<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 July 3, 1999
___ 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
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(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 July 30, 1999
Title of Class Shares Outstanding
Common Stock, $.01 par value 12,447,791
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V. I. TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements:
Condensed balance sheets at July 3, 1999
and January 2, 1999 3
Condensed statements of operations for
the thirteen and twenty-six weeks
ended July 3, 1999 and July 4, 1998 4
Condensed statement of stockholders'equity
for the twenty-six weeks ended
July 3, 1999 5
Condensed statements of cash flows for the
twenty-six weeks ended July 3, 1999
and July 4, 1998 6
Notes to condensed financial statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About 14
Market Risk
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
2
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PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
V. I. TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(In thousands, except for share and per share data)
<TABLE>
<CAPTION>
July 3,
1999 January 2,
(Unaudited) 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,470 $ 35,265
Trade receivables ` 5,980 3,967
Other receivables, net 838 594
Due from related parties, net 92 313
Inventory 3,098 2,512
Prepaid expenses and other current assets 1,050 987
----------- -----------
Total current assets 38,528 43,638
Property, plant and equipment, net 33,504 30,821
Other assets, net 503 766
----------- -----------
Total assets $ 72,535 $ 75,225
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,587 $ 2,687
Current portion of capital lease obligations 1,272 1,272
Accounts payable and accrued expenses 7,989 6,576
----------- -----------
Total current liabilities 12,848 10,535
Long-term debt, less current portion 5,627 7,731
Capital lease obligations, less current portion 2,712 3,324
----------- -----------
Total liabilities 21,187 21,590
----------- -----------
Stockholders' equity:
Preferred stock, par value $.01 per share; authorized
1,000,000 at July 3, 1999 and January 2, 1999;
no shares issued and outstanding - -
Common stock, par value $.01 per share; authorized
29,000,000
shares; issued and outstanding 12,447,628 at July 3, 125 124
1999 and
12,359,148 at January 2, 1999
Additional paid-in-capital 86,840 86,575
Accumulated deficit (35,617) (33,064)
----------- -----------
Total stockholders' equity 51,348 53,635
----------- -----------
Total liabilities and stockholders' equity $ 72,535 $ 75,225
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
3
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V. I. TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except for share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Twenty-six Weeks
Ended Ended
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
------------------------------------ -------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 9,352 $ 7,946 $20,494 $12,067
Costs and expenses:
cost of sales 5,326 5,363 11,386 10,105
Research and development, net 2,104 1,748 4,115 3,395
Selling, general and administrative 2,496 2,214 4,989 3,538
expenses
Charge related to product recall 2,645 - 2,645
Charge related to research collaboration - - - 2,202
--------------- ---------------- --------------- ----------------
Total operating costs and expenses 12,571 9,325 23,135 19,240
--------------- --------------- --------------- ----------------
Loss from operations (3,219) (1,379) (2,641) (7,173)
Interest income (expense), net 51 (317) 88 (738)
--------------- --------------- --------------- ----------------
Net loss $(3,168) $(1,696) $(2,553) $(7,911)
=============== =============== =============== ================
Basic and diluted net loss per share $(0.25) $(0.18) $(0.21) $(0.91)
=============== =============== =============== ================
Weighted average shares used in calculation
of basic and diluted net loss per share 12,435 9,381 12,421 8,738
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
4
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V. I. TECHNOLOGIES, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Common Common Additional
Stock Stock Paid-In Accumulated Stockholders'
Shares) (Amount) Capital Deficit Equity
------------ ---------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at January 2, 1999 12,359,148 $124 $86,575 $(33,064) $53,635
Compensation expense in connection
with acceleration of option vesting - - 4 - 4
Issuance of shares of common stock
upon exercise of stock options and
purchases under the Employee Stock
Purchase Plan 88,480 1 261 - 262
Net loss - - - (2,553) (2,553)
------------ ---------- ----------- ------------ --------------
Balance at July 3, 1999 12,447,628 $125 $86,840 $(35,617) $51,348
============ ========== =========== ============ ==============
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
5
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V. I. TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
July 3, July 4,
1999 1998
--------------- ----------------
