<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 March 31, 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>
<S> <C>
Delaware 04-2742593
(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 May 12, 1998, 6,761,482 shares of registrant's common stock (par value, $.01)
were outstanding.
Page 1 of 17
<PAGE> 2
ADVANCED MAGNETICS, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
PART I. FINANCIAL INFORMATION
Item 1 -- Financial Statements
Page 2 of 17
<PAGE> 3
ADVANCED MAGNETICS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS March 31, September 30,
------ ----------- -------------
1998 1997
----------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................... $10,320,663 $10,724,740
Marketable securities (Note B) ...................................... 24,816,396 27,365,765
Accounts receivable ................................................. 945,548 546,807
Inventories ......................................................... 377,492 113,178
Prepaid expenses .................................................... 445,773 224,868
----------- -----------
Total current assets .............................................. 36,905,872 38,975,358
----------- -----------
Property, plant and equipment:
Land ................................................................ 360,000 360,000
Building ............................................................ 4,452,730 4,356,295
Laboratory equipment ................................................ 7,928,846 7,722,445
Furniture and fixtures .............................................. 688,413 645,299
----------- -----------
13,429,989 13,084,039
Less--accumulated depreciation and amortization ..................... (7,834,125) (7,332,118)
----------- -----------
Net property, plant and equipment ................................... 5,595,864 5,751,921
----------- -----------
Other assets ........................................................ 248,902 248,902
----------- -----------
Total assets ...................................................... $42,750,638 $44,976,181
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable .................................................... $ 516,172 $ 443,925
Accrued expenses .................................................... 735,977 1,059,070
Income taxes payable ................................................ 47,628 50,128
----------- -----------
Total current liabilities ......................................... 1,299,777 1,553,123
Minority interest in subsidiary ..................................... 40,637 ---
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 6,761,482 shares at March 31, 1998
and 6,740,626 shares at September 30, 1997 ........................ 67,615 67,406
Additional paid-in capital .......................................... 44,223,104 44,244,558
Retained earnings (deficit) ......................................... (8,921,553) (6,095,302)
Unrealized gains on market value of securities (Note B) ............. 6,041,058 5,206,396
----------- -----------
Total stockholders' equity ........................................ 41,410,224 43,423,058
----------- -----------
Total liabilities and stockholders' equity ........................ $42,750,638 $44,976,181
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 3 of 17
<PAGE> 4
ADVANCED MAGNETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three-Month Period Ended March 31, Six-Month Period Ended March 31,
---------------------------------- --------------------------------
1998 1997 1998 1997
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
License fees .............................. $ --- $ --- $ --- $5,500,000
Royalties ................................. 370,000 95,904 740,000 220,904
Product sales ............................. 619,464 209,793 624,024 876,255
Interest, dividends and net gains
and losses on sales of securities ....... 996,977 1,058,895 1,988,990 1,805,341
----------- ----------- ----------- ----------
Total revenues ....................... 1,986,441 1,364,592 3,353,014 8,402,500
Cost and expenses:
Cost of product sales ..................... 103,514 33,139 109,319 176,335
Research and development expenses ......... 2,166,670 1,956,700 4,418,171 4,253,276
Selling, general and administrative
expenses ................................ 942,317 469,027 1,805,316 790,210
----------- ----------- ----------- ----------
Total costs and expenses ............. 3,212,501 2,458,866 6,332,806 5,219,821
----------- ----------- ----------- ----------
Income (loss) before provision for
income taxes and minority interest
in subsidiary ................................ (1,226,060) (1,094,274) (2,979,792) 3,182,679
Income tax provision (benefit) ............ --- --- --- ---
----------- ----------- ----------- ----------
Income (loss) before minority interest
in subsidiary ................................ (1,226,060) (1,094,274) (2,979,792) 3,182,679
Minority interest in subsidiary ........... 80,243 --- 153,541 ---
----------- ----------- ----------- ----------
Net income (loss) ............................ (1,145,817) (1,094,274) (2,826,251) 3,182,679
=========== =========== =========== ==========
Basic and diluted net income (loss)
