-----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, GaSF6oA0THRulWiuLboGeMKeNFuWHEsbsynxK0EkzNXvaX6mIvHiQ1ZNRXjTvRXO Mfzzq7bjAQhlfOu0JTVMqA== 0000950135-99-002689.txt : 19990517 0000950135-99-002689.hdr.sgml : 19990517 ACCESSION NUMBER: 0000950135-99-002689 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99621735 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, INC. 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, 1999 ---------------------------- 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 (IRS Employer Incorporation of organization) 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 7, 1999, 6,767,660 shares of registrant's common stock (par value, $.01) were outstanding. Page 1 of 26 2 ADVANCED MAGNETICS, INC. FORM 10-Q QUARTER ENDED MARCH 31, 1999 PART I. FINANCIAL INFORMATION Item 1 -- Financial Statements Page 2 of 26 3 ADVANCED MAGNETICS, INC. CONSOLIDATED BALANCE SHEETS MARCH 31, 1999 AND SEPTEMBER 30, 1998 (UNAUDITED) ---------
ASSETS MARCH 31, SEPTEMBER 30, ------ --------- ------------- 1999 1998 ---- ---- Current assets: Cash and cash equivalents........................................... $ 12,925,979 $ 7,704,245 Marketable securities (Note B)...................................... 9,502,501 19,096,942 Accounts receivable................................................. 1,172,871 995,010 Inventories......................................................... 345,384 448,630 Prepaid expenses.................................................... 140,193 228,985 ------------------ ------------------- Total current assets.............................................. 24,086,928 28,473,812 Property, plant and equipment: Land................................................................ 360,000 360,000 Building............................................................ 4,702,080 4,497,005 Laboratory equipment................................................ 8,100,338 8,065,834 Furniture and fixtures.............................................. 763,368 745,560 ------------------ ------------------- 13,925,786 13,668,399 Less--accumulated depreciation and amortization..................... (8,748,779) (8,331,740) ------------------ ------------------- Net property, plant and equipment................................... 5,177,007 5,336,659 Other assets........................................................ 304,237 304,237 ------------------ ------------------- Total assets...................................................... $ 29,568,172 $ 34,114,708 ================== =================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................................... $ 294,887 $ 422,993 Accrued expenses.................................................... 696,807 720,266 Income taxes payable................................................ 50,750 52,051 ------------------ ------------------- Total current liabilities......................................... 1,042,444 1,195,310 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 6,767,660 shares at March 31, 1999 and 6,767,358 shares at September 30, 1998....................... 67,677 67,674 Additional paid-in capital.......................................... 44,277,706 44,277,698 Retained earnings (deficit)......................................... (15,808,670) (12,404,643) Unrealized gains (losses) on market value of securities (Note B).... (10,985) 978,669 ------------------ ------------------- Total stockholders' equity........................................ 28,525,728 32,919,398 ------------------ ------------------- Total liabilities and stockholders' equity.......................... $ 29,568,172 $ 34,114,708 ================== ===================
The accompanying notes are an integral part of the consolidated financial statements. Page 3 of 26 4 ADVANCED MAGNETICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED) ---------
THREE-MONTH PERIOD ENDED MARCH 31, SIX-MONTH PERIOD ENDED MARCH 31, ---------------------------------- -------------------------------- 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS Revenues: Royalties................................. $ 200,000 $ 370,000 $ 360,000 $ 740,000 Product sales............................. 1,001,239 619,464 1,318,079 624,024 Contract research and development......... 144,856 --- 389,758 --- Interest, dividends and net gains and losses on sales of securities....... 937,638 996,977 1,130,415 1,988,990 --------------- --------------- --------------- --------------- Total revenues....................... 2,283,733 1,986,441 3,198,252 3,353,014 Cost and expenses: Cost of product sales..................... 155,903 103,514 268,084 109,319 Contract research and development ........ expenses................................ 15,815 --- 15,815 --- Company-sponsored research and............ development expenses.................... 1,980,625 2,166,670 4,471,376 4,418,171 Selling, general and administrative expenses................................ 1,346,808 942,317 2,268,565 1,805,316 --------------- --------------- --------------- --------------- Total costs and expenses............. 3,499,151 3,212,501 7,023,840 6,332,806 Other (income) expenses................... (421,561) --- (421,561) --- --------------- --------------- --------------- --------------- Income (loss) before provision for income taxes and minority interest in (793,857) (1,226,060) (3,404,027) (2,979,792) subsidiary..................................... Provision for income taxes................ --- --- --- --- --------------- --------------- --------------- --------------- Income (loss) before minority interest (793,857) (1,226,060) (3,404,027) (2,979,792) in subsidiary................................ Minority interest in subsidiary........... --- (80,243) --- (153,541) --------------- --------------- --------------- --------------- Net income (loss)............................ (793,857) (1,145,817) (3,404,027) (2,826,251) =============== =============== =============== =============== Basic and diluted net income (loss) per share................................. $ (0.12) $ (0.17) $ (0.50) $ (0.42) ================================================================================ Weighted average number of common shares.................................... 6,767,660 6,745,837 6,767,574 6,742,118 Weighted average number of common and common equivalent shares............ 6,767,660 6,745,837 6,767,574 6,742,118 --------------- --------------- --------------- ---------------
The accompanying notes are an integral part of the consolidated financial statements. Page 4 of 26 5
THREE-MONTH PERIOD ENDED MARCH 31, SIX-MONTH PERIOD ENDED MARCH 31, ---------------------------------- -------------------------------- 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME Net income (loss)............................ $ (793,857) $1,145,817) $(3,404,027) $(2,826,251) Other comprehensive income: Unrealized gains (losses) on securities.............................. (2,379,173) 1,593,614 (232,947) 2,334,037 Reclassification adjustment for gains included in net income............ (757,707) (732,345) (756,707) (1,499,375) --------------- --------------- --------------- --------------- Other comprehensive income................... (3,135,880) 861,269 (989,654) 834,662 --------------- --------------- --------------- --------------- Net income (loss)............................ $(3,929,737) $ (284,548) $(4,393,681) $(1,991,589) =============== =============== =============== ===============
The accompanying notes are an integral part of the consolidated financial statements. Page 5 of 26 6 ADVANCED MAGNETICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED) ---------