<S> <C> <C>
Cash flows (used in) operating activities:
Net loss $(2,553) $(7,911)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 1,551 2,014
Compensation expense in connection with acceleration of
option vesting 4 281
Charge related to research collaboration - 2,202
Accretion of interest on customer advance 140 -
Changes in operating accounts:
Trade receivables (2,013) (2,631)
Other receivables, net (244) 82
Due to/from related parties 221 (492)
Inventory (586) (2,172)
Prepaid expenses and other current assets 116 (238)
Deferred revenue - 1,868
Accounts payable and accrued expenses 1,413 2,617
--------------- ---------------
Net cash used in operating activities (1,951) (4,380)
--------------- ---------------
Cash flows used in investing activities:
Additions to property, plant and equipment (4,150) (900)
--------------- ---------------
Net cash used in investing activities (4,150) (900)
--------------- ---------------
Cash flows (used in) provided by financing activities:
Proceeds from sale of common stock, net of
issuance costs - 41,634
Proceeds from issuance of common stock upon exercise
of options 262 136
Principal repayment of long-term debt (1,344) (1,344)
Principal repayment of capital lease obligations (612) (427)
--------------- ---------------
Net cash (used in) provided by financing activities (1,694) 39,999
--------------- ---------------
Net (decrease) increase in cash and cash equivalents (7,795) 34,719
Cash and cash equivalents at beginning of year 35,265 5,250
--------------- ---------------
Cash and cash equivalents at end of period $27,470 $39,969
=============== ===============
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
6
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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 or VITEX) 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 twenty-six weeks ended July 3, 1999 are not necessarily
indicative of the results that may be expected for the year ended January
1, 2000. For further information, refer to the financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended January 2, 1999.
Certain reclassifications were made to prior year amounts to conform to the
1999 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.
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 $0.4 million and $0.1 million for
the thirteen weeks ended July 3, 1999 and July 4, 1998, respectively, and
$1.4 million and $0.5 million for the twenty-six weeks ended July 3, 1999
and July 4, 1998, respectively.
2. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed on the basis of the weighted
average number of common shares outstanding. Diluted earnings (loss) per
share is computed on the basis of the weighted average number of common
shares outstanding plus the effect of outstanding stock options and
warrants calculated using the "treasury stock" method. Earnings (loss) per
share for the thirteen and twenty-six weeks ended July 3, 1999 and July 4,
1998 do not include the assumed exercise of stock options and warrants
because the effect of such inclusion would be antidilutive. As of July 3,
1999, the Company had 1,812,270 options and warrants outstanding.
7
<PAGE>
3. Inventory
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
July 3, January 2,
1999 1999
-------------- ---------------
<S> <C> <C>
Work in process $ 1,733 $ 1,382
Supplies 1,365 1,130
-------------- ---------------
$ 3,098 $ 2,512
============== ===============
</TABLE>
4. Charge Related to Product Recall
On April 16, 1999, the Company initiated a voluntary recall of lots of
PLAS+SD which were found to contain a heightened presence of parvovirus
B19. This recall, which was a precautionary measure, was completed on May
12, 1999. Results for the quarter included one-time costs associated with
the recall amounting to $2,918,000, or $0.24 per share. In the accompanying
condensed statements of operations, the charge related to product recall of
$2,645,000 includes the write-off of inventory lots with heightened levels
of parvovirus B19, production testing, other direct recall expenses and a
reserve for an equitable sharing of recall costs incurred by the Company's
exclusive distributor of PLAS+SD, the American National Red Cross (Red
Cross). While the Company believes it is not contractually liable for Red
Cross costs in this situation, covering a portion of such costs is
consistent with the spirit of the collaboration. Discussions with the Red
Cross on this issue are ongoing and are expected to be resolved shortly.
Costs associated with idle production facilities during the recall period,
in the amount of $273,000, are included in cost of sales.
Since the initial recall, the Company has been developing and validating a
process to screen untreated plasma for parvovirus B19 prior to commencing
the manufacturing process. This screening will use an experimental, highly
sensitive Polymerase Chain Reaction (PCR) test in order to ensure that this
virus is below specified laboratory levels. The Company is completing
formal validation of the technique and intends to apply to the FDA for a
parvovirus B19 label claim with approval expected in early 2000.
