<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File No. 0-24241
V.I. TECHNOLOGIES, INC.
-----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-3238476
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
155 Duryea Road, Melville, New York 11747
-----------------------------------------
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (516) 752-7314
- --------------------------------------------------------------------------------
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 ( )
The number of shares outstanding of each of the Registrant's classes of common
stock as of November 9, 1998
Title of Class Shares Outstanding
Common Stock, $.01 par value 12,324,340
<PAGE>
V. I. TECHNOLOGIES, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed balance sheets at October 3, 1998
and December 31, 1997 3
Condensed statements of operations for the
thirteen and thirty-nine weeks ended October 3,
1998 and October 4, 1997 4
Condensed statements of cash flows for the
thirty-nine weeks ended October 3, 1998
and October 4, 1997 5
Condensed statement of stockholders' equity
for the thirty-nine weeks ended October 3, 1998 6
Notes to condensed financial statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
<PAGE>
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
V. I. TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(In thousands, except for share data)
<TABLE>
<CAPTION>
October 3, December 31,
1998 1997
(Unaudited)
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $41,915 $ 5,250
Trade receivables 4,562 1,355
Other receivables, net 40 895
Inventory 2,612 575
Prepaid expenses and other current assets 697 321
------- -------
Total current assets 49,826 8,396
Property, plant and equipment, net 28,653 29,050
Other assets, net 631 721
------- -------
Total assets $79,110 $38,167
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $2,687 $ 2,687
Current portion of capital lease obligations 1,157 964
Current portion of advance from customer 450 338
Deferred revenue 1,816 -
Accounts payable and accrued expenses 8,257 6,814
Due to related parties, net 358 368
------- -------
Total current liabilities 14,725 11,171
Long-term debt, less current portion 6,047 8,063
Capital lease obligations, less current portion 3,696 4,593
Advance from customer, less current portion 2,550 2,662
------- -------
Total liabilities 27,018 26,489
======= =======
Stockholders' equity:
Preferred stock, par value $.01 per share; authorized
1,000,000 at October 3, 1998 and 500 at December 31, 1997;
no shares issued and outstanding - -
Common stock, par value $.01 per share; authorized 29,000,000
shares; issued and outstanding 12,286,163 at October 3, 1998 and
7,852,723 at December 31, 1997 123 78
Additional paid-in-capital 86,307 38,298
Note receivable from stockholder (250) (35)
Accumulated deficit (34,088) (26,663)
------- -------
Total stockholders' equity 52,092 11,678
------- -------
Total liabilities and stockholders' equity $79,110 $38,167
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
3
<PAGE>
V. I. TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except for share data)
<TABLE>
<CAPTION>
Thirteen Weeks Thirty-nine Weeks
Ended Ended
October 3, October 4, October 3, October 4,
1998 1997 1998 1997
----------------------- -----------------------
<S> <C> <C> <C> <C>
Revenue $11,660 $3,171 $23,727 $11,333
Costs and expenses:
Cost of sales 7,818 5,420 17,923 12,891
Research and development, net 1,894 1,093 5,288 3,627
Selling, general and administrative expenses 1,648 1,019 5,187 2,374
Charge related to research collaboration - - 2,202 -
------ ------ ------ ------
Total operating costs and expenses 11,360 7,532 30,600 18,892
------ ------ ------ ------
Income (loss) from operations 300 (4,361) (6,873) (7,559)
Interest income (expense), net 186 - (552) (97)
------ ------ ------ ------
Net income (loss) $486 $(4,361) $(7,425) $(7,656)
====== ====== ====== ======
Basic and diluted net income (loss) per share $0.04 $(0.56) $(0.75) $(1.08)
====== ====== ====== ======
Weighted average shares used in calculation of:
Basic earnings per share 12,250 7,840 9,897 7,063
Diluted earnings per share 13,218 7,840 9,897 7,063
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
4
<PAGE>
V. I. TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
October 3, October 4,
1998 1997
---------- ----------
<S> <C> <C>
Cash flows used in operating activities:
Net loss $(7,425) $(7,656)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,021 2,133
Compensation expense in connection with acceleration of
option vesting 284 -
Charge related to research collaboration 2,202 -
Changes in operating accounts:
Trade receivables (3,207) (814)
Other receivables, net 855 1,455
Due to/from related parties (10) (52)
Inventory (2,037) (373)
Prepaid expenses and other current assets (394) (517)