per share ................................. $ (0.17) $ (0.16) $ (0.42) $ 0.47
=========== =========== =========== ==========
Weighted average number of common
shares .................................... 6,745,837 6,738,211 6,742,118 6,748,239
Weighted average number of common
and common equivalent shares .............. 6,745,837 6,738,211 6,742,118 6,828,911
----------- ----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 4 of 17
<PAGE> 5
ADVANCED MAGNETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Six-Month Periods Ended
March 31,
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers ....................................... $ 527,580 $ 6,379,265
Cash paid to suppliers and employees ............................... (6,456,054) (4,530,951)
Dividends and interest received .................................... 982,489 832,734
Income taxes paid .................................................. -- --
----------- -----------
Net cash provided by (used in) operating activities ................ (4,945,985) 2,681,048
Cash flows from investing activities:
Proceeds from sales of securities .................................. 5,655,077 6,094,377
Proceeds from U.S. Treasury Notes maturing ......................... 5,000,000 --
Purchase of securities ............................................. (5,745,974) (6,669,715)
Capital expenditures ............................................... (345,950) (140,086)
----------- -----------
Net cash provided by (used in) investing activities ................ 4,563,153 (715,424)
----------- -----------
Cash flows from financing activities:
Proceeds from issuances of common stock ............................ 135,104 26,446
Purchase of treasury stock ......................................... (156,349) (649,843)
----------- -----------
Net cash provided by (used in) financing activities ................ (21,245) (623,397)
----------- -----------
Net increase (decrease) in cash and cash equivalents ............... (404,077) 1,342,227
Cash and cash equivalents at beginning of the period ............... 10,724,740 10,805,842
----------- -----------
Cash and cash equivalents at end of the period ..................... $10,320,663 $12,148,069
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 5 of 17
<PAGE> 6
ADVANCED MAGNETICS, INC.
RECONCILIATION OF NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
FOR THE SIX-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Six-Month Periods
Ended March 31,
--------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net income (loss) ..................................................... $(2,826,251) $ 3,182,679
----------- -----------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Non-cash reduction in value of investment in subsidiary ............... 194,178 ---
Minority interest in subsidiary ....................................... (153,541) ---
Depreciation and amortization ......................................... 502,007 542,730
Accretion of U.S. Treasury Notes discount ............................. (25,697) (17,736)
Decrease (increase) in accounts receivable ............................ (398,741) (104,648)
(Increase) decrease in prepaid expenses and other assets .............. (220,905) (164,616)
(Decrease) increase in accounts payable and accrued expenses ......... (250,846) 127,221
(Decrease) in income taxes payable .................................... (2,500) ---
Net realized (gains) losses on sales of securities .................... (1,499,375) (1,018,878)
(Increase) decrease in inventories .................................... (264,314) 134,296
----------- -----------
Total adjustments ..................................................... (2,119,734) (501,631)
----------- -----------
Net cash provided by (used in) operating activities ................... $(4,945,985) $ 2,681,048
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 6 of 17
<PAGE> 7
ADVANCED MAGNETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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. It is suggested that these interim financial statements
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>
March 31, 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 $ 7,457,766 $ 7,460,985 $ 5,000,000 $ 4,998,900
Due after one through five years --- --- 7,438,569 7,429,650
Preferred stock 2,027,409 2,277,500 2,604,711 3,092,335
Common stock 9,290,163 15,077,911 7,116,089 11,844,880
----------- ----------- ----------- -----------
$18,775,338 $24,816,396 $22,159,369 $27,365,765
=========== =========== =========== ===========
</TABLE>
Page 7 of 17
<PAGE> 8
C. INCOME TAX
There were no income tax provisions for the three and six month periods
ended March 31, 1998 and 1997 due to a net operating loss in the three and six
months ending March 31, 1998 and the three months ending March 31, 1997. There
was a net loss carry-forward for the six months ending March 31, 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. Adoption of this statement has not affected the
amounts presented in any period. 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 six months
ended March 31, 1998, common stock equivalents are not included in the
calculation of weighted average shares since their effect would be antidilutive.