5. Subsequent Event
On July 28, 1999, the Company and Pentose Pharmaceuticals, Inc. (Pentose),
a privately held company, signed an Agreement and Plan of Merger and
Reorganization pursuant to which Pentose would be merged with and into the
Company. The proposed merger, which is subject to shareholder approval by
both companies, and the satisfaction of other closing conditions, is
structured as an all stock transaction with an estimated value of $45
million, based upon the closing price of the Common Stock of the Company on
July 27, 1999. Pentose shareholders will receive shares of common stock of
the Company such that, postmerger, they will own 34% of the outstanding
shares of the combined company. All outstanding options, warrants or other
rights to acquire capital stock of Pentose will be assumed by the Company
upon the closing of the transaction. The transaction will be accounted for
under the purchase method of accounting by the Company.
8
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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 B19 and other known and unknown
pathogens.
On July 28, 1999, the Company announced that it had signed an Agreement and Plan
of Merger and Reorganization pursuant to which Pentose Pharmaceuticals, Inc., a
privately held company developing viral inactivation products, would be merged
with and into the Company. The agreement, which is subject to shareholder
approval and the satisfaction of other closing conditions is structured as an
all stock transaction under terms of which Pentose shareholders will own 34% of
the outstanding shares of the combined company. The transaction is valued at
approximately $45 million, based on the closing price of the Company's Common
Stock on July 27, 1999, and will be treated as a purchase for accounting
purposes. Accordingly, a portion of the transaction value will be written off as
in-process R&D. The merger is expected to be completed in the fourth quarter,
although the Company cannot assure that all of the closing conditions will be
satisfied and the transaction will close within that time frame. Pentose is
developing a proprietary viral inactivation technology, called Inactine
compounds, that in preclinical studies have inactivated all classes of viruses
known to infect blood - both enveloped and non-enveloped viruses - in a highly
selective manner. Pentose's most advanced Inactine development program is for
use in red blood cells. The Company expects to submit an Investigational New
Drug (IND) application for this program and to begin clinical trials within the
next three months. Inactines also have applicability for viral inactivation of
plasma and platelets.
V.I.Technologies reported a net loss of $3,168,000 for the second quarter ended
July 3, 1999, including one-time costs of $2,918,000 related to the recall of
PLAS+SD, and its accumulated deficit to that date was $35,617,000. Operating
results will vary from period to period and, accordingly, the results for the
thirteen and twenty-six weeks ended July 3, 1999 may not necessarily be
indicative of results to be expected in future periods. The significant risk
factors that affect the Company are described in its annual report on Form 10-K
for the year ended January 2, 1999.
The Company's revenues are derived from the manufacture and sale of plasma
fractions and transfusion plasma:
. 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.
The Company is currently utilizing all of its existing fractionation
plasma capacity. Due to an industry-wide shortage of fractionation
capacity, in conjunction with solicitations from Bayer and others, the
Company is in the process of expanding its fractionation capacity by
15%. The additional capacity is expected to be operational by the end
of the third quarter of 1999. The Company is also examining the
cost/benefit of further expansion in subsequent years. Although the
Company believes that it can accomplish the 1999 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. PLAS+SD, the first of the Company's virally
inactivated products, received marketing clearance from the United
States Food and Drug Administration (FDA) on May 6, 1998. Commercial
scale production of PLAS+SD, a pooled transfusion plasma which
utilizes the Company's solvent/detergent (SD) viral inactivation
technology to inactivate lipid-enveloped viruses, began in June 1998.
PLAS+SD was the first, and is the only FDA approved, virally
inactivated blood component available for use in the United States.
The product is sold under an exclusive Amended and Restated Supply,
Manufacturing and Distribution Collaboration Agreement, dated October
1, 1998 (Distribution Agreement) with the American National Red Cross
(Red Cross) which expires in 2002. Under the Distribution Agreement,
the Red Cross, which is the largest supplier of transfusion plasma to
hospitals in the United States, providing about 45% of the transfusion
plasma used annually, is required to purchase minimum stated
quantities of PLAS+SD to maintain its exclusive rights. Once the Red
Cross places its annual purchase order with VITEX, it is obligated to
supply
9
<PAGE>
VITEX with a sufficient quantity of plasma to enable VITEX to fulfill
the order. The Red Cross 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 Red Cross. This situation could recur
in future periods, which could negatively impact the timing of revenue
recognition, production scheduling and ultimately, production costs.