Six-Month Periods Ended March 31, -------------------------------------------- 1999 1998 ---- ---- Cash flows from operating activities: Cash received from customers........................................... $ 1,624,917 $ 527,580 Cash paid to suppliers and employees................................... (6,255,845) (6,456,054) Dividends and interest received........................................ 397,568 595,690 Royalties received..................................................... 335,618 386,799 ------------------ ----------------- Net cash provided by (used in) operating activities.................... (3,897,742) (4,945,985) Cash flows from investing activities: Proceeds from sales of securities...................................... 2,959,633 5,655,077 Proceeds from U.S. Treasury Notes maturing............................. 7,500,000 5,000,000 Purchase of securities................................................. (1,082,782) (5,745,974) Capital expenditures................................................... (257,386) (345,950) Net cash provided by (used in) investing activities.................... 9,119,465 4,563,153 ------------------ ----------------- Cash flows from financing activities: Proceeds from issuances of common stock................................ 11 135,104 Purchase of treasury stock............................................. --- (156,349) ------------------ ----------------- Net cash provided by (used in) financing activities.................... 11 (21,245) ------------------ ----------------- Net increase (decrease) in cash and cash equivalents................... 5,221,734 (404,077) Cash and cash equivalents at beginning of the period................... 7,704,245 10,724,740 ------------------ ----------------- Cash and cash equivalents at end of the period......................... $ 12,925,979 $ 10,320,663 ================== =================
The accompanying notes are an integral part of the consolidated financial statements. Page 6 of 26 7 ADVANCED MAGNETICS, INC. RECONCILIATION OF CONSOLIDATED NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED) ---------
Six-Month Periods Ended March 31, ----------------------------------------------- 1999 1998 ---- ---- Net income (loss)......................................................... $ (3,404,027) $ (2,826,251) ------------------ --------------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Accretion of U.S. Treasury Notes discount................................. (15,358) (25,697) Decrease (increase) in accounts receivable................................ (177,861) (398,741) (Increase) decrease in inventories........................................ 103,246 (264,314) (Increase) decrease in prepaid expenses and other assets.................. 88,792 (220,905) Depreciation and amortization............................................. 417,039 502,007 (Decrease) increase in accounts payable and accrued expenses............. (151,565) (250,846) (Decrease) in income taxes payable........................................ (1,301) (2,500) Non-cash reduction in value of investment in subsidiary................... --- 194,178 Minority interest in subsidiary........................................... --- (153,541) Net realized (gains) losses on sales of securities........................ (756,707) (1,499,375) ------------------ --------------------- Total adjustments......................................................... (493,715) (2,119,734) ------------------ --------------------- Net cash provided by (used in) operating activities....................... $ (3,897,742) $ (4,945,985) ================== =====================
The accompanying notes are an integral part of the consolidated financial statements. Page 7 of 26 8 ADVANCED MAGNETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 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. The consolidated balance sheet of the Company, and the consolidated statements of operations and cash flows include the accounts of Kalisto Biologicals, Inc., an 80.7% owned subsidiary of the Company. 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 1998 financial statement have been reclassified to conform with the fiscal 1999 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, 1998. B. MARKETABLE SECURITIES The cost and market value of the Company's marketable securities portfolio are as follows:
March 31, 1999 September 30, 1998 ------------------------------------- -------------------------------------- Cost Fair Value Cost Fair Value ---------------- ----------------- ----------------- ----------------- U. S. government securities Due in one year or less $ --- $ --- $ 7,484,642 $ 7,513,215 Corporate Bonds --- --- 482,403 582,500 Preferred stock --- --- 543,003 570,000 Common stock 9,513,486 9,502,501 9,608,225 10,431,227 ---------------- ----------------- ----------------- ----------------- $ 9,513,486 $ 9,502,501 $18,118,273 $19,096,942 ================ ================= ================= =================
Page 8 of 26 9 C. INCOME TAX There were no income tax provisions for the three and six month periods ended March 31, 1999 and 1998 due to net operating losses in those periods. D. EARNINGS (LOSS) PER SHARE The weighted average common and common equivalent shares used in the computation of basic and diluted earnings per share is presented below. Aggregate options of 430,320 (weighted average exercise price of $11.21) and 404,849 (weighted average exercise price of $11.28) for the three and six-month periods ended March 31, 1999 and March 31, 1998, respectively, have not been included in the calculation of weighted average shares, since their effect would be anti-dilutive, given the net loss in those periods.
Three-Month Periods Six-Month Periods Ended March 31, Ended March 31, ------------------------- -------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Weighted average number of shares issued and outstanding.................. 6,767,660 6,745,837 6,767,574 6,742,118 Common stock equivalents --- --- --- --- ---------------------------------------------- ------------- ------ ------------- ------- ------------- ------- ------------- As adjusted................................ 6,767,660 6,745,837 6,767,574 6,742,118 ============= ============= ============= =============
E. LEGAL PROCEEDINGS The Company and certain of its officers were sued in an action entitled David D. Stark, M.D. v. Advanced Magnetics. Inc., Jerome Goldstein, Ernest V. Groman, and Lee Josephson, Civil Action No. 92-12157-WGY, in the United States District Court for the District of Massachusetts on September 3, 1992. The plaintiff, a former consultant to the Company, claims that he was incorrectly omitted as an inventor or joint inventor on certain of the Company's patents and on pending applications, and seeks injunctive relief and unspecified damages. In addition, the complaint also alleges state law claims for breach of contract, breach of good faith and fair dealing, breach of implied contract, misappropriation of trade secrets, conversion, negligent misrepresentation, misrepresentation, unjust enrichment and unfair trade practices. The District Court has stayed this federal action pending resolution of an appeal in the State Court of summary judgment in the Company's favor as well as resolution of a jurisdictional issue. While the outcome of the action cannot be determined, the Company believes the action is without merit and intends to defend the action vigorously. There can be no assurance, however, that the Company will be able to defend successfully this action and the failure by the Company to prevail for any reason could have an adverse effect on the Company's future business, financial condition and results of operations. The Company and certain of its officers were sued in David D. Stark, M.D. v. Advanced Magnetics, Inc., Jerome Goldstein, Ernest V. Groman and Lee Josephson, Civil Action No. 93-02846-C, in the Superior Court Department of the Massachusetts Trial Court for Middlesex County. This case involves claims of breach of contract, breach of good faith and fair dealing, breach of implied contract, unjust enrichment and unfair trade practices that were originally dismissed by, but later remanded to, the Federal Court in the above-mentioned action, as well as a new count alleging tortious interference with contractual or advantageous relations. The Superior Court granted partial summary judgment in the Company's favor and dismissed the unfair trade practices and tort counts. The plaintiff's contract claims have been dismissed with prejudice and final judgment was entered against the plaintiff. The plaintiff filed an appeal in David D. Stark, M.D. v. Advanced Magnetics, Inc., Jerome Goldstein, Ernest V. Groman and Lee Josephson, Appeal No. 98-P-1749 in the Massachusetts Appeals Court, on January 25, 1999. While the outcome of the action cannot be determined, the Company believes the action is without merit and intends to defend the action vigorously. Page 9 of 26 10 There can be no assurance, however, that the Company will be able to defend this action successfully and the failure by the Company to prevail for any reason could have an adverse effect on the Company's future business, financial condition and results of operations. The Company filed suit on October 7, 1997 against Sanofi Pharmaceuticals, Inc. (formerly known as Sanofi