-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FaxN636mn8GxpvFHc+7bTb3d/8wOR1FO/v/76fdXWvmg+4of+qigskf5V0P9UnVU IiHHQz8UCcsjE2ENyljRMA== 0000950135-98-003281.txt : 19980515 0000950135-98-003281.hdr.sgml : 19980515 ACCESSION NUMBER: 0000950135-98-003281 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED MAGNETICS INC CENTRAL INDEX KEY: 0000792977 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 042742593 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14732 FILM NUMBER: 98620381 BUSINESS ADDRESS: STREET 1: 61 MOONEY ST CITY: CAMBRIDGE STATE: MA ZIP: 02138 BUSINESS PHONE: 6173543929 MAIL ADDRESS: STREET 1: 61 MOONEY ST CITY: CAMBRIDGE STATE: MA ZIP: 02138 10-Q 1 ADVANCED MAGNETICS 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) Delaware 04-2742593 (State or other jurisdiction of organization) (IRS Employer Incorporation or Identification No.)
61 Mooney Street Cambridge, MA 02138 (Address of principal executive offices) Registrant's telephone number, including area code: (617) 497-2070 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- At May 12, 1998, 6,761,482 shares of registrant's common stock (par value, $.01) were outstanding. Page 1 of 17 2 ADVANCED MAGNETICS, INC. FORM 10-Q QUARTER ENDED MARCH 31, 1998 PART I. FINANCIAL INFORMATION Item 1 -- Financial Statements Page 2 of 17 3 ADVANCED MAGNETICS, INC. CONSOLIDATED BALANCE SHEETS MARCH 31, 1998 AND SEPTEMBER 30, 1997 (UNAUDITED)
ASSETS March 31, September 30, ------ ----------- ------------- 1998 1997 ----------- ------------- 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 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. Page 3 of 17 4 ADVANCED MAGNETICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
Three-Month Period Ended March 31, Six-Month Period Ended March 31, ---------------------------------- -------------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ---------- 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 ----------- ----------- ----------- ----------
The accompanying notes are an integral part of the consolidated financial statements. Page 4 of 17 5 ADVANCED MAGNETICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
Six-Month Periods Ended March 31, --------------------------------- 1998 1997 ----------- ----------- 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 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. Page 5 of 17 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)
Six-Month Periods Ended March 31, -------------------------------- 1998 1997 ----------- ----------- 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 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. Page 6 of 17 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:
March 31, 1998 September 30, 1997 -------------------------- -------------------------- Cost Fair Value Cost Fair Value ----------- ----------- ----------- ----------- 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 =========== =========== =========== ===========
Page 7 of 17 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.
Three-Month Periods Six-Month Periods Ended March 31, Ended March 31, ----------------------------- ----------------------------- 1998 1997 1998 1997 --------- --------- --------- --------- 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 ========= ========= ========= =========
Page 8 of 17 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 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 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 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 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 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 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 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:
Matter For Against Withheld Abstain ------ --------- ------- -------- ------- 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
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 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 EX-10.1 2 PROMISSORY NOTE DATED FEBRUARY 10, 1998 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 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 6-MOS SEP-30-1997 SEP-30-1997 MAR-31-1998 10,320,663 24,816,396 945,548 0 377,492 36,905,872 13,429,989 7,834,125 42,750,638 1,299,777 0 0 0 67,615 0 42,750,638 0 1,986,441 103,514 0 3,108,987 0 0 (1,226,060) 0 0 0 80,243 0 (1,145,817) (0.17) (0.17)
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