<TABLE>
<CAPTION>
Three-Month Periods Six-Month Periods
Ended March 31, Ended March 31,
----------------------------- -----------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average number of shares
issued and outstanding ..................... 6,745,837 6,738,211 6,742,118 6,748,239
Assumed exercise of options reduced
by the number of shares which
could have been purchased with
the proceeds of those options .............. --- --- --- 80,672
As adjusted ................................... 6,745,837 6,738,211 6,742,118 6,828,911
========= ========= ========= =========
</TABLE>
Page 8 of 17
<PAGE> 9
E. LEGAL PROCEEDINGS
The Company and certain of its officers were sued in an action 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
monetary damages. The plaintiff filed two related cases in the Superior Court of
the Commonwealth of Massachusetts. In one of these cases, the Superior Court has
dismissed most of the claims on summary judgment. On March 31, 1998, the
District Court issued an order declining to exercise supplemental jurisdiction
over the plaintiff's state law tort claims. While the final outcome of these
actions cannot be determined, the Company believes that the plaintiff's claims
are without merit and intends to defend the actions vigorously.
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 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.
Page 9 of 17
<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 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 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 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 reflect the
operations of Kalisto for the period from the date of acquisition until March
31, 1998.
The Company does not expect that Year 2000 issues will have a material
effect on the Company's results of operations or financial condition.
Page 10 of 17
<PAGE> 11
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1998 AS COMPARED TO THE
QUARTER ENDED MARCH 31, 1997
REVENUES
Total revenues for the second fiscal quarter ended March 31, 1998 were
$1,986,441 compared to $1,364,592 for the second fiscal quarter ended March 31,
1997. The increase in revenues in the second quarter ended March 31, 1998
compared to the second fiscal quarter ended March 31, 1997 was due to an
increase in both product sales and royalty income. Royalties for the fiscal
quarter ended March 31, 1998 of $370,000 were related primarily to the
successful launch of Feridex I.V. in Japan. By comparison, royalties for the
fiscal quarter ended March 31, 1997 were $95,904 and were related to product
sales in the United States and Europe.
Product sales for the second fiscal quarter ended March 31, 1998 were
$619,464 compared to $209,793 for the second fiscal quarter ended March 31,1997,
primarily due to reorders of Feridex I.V. and GastroMARK for sale in the United
States and Europe.
Interest, dividends and gains on sales of securities resulted in
revenues of $996,977 in the fiscal quarter ended March 31, 1998 compared to
$1,058,895 for the fiscal quarter ended March 31, 1997. Interest, dividends and
net gains on sales of securities consisted of the following:
Second Quarter Ended March 31,
------------------------------
1998 1997
-------- ----------
Interest income ..................... $202,832 $ 332,399
Dividend income ..................... 61,800 53,619
Net gains on sales of securities .... 732,345 672,877
-------- ----------
Total ............................... $996,977 $1,058,895
======== ==========
There was no license fee income during the quarters ended March 31,
1998 and March 31, 1997.
COSTS AND EXPENSES
As a result of increased product sales, the Company incurred costs of
$103,514 for products sold in the quarter ended March 31, 1998 compared to
$33,139 for the second fiscal quarter ended March 31, 1997. The cost of product
sales for the three-month period ended March 31, 1998 was 17% of product sales
compared with 16% for the three-month period ended March 31, 1997. The cost of
manufacturing the contrast agents has decreased due to product mix, while the
costs associated with sales at Kalisto are higher than those for contrast agents
in general.
Selling, general and administrative expenses were $942,317 for the
second fiscal quarter ended March 31, 1998 compared to $469,027 for the second
fiscal quarter ended March 31, 1997. The increase of $473,290 in fiscal 1998 was
primarily related to the inclusion of costs from Kalisto and increased legal
expenses. Research and development expenses for the second fiscal quarter ended
March 31, 1998 were $2,166,670 compared to $1,956,700 for the second fiscal
quarter ended March 31, 1997. The increase in fiscal 1998 was due to the
inclusion of costs associated with development efforts at Kalisto.