Winthrop, Inc.) and Sanofi SA (collectively, "Defendants") in the Superior Court of the Commonwealth of Massachusetts. The action is entitled Advanced Magnetics, Inc. v. Sanofi Pharmaceuticals, Inc. and Sanofi SA, Civil Action No. 97-5222B. The Company claims that the Defendants tortiously interfered with a license, supply and marketing agreement (the "Agreement"), and seeks unspecified monetary damages. In addition, the Company seeks a declaration that the Defendants do not have any rights under the Agreement and that the Company has not breached the Agreement. Sanofi Pharmaceuticals, Inc., filed counterclaims against the Company on February 4, 1998 seeking compensatory damages of $11,500,000 and multiple damages as a result of the Company's alleged breach of the Agreement. Sanofi Pharmaceuticals, Inc. also filed a motion to dismiss the Company's tortious interference claim, which the Court denied on July 3, 1998. On October 26, 1998, the Company served a motion for partial summary judgment which, among other things, requests judgment in its favor on all of Sanofi Pharmaceuticals, Inc.'s counterclaims. On November 13, 1998 the Company filed an amended complaint adding claims for unfair competition and breach of contract against the Defendants. On November 23, 1998, Defendants answered the Company's amended complaint, and Sanofi Pharmaceuticals, Inc. served a new set of counterclaims seeking compensatory damages of $15,000,000 and multiple damages as a result of the Company's alleged conduct. On December 18, 1998, the court held a hearing on the Company's motion for partial summary judgment, and at that time, ordered all discovery stayed until a ruling on the pending summary judgment motion. While the final outcome of these claims and counterclaims cannot be determined, the Company will pursue its claims vigorously, and believes that the Sanofi Pharmaceuticals, Inc. counterclaims are without merit and intends to defend them vigorously. F. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In 1997, the FASB 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 periods beginning after December 15, 1997. Restatement for earlier years is required for comparative purposes unless impracticable. In addition, SFAS 131 need not be applied to interim periods in the initial year, however, in subsequent years, interim period information must be presented on a comparative basis. 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. G. COMPREHENSIVE INCOME. Effective December 31, 1998, the Company has adopted FASB Statement 130 ("SFAS 130"), "Reporting Comprehensive Income". This statement required changes in comprehensive income to be shown in a financial statement that is displayed with the same prominence as other financial statements. Accordingly, the Company has provided a statement of comprehensive income and has reclassified earlier periods for comparative purposes. Page 10 of 26 11 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This document contains forward-looking statements. Any statements contained herein that do not describe historical facts are forward looking statements. The forward-looking statements contained herein are based on current expectations, but are subject to a number of risks and uncertainties. The factors that could cause actual results to differ materially from current expectations include the following: the ability to 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, achieving projected expense reductions, the need for additional cost reduction measures, 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, 1998. 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 acquisiton until March 31, 1999. Page 11 of 26 12 YEAR 2000 READINESS DISCLOSURE STATEMENT The widely publicized Year 2000 issue arose because many existing computer programs use only the last two digits to define the applicable year. As a result, such computer programs may misinterpret "00" as the year 1900 rather than the year 2000. The consequences of such a misinterpretation could range from a simple miscalculation to a system failure that might cause a disruption of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Since computer and microprocessor use is so widespread, the issue has become a societal concern, the potential impact of which is not yet known. Under the auspices of the Audit Committee, the Company conducted and completed an assessment of its exposure to potential disruptions caused by the Year 2000 issue. In the first phase of its readiness investigation the Company identified its Clinical Data Network (which tracks and analyzes the results of product trials in support of FDA approvals) and its accounting system as mission-critical components that required protection from Year 2000 related disruption. The Company, in order to address Year 2000 concerns and as part of a general systems upgrade, has determined to modify the Clinical Data Network and replace the accounting system. The Company has obtained written confirmation that the new software applications are Year 2000 compliant. The accounting system has been replaced at this time and the Company expects that the necessary Clinical Data Network modifications will be installed and operational by the end of November 1999. In addition to evaluating its computer systems, the Company recognizes that the Year 2000 issue may impact machines or equipment that rely on embedded microchips. The Company has evaluated and tested such equipment used in its manufacturing facilities and believes that it does not have a material risk of disruptions in manufacturing due to a Year 2000 failure. The Company is in the process of evaluating its non-manufacturing equipment. In addition to the Company's critical systems, the Company recognized that it relies on third party service providers and suppliers in the conduct of its business and that there was potential exposure to Year 2000 related business disruptions as a result. For example, third party service providers handle the payroll function for the Company, and the Company also relies on the services of telecommunication companies, banks, and utility companies, among others. The Company has contacted all of its significant service providers and obtained assurances that they are addressing Year 2000 issues in a prudent fashion. However, the Company, like all others, is subject to exposure to disruptions in the generic systems that all businesses and consumers rely on generally. The Company is currently obtaining assurances from its significant raw material suppliers that there will be no interruption of service as a result of the Year 2000 issue, and to the extent such assurances are not given, the Company intends to devise contingency plans to ameliorate the potential negative effects in the event of the unavailability of materials. The Company also intends to increase inventory levels moderately prior to December 1999 as a contingency against possible disruptions anywhere in its supply chain. A failure of any contingency plan developed by the Company may not prevent a business interruption caused by one or more of the Company's third party service providers or suppliers, and such a failure may have a material adverse effect on the Company. In addition, the failure on the part of the accounting systems of the Company's customers due to the Year 2000 issue could result in a delay in the payment of invoices issued by the Company. A failure of the accounting systems of a significant number of the Company's customers would have a material adverse effect on the Company. Page 12 of 26 13 All expenses related to determining and addressing Year 2000 readiness have been expensed as incurred and have amounted to roughly $60,000 to date. The Company has provided $200,000 for the enhancement of its systems in its operating and capital budgets for the current fiscal year. However, if compliance efforts of which the Company is not currently aware are required and are not completed on time, or if the cost of any required updating, modification or replacement of the Company's Information Technology systems exceeds the Company's estimates, the Year 2000 issue could have a material adverse impact on the Company. Various statements in this discussion of Year 2000 issues are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include statements of the Company's expectation, statements with regard to schedules and expected completion dates and statements regarding expected Year 2000 compliance. These forward-looking statements