. Groman and Lee
Josephson, Civil Action No. 92-12157-WGY, 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 Company and certain of its officers were sued in David D.
Stark, M.D. v. Advanced Magnetics, Inc., Jerome Goldstein, Ernest V. Groman, and
Lee Josephson, Civil Action No. 98-2097, in the Superior Court Department of the
Massachusetts Trial Court for Middlesex County. This case involves claims for
misappropriation of trade secrets, conversion, negligent misrepresentation and
misrepresentation that were dismissed on March 31, 1998 by the Federal Court in
the above-mentioned action. The Superior Court consolidated the two State Court
actions, and entered final judgement in the consolidated action on June 29,
1998. The Superior Court dismissed as time barred Plaintiff's consolidated
claims for misappropriation of trade secrets, conversion and negligent
misrepresentation. The Superior Court also dismissed the plaintiff's claim for
tortious interference with contractual or advantageous relations and claim for
unjust enrichment. In addition, the Superior Court dismissed with prejudice and
without right of appeal plaintiff's claims for breach of contract, breach of
good faith and fair dealing, breach of implied contract and misrepresentation.
On July 28, 1998, the plaintiff filed a notice of appeal to the Massachusetts
Appeals Court. 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
successfully defend this action and the failure by the Company to prevail for
any reason could have an adverse effect on the Company's business, financial
condition and results of operations.
ITEM 5. OTHER INFORMATION
Proposals of stockholders intended for inclusion in the proxy
statement to be furnished to all stockholders entitled to vote at the next
annual meeting of stockholders of the Company must be received at the Company's
principal executive offices not later than August 24, 1998. The deadline for
providing timely notice to the Company of matters that stockholders otherwise
desire to introduce at the next annual meeting of stockholders is November 7,
1998. The Company may exercise its discretionary voting authority to direct the
voting of proxies on any matter submitted for a vote at the annual meeting of
stockholders if notice concerning proposal of such matter was not received prior
to November 7, 1998. In order to curtail any controversy as to the date on which
a proposal was received by the Company, it is suggested that proponents submit
their proposals by Certified Mail, Return Receipt Requested.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27.1 Financial Data Schedule (EDGAR filing only)
The Company did not file any current reports on Form 8-K during the
quarter ended June 30, 1998.
Page 15 of 16
<PAGE> 16
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, 1998 By /s/Jerome Goldstein
---------------------- --------------------------------------------
Jerome Goldstein, Treasurer
and Chairman of the Board of Directors
Date August 14, 1998 By /s/James A. Matheson
---------------------- --------------------------------------------
James A. Matheson, Vice President
and Principal Accounting Officer
Page 16 of 16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1998 3RD
QUARTER 10-Q REPORT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 10,996,383
<SECURITIES> 21,427,974
<RECEIVABLES> 403,094
<ALLOWANCES> 0
<INVENTORY> 466,875
<CURRENT-ASSETS> 33,588,848
<PP&E> 13,520,726
<DEPRECIATION> 8,086,816
<TOTAL-ASSETS> 39,326,995
<CURRENT-LIABILITIES> 931,736
<BONDS> 0
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<COMMON> 67,674
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 39,326,995
<SALES> 170,158
<TOTAL-REVENUES> 1,493,493
<CGS> 28,947
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<INCOME-PRETAX> (1,462,332)
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