INCOME TAXES
There were no income tax provisions for the fiscal quarters ended March
31, 1998 and March 31, 1997 due to operating losses for both periods.
Page 11 of 17
<PAGE> 12
EARNINGS
For the reasons stated above, there was a net loss of $1,145,817 or
$(0.17) per share for the quarter ended March 31, 1998 compared to a net loss of
$1,094,274 or $(0.16) per share for the fiscal quarter ended March 31, 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 any period.
RESULTS OF OPERATIONS FOR THE SIX-MONTHS ENDED MARCH 31, 1998 AS COMPARED TO THE
SIX-MONTHS ENDED MARCH 31, 1997
REVENUES
Total revenues for the six-month period ended March 31, 1998 were
$3,353,014 compared to $8,402,500 for the six-month period ended March 31, 1997.
There were no license fee revenues for the six-month period ended March
31, 1998 compared to license fee revenues of $5,500,000 for the six-month period
ended March 31, 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. 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 six-month period ended March 31, 1998 were $740,000
compared with royalties for the six-month period ended March 31, 1997 of
$220,904. The increase in royalties is associated with the product launch of
Feridex I.V. in Japan.
Product sales for the six-month period ended March 31, 1998 were
$624,024 compared to $876,255 for the six-month period ended March 31, 1997.
Sales during the period ended March 31, 1997 reflected the bulk sales in
connection with 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 $1,988,990 for the six-month period ended March 31, 1998
compared to $1,805,341 for the six-month period ended March 31, 1997. The
increase compared to the six-month period ended March 31, 1997 reflects the
increase of $480,497 in gains on sales of securities offset by a decrease of
$241,445 in interest income associated with the maturities of U.S. Treasury
Notes and a decrease of $55,403 in dividend income due to a reduction in
dividend bearing securities.
COSTS AND EXPENSES
The cost of product sales for the six-month period ended March 31, 1998
was $109,319 compared to $176,335 for the six-month period ended March 31, 1997.
The decrease in cost of sales reflects the decrease in product sales during the
period. The cost of product sales for the six-month period ended March 31, 1998
was 17.5% of product sales compared with 20% for the three-month period ended
March 31, 1997. The cost of product sales decreased because of the lower cost of
manufacturing contrast agents due to product mix, offset by the costs associated
with sales at Kalisto, which are higher than those for contrast agents in
general.
Research and development expenses for the six-month period ended March
31, 1998 were $4,418,171 compared to $4,253,276 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 $1,805,316 for the six-month period ended March 31, 1998
from $790,210 for the six-month period ended March 31, 1997. The increase was
also due to the inclusion of expenses for Kalisto in fiscal 1998 and increased
legal fees.
Page 12 of 17
<PAGE> 13
INCOME TAXES
There was no income tax provision for the six-month period ended March
31, 1998 due to an operating loss for the period. There was no income tax
provision for the six-month period ended March 31, 1997 due to a net operating
loss carry-forward for the period.
EARNINGS
For the reasons stated above, there was a net loss of $2,826,251 or
$(0.42) per share for the six-month period ended March 31, 1998 compared to net
income for the six-month period ended March 31, 1997 of $3,182,679 or $0.47 per
share.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company's cash and cash equivalents totaled
$10,320,663 compared to $10,724,740 at September 30, 1997. In addition, the
Company had marketable securities of $24,816,396 at March 31, 1998 compared to
$27,365,765 on September 30, 1997. Net cash used in operating activities was
$4,945,985 in the six-month period ended March 31, 1998 compared to net cash
provided by operating activities of $2,681,048 in the six-month period ended
March 31, 1997. Cash provided by investing activities was $4,563,153 for the
six-month period ended March 31, 1998 compared to $715,424 used in investing
activities in the six-month period ended March 31, 1997. Cash provided by
investing activities in the six-month period ended March 31, 1998 included the
proceeds of $5,655,077 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 $5,745,974 in the six-month period ended
March 31, 1998. Cash used in financing activities in the six-month period ended
March 31, 1998 was $21,245 compared to $623,397 used in financing activities in
the six-month period ended March 31, 1997. Cash used in financing activities in
the six-month period ended March 31, 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 six-month period ended March 31, 1998 were
$345,950 compared to $140,086 in the six-month period ended March 31, 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 17
<PAGE> 14
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The 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.