Under the Distribution Agreement, the Red Cross is required to pay to
the Company a fixed price per unit of PLAS+SD, plus a royalty which is
initially fixed. Beyond a specified volume, the royalty becomes
variable, based on equal sharing of the amount by which the average
selling price by the Red Cross exceeds a stated amount. The Company
and the Red Cross have each committed to spend minimum amounts for
marketing PLAS+SD during the two-year period ending September 2000.
The Company's spending commitment is expected to be satisfied, to a
large extent, by the cost of its sales force which was hired in
January 1999.
The Company is delivering PLAS+SD under the second purchase order of
the Red Cross Distribution Agreement. The Distribution Agreement
requires the Red Cross to achieve certain end-user sales levels in
order to maintain its exclusive distribution rights. Failure to
achieve these sales levels could result in termination of the
Distribution Agreement by either the Red Cross or the Company.
Although end customer sales of PLAS+SD have risen since the product
was introduced, end-user market penetration has increased at a slower
rate than anticipated. The Company recently established its own
national sales force to support the efforts of the Red Cross by
increasing product awareness among users in an attempt to accelerate
market penetration. While measurement of the success of the sales
force is premature since the sales force has been in the field only
since late January 1999, preliminary results have shown an upward
trend in sales. However, there can be no assurance that PLAS+SD will
continue to increase or maintain its current level of market
acceptance among blood centers, physicians, patients and health care
payers.
During April 1999, in connection with PLAS+SD Phase IV safety studies,
the Company observed several seroconversions to parvovirus B19 in
healthy volunteers who received the product from production lots which
were found to contain high concentrations of the virus. Although there
was no evidence of clinical disease typical of parvovirus B19
associated with these seroconversions, on April 16, 1999, the Company
initiated a voluntary recall of lots of PLAS+SD that were found to
contain heightened levels of parvovirus B19 DNA. The Company is
developing and validating experimental parvovirus B19 PCR screening
into its product release process. This screening will use an
experimental, highly sensitive Polymerase Chain Reaction (PCR) testing
in order to ensure that this virus is below specified laboratory
levels. The Company is completing formal validation of the technique
and intends to apply to the FDA for a parvovirus B19 label claim with
approval expected in early 2000.
Results for the quarter include one-time costs associated with the
recall amounting to $2,918,000, or $0.24 per share. In the condensed
statements of operations, the charge related to product recall of
$2,645,000 includes the write-off of inventory lots with heightened
levels of parvovirus B19, production testing, other direct recall
expenses and a reserve for an equitable sharing of recall costs
incurred by the Company's exclusive distributor, the Red Cross. While
the Company believes it is not contractually liable for Red Cross
costs in this situation, covering a portion of such costs is
consistent with the spirit of the collaboration. Discussions with the
Red Cross on this issue are ongoing and are expected to be resolved
shortly. Costs associated with idle production facilities during the
recall period, in the amount of $273,000, are included in cost of
sales.
The Company's other virally inactivated blood products are all under development
and include:
. Universal PLAS+SD. Universal PLAS+SD is a product under development by
the Company which is intended to improve upon PLAS+SD. In addition to
having the same characteristics and benefits as PLAS+SD, Universal
PLAS+SD would eliminate the need for matching donor and recipient
blood types. Universal PLAS+SD is prepared using patented technology,
exclusively licensed from the New York Blood Center (NYBC), which
binds and removes specific antibodies present in donor plasma that
would otherwise cause an immune response in the recipient. The Company
expects to file an amendment to its current IND application for
Universal PLAS+SD during the third quarter of 1999.
. Universal PLAS+SD II. Universal PLAS+SD II adds a second method of
viral inactivation to Universal PLAS+SD. In addition to inactivating
enveloped viruses, the Company is evaluating alternative technologies,
including ultra violet light and chemical compounds, intended to
inactivate known non-enveloped viruses, such as parvovirus B19 and
HAV, and may offer added protection against other non-enveloped
viruses that might contaminate the blood supply in the future.
Universal PLAS+SD II is at an
10
<PAGE>
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.
