UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 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 number: 0-26642 ------- MYRIAD GENETICS, INC. (Exact name of registrant as specified in its charter) Delaware 87-0494517 -------- ---------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 320 Wakara Way, Salt Lake City, UT 84108 - ---------------------------------------- -------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (801) 584-3600 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 [_] As of February 8, 2000, the registrant had 10,303,403 shares of common stock outstanding.
MYRIAD GENETICS, INC. INDEX TO FORM 10-Q Page ---- PART I - Financial Information Item 1. Financial Statements. Condensed Consolidated Balance Sheets as of December 31, 1999 and June 30, 1999 3 Condensed Consolidated Statements of Operations for the three and six months ended December 31, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 1999 and 1998 5 Notes to Condensed Unaudited Consolidated Financial Statements 6 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 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURE(S) 16 2
MYRIAD GENETICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> Dec. 31, 1999 (Unaudited) June 30, 1999 --------------- ------------- Assets ------ <S> <C> <C> Current assets: Cash and cash equivalents $ 27,679,996 $ 5,404,944 Marketable investment securities 16,940,184 4,477,138 Prepaid expenses 911,778 622,700 Trade accounts receivables, less allowance for doubtful accounts of $108,847 at December 31, 1999, $73,439 at June 30, 1999 1,798,478 1,322,950 Other receivables 113,449 1,855,696 --------------- ------------- Total current assets 47,443,885 13,683,428 --------------- ------------- Equipment and leasehold improvements: Equipment 14,129,785 13,351,229 Leasehold improvements 3,951,776 3,520,253 --------------- ------------- 18,081,561 16,871,482 Less accumulated depreciation and amortization 8,242,006 6,871,981 --------------- ------------- Net equipment and leasehold improvements 9,839,555 9,999,501 Long-term marketable investment securities 15,422,327 29,044,377 Other assets 1,156,408 823,634 --------------- ------------- $ 73,862,175 $ 53,550,940 =============== ============= Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 3,426,068 $ 2,917,810 Accrued liabilities 2,317,545 1,754,634 Deferred revenue 12,629,422 662,760 --------------- ------------- Total current liabilities 18,373,035 5,335,204 --------------- ------------- Stockholders' equity Common stock, $0.01 par value. Authorized 15,000,000 shares; issued and outstanding 10,284,349 on December 31, 1999 and 9,428,732 on June 30, 1999 102,843 94,287 Additional paid-in capital 103,592,079 92,377,949 Accumulated other comprehensive loss (85,715) (68,846) Deferred compensation (111,945) (247,774) Accumulated deficit (48,008,122) (43,939,880) --------------- ------------- Net stockholders' equity 55,489,140 48,215,736 --------------- ------------- $ 73,862,175 $ 53,550,940 =============== ============= </TABLE> See accompanying notes to condensed consolidated financial statements. 3
MYRIAD GENETICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------ ----------------- Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1999 Dec. 31, 1998 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> <C> Revenues: Research revenue $ 6,255,872 $ 4,536,512 $ 11,503,517 $ 9,183,028 Molecular diagnostic revenue 2,023,871 1,210,959 3,638,157 2,124,429 -------------- ------------- ------------- ------------- Total revenues 8,279,743 5,747,471 15,141,674 11,307,457 -------------- ------------- ------------- ------------- Expenses: Molecular diagnostic cost of revenue 989,156 778,936 1,792,087 1,381,808 Research and development expense 6,205,468 5,681,806 11,992,270 11,499,295 Selling, general and administrative expense 3,353,944 2,760,301 6,375,930 5,315,717 -------------- ------------- ------------- ------------- Total costs and expenses 10,548,568 9,221,043 20,160,287 18,196,820 -------------- ------------- ------------- ------------- Operating loss (2,268,825) (3,473,572) (5,018,613) (6,889,363) Other income (expense): Interest income 736,664 579,471 1,310,453 1,275,690 Interest expense - (3,908) - (6,279) Gain (loss) on disposition of assets (344,989) 47,750 (360,082) 67,191 -------------- ------------- ------------- ------------- 391,675 623,313 950,371 1,336,602 -------------- ------------- ------------- ------------- Net loss ($1,877,150) ($2,850,259) ($4,068,242) ($5,552,761) ============== ============= ============= ============= Basic and diluted loss per share ($0.19) ($0.30) ($0.42) ($0.59) ============== ============= ============= ============= Basic and diluted weighted average shares outstanding 10,123,902 9,391,844 9,778,319 9,367,393 </TABLE> See accompanying notes to condensed consolidated financial statements. 4