Deferred revenue 1,816 -
Accounts payable and accrued expenses 1,682 (502)
------- -------
Net cash used in operating activities (3,213) (6,326)
------- -------
Cash flows used in investing activities:
Additions to property, plant and equipment (2,496) (3,556)
------- -------
Net cash used in investing activities (2,496) (3,556)
------- -------
Cash flows provided by financing activities:
Proceeds from sale of common stock, net of
issuance costs 44,899 14,094
Proceeds from issuance of common stock upon exercise
of options 195 -
Proceeds from issuance of notes payable - 1,473
Principal repayment of long-term debt (2,016) (1,750)
Principal repayment of capital lease obligations (704) (431)
------- -------
Net cash provided by financing activities 42,374 13,386
------- -------
Net increase in cash and cash equivalents 36,665 3,504
Cash and cash equivalents at beginning of year 5,250 4,752
------- -------
Cash and cash equivalents at end of period $41,915 $8,256
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
5
<PAGE>
V. I. TECHNOLOGIES, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Note
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 3, 1998 Common Common Additional Receivable
Stock Stock Paid-In From Accumulated Stockholders'
(Shares) (Amount) Capital Stockholder Deficit Equity
----------- -------- ---------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 7,852,723 78 38,298 (35) (26,663) 11,678
Issuance of shares of common stock in connection
with Initial Public Offering, including exercise
of underwriter's over-allotment option 3,325,000 33 35,825 - - 35,858
Issuance of shares of common stock to Pall
Corporation in connection with private placements 925,070 9 8,991 - - 9,000
Issuance of shares of common stock to New York
Blood Center in satisfaction of obligation 35,778 1 299 - - 300
Charge in connection with research collaboration - - 2,202 - - 2,202
Compensation expense in connection with
acceleration of option vesting - - 284 - - 284
Issuance of shares of common stock upon exercise
of stock options 147,592 2 408 (215) - 195
Net loss - - - - (7,425) (7,425)
========== ==== ======= =========== =========== =======
Balance at October 3, 1998 12,286,163 $123 $86,307 $(250) $(34,088) $52,092
========== ==== ======= =========== =========== =======
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
6
<PAGE>
V. I. TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed financial statements of V.I.
Technologies, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information
and in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all material adjustments
(consisting of normal recurring accruals) necessary for a fair presentation
have been included. Operating results for the thirteen and thirty-nine weeks
ended October 3, 1998 are not necessarily indicative of the results that may
be expected for the year ended January 2, 1999. For further information,
refer to the financial statements and footnotes thereto included in the
Company's Prospectus dated June 10, 1998 for the year ended December 31,
1997.
Certain reclassifications were made to prior year amounts to conform to the
1998 presentation.
Stock Split
In February 1998, the Board of Directors authorized and the stockholders
approved a 1-for-2.795 reverse split of the Company's common stock, which
became effective on February 23, 1998. All share and per share amounts
included in the accompanying condensed financial statements and footnotes
have been restated to reflect the reverse stock split.
Fiscal Year
As reported in the Company's Form 8-K filed August 11, 1998, the Company
changed from a calendar year to a 52-53 week fiscal year ending on the
Saturday closest to December 31, beginning with the fiscal year ending
January 2, 1999. Such fiscal period corresponds with the Company's natural
business year.
Inventory
Costs incurred in connection with plasma fractionation processing services
and with the production of PLAS+SD are included in inventories and expensed
upon recognition of related revenues. Such costs include direct labor and
processing overheads. The processed plasma is supplied and owned by the
Company's customers and is not included in inventory. Inventory is stated at
the lower of cost, as determined using the average cost method, or net
realizable value.
Revenue Recognition
Revenue from plasma fractionation processing services and the production of
PLAS+SD is recognized in the period in which the related services have been
rendered and upon satisfaction of certain quality control requirements.
Revenue recognized in the accompanying statements of operations is not
subject to repayment or future performance obligations. Deferred revenue
represents billings for the PLAS+SD product awaiting satisfaction of certain
quality control requirements.