. VITEX Fibrin Sealant. The Company is developing its VITEX Fibrin
Sealant for use during surgical procedures to augment or replace
sutures or staples for wound closure. Fibrin sealants-also known as
fibrin glues-are created by combining the two principal clotting
factors found in blood, fibrinogen and thrombin, whose natural
function is to halt bleeding and seal tissues. Fibrin sealants are
biodegradable, and their use does not generally elicit an immune
response frequently associated with non-biological glues. The Company
expects that its fibrin sealant will be the first double virally
inactivated fibrin sealant available in the United States. This
product has completed Phase II clinical trials for two indications
(non-healing rectal fistula and modified radical mastectomy) and
completed enrollment for Phase III clinical trials for use during
breast cancer surgery. Enrollment for an additional Phase III clinical
trial, which is intended to evaluate the product's ability to reduce
blood loss following carotid artery surgery, was completed during the
second quarter of 1999.
. The Company's fibrin sealant development is jointly funded by United
States Surgical Corporation (U.S. Surgical) which 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.
During 1998, the Company completed construction of a multi-use
manufacturing suite, within its existing facility, to permit the
production, subject to FDA approval, of commercial quantities of VITEX
Fibrin Sealant. Validation of the new manufacturing area is currently
underway. 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.
. VITEX Red Blood Cell Concentrates. The Company has been working to
develop virally inactivated red blood cell concentrates (RBCC) based
on the use of light activated compounds that respond to specific
wavelengths of light and has entered into an agreement with Pall
Corporation regarding the development and distribution of systems for
the viral inactivation of RBCC. Following the completion of the
Pentose merger described above, the Company intends to focus its
future efforts in red cells on the Inactine technology. It will
incorporate this technology into the agreement with Pall Corporation.
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.
Results of Operations
Revenue
Revenue increased $1.4 million in the second quarter of 1999 to $9.4 million,
compared to $7.9 million during the second quarter of 1998. For the twenty-six
weeks ended July 3, 1999, revenue increased to $20.5 million from $12.1 million
for the twenty-six weeks ended July 4, 1998. The increase for both the quarter
and twenty-six weeks was primarily due to the initiation of 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 increased processing
volume and higher unit pricing in accordance with the Company's processing
agreement with Bayer.
Cost of Sales
Cost of sales amounted to $5.3 million in the second quarter of 1999, compared
to $5.4 million during the second quarter of 1998. For the twenty-six weeks
ended July 3, 1999, cost of sales increased to $11.4 million from $10.1 million
for the twenty-six weeks ended July 4, 1998. The year-to-date increase was
primarily due to processing costs related to the production of PLAS+SD. Cost of
sales during the second quarter of 1999 includes $0.3 million of costs
associated with idle production facilities during the recall period. Cost of
sales in the corresponding periods of the prior year included additional
processing costs related to the production ramp-up of PLAS+SD.
11
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As a percentage of revenue, cost of sales was 57% (54% excluding idle facility
costs) and 56% (54% excluding idle facility costs), respectively, for the
quarter and twenty-six weeks ended July 3, 1999. This was a significant
improvement from the comparative 1998 periods, as sales of PLAS+SD did not
commence until the Company received marketing approval from the FDA in May 1998.
In addition, the Company continued to strengthen both its plasma fractionation
and PLAS+SD manufacturing processes, resulting in improved margins, after
adjustment for idle facility costs, from the previous quarter. Since the
initial recall, the Company has been developing and validating a process to
screen untreated plasma for parvovirus B19 prior to commencing the manufacturing
process. The Company expects that the resulting increase in production costs
due to the new testing will be relatively modest.