MYRIAD GENETICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Six Months Ended ------------------ Dec. 31, 1999 Dec. 31, 1998 (Unaudited) (Unaudited) ------------- ------------- <S> <C> <C> Cash flows from operating activities: Net loss ($4,068,242) ($5,552,761) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,565,663 1,750,082 Loss on disposition of assets 360,082 12,401 Bad debt expense 35,410 21,000 Increase in trade receivables (510,936) (333,159) Decrease in other receivables 1,742,247 36,800 Increase in prepaid expenses (289,080) (455,370) Decrease (increase) in other assets (332,774) 84,375 Increase (decrease) in accounts payable and accrued expenses 1,071,169 (2,146,413) Increase (decrease) in deferred revenue 11,966,662 (987,429) ------------- ------------- Net cash provided by (used in) operating activities 11,540,201 (7,570,474) ------------- ------------- Cash flows from investing activities: Capital expenditures (1,582,927) (1,897,878) Proceeds from sale of equipment - 3,554,379 Net change in marketable investment securities 1,095,091 8,370,588 ------------- ------------- Net cash provided by (used in) investing activities (487,836) 10,027,089 ------------- ------------- Cash flows from financing activities: Net payments of notes payable - (128,843) Net proceeds from issuance of common stock 11,222,686 380,039 ------------- ------------- Net cash provided by financing activities 11,222,686 251,196 ------------- ------------- Net increase in cash and cash equivalents 22,275,051 2,707,811 Cash and cash equivalents at beginning of period 5,404,944 14,595,034 ------------- ------------- Cash and cash equivalents at end of period $ 27,679,995 $ 17,302,845 =============== ============= </TABLE> See accompanying notes to condensed consolidated financial statements. 5
MYRIAD GENETICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (1) Basis of Presentation --------------------- The accompanying condensed unaudited consolidated financial statements have been prepared by Myriad Genetics, Inc. (the "Company") in accordance with generally accepted accounting principles for interim financial information and pursuant to the applicable rules and regulations of the Securities and Exchange Commission. The condensed unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the accompanying financial statements contain all adjustments (consisting of normal and recurring accruals) necessary to present fairly all financial statements. The financial statements herein should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 1999, included in the Company's Annual Report on Form 10-K for the year ended June 30, 1999. Operating results for the three and six month periods ended December 31, 1999 may not necessarily be indicative of the results to be expected for any other interim period or for the full year. (2) Leases ------ On October 25, 1999, the Company entered into a Master Lease Agreement with Comdisco Laboratory and Scientific Group, a Division of Comdisco Healthcare Group, Inc. ("Comdisco") for a 48 month period. Under the Master Lease Agreement, the Company is subject to certain financial covenants. As of December 31, 1999, the Company was fully compliant with these covenants. (3) Collaborative Research Agreements --------------------------------- In December 1999, the Company entered into a 12 month collaboration with Hoffmann-LaRoche Inc., to utilize the Company's protein interaction technology ("ProNet") for drug discovery and development in the area of cardiovascular disease. This collaboration may provide the Company with research funding, licensing fees, and milestone payments with a value of up to $13,000,000. (4) Common Stock ------------ In October 1999, the Company announced the expansion of its collaboration with Schering AG, Germany to include research into the field of cardiovascular disease. The Company also entered into a Securities Purchase Agreement and a Standstill Agreement with Schering Berlin Venture Corporation ("Schering Berlin") to sell to Schering Berlin 303,030 shares of the Company's unregistered Common Stock, $.01 par value per share (the "Shares"). Schering Berlin acquired the Shares for an aggregate purchase price of $5,000,000. 6
(5) Comprehensive Earnings (Loss) ----------------------------- The Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income", effective July 1, 1998. SFAS 130 establishes standards for reporting and displaying comprehensive loss and its components in financial statements. The components of the Company's comprehensive loss are as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------ ----------------- Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1999 Dec. 31, 1998 (unaudited) (unaudited) (unaudited) (unaudited) ------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Net loss ($1,877,150) ($2,850,259) ($4,068,242) ($5,552,761) Unrealized loss on available- for-sale marketable investment securities (16,842) (129,085) (16,869) (36,007) ------------- -------------- -------------- -------------- Comprehensive loss ($1,893,992) ($2,979,344) ($4,085,111) ($5,588,768) ============= ============== ============== ============== </TABLE> (6) Segment and Related Information ------------------------------- The Company's business units have been aggregated into two reportable segments: (i) research and (ii) molecular diagnostics. The research segment is focused on the discovery and sequencing of genes related to major common diseases, marketing of subscriptions to proprietary database information, and the development of therapeutic products for the treatment and prevention of major diseases. The molecular diagnostics segment provides testing to determine predisposition to common diseases. The accounting policies of the segments are the same as those described in the basis of presentation (note 1). The Company evaluates segment performance based on loss from operations before interest income and expense and other income and expense. The Company's assets are not identifiable by segment. <TABLE> <CAPTION> Molecular Research diagnostics Total ----------- ----------- ---------- <S> <C> <C> <C> Three months ended December 31, 1999: Revenues $ 6,255,872 $2,023,871 $ 8,279,743 Depreciation and amortization 582,021 189,915 771,936 Segment operating loss 641,612 1,627,213 2,268,825 Three months ended December 31, 1998: Revenues 4,536,512 1,210,959 5,747,471 Depreciation and amortization 705,620 203,867 909,487 Segment operating loss 2,107,730 1,365,842 3,473,572 Six months ended December 31, 1999: Revenues 11,503,517 3,638,157 15,141,674 Depreciation and amortization 1,190,624 375,039 1,565,663 Segment operating loss 2,228,560 2,790,053 5,018,613 Six months ended December 31, 1998: Revenues 9,183,028 2,124,429 11,307,457 Depreciation and amortization 1,344,242 405,840 1,750,082 Segment operating loss 3,742,649 3,146,714 6,889,363 </TABLE> 7
(7) Net Loss Per Common and Common Equivalent Share ----------------------------------------------- Loss per common share is computed based on the weighted-average number of common shares and, as appropriate, dilutive potential common shares outstanding during the period. Stock options and warrants are considered to be potential common shares. Basic loss per common share is the amount of loss for the period available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of loss for the period available to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the period. In calculating loss per common and common-equivalent share the net loss and the weighted average common and common-equivalent shares outstanding were the same for both the basic and diluted calculation. As of December 31, 1999 and December 31, 1998, there were antidilutive potential common shares of 1,753,484 and 2,017,645, respectively. Accordingly, these potential common shares were not included in the computation of diluted loss per share for the years presented, but may be dilutive to future basic and diluted earnings per share. (8) Recent Accounting Pronouncements -------------------------------- On December 3, 1999, the SEC staff issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101). SAB 101 summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company will incorporate the guidance of SAB 101 in the first quarter of fiscal 2001. Management has not yet determined the impact that SAB 101 will have on the financial position or results of operations of the Company. 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Since inception, the Company has devoted substantially all of its resources to maintaining its research and development programs, supporting collaborative research agreements, operating a molecular diagnostic laboratory, and more recently establishing genomic sequencing, high throughput screening, and drug development facilities. The Company's revenues have been primarily payments received pursuant to collaborative research agreements, upfront fees, milestone payments, and sales of molecular diagnostics. The Company has been unprofitable since its inception and, for the quarter ended December 31, 1999, the Company had a net loss of $1,877,150 and as of December 31, 1999 had an accumulated deficit of $48,008,122. In April 1995, the Company commenced a five-year collaborative research and development arrangement with Novartis Corporation ("Novartis"). This collaboration may provide the Company with an equity investment, research funding and potential milestone payments of up to $60,000,000. The Company is entitled to receive royalties from sales of therapeutic products sold by Novartis. In September 1995, the Company commenced a five-year collaborative research and development arrangement with Bayer Corporation ("Bayer"). This collaboration may provide the Company with an equity investment, research funding and potential milestone payments of up to $71,000,000. In November 1997 and again in December 1998, the Company announced expansions of its collaborative research and development arrangement with Bayer. The expanded collaboration may provide the Company with additional research funding and potential milestone payments of up to $137,000,000. The Company is entitled to receive royalties from sales of therapeutic products sold by Bayer. In October 1996, the Company announced the introduction of BRACAnalysis, a comprehensive BRCA1 and BRCA2 gene sequence analysis for susceptibility to breast and ovarian cancer. In January 1998, the Company