Research and Development
All research and development costs are charged to operations as incurred.
Reimbursement for research and development costs incurred in accordance with
collaborative agreements is recognized as an offset to research and
development costs in the period in which the eligible costs are incurred by
the Company. Such reimbursement totaled $0.5 million and $0.1 million for
the thirteen weeks ended October 3, 1998 and October 4, 1997, respectively,
and $1.0 million and $0.7 million for the thirty-nine weeks ended October 3,
1998 and October 4, 1997, respectively.
7
<PAGE>
2. Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Diluted earnings per share for the thirty-nine weeks
ended October 3, 1998 and the thirteen and thirty-nine weeks ended October
4, 1997 do not include the effect of dilutive options because the inclusion
of such securities would be antidilutive.
The following table sets forth the computation for basic and diluted
earnings per share (in thousands, except per share information):
<TABLE>
<CAPTION>
Thirteen Weeks Thirty-nine Weeks
Ended Ended
October 3, October 4, October 3, October 4,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted
earnings per share-net income (loss) $486 $(4,361) $(7,425) $(7,656)
=================================================================
Denominator:
Denominator for basic earnings
per share-weighted average shares 12,250 7,840 9,897 7,063
Effect of dilutive securities -
stock options 968 - - -
-----------------------------------------------------------------
Denominator for diluted earnings
per share-adjusted weighted
average shares 13,218 7,840 9,897 7,063
Basic and diluted earnings per share $0.04 $(0.56) $(0.75) $(1.08)
=================================================================
</TABLE>
3. Exercise of Over-Allotment Option
As part of the Company's initial public offering, an over-allotment option
on up to 450,000 shares of the Company's common stock was exercisable for a
30-day period expiring on July 10, 1998. On July 10, 1998, the underwriters
partially exercised their over-allotment option for an additional 325,000
shares priced at $12.00 per share, raising additional gross proceeds of
$3,900,000 before underwriters' commissions and expenses. The Company
intends to use the net proceeds to fund costs associated with the
continuing market introduction of PLAS+SD, research and development,
capital investments and general corporate purposes.
4. Inventory
Inventory consists of the following at October 3, 1998 and December 31,
1997 (in thousands):
1998 1997
------ ----
Work in process $2,150 $211
Supplies 462 364
------ ----
$2,612 $575
====== ====
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
V.I. Technologies, Inc. is a leading developer of a broad portfolio of blood
products and systems using its proprietary viral inactivation technologies. The
Company's technologies are intended to address the risks of viral contamination
in blood products, including plasma, plasma derivatives, red blood cells and
platelets. Viral inactivation processes have the potential to eliminate viruses
that are enveloped by lipid membranes such as hepatitis B virus ("HBV"),
hepatitis C virus ("HCV") and HIV, the virus that causes AIDS, and non-enveloped
viruses such as hepatitis A virus ("HAV") and parvovirus and other known and
unknown pathogens.
The Company's predecessor, Melville Biologics, Inc., was formed more than 15
years ago by New York Blood Center, Inc. ("NYBC"), a world leader in research
and development in the fields of hematology and transfusion medicine, to process
plasma fractions and derivatives, and to facilitate its research efforts.
Effective January 1, 1995, the NYBC transferred to the Company substantially all
of the assets of the predecessor Company, including a cGMP manufacturing
facility used primarily to produce plasma fractions and related operating and
product licenses. In addition, several NYBC scientists who were inventors of
most of VITEX's core technologies became employees of the Company and have been
continuing their research efforts at VITEX.
The Company reported net income of $486,000 for the third quarter ended October
3, 1998 and its accumulated deficit to that date was $34.1 million. Operating
results will vary from period to period and, accordingly, net income for the
quarter ended October 3, 1998 may not necessarily be indicative of results to be
expected in future periods. The significant risk factors that affect the Company
are described in the Prospectus dated June 10, 1998.
The Company's revenues are derived from sales of plasma fractions and
transfusion plasma. Its research and development programs extend viral
inactivation technologies to wound closure and red blood cell concentrates.
Plasma Fractions
VITEX produces plasma fractions principally for Bayer Corporation ("Bayer")
under terms of a processing agreement whose initial term extends through 2001.