Page 14 of 17
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and certain of its officers were sued in David D. Stark 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 Federal Court on March 31, 1998 by the United States District Court for the
District of Massachusetts 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 Superior Court has removed the stay of the proceedings that
previously had been in place. 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 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 in the above-mentioned federal action.
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 business, financial condition and results of
operations.
Page 15 of 17
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 3, 1998, the Company held its Annual Meeting of
Stockholders. At the meeting, the stockholders acted upon the following
proposal: (i) election of directors.
Votes "FOR" represent affirmative votes and do not include abstentions
or broker non-votes. In cases where a signed proxy was submitted without
designation, the shares represented by the proxy were voted "FOR" each proposal
in the manner described in the Proxy Statement. On the record date (December 8,
1997), 6,729,526 shares of the Company's common stock were issued and
outstanding.
Voting results were as follows:
<TABLE>
<CAPTION>
Matter For Against Withheld Abstain
------ --------- ------- -------- -------
<S> <C> <C> <C> <C>
1. Election of Directors
Leonard M. Baum 5,404,982 131,700 N/A N/A
Jerome Goldstein 5,405,182 131,500 N/A N/A
Leslie Goldstein 5,405,007 131,675 N/A N/A
Joseph Lassiter, III 5,405,182 131,500 N/A N/A
Michael Loberg 5,405,182 131,500 N/A N/A
Edward B. Roberts 5,405,182 131,500 N/A N/A
George M. Whitesides 5,405,182 131,500 N/A N/A
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 10.1 Promissory Note dated February 10, 1998 issued to the
Company by Leonard Baum
Exhibit 27.1 Financial Data Schedule (EDGAR filing only)
The Company did not file any current reports on Form 8-K during the
quarter ended March 31, 1998.
Page 16 of 17
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED MAGNETICS, INC.
Date May 13, 1998 By /s/
------------------- -----------------------------------------
Jerome Goldstein, Treasurer
and Chairman of the Board of Directors
Date May 13, 1998 By /s/
------------------- -----------------------------------------
James A. Matheson, Vice President
and Principal Accounting Officer
Page 17 of 17
<PAGE> 1
Exhibit 10.1
[ADVANCED MAGNETICS, INC. LOGO]
Corporate Headquarters
February 10, 1998
PROMISSORY NOTE
A loan has been granted to Leonard Baum under the following terms and
conditions:
Amount: $25,000.00
Rate: 7% per annum
Term: One year
Collateral: 2,000 shares of Advanced Magnetics, Inc. Common Stock
Signed: /s/ James A. Matheson February 10, 1998
------------------------------- -----------------------
James A. Matheson Date
Vice President - Finance
Signed: /s/ Leonard Baum February 10, 1998
------------------------------- -----------------------
Leonard Baum Date
President
Corporate Headquarters: 61 Mooney Street, Cambridge, MA 02138-1038
(617) 497-2070 Fax (617) 547-2445
Clinical Operations: 104 Carnegie Center, Princeton, NJ 08540-6232
(609) 520-8505 Fax (609) 520-0620
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> SEP-30-1997
<PERIOD-END> MAR-31-1998
<CASH> 10,320,663
<SECURITIES> 24,816,396
<RECEIVABLES> 945,548
<ALLOWANCES> 0
<INVENTORY> 377,492
<CURRENT-ASSETS> 36,905,872
<PP&E> 13,429,989
<DEPRECIATION> 7,834,125
<TOTAL-ASSETS> 42,750,638
<CURRENT-LIABILITIES> 1,299,777
<BONDS> 0
0
0
<COMMON> 67,615
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 42,750,638
<SALES> 0
<TOTAL-REVENUES> 1,986,441
<CGS> 103,514
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,108,987
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,226,060)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 80,243
<CHANGES> 0
<NET-INCOME> (1,145,817)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