announced the introduction of CardiaRisk, which may assist physicians both in (i) identifying which hypertensive patients are at a significantly increased risk of developing cardiovascular disease and (ii) identifying which patients are likely to respond to low salt diet therapy and antihypertensive drug therapy. The Company, through its wholly owned subsidiary Myriad Genetic Laboratories, Inc., recognized molecular diagnostic revenues, primarily from BRACAnalysis, of $2,023,871 for the quarter ended December 31, 1999. In April 1997, the Company commenced a three-year collaborative research and development arrangement with Schering Corporation ("Schering-Plough"). This collaboration may provide the Company with an equity investment, license fees, research funding and potential milestone payments of up to $60,000,000. The Company is entitled to receive royalties from sales of therapeutic products sold by Schering-Plough. In October 1998, the Company entered into a five-year collaboration with Schering AG, Germany ("Schering AG"), to utilize the Company's protein interaction technology ("ProNet) for drug discovery and development. Under the agreement, the Company will have an option to co-promote all new therapeutic products in North America and receive 50 percent of the profits from North American sales of all new drugs discovered with ProNet. This collaboration may provide the Company with licensing fees, subscription fees, option payments and milestone fees with a value of up to $51,000,000. If the Company chooses to co- promote a drug developed by Schering AG as a 50 percent partner, the Company may be required to pay funds to Schering AG to establish equal ownership. In November 1998, the Company entered into a 15 month collaboration with Monsanto Company ("Monsanto"), to utilize ProNet for drug discovery and development. In December 1999, Monsanto exercised its option to extend the research term for an additional twelve months and exercised its option to expand the research funding. This collaboration may provide the Company with research funding, option payments, license fees and potential milestone payments of up to $28,000,000. The Company is entitled to receive royalties from sales of therapeutic products sold by Monsanto. 9
In July 1999, the Company entered into a two-year collaboration and license agreement with the Novartis Agricultural Discovery Institute, Inc. ("NADII"). The genomic collaboration will focus on the discovery of the genetic structure of cereal crops. The collaboration may provide the Company with an upfront payment and research funding of up to $33,500,000. Upon completion, NADII and the Company intend to jointly offer commercial access to the genomic databases and share equally in any resulting proceeds. In October 1999, the Company announced the expansion of its collaboration with Schering AG to include research in the field of cardiovascular disease. The Company also entered into a Securities Purchase Agreement and a Standstill Agreement with Schering Berlin Venture Corporation ("Schering Berlin") to sell to Schering Berlin 303,030 Shares. Schering Berlin acquired the Shares for an aggregate purchase price of $5,000,000. In December 1999, the Company entered into a 12 month collaboration with Hoffmann-LaRoche Inc. ("Roche"), to utilize ProNet for drug discovery and development in the area of cardiovascular disease. This collaboration may provide the Company with research funding, licensing fees, and milestone payments with a value of up to $13,000,000. The Company is entitled to receive royalties from sales of therapeutic products sold by Roche. The Company intends to enter into additional collaborative relationships to locate and sequence genes and discover protein networks associated with other common diseases as well as to continue to fund internal research projects. There can be no assurance that the Company will be able to enter into additional collaborative relationships on terms acceptable to the Company. The Company expects to incur losses for at least the next several years, primarily due to expansion of its research and development programs, expansion of its drug discovery efforts, increased staffing costs and expansion of its facilities. Additionally, the Company expects to incur substantial sales, marketing and other expenses in connection with building its molecular diagnostic business. The Company expects that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. Results of Operations for the Three Months Ended December 31, 1999 and 1998 Research revenues for the quarter ended December 31, 1999 were $6,255,872 as compared to $4,536,512 for the same quarter of 1998. The increase in research revenue is primarily attributable to revenue recognized from the NADII collaboration which began in July 1999. Research revenue from the research collaboration agreements is recognized as related costs are incurred. Consequently, as these programs progress and costs increase or decrease, revenues increase or decrease proportionately. Molecular diagnostic revenues of $2,023,871 were recognized in the quarter ended