Under this agreement, Bayer is obligated to provide the Company with a specified
quantity of plasma annually and the Company is obligated to return plasma
fractions to Bayer within certain specified periods. The agreement is structured
as a take-or-pay arrangement under which Bayer is obligated to pay VITEX a fixed
fee per liter of fractionated plasma whether or not Bayer fulfills its
obligation to supply plasma to the Company. In the event that VITEX does not
provide fractions as required under the agreement, or upon the occurrence of
other events of default, Bayer has certain rights to take over and operate the
fractionation portion of the Company's production facility.
Due to an industry-wide shortage of fractionation capacity, in conjunction with
preliminary solicitations from Bayer and others, the Company is planning to
expand its fractionation capacity by 15% in 1999, at an estimated cost of $0.5
million. Although the Company believes that it can accomplish the expansion and
achieve attractive margins on the increased volume, there can be no assurance as
to the eventual commercial success of the project.
Transfusion Plasma
The Company's virally inactivated transfusion plasma product, PLAS+SD, was
approved for marketing by the FDA on May 6, 1998. This product is sold under an
exclusive distribution agreement with the American National Red Cross ("ANRC")
which extends to September 2002. Under the agreement, the ANRC has an annual
requirement to purchase stated minimum quantities of PLAS+SD to maintain its
exclusive rights. Once the ANRC places its annual purchase order with VITEX, it
is obligated to supply VITEX with a sufficient quantity of plasma to enable
VITEX to fulfill the order. The ANRC must pay for the amount of PLAS+SD
specified in the purchase order even if it is unable to supply sufficient
quantities of plasma. In the past, there has been variability in the rate of
plasma supply from the ANRC. This situation could recur in future periods, which
could negatively impact the timing of revenue recognition, production scheduling
and ultimately, production costs. Under the agreement, the ANRC is required to
pay to the Company a fixed price per unit of PLAS+SD plus a royalty equal to the
amount by which the average selling price by the ANRC exceeds a stated amount.
The Company and the ANRC have each committed to spend minimum amounts for
marketing PLAS+SD in 1998 and 1999.
9
<PAGE>
The Company is delivering PLAS+SD under the initial purchase order of the ANRC
distribution agreement. End customer sales of PLAS+SD by the ANRC have been
rising since product introduction but at a slower rate than anticipated thereby
causing higher than expected inventory levels. VITEX and the ANRC are presently
in discussions concerning the second annual purchase order and, in light of the
ANRC inventory situation and slower market penetration, these discussions are
covering the full scope of the distribution arrangement between the companies.
The eventual outcome of these discussions cannot be predicted at this time;
however, it is possible that a revised agreement will emerge in which there
could be new distribution terms, revised pricing and volume commitments, sharing
of market risk or a combination of these elements. The Company expects that the
negotiations will be concluded in the fourth quarter of 1998. Additionally, the
Company has decided to direct a portion of its marketing commitment to
establishing a sales force which will work with the ANRC in developing product
demand.
The next product generation to PLAS+SD is Universal, a product under development
by the Company, which, in addition to the characteristics of PLAS+SD, would
eliminate the need for matching donor and recipient blood types. This product is
in pre-clinical evaluation and the Company intends to file with the FDA, during
the first half of 1999, a license supplement to its current IND in early 1999.
Following Universal is Universal UVC, which adds a second method of viral
inactivation, UVC treatment, to the solvent detergent treatment. In addition to
inactivating lipid enveloped viruses under the SD process, UVC also inactivates
known non-enveloped viruses and may offer added protection against other non-
lipid enveloped viruses that might contaminate the blood supply. Universal UVC
is at an early stage of development and, consequently, there can be no assurance
that the Company will be able to successfully develop, secure approval for or
commercialize this product.
Wound Closureare Products
The Company is developing a fibrin sealant product for use during surgical
procedures to augment or replace sutures or staples for wound closure. The
Company expects that its fibrin sealant will be the first available doubly
virally inactivated fibrin sealant in the United States. This product has
completed Phase II clinical trials for two indications (chronic rectal fistula
and modified radical mastectomy) and completed enrollment for one Phase III
clinical trial (breast lumpectomy). Phase III clinical trials are currently
underway for an additional indication (carotid endarterectomy).