Research and Development
Research and development costs increased $0.4 million in the second quarter of
1999 to $2.1 million, compared to $1.7 million during the second quarter of
1998. For the twenty-six weeks ended July 3, 1999, research and development
costs increased to $4.1 million from $3.4 million for the twenty-six weeks ended
July 4, 1998. The increase in research and development costs for the thirteen
and twenty-six weeks ended July 3, 1999 was due to expanded activities in the
Company's red blood cell and plasma programs, and an increase in expenditures
for PLAS+SD Phase IV clinical trial studies. In connection with the Pentose
merger discussed previously, the Company will incur a restructuring charge in
the third fiscal quarter as it rationalizes its research programs with the
Pentose programs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $0.3 million in the
second quarter of 1999 to $2.5 million, compared to $2.2 million during the
second quarter of 1998. For the twenty-six weeks ended July 3, 1999, selling
general and administrative expenses increased to $5 million from $3.5 million
for the twenty-six weeks ended July 4, 1998. The increase for the thirteen and
twenty-six weeks ended July 3, 1999, was principally due to marketing costs
associated with PLAS+SD and the hiring of new personnel, including the national
sales force in December 1998. Although the Company is reducing its general and
administrative expenses in certain areas, expected increases in sales and
marketing expenditures relating to PLAS+SD will likely offset these reductions,
resulting in a similar level of selling, general and administrative expenditures
throughout the remainder of the year.
Charge Related to Product Recall
As further described above, the results for the second quarter of 1999 included
one-time costs associated with the recall amounting to $2,918,000, or $0.24 per
share. In the condensed statements of operations, the charge related to product
recall of $2,645,000 includes the write-off of inventory lots with heightened
levels of parvovirus B19, production testing, other direct recall expenses and a
reserve for an equitable sharing of recall costs incurred by the Company's
exclusive distributor, the Red Cross. While the Company believes it is not
contractually liable for Red Cross costs in this situation, covering a portion
of such costs is consistent with the spirit of the collaboration. Discussions
with the Red Cross on this issue are ongoing and are expected to be resolved
shortly.
Charge Related to Research Collaboration
During the first quarter of 1998, the Company recorded a one-time charge of $2.2
million in 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 $0.1 million during the quarter ended
July 3, 1999, compared to the second quarter of 1998 when the Company incurred
net interest expense of $0.3 million. During the twenty-six weeks ended July 3,
1999, the Company earned net interest income of $0.1 million compared to the
twenty-six weeks ended July 4, 1998 when the Company incurred net interest
expense of $0.7 million. The change reflects the reduced level of debt
outstanding during 1999, combined with the interest earned on cash balances,
including the proceeds from the Company's initial public offering. Included in
net interest income during the thirteen and twenty-six weeks ended July 3, 1999
are non-cash charges of $70 thousand and $140 thousand, respectively,
representing the accretion of the balance of the Company's non-interest bearing
advance from the Red Cross.
12
<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 Red Cross. 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. At July 3, 1999, the Company had working capital of $25.7 million,
including cash and cash equivalents of $27.5 million, compared to working
capital of $33.1 million, including cash and cash equivalents of $35.3 million,
at January 2, 1999.
During the twenty-six weeks ended July 3, 1999, the Company used $2.0 million of
cash to fund its operations, primarily as a result of an increase in receivables
due to sales of PLAS+SD, partially offset by an increase in accounts payable and
accrued expenses, reflecting accruals for the charge taken as a result of the
product recall. Cash used in investing activities of $4.2 million during the
twenty-six weeks ended July 3, 1999, was primarily related to the Company's
renovation of its production facility, while cash used in financing activities
of $1.7 million, was primarily related to scheduled repayments of the Company's
long-term debt and capital lease obligations.
In connection with the Pentose merger, the Company will record a restructuring
charge in the third quarter for the anticipated costs of rationalizing its R&D
programs with those of Pentose.
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
Some of the Company's older computer software programs were written using two
digit fields rather than four digit fields to define the applicable year (i.e.,
"98" in the computer code refers to the year "1998"). As a result, time-
sensitive functions of those software programs may misinterpret dates after
January 1, 2000, to refer to the twentieth century rather than the twenty-first
century (i.e., "02" could be interpreted as "1902" rather than "2002" (the Year
2000 Issue). This could cause system failures or miscalculations resulting in
inaccuracies in computer output or disruptions of operations, including, among
other things, inaccurate processing of financial information and/or temporary
inability to process transactions, manufacture products, or engage in similar
normal business activities.
The Company's plan to resolve the Year 2000 issue involves the following four
phases: assessment, testing, remediation and maintenance. To date the Company
has fully completed its assessment of all systems that could be significantly
affected by the Year 2000 Issue. The completed assessment indicated that most of
the Company's significant information, financial reporting and manufacturing
systems were at risk. Affected manufacturing systems include program logic
controllers used in various aspects of the manufacturing process.