are subject to various risk factors which may materially affect the Company's efforts to achieve Year 2000 compliance. These risk factors include the inability of the Company to complete the plans and modifications that it has identified, the wide variety of information systems and components, both hardware and software, that must be evaluated, the variety, number and complexity of equipment used in the Company's operations and the large number of vendors and customers with which the Company interacts. The Company's assessments of the effect of Year 2000 on the Company are based, in part, upon information received from third parties and the Company's reasonable reliance on that information. Therefore, the risk that inaccurate information is supplied by third parties upon which the Company reasonably relied must be considered as a risk factor that might affect the Company's Year 2000 efforts. The Company is attempting to reduce the risks by utilizing an organized approach, extensive testing, and allowance of ample contingency time to address issues identified by tests. Page 13 of 26 14 RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1999 AS COMPARED TO THE - ----------------------------------------------------------------------------- QUARTER ENDED MARCH 31, 1998 - ---------------------------- REVENUES Total revenues for the second fiscal quarter ended March 31, 1999 were $2,283,733 compared to $1,986,441 for the second fiscal quarter ended March 31, 1998. The increase in revenues in the second quarter ended March 31, 1999 compared to the second quarter ended March 31, 1998 was due to an increase in both product sales and contract research and development, offset by a decrease in royalty income and lower interest, dividends and gains on sales of securities. Royalties for the fiscal quarter ended March 31, 1999 of $200,000 were $170,000 lower than in the fiscal quarter ended March 31, 1998 because of the launch of Feridex I.V. in Japan in the fiscal quarter ended March 31, 1998. Royalties in that quarter were higher because the Company's marketing partner made orders to stock product. Product sales for the second fiscal quarter ended March 31, 1999 were $1,001,239 compared to $619,464 for the second fiscal quarter ended March 31,1998. The increase of $381,775 was primarily due to sales of diagnostic systems by Kalisto Biologicals, Inc. Contract research and development revenues were $144,856 for the second fiscal quarter ended March 31, 1999 compared with none for the second fiscal quarter ended March 31,1998. The increase reflects the reimbursement of certain development costs of approximately $100,000 under an agreement with Berlex Laboratories, Inc. and development work done for Guerbet S.A. Interest, dividends and gains on sales of securities resulted in revenues of $937,638 in the fiscal quarter ended March 31, 1999 compared to $996,977 for the fiscal quarter ended March 31, 1998. Interest, dividends and net gains on sales of securities consisted of the following: Second Quarter Ended March 31, ---------------------------------------- 1999 1998 ---- ---- Interest income $ 124,436 $ 202,832 Dividend income 56,495 61,800 Net gains on sales of securities 756,707 732,345 =============== =============== Total $ 937,638 $ 996,977 =============== =============== COSTS AND EXPENSES As a result of increased product sales, the Company incurred costs of $155,903 for products sold in the quarter ended March 31, 1999 compared to $103,514 for the second fiscal quarter ended March 31, 1998. The cost of product sales for the three-month period ended March 31, 1999 remained relatively constant at 16% of product sales compared with 17% for the three-month period ended March 31, 1998. Direct costs of $15,815 were incurred for contract sponsored research and development during the three-month period ended March 31, 1999. Company sponsored research and development expenses for the second fiscal quarter ended March 31, 1999 were $1,980,625 compared to $2,166,670 for the second fiscal quarter ended March 31, 1998. The decrease in fiscal 1999 was due to the reduction of costs associated with a shift from research to development efforts at both Advanced Magnetics and Kalisto. Selling, general and administrative expenses were $1,346,808 for the second fiscal quarter ended March 31, 1999 compared to $942,317 for the second fiscal quarter ended March 31, 1998. The increase of $394,101 in fiscal 1999 was primarily related to increased costs for Kalisto sales efforts and increased legal expenses at Advanced Magnetics. Page 14 of 26 15 The Company had $421,560 in other income during the second fiscal quarter ended March 31, 1999. An excise tax claim against the Commonwealth of Massachusetts was settled in the amount of $50,000 and an insurance settlement in the amount of $371,560 was made for damages to research facilities caused by a flood in June 1998. INCOME TAXES There were no income tax provisions for the fiscal quarters ended March 31, 1999 and March 31, 1998 due to operating losses for both periods. EARNINGS For the reasons stated above, there was a net loss of $793,857 or $(0.12) per share for the quarter ended March 31, 1999 compared to a net loss of $1,145,817 or $(0.17) per share for the fiscal quarter ended March 31, 1998. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 1999 AS COMPARED TO THE - -------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 1998 - ------------------------------- REVENUES Total revenues for the six-month period ended March 31, 1999 were $3,198,252 compared to $3,353,014 for the six-month period ended March 31, 1998. Royalties for the six-month period ended March 31, 1999 were $360,000 compared with royalties for the six-month period ended March 31, 1998 of $740,000. The decrease in royalties is associated with the non-recurring product launch of Feridex I.V. in Japan during the six-month period ended March 31, 1998. Product sales for the six-month period ended March 31, 1999 were $1,318,079 compared to $624,024 for the six-month period ended March 31, 1998. The increase is primarily due to Kalisto sales increases. Contract research and development revenues were $389,758 for the six-month period ended March 31, 1999 compared with none for the six-month period ended March 31,1998. The increase reflects the reimbursement of certain development costs of approximately $345,000 under an agreement with Berlex Laboratories, Inc. and development work done for Guerbet S.A. Interest, dividends and gains and losses on sales of securities resulted in revenues of $1,130,415 for the six-month period ended March 31, 1999 compared to $1,988,990 for the six-month period ended March 31, 1998. The decrease compared to the six-month period ended March 31, 1998 reflects the maturity of a U.S. Treasury Note and a decrease in interest income due to a reduction in interest bearing securities. COSTS AND EXPENSES The cost of product sales for the six-month period ended March 31, 1999 was $268,084 compared to $109,319 for the six-month period ended March 31, 1998. The cost of product sales for the six-month period ended March 31, 1999 was 20.3% of product sales compared with 17.5% for the six-month period ended March 31, 1998. The higher rate of cost of sales reflects the increase in sales of Kalisto diagnostic systems as those systems have a higher cost of sales than do contrast agents in general. Direct costs of $15,815 were incurred for contract sponsored research and development during the six-month period ended March 31, 1999. Page 15 of 26 16 Company sponsored research and development expenses for the six-month period ended March 31, 1999 remained relatively constant at $4,487,191 compared to $4,418,171 for the same period in 1998. Selling, general and administrative expenses increased to $2,268,565 for the six-month period ended March 31, 1999 from $1,805,316 for the six-month period ended March 31, 1998. The increase of $463,249 in fiscal 1999 was primarily related to increased costs for Kalisto sales efforts and increased legal expenses at Advanced Magnetics. The Company had $421,560 in other income during the six-month period ended March 31, 1999. An excise tax claim against the Commonwealth of Massachusetts was settled in the amount of $50,000 and an insurance settlement in the amount of $371,560 was made for damages to research facilities caused by a flood in June 1998. INCOME TAXES There was no income tax provision for the six-month periods ended March 31, 1999 and March 31, 1998 due to operating losses for both periods. EARNINGS For the reasons stated above, there was a net loss of $3,404,027 or $(0.50) per share for the six-month period ended March 31, 1999 compared to a net loss for the six-month period ended March 31, 1998 of $2,826,251 or $(0.42) per share. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1999, the Company's cash and cash equivalents totaled $12,925,979 compared to $7,704,245 at September 30, 1998. In addition, the Company had marketable securities of $9,502,501 at March 31, 1999 compared to $19,096,942 on September 30, 1998. Net cash used in operating activities was $3,897,742 in the six-month period ended March 31, 1999 compared to net cash used in operating activities of $4,945,985 in the six-month period ended March 31, 1998. Cash provided by investing activities was $9,119,465 for the six-month period ended March 31, 1999 compared to $4,563,153 provided by investing activities in the six-month period ended March 31, 1998. Cash provided by investing activities in the six-month period ended March 31, 1999 included the proceeds of $2,959,633 from the sale of marketable securities and $7,500,000 from the maturing of a U.S. Treasury Note. Offsetting these proceeds was the purchase of marketable securities of $1,082,782 in the six-month period ended March 31, 1999. Cash provided by financing activities in the six-month period ended March 31, 1999 was $11 compared to $21,245 used in financing activities in the six-month period ended March 31, 1998. Capital expenditures during the six-month period ended March 31, 1999 were $257,386 compared to $345,950 in the six-month period ended March 31, 1998. This reflects a continuing upgrade to existing property, plant and equipment and purchases to support the research facilities of Kalisto. The Company has reduced its overhead by decreasing the number of its employees, excluding Kalisto, from 61 to 49 and has made, and will continue to make, cutbacks in discretionary expenditures. These efforts are expected to significantly reduce the Company's cash expenditures in what has been a difficult financing environment for small biopharmaceutical companies. The Company is being careful to retain all of its critical capabilities, including research and development, and to ensure that headcount reductions will reduce capacity rather than core competencies. Management believes that existing cash balances, cash generated from investing activities and cash generated from operations will be sufficient to meet cash and working capital requirements for the foreseeable future. In addition, the Company will consider from time to time various financing alternatives and may seek to raise additional capital through equity or debt financing or to enter into corporate partnering arrangements. There can be no assurance, however, that such funding will be available on terms acceptable to the Company, if at all. Page 16 of 26 17 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In 1997, the FASB 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 periods beginning after December 15, 1997. Restatement for earlier years is required for comparative purposes unless impracticable. In addition, SFAS 131 need not be applied to interim periods in the initial year, however, in subsequent years, interim period information must be presented on a comparative basis. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change to the information concerning the Company's market risk sensitive instruments as set forth in the Company's 10-K for the period ended September 30, 1998. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no material developments in the legal proceedings to which the Company is a party since the description of the litigation with Sanofi Pharmaceuticals, Inc. described in the Company's most recent Form 10-Q for the quarter ended December 31, 1998. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On February 2, 1999, the Company held its Annual Meeting of Stockholders. At the meeting, the stockholders acted upon the following proposals: (i) election of directors and (ii) an amendment to the Company's 1993 Stock Plan (the "1993 Plan") to increase the number of shares of common stock available for issuance under the 1993 Plan from 500,000 to 700,000. 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 7, 1998), 6,767,660 shares of the Company's common stock were issued and outstanding. Page 17 of 26 18 Voting results were as follows:
MATTER FOR AGAINST WITHHELD ABSTAIN ------ --- ------- -------- ------- 1. Election of Directors Leonard M. Baum 5,730,493 N/A 52,040 N/A Jerome Goldstein 5,730,493 N/A 52,040 N/A Leslie Goldstein 5,730,493 N/A 52,040 N/A Joseph B. Lassiter, III 5,730,493 N/A 52,040 N/A Michael D. Loberg 5,730,493 N/A 52,040 N/A Edward B. Roberts 5,730,493 N/A 52,040 N/A George M. Whitesides 5,730,493 N/A 52,040 N/A 2. Amendment to 1993 Plan 5,451,336 301,812 N/A 29,385
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit 10.1 1993 Stock Plan, as amended. 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, 1999. 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, 1999 By /s/ Jerome Goldstein ---------------- ---------------------------------- Jerome Goldstein, Treasurer and Chairman of the Board of Directors Date May 13, 1999 By /s/ James A. Matheson ---------------- ---------------------------------- James A. Matheson, Vice President and Principal Accounting Officer Page 18 of 26 EX-10.1 2 1993 STOCK PLAN 1 ADVANCED MAGNETICS, INC. 1993 STOCK PLAN (AS AMENDED FEBRUARY 2, 1999) 1. PURPOSE. This 1993 Stock Plan (the "Plan") is intended to provide incentives: (a) to the officers and other employees of Advanced Magnetics, Inc. (the "Company"), and of any present or future parent or subsidiary of the Company (collectively, "Related Corporations"), by providing them with opportunities to purchase stock in the Company pursuant to options granted hereunder which qualify as "incentive stock options" ("ISOs") under Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"); (b) to directors, officers, employees and consultants of the Company and Related Corporations by providing them with opportunities to purchase stock in the Company pursuant to options granted hereunder which do not qualify as ISOs ("Non-Qualified Options"); (c) to directors, officers, employees and consultants of the Company and Related Corporations by providing them with awards of stock in the Company ("Awards"); and (d) to directors, officers, employees and consultants of the Company and Related Corporations by providing them with opportunities to make direct purchases of stock in the Company ("Purchases"). Both ISOs and Non-Qualified Options are referred to hereafter individually as an "Option" and collectively as "Options." Options, Awards and authorizations to make Purchases are referred to hereafter collectively as "Stock Rights." As used herein, the terms "parent" and "subsidiary" mean "parent corporation" and "subsidiary corporation," respectively, as those terms are defined in Section 424 of the Code. 2. ADMINISTRATION OF THE PLAN. A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be administered by the Board of Directors of the Company (the "Board") or by a committee appointed by the Board (the "Committee"); provided that, to the extent required by Rule 16b-3 promulgated under the Securities Exchange Act of 1934 or any successor provision ("Rule 16b-3"), with respect to specific grants of Stock Rights, the Plan shall be administered by a disinterested administrator or administrators within the meaning of Rule 16b-3. Hereinafter, all references in this Plan to the "Committee" shall mean the Board if no Committee has been appointed. Subject to ratification of the grant or authorization of each Stock Right by the board (if so required by applicable state law), and subject to the terms of the Plan, the Committee shall have the authority to (i) determine the employees of the Company and Related Corporations (from among the class of employees eligible under paragraph 3 to receive ISOs) to whom ISOs shall be granted, and determine (from among the class of individuals and entities eligible under paragraph 3 to receive Non-Qualified Options and Awards and to make Purchases) to whom Non-Qualified Options, Awards and authorizations to make Purchases may be granted; (ii) determine the time or times at which Options or Awards shall be granted or Purchases made; (iii) determine the option price of shares subject to each Option, which price shall not be less than the minimum price specified in paragraph 6, and the purchase price of shares subject to each Purchase; (iv) determine whether each Option granted shall be an ISO or a Non-Qualified Option; (v) determine (subject to paragraph 7) the time or times when each Option shall become exercisable and the duration of the exercise period; (vi) determine whether restrictions such as repurchase options are to be imposed on shares subject to Options, Awards and Purchases and the nature of such restrictions, if any, and (vii) interpret the Plan and prescribe and rescind rules and regulations relating to it. If the Committee determines to issue a Non-Qualified Option, it shall take whatever actions it deems necessary, under Section 422 of the Code and the regulations promulgated thereunder, to ensure that such Option is not treated as an ISO. The interpretation and construction by the Committee of any provisions of the Plan or of any Stock Right granted under it shall be final unless otherwise determined by the Board. The Committee may from time to time adopt such rules and regulations for carrying out the Plan as it may deem best. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Stock Right granted under it. Page 19 of 26 2 B. COMMITTEE ACTIONS. The Committee may select one of its members as its chairman, and shall hold meetings at such time and places as it may determine. Acts by a majority of the members of the committee, or acts reduced to or approved in writing by a majority of the members of the Committee (if consistent with applicable state law), shall constitute the valid acts of the Committee. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. C. GRANT OF STOCK RIGHTS TO BOARD MEMBERS. Stock Rights may be granted to members of the Board consistent with the provisions of the first sentence of paragraph 2(A) above, if applicable. All grants of Stock Rights to members of the Board shall in all other respects be made in accordance with the provisions of this Plan applicable to other eligible persons. Consistent with the provisions of the first sentence of paragraph 2(A) above, members of the Board who either (i) are eligible to receive grants of Stock Rights pursuant to the Plan or (ii) have been granted Stock Rights may vote on any matters affecting the administration of the Plan or the grant of any Stock Rights pursuant to the Plan, except that no such member shall act upon the granting to himself of Stock Rights, but any such member may be counted in determining the existence of a quorum at any meeting of the Board during which action is taken with respect to the granting to him of Stock Rights. 3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted only to employees of the Company or any Related Corporation. Non-Qualified Options, Awards and authorizations to make Purchases may be granted to any employee, officer or director (whether or not also an employee) or consultant of the Company or any Related Corporation. The Committee may take into consideration a recipient's individual circumstances in determining whether to grant an ISO, a Non-Qualified Option, an Award or an authorization to make a Purchase. Granting of any Stock Right to any individual or entity shall neither entitle that individual or entity to, nor disqualify him from, participation in any other grant of Stock Rights. 4. STOCK. The stock subject to Options, Awards and Purchases shall be authorized but unissued shares of Common Stock of the Company, par value $.01 per share (the "Common Stock"), or shares of Common Stock reacquired by the Company in any manner. The aggregate number of shares which may be issued pursuant to the Plan is 700,000, subject to adjustment as provided in paragraph 13. If any Stock Right granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, the unpurchased shares subject to such Stock Right shall again be available for grants of Stock Rights under the Plan. 5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the Plan at any time after December 8, 1992 and prior to December 7, 2002. The date of grant of a Stock Right under the Plan will be the date specified by the Committee at the time it grants the Stock Rights; provided, however, that such date shall not be prior to the date on which the Committee acts to approve the grant. 6. MINIMUM OPTION PRICE; ISO LIMITATIONS. A. PRICE FOR NON-QUALIFIED OPTIONS. The exercise price per share specified in the agreement relating to each Non-Qualified Option granted under the Plan shall in no event be less than the minimum legal consideration required therefor under the laws of Massachusetts or the laws of any jurisdiction in which the Company or its successors in interest may be organized. Page 20 of 26 3 B. PRICE FOR ISOS. The exercise price per share specified in the agreement relating to each ISO granted under the Plan shall not be less than the fair market value per share of Common Stock on the date of such grant. In the case of an ISO to be granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation, the price per share specified in the agreement relating to such ISO shall not be less than one hundred ten percent (110%) of the fair market value per share of Common Stock on the date of grant. For purposes of determining stock ownership under this paragraph, the rules of Section 424(d) of the Code shall apply. C. $100,000 ANNUAL LIMITATION ON ISO VESTING. Each eligible employee may be granted Options treated as ISOs only to the extent that, in the aggregate under this Plan and all incentive stock option plans of the Company and any Related Corporation, ISOs do not become exercisable for the first time by such employee during any calendar year with respect to stock having a fair market value (determined at the time the ISOs were granted) in excess of $100,000. The Company intends to designate any Options granted in excess of such limitation as Non-Qualified Options. D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option is granted under the Plan, the Company's Common Stock is publicly traded, "fair market value" shall be determined as of the last business day for which the prices or quotes discussed in this sentence are available prior to the date such Option is granted and shall mean (i) the average (on that date) of the high and low prices of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; or (ii) the last reported sale price (on that date) of the Common Stock on the NASDAQ National Market List, if the Common Stock is not then traded on a national securities exchange; or (iii) the closing bid price (or average of bid prices) last quoted (on that date) by an established quotation service for over-the-counter securities, if the Common Stock is not reported on the NASDAQ National Market List. However, if the Common Stock is not publicly traded at the time an Option is granted under the Plan, "fair market value" shall be deemed to be the fair value of the Common Stock as determined by the Committee after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's length. 7. OPTION DURATION. Subject to earlier termination as provided in paragraphs 9 and 10, each Option shall expire on the date specified by the Committee, but not more than (i) ten years from the date of grant in the case of Options generally and (ii) five years from the date of grant in the case of ISOs granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation, as determined under paragraph 6(B). Subject to earlier termination as provided in paragraphs 9 and 10, the term of each ISO shall be the term set forth in the original instrument granting such ISO, except with respect to any part of such ISO that is converted into a Non-Qualified Option pursuant to paragraph 16. 8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9 through 12, each Option granted under the Plan shall be exercisable as follows: A. VESTING. The Option shall either be fully exercisable on the date of grant or shall become exercisable thereafter in such installments as the Committee may specify. B. FULL VESTING OF INSTALLMENTS. Once an installment becomes exercisable it shall remain exercisable until expiration or termination of the Option, unless otherwise specified by the Committee. C. PARTIAL EXERCISE. Each Option or installment may be exercised at any time or from time to time, in whole or in part, for up to the total number of shares with respect to which it is then exercisable. Page 21 of 26 4 D. ACCELERATION OF VESTING. The Committee shall have the right to accelerate the date of exercise of any installment of any Option; provided that the Committee shall not, without the consent of an optionee, accelerate the exercise date of any installment of any Option granted to any employee as an ISO (and not previously converted into a Non-Qualified Option pursuant to paragraph 16) if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code, as described in paragraph 6(C). 