The Company's fibrin sealant development is jointly funded by U.S. Surgical who
has entered into an exclusive worldwide distribution agreement with VITEX.
Under terms of the agreement, U.S. Surgical must achieve certain minimum product
sales to maintain its exclusive distribution rights. The Company has agreed to
supply U.S. Surgical's forecasted demand for the product. Either the Company or
U.S. Surgical may terminate the agreement upon written notice in certain
circumstances, including a breach of the agreement by the other party. U.S.
Surgical may also terminate the agreement for any reason upon nine months notice
to the Company. The Company is presently constructing a facility at an estimated
cost of $1.8 million to manufacture essential components of the product.
Facility construction is scheduled for completion by year end 1998 at which
time it will be subject to validation procedures. U.S. Surgical was recently
acquired by Tyco Corporation. The effects, if any, of this acquisition on the
development programs and the eventual success of the product cannot be assessed
at this time.
Red Blood Cell Concentrates
The Company is developing virally inactivated red blood cell concentrates based
on the use of light activated compounds that respond to specific wavelengths of
light. These viral inactivation procedures are designed to leave unaffected the
structure, function and circulatory persistence of the treated cells, thus
preserving the biological characteristics of these blood components. The Company
has entered into an agreement with Pall Corporation ("Pall") regarding the
development and distribution systems for the viral inactivation of red blood
cells. The Company plans to file with the FDA, during 1999, for permission to
initiate U.S. clinical trials in humans.
The field of transfusion medicine and therapeutic use of blood products is
characterized by rapid technological change. Product development involves a
high degree of risk, and there can be no assurance that the Company's product
development efforts will result in any commercial success.
10
<PAGE>
RESULTS OF OPERATIONS
Revenue
Revenue increased $8.5 million in the third quarter of 1998 to $11.7 million,
compared to $3.2 million during the third quarter of 1997. For the thirty-nine
weeks ended October 3, 1998, revenue increased to $23.7 million from $11.3
million for the thirty-nine weeks ended October 4, 1997. The increase for both
the quarter and thirty-nine weeks was primarily due to sales of PLAS+SD, which
was approved by the FDA in May 1998. Sales of plasma fractions were also higher
for the quarter and year-to-date, as a result of an increase in processing
volume, partially offset by a decrease in unit pricing in accordance with the
processing agreement with Bayer Corporation.
Cost of Sales
Cost of sales increased $2.4 million in the third quarter of 1998 to $7.8
million, compared to $5.4 million during the third quarter of 1997. For the
thirty-nine weeks ended October 3, 1998, cost of sales increased to $17.9
million from $12.9 million for the thirty-nine weeks ended October 4, 1997. The
increase for the quarter and year-to-date was primarily due to processing and
start-up costs related to the production of PLAS+SD.
As a percentage of revenue, cost of sales was 67% and 75.5%, respectively, for
the quarter and thirty-nine weeks ended October 3, 1998. This was a significant
improvement from the comparative 1997 periods, which did not contain revenue
from the sale of PLAS+SD.
Research and Development
Research and development costs increased $0.8 million in the third quarter of
1998 to $1.9 million, compared to $1.1 million during the third quarter of 1997.
For the thirty-nine weeks ended October 3, 1998, research and development costs
increased to $5.3 million from $3.6 million for the thirty-nine weeks ended
October 4, 1997. The increase in research and development costs for both the
thirteen and thirty-nine weeks is due to the expanded activities in the
Company's red blood cell program, expanded clinical trials for its fibrin
sealant and additional development activities. Further increases in research
and development expenditures are expected to continue through the remainder of
1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $0.6 million in the third
quarter of 1998 to $1.6 million, compared to $1 million during the third quarter
of 1997. For the thirty-nine weeks ended October 3, 1998, selling, general and
administrative expenses increased to $5.2 million from $2.4 million for the
thirty-nine weeks ended October 4, 1997. The increase for the thirteen and
thirty-nine weeks is principally due to administrative costs associated with the
hiring of new personnel, marketing costs associated with PLAS+SD and legal
expenses associated with collaborator agreements and a response to a Civil
Investigative Demand from the U.S. Department of Justice.