The Company has fully remediated all information and financial reporting
systems. The Company expects to complete remediation of its critical
manufacturing systems by the end of August 1999. The Company is continuing to
develop its contingency plan for critical applications, which primarily involve
manual workaround procedures. The contingency plan is expected to be completed
by August 1999.
The Company has no systems which directly interface with either customers or
vendors. The Company has queried, and is in the process of collecting responses
from its important suppliers and contractors that do not share information
systems with the Company (external agents). To date, the Company is not aware of
any external agent Year 2000 issue that would materially impact the Company's
results of operations, liquidity, or capital resources.
The Company will utilize both internal and external resources to reprogram,
replace, test, and implement hardware and software for Year 2000 modifications.
The total cost of the Year 2000 project is estimated at $450,000 and is being
funded through operating cash flows. Through July 3, 1999, the Company had
incurred approximately $175,000 (all of which has been expensed), relating to
all phases of the Year 2000 project. Of the total remaining project costs,
approximately $250,000 is attributable to the purchase of new software and
operating equipment, which will be capitalized. The remaining $25,000 relates to
continued Year 2000 compliance monitoring and repair of hardware and software
and will be expensed as incurred.
13
<PAGE>
The Company's plan to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources, and
other factors. There can be no guarantee that these estimates will be achieved
and actual results could differ materially.
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, including its annual report on
Form 10-K for the year ended January 2, 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
money market funds with portfolios of investment grade corporate and U.S.
government securities and, secondarily, its long-term debt arrangements. Under
its current policies, the Company does not use interest rate derivative
instruments to manage exposure to interest rate changes.
14
<PAGE>
PART II. - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(d) Use of proceeds information is provided herewith in connection
with the Company's initial public offering ("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
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,
the Company's net proceeds from the offering were $35,868,000. The
Company has utilized these proceeds to: (i) fund capital
investments, primarily for improvements and expansion of its
manufacturing facility ($8,300,000), (ii) fund research and
development projects ($8,200,000), (iii) repay debt ($3,700,000)
and (iv) fund PLAS+SD marketing, selling and manufacturing
operations ($1,900,000). The Company will continue to use the
remaining 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 and other general corporate purposes.
Unused proceeds of the Offering are invested in money market funds
with portfolios of investment grade corporate and U.S. government
securities.
Item 4. Submission of Matters to a Vote of Security Holders
On May 21, 1999 the Company held its Annual Meeting of
Stockholders. At the meeting the following matters were approved:
1. The election of John R. Barr, Richard A. Charpie and Irwin
Lerner as Class I Directors of the Company to serve until the
2002 Annual Meeting of Stockholders. 11,244,082 shares of
Common Stock were voted for the election of Mr. Barr and
207,013 shares were withheld from the election of Mr. Barr.
11,244,171 shares of Common Stock were voted for the election
of Mr. Charpie and 207,024 shares were withheld from the
election of Mr. Charpie. 11,244,171 shares of Common Stock
were voted for the election of Mr. Lerner and 207,024 shares
were withheld from the election of Mr. Lerner.
2. An amendment to the Company's 1998 Director Stock Option Plan
(the "1998 Equity Plan") which increased the maximum number of
shares of the Company's common stock for which options may be
granted under the 1998 Director Plan from 89,445 to 150,000
shares. 11,050,058 shares of Common Stock were voted for such
amendment and 376,993 shares of Common Stock were voted
against such amendment and 244,144 shares of Common Stock
abstained from the vote. No shares of common stock were
subject to non-votes.
3. An amendment to the Company's 1998 Equity Incentive Plan (the
"1998 Equity Plan") which increased the maximum number of
shares of the Company's common stock for which awards may be
made under the 1998 Equity Plan from 2,146,690 to 2,400,000.
10,618,502 shares of Common Stock were voted for such
amendment, 809,469 shares of Common Stock were voted against
such amendment and 23,224 shares of Common stock abstained
from the vote. No shares of common stock were subject to non -
votes.
4. The ratification of the appointment of KPMG LLP as the
Company's independent accountants for the current fiscal year.