9. TERMINATION OF EMPLOYMENT. If an ISO optionee ceases to be employed by the Company and all Related Corporations other than by reason of death or disability as defined in paragraph 10, no further installments of his ISOs shall become exercisable, and his ISOs shall terminate after the passage of ninety (90) days from the date of termination of his employment, but in no event later than on their specified expiration dates, except to the extent that such ISOs (or unexercised installments thereof) have been converted into Non-Qualified Options pursuant to paragraph 16. For purposes of this paragraph 9, employment shall be considered as continuing uninterrupted during any bona fide leave of absence (such as those attributable to illness, military obligations or governmental service) provided that the period of such leave does not exceed 90 days or, if longer, any period during which such optionee's right to reemployment is guaranteed by statute. A bone fide leave of absence with the written approval of the Committee shall not be considered an interruption of employment under this paragraph 9, provided that such written approval contractually obligates the Company or any Related Corporation to continue the employment of the optionee after the approved period of absence. ISOs granted under the Plan shall not be affected by any change of employment within or among the Company and Related Corporations, so long as the optionee continues to be an employee of the Company or any Related Corporation. Nothing in the Plan shall be deemed to give any grantee of any Stock Right the right to be retained in employment or other service by the Company or any Related Corporation for any period of time. 10. DEATH; DISABILITY. A. DEATH. If an ISO optionee ceases to be employed by the Company and all Related Corporations by reason of his death, any ISO of his may be exercised, to the extent of the number of shares with respect to which he could have exercised it on the date of his death, by his estate, personal representative or beneficiary who has acquired the ISO by will or by the laws of descent and distribution, at any time prior to the earlier of the specified expiration date of the ISO or 180 days from the date of the optionee's death. B. DISABILITY. If an ISO optionee ceases to be employed by the Company and all Related Corporations by reason of his disability, he shall have the right to exercise any ISO held by him on the date of termination of employment, to the extent of the number of shares with respect to which he could have exercised it on that date, at any time prior to the earlier of the specified expiration date of the ISO or 180 days from the date of the termination of the optionee's employment. For the purposes of the Plan, the term "disability" shall mean "permanent and total disability" as defined in Section 22(e) (3) of the Code or any successor statute. 11. ASSIGNABILITY. No Stock Right shall be assignable or transferable by the grantee except by will or by the laws of descent and distribution. During the lifetime of the grantee each Stock Right shall be exercisable only by him. Page 22 of 26 5 12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by instruments (which need not be identical) in such forms as the Committee may from time to time approve. Such instruments shall conform to the terms and conditions set forth in paragraphs 6 through 11 hereof and may contain such other provisions as the Committee deems advisable which are not inconsistent with the Plan, including restrictions applicable to shares of Common Stock issuable upon exercise of Options. The Committee may specify that any Non-Qualified Option shall be subject to the restrictions set forth herein with respect to ISOs, or to such other termination and cancellation provisions as the Committee may determine. The Committee may from time to time confer authority and responsibility on one or more of its own members and/or one or more officers of the Company to execute and deliver such instruments. The proper officers of the Company are authorized and directed to take any and all action necessary or advisable from time to time to carry out the terms of such instruments. 13. ADJUSTMENTS. Upon the occurrence of any of the following events, an optionee's rights with respect to Options granted to him hereunder shall be adjusted as hereinafter provided, unless otherwise specifically provided in the written agreement between the optionee and the Company relating to such Option: A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of Options shall be appropriately increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated with or acquired by another entity in a merger, sale of all or substantially all of the Company's assets or otherwise (an "Acquisition"), the Committee or the board of directors of any entity assuming the obligations of the Company hereunder (the "Successor Board"), shall, as to outstanding Options, either (i) make appropriate provision for the continuation of such Options by substituting on an equitable basis for the shares then subject to such Options the consideration payable with respect to the outstanding shares of Common Stock in connection with the Acquisition; or (ii) upon written notice to the optionees, provide that all Options must be exercised, to the extent then exercisable, within a specified number of days of the date of such notice, at the end of which period the Options shall terminate; or (iii) terminate all Options in exchange for a cash payment equal to the excess of the fair market value of the shares subject to such Options (to the extent then exercisable) over the exercise price thereof. C. RECAPITALIZATION OR REORGANIZATION. In the event of a recapitalization or reorganization of the Company (other than a transaction described in subparagraph B above) pursuant to which securities of the company or of another corporation are issued with respect to the outstanding shares of Common Stock, an optionee upon exercising an Option shall be entitled to receive for the purchase price paid upon such exercise the securities he would have received if he had exercised his Option prior to such recapitalization or reorganization. D. MODIFICATION OF ISOS. Notwithstanding the foregoing, any adjustments made pursuant to subparagraphs A, B or C with respect to ISOs shall be made only after the Committee, after consulting with counsel for the Company, determines whether such adjustments would constitute a "modification" or such ISOs (as that term is defined in Section 424 of the Code) or would cause any adverse tax consequences for the holders of such ISOs. If the Committee determines that such adjustments made with respect to ISOs would constitute a modification of such ISOs or would cause adverse tax consequences to the holders, it may refrain from making such adjustments. Page 23 of 26 6 E. DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, each Option will terminate immediately prior to the consummation of such proposed action or at such other time and subject to such other conditions as shall be determined by the Committee. F. ISSUANCES OF SECURITIES. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to Options. No adjustments shall be made for dividends paid in cash or in property other than securities of the Company. G. FRACTIONAL SHARES. No fractional shares shall be issued under the Plan and the optionee shall receive from the Company cash in lieu of such fractional shares. H. ADJUSTMENTS. Upon the happening of any of the events described in subparagraphs A, B or C above, the class and aggregate number of shares set forth in paragraph 4 hereof that are subject to Stock Rights which previously have been or subsequently may be granted under the Plan shall also be appropriately adjusted to reflect the events described in such subparagraphs. The Committee or the Successor Board shall determine the specific adjustments to be made under this paragraph 13 and, subject to paragraph 2, its determination shall be conclusive. 