Charge Related to Research Collaboration
During the first quarter of 1998, the Company recorded a one-time charge of $2.2
million forin connection with its research collaboration with Pall Corporation.
The charge occurred in connection with an equity investment in the Company made
by Pall under the collaboration agreement and reflects the difference between
the amount paid for the shares issued to Pall and the fair market value of the
common stock at that date.
Net Interest Expense
The Company earned net interest income of $0.2 million during the quarter ended
October 3, 1998. During the thirty-nine weeks ended October 3, 1998 and October
4, 1997, the Company incurred net interest expense of $0.6 million and $0.1
million, respectively, reflecting the levels of debt outstanding during such
periods, offset by interest earned on cash balances, including the proceeds from
the Company's initial public offering.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations primarily through sales of
common stock, issuance of long-term debt and capital lease financing
arrangements. In addition to these financing methods, the Company generates
cash from revenues derived under its processing agreement with Bayer Corporation
and the sale of PLAS+SD to the ANRC. The Company also receives research and
development funding, under a collaboration agreement from U.S. Surgical, for the
direct costs associated with clinical and regulatory activities for the
development of its fibrin sealant and from Pall Corporation, as part of a cost
sharing agreement, in connection with the research collaboration described
previously.
On June 15, 1998, the Company completed an initial public offering ("IPO") of
3,000,000 shares of the Company's common stock, raising net proceeds of
approximately $32.2 million. On July 10, 1998, the underwriters of the
Company's IPO partially exercised their over-allotment option for an additional
325,000 shares, raising net proceeds of $3.6 million. In conjunction with the
collaboration agreement between the Company and Pall, Pall acquired $9 million
of the Company's common stock in two private placements which occurred during
1998, the second of which amounted to $5 million and closed contemporaneously
with, and at the same price, terms and conditions as the IPO.
At October 3, 1998, the Company had working capital of $35.1 million, including
cash and cash equivalents of $41.9 million. At December 31, 1997, there was a
working capital deficit of $2.8 million, including cash and cash equivalents of
$5.3 million. The increase in cash balances was primarily due to the Company's
financing activities, which provided cash of $42.4 million.
During the thirteen and thirty-nine weeks ended October 3, 1998, the Company's
cash flows from operations were approximately $1.2 million and $(3.2) million,
respectively, compared to $(3.6) million and $(6.3) million during the thirteen
and thirty-nine weeks ended October 4, 1997, respectively. The increase in cash
flow was primarily related to the sale of PLAS+SD.
The Company believes that its existing funds and funds expected to be generated
from operations will be sufficient to meet cash requirements in the foreseeable
future.
Year 2000
The Company is aware of the challenges associated with the inability of certain
computer systems to properly format information after December 31, 1999 (the
"Year 2000 Challenge"). The Company is modifying its computer systems to
address the Year 2000 Challenge and does not expect that the cost of modifying
such systems will be material. The Company believes it will fully remediate any
of its Year 2000 Challenges in advance of the year 2000 and does not anticipate
any material disruption in its operations as the result of any failure by the
Company to fully remediate such challenges. The Company is in the process of
contacting all significant suppliers, customers and financial institutions in
order to identify potential areas of concern. It is anticipated that this
inquiry will be completed by the first quarter of 1999.
Improper or inadequate remediation of Year 2000 problems by parties with whom
the Company does business could adversely affect the Company's ability to
conduct its research activities and manage its production and distribution
activities. In addition, administrative functions essential to day to day
operation of the business could be impaired if Year 2000 remediation is not
completed in a timely manner. Due to uncertainty of the Year 2000 readiness of
parties with whom the Company does business, the Company is unable to determine
at this time whether the consequences of Year 2000 failures will have a material
adverse impact on the Company's results of operations, liquidity or financial
condition.
The Company intends to create a contingency plan to identify and document
potential business disruptions and continuity planning procedures. The focus of
this activity is on potential failures of external systems required to carry out
normal business operations, including services provided by the public
infrastructure such as electric power, transportation, and telecommunications.
The Company expects this activity to be an ongoing process into the third
quarter of 1999.
12
<PAGE>
Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-Q include "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities and Exchange Act of 1934 (the "Exchange Act").