11,417,000 shares of Common Stock were voted for such
ratification, 32,420 shares of Common Stock were voted against
such ratification and 1,735 shares of Common Stock were
abstained from the vote. No shares of common stock were
subject to non-votes.
15
<PAGE>
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).
4.4 Amendment No. 1 to the Joint Development, Marketing and
Distribution Agreement between Pall Corporation and V.I.
Technologies, Inc., dated July 19, 1999.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
July 3, 1999.
16
<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: August 11, 1999 /s/ John R. Barr
- --------------------- ----------------------------------
John R. Barr
President, Chief Executive Officer
Date: August 11, 1999 /s/ Thomas T. Higgins
- ---------------------- ----------------------------------
Thomas T. Higgins
Executive Vice President, Operations
and Chief Financial Officer
17
<PAGE>
EXHIBIT 4.4
AMENDMENT NO. 1
TO THE
JOINT DEVELOPMENT,
MARKETING AND DISTRIBUTION AGREEMENT
BETWEEN
PALL CORPORATION
AND V.I. TECHNOLOGIES, INC.
THIS AMENDMENT NO. 1 to the Joint Development, Marketing and Distribution
Agreement dated February 19, 1998 (the "Joint Development Agreement") between
Pall Corporation ("Pall") and V.I. Technologies, Inc. ("Vitex"), is made as of
July 19, 1999 by and between Pall and Vitex. Capitalized terms used but not
otherwise defined herein shall have the meanings ascribed to them in the Joint
Development Agreement.
BACKGROUND
Under the Joint Development Agreement, the termination of the employment
with Vitex of BERNARD HOROWITZ is deemed to be a Material Default by Vitex,
permitting Pall to terminate the Joint Development Agreement in accordance with
Section 13.03 thereof. Pall has been advised that BERNARD HOROWITZ intends to
terminate his employment with Vitex (the "Termination"). Pall and Vitex agree
that Pall should have one full year following the later of the date of this
Amendment No. 1 or the effective date of the Termination to exercise its rights
under Section 13.03 of the Joint Development Agreement to terminate the Joint
Development Agreement. Accordingly, in consideration of the foregoing and for
other good and valuable consideration, the receipt, sufficiency and adequacy of
which is hereby acknowledged by both parties, Pall and Vitex hereby agree as
follows.
1. Amendment to Section 13.03 (b). The following shall be after the last
-------------------------------
sentence of Section 13.03 (b) of the Joint Development Agreement:
"Vitex shall promptly notify Pall in writing of the effective date (the
"Effective Date") of the termination of BERNARD HOROWITZ's employment with
Vitex. Upon such notification, which constitutes acknowledgement by Vitex
that a Material Default by Vitex under the terms of this Agreement has
occurred, and notwithstanding any provision of this Section 13.03(b) to the
contrary, the parties agree that (i) except as set forth below, such
Material Default shall not be curable and Notice to Cure need not be
delivered, and (ii) Pall shall have one full year (the "Decision Period")
following the later of (y) the Effective Date or (z) the date of Amendment
No. 1 to this Agreement to deliver to Vitex a Notice of Termination in
accordance with this Section 13.03(b), and following such delivery, this
Agreement shall terminate as of the date specified in such notice, which
shall not be less than 30 days from the date on which such Notice of
Termination is given. The parties agree that the Decision Period is a
reasonable period of time for Pall to determine whether to exercise its
rights under the terms of this Section 13.03 to terminate this Agreement
and that such determination shall be made by Pall in its sole discretion.
If Pall does not exercise its rights to terminate this Agreement pursuant
to this paragraph, then the Material Default resulting from the Termination
shall be deemed to have been cured."
2. No Other Charges. Except as set forth herein, the Joint Development
-----------------
Agreement is and shall remain in full force and effect and this Amendment No. 1
does not and shall not be deemed to waive, modify or amend any other terms of
the Joint Development Agreement.
IN WITNESS WHEREOF, Pall and Vitex have caused this Amendment No. 1 to be
executed by their authorized representatives as of the date above written.
PALL CORPORATION
/s/ Gilbert P. Weiss
By:_________________________
V. I. TECHNOLOGIES, INC.
/s/ John R. Barr
By:_________________________
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