14. MEANS OF EXERCISING STOCK RIGHTS. A Stock Right (or any part or installment thereof) shall be exercised by giving written notice to the Company at its principal office address. Such notice shall identify the Stock Right being exercised and specify the number of shares as to which such Stock Right is being exercised, accompanied by full payment of the purchase price therefor either (a) in United States dollars in cash or by check, (b) at the discretion of the Committee, through delivery of shares of Common Stock having a fair market value equal as of the date of the exercise to the cash exercise price of the Stock Right, (c) at the discretion of the Committee, by delivery of the grantee's personal recourse note bearing interest payable not less than annually at no less than 100% of the lowest applicable Federal rate, as defined in Section 1274(d) of the Code, (d) at the discretion of the Committee and consistent with applicable law, through the delivery of an assignment to the Company of a sufficient amount of the proceeds from the sale of the Common Stock acquired upon exercise of the Stock Right and an authorization to the broker or selling agent to pay that amount to the Company, which sale shall be at the participant's direction at the time of exercise, or (e) at the discretion of the Committee, by any combination of (a), (b), (c) and (d) above. If the Committee exercises its discretion to permit payment of the exercise price of an ISO by means of the methods set forth in the clauses (b), (c), (d) or (e) of the preceding sentence, such discretion shall be exercised in writing at the time of the grant of the ISO in question. The holder of a Stock Right shall not have the rights of a shareholder with respect to the shares covered by his Stock Right until the date of issuance of a stock certificate to him for such shares. Except as expressly provided above in paragraph 13 with respect to changes in capitalization and stock dividends, no adjustment shall be made for dividends or similar rights for which the record date is before the date such stock certificate is issued. Page 24 of 26 7 15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board on December 8, 1992, subject, with respect to the validation of ISOs granted under the Plan, to approval of the Plan by the stockholders of the Company at the next Meeting of Stockholders or, in lieu thereof, by written consent. If the approval of stockholders is not obtained prior to December 8, 1993, any grants of ISOs under the Plan made prior to that date will be rescinded. The Plan shall expire at the end of the day on December 7, 2002 (except as to Options outstanding on that date). Subject to the provisions of paragraph 5 above, Stock Rights may be granted under the Plan prior to the date of stockholder approval of the Plan. The Board may terminate or amend the Plan in any respect at any time, except that, without the approval of the stockholders obtained within 12 months before or after the Board adopts a resolution authorizing any of the following actions: (a) the total number of shares that may be issued under the Plan may not be increased (except by adjustment pursuant to paragraph 13); (b) the benefits accruing to participants under the Plan may not be materially increased; (c) the requirements as to eligibility for participation in the Plan may not be materially modified; (d) the provisions of paragraph 3 regarding eligibility for grants of ISOs may not be modified; (e) the provisions of paragraph 6(B) regarding the exercise price at which shares may be offered pursuant to ISOs may not be modified (except by adjustment pursuant to paragraph 13); (f) the expiration date of the Plan may not be extended; and (g) the Board may not take any action which would cause the Plan to fail to comply with Rule 16b-3. Except as otherwise provided in this paragraph 15, in no event may action of the Board or stockholders alter or impair the rights of a grantee, without his consent, under any Stock Right previously granted to him. 16. CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS. The Committee, at the written request or with the written consent of any optionee, may in its discretion take such actions as may be necessary to convert such optionee's ISOs (or any installments or portions of installments thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such ISOs, regardless of whether the optionee is an employee of the Company or a Related Corporation at the time of such conversion. Such actions may include, but shall not be limited to, extending the exercise period or reducing the exercise price of the appropriate installments of such ISOs. At the time of such conversion, the Committee (with the consent of the optionee) may impose such conditions on the exercise of the resulting Non-Qualified Options as the Committee in its discretion may determine, provided that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give any optionee the right to have such optionee's ISOs converted into Non-Qualified Options, and no such conversion shall occur until and unless the Committee takes appropriate action. 17. APPLICATION OF FUNDS. The proceeds received by the Company from the sale of shares pursuant to Options granted and Purchases authorized under the Plan shall be used for general corporate purposes. 18. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. By accepting an ISO granted under the Plan, each optionee agrees to notify the Company in writing immediately after he makes a Disqualifying Disposition (as described in Sections 421, 422 and 424 of the Code and regulations thereunder) of any stock acquired pursuant to the exercise of ISOs granted under the Plan. A Disqualifying Disposition is generally any disposition occurring within two years of the date the ISO was granted or within one year of the date the ISO was exercised, whichever period ends later. Page 25 of 26 8 19. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a Non-Qualified Option, the grant of an Award, the making of a Purchase of Common Stock for less than its fair market value, the making of a Disqualifying Disposition (as defined in paragraph 18), the vesting or transfer of restricted stock or securities acquired on the exercise of a Stock Right hereunder, or the making of a distribution or other payment with respect to such stock or securities, the Company may withhold taxes in respect of amounts that constitute compensation includible in gross income. The Committee in its discretion may condition (i) the exercise of an Option, (ii) the grant of an Award, (iii) the making of a Purchase of Common Stock for less than its fair market value, or (iv) the vesting or transferability of restricted stock or securities acquired by exercising a Stock Right, on the grantee's making satisfactory arrangement for such withholding. Such arrangement may include payment by the grantee in cash or by check of the amount of the withholding taxes or, at the discretion of the Committee, by the grantee's delivery of previously held shares of Common Stock or the withholding from the shares of Common Stock otherwise deliverable upon exercise of a Stock Right shares having an aggregate fair market value equal to the amount of such withholding taxes. 20. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver shares of the Common Stock under this Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such shares. Government regulations may impose reporting or other obligations on the Company with respect to the Plan. For example, the Company may be required to send tax information statements to employees and former employees that exercise ISOs under the Plan, and the Company may be required to file tax information returns reporting the income received by grantees of Stock Rights in connection with the Plan. 21. GOVERNING LAW; CONSTRUCTION. The validity and construction of the Plan and the instruments evidencing Stock Rights shall be governed by the laws of Massachusetts, or the laws of any jurisdiction in which the Company or its successors in interest may be organized. In construing this Plan, the singular shall include the plural and the masculine gender shall include the feminine and neuter, unless the context otherwise requires. Page 26 of 26 EX-27 3 FINANCIAL DATA SCHEDULE
5 0000792977 ADVANCED MAGNETICS, INC. 3-MOS SEP-30-1999 OCT-01-1998 MAR-31-1999 12,925,979 9,502,501 1,172,871 0 345,384 24,086,928 13,925,786 8,748,779 29,568,172 1,042,444 0 0 0 67,677 0 29,568,172 1,001,239 2,283,733 155,903 3,499,151 (421,561) 0 0 (793,857) 0 0 0 0 0 (793,857) (0.12) (0.12)
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