All statements other than statements of historical information provided herein
are forward-looking statements and may contain information about financial
results, economic conditions, trends and known uncertainties. These forward-
looking statements involve risks and uncertainties, such as quarterly
fluctuations in operating results, the timely availability of new products,
market acceptance of the Company's products, and the impacts of competitive
products and pricing. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis, judgment, belief or expectation
only as of the date hereof. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date hereof. In addition to the disclosure contained herein,
readers should carefully review any disclosure of risks and uncertainties
contained in other documents the Company has filed with the Securities and
Exchange Commission pursuant to the Exchange Act and the Company's Prospectus
dated June 10, 1998.
13
<PAGE>
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
On August 27, 1998, the Appellate Division of the Supreme Court of New York
awarded the Company a summary judgement against its insurance carrier, reversing
a lower court decision which denied the Company's previous claim for recovery of
costs incurred in 1996 as a result of a plasma processing loss. The Company had
recorded a special charge in 1996 to recognize reimbursement due to Bayer
Corporation for the plasma loss ($4.1 million) and to write-off processing costs
($1.0 million). The Company has filed a claim with the insurer to recover these
and related costs. On October 27, 1998, the insurance carrier filed a motion to
appeal the decision of the Appellate Court. The ultimate outcome of this matter
can not be determined at the present time.
There has been no further activity with respect to other legal proceedings
involving the Company, including the March 28, 1998 Civil Investigative Demand
from the Antitrust Division of the U.S. Department of Justice. For further
information regarding these matters, refer to the financial statements and
footnotes thereto included in the Company's Prospectus dated June 10, 1998 for
the year ended December 31, 1997.
Item 2. Changes in Securities and Use of Proceeds
(d) Use of proceeds information is provided herewith in Connection with
the Offering. The Company's Registration Statement on Form S-1 (File
No. 333-46933) was declared effective by the Securities and Exchange
Commission on June 9, 1998. The first closing for the Offering was
held on June 15, 1998 and a second overallotment closing was held on
July 15, 1998. The Offering has terminated.
In the Offering, the Company sold in its two closings, an aggregate of
3,325,000 shares (with an aggregate offering price to the public of
$39,900,000) out of the 3,450,000 shares of Common Stock (with an
aggregate offering price of $41,400,000) registered in the Offering.
The managing underwriters of the Offering were Cowen & Company and SBC
Warburg Dillon Read, Inc.
After expenses incurred through October 3, 1998, the Company's net
proceeds from the Offering were $35,858,000.
The Company intends to use the net proceeds to fund costs associated
with the marketing and distribution of PLAS+SD, clinical trials,
research and development and capital investments, including the
expansion of the manufacturing facility for fibrin sealant and other
general corporate purposes. Unused proceeds of the Offering are
currently invested in short term investment funds pending final use.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
4.1 Restated Certificate of Incorporation of the Registrant.
Incorporated by reference to Exhibit 3.8 to the Registrant's
Registration Statement on Form S-1, filed with the Commission on
February 26, 1998 (File No. 333-46933).
4.2 Amended and Restated By-Laws of the Registrant. Incorporated by
reference to Exhibit 3.10 to the Registrant's Registration
Statement on Form S-1, filed with the Commission on February 26,
1998 (File No. 333-46933).
4.3 Form of Certificate for Common Stock. Incorporated by reference
to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-1, filed with the Commission on February 26, 1998 (File
No. 333-46933).
27.1 Financial Data Schedule.
14
<PAGE>
(b) Reports on Form 8-K
The Registrant filed a current report on Form 8-K on August 11, 1998
reporting that on August 10, 1998, the Company changed its fiscal year
from a calendar year to a 52-53 week year ending on the Saturday
closest to December 31, beginning in 1998.
15
<PAGE>
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.
V.I. TECHNOLOGIES, INC.
------------------------
(Registrant)
Date: November 16, 1998 /s/ John R. Barr
- -------------------------- ------------------------
John R. Barr
President, Chief Executive Officer
Date: November 16, 1998 /s/ Thomas T. Higgins
- -------------------------- ------------------------
Thomas T. Higgins
Executive Vice President, Operations
and Chief Financial Officer
16
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