December 31, 1999, an increase of 67% or $812,912 over the same quarter of the prior year. Molecular diagnostic revenue is comprised of sales of molecular diagnostic tests. The Company's sales and marketing efforts since that time have given rise to the increased revenues for the quarter ended December 1999. There can be no assurance, however, that molecular diagnostic revenues will continue to increase at the historical rate. Research and development expenses for the quarter ended December 31, 1999 were $6,205,468 as compared to $5,681,806 for the same quarter of 1998. This increase was primarily due to an increase in research activities as a result of the Company's recent collaboration with NADII. The increased level of research spending also includes the ongoing drug discovery efforts of Myriad Pharmaceuticals, a wholly-owned subsidiary, continuing development and utilization of ProNet, and third-party sponsored research programs. Selling, general and administrative expenses for the quarter ended December 31, 1999 were $3,353,944 as compared to $2,760,301 for the same quarter of 1998. The increase was primarily attributable to costs associated with expansion of the Company's sales force and start-up expenses for the sales staff including recruiting, training, and sales supplies. The Company has also incurred increased expenses for its ongoing promotion of its molecular diagnostic business and the filing of patent applications both domestically and abroad. The Company expects its selling, general and administrative expenses will continue to fluctuate as needed in support of its molecular diagnostic business and its research and drug development efforts. Cash, cash equivalents, and marketable investment securities were $60,042,507 at December 31, 1999 as compared to $47,410,710 at December 31, 1998. This increase in cash and investments is primarily attributable to the private 10
sale of approximately $10,000,000 worth of the Company's Common Stock, as well as the receipt of advance payments from the Company's collaborators. These cash receipts were offset by expenditures incurred in the ordinary course of business. As a result of the Company's increased cash position, the Company's interest income for the quarter ended December 31, 1999 was $736,664 as compared to $579,471 for the same quarter of 1998. Interest expense for the quarter ended December 31, 1998, amounting to $3,908, was due entirely to borrowings under the Company's equipment financing facility. The loss on sale of assets of $344,989 in the quarter ended December 31, 1999 is the result of the Company retiring an unproductive asset. Results of Operations for the Six Months Ended December 31, 1999 and 1998 Research revenues for the six months ended December 31, 1999 were $11,503,517 as compared to $9,183,028 for the same period of 1998. The increase in research revenue is primarily attributable to revenue recognized from the NADII collaboration which began in July 1999. Research revenue from the research collaboration agreements is recognized as related costs are incurred. Consequently, as these programs progress and costs increase or decrease, revenues increase or decrease proportionately. Molecular diagnostic revenues of $3,638,157 were recognized in the six months ended December 31, 1999, an increase of $1,513,728 over the same six month period of 1998. Molecular diagnostic revenue is comprised of sales of diagnostic tests. The Company's sales and marketing efforts have given rise to the increased revenues for the six months ended December 1999. There can be no assurance, however that molecular diagnostic revenues will continue to increase at the historical rate. Research and development expenses for the six months ended December 31, 1999 were $11,992,270 as compared to $11,499,295 for the prior year. This increase was primarily due to an increase in research activities as a result of the Company's recent collaboration with NADII. The increased level of research spending also includes the ongoing drug discovery efforts of Myriad Pharmaceuticals, a wholly-owned subsidiary, continuing development and utilization of ProNet, and third-party sponsored research programs. Selling, general and administrative expenses for the six months ended December 31, 1999 were $6,375,930 as compared to $5,315,717 for the prior year. The increase was primarily attributable to costs associated with expansion of the Company's sales force and start-up expenses for the sales staff including recruiting, training, and sales supplies. The Company has also incurred increased expenses for its ongoing promotion of its molecular diagnostic business and the filing of patent applications both domestically and abroad. During the six months ended December 31, 1999, the Company also wrote off an intangible asset resulting in a one-time expense of $344,531. The Company expects its selling, general and administrative expenses will continue to fluctuate as needed in support of its molecular diagnostic business and its research and drug development efforts. Cash, cash equivalents, and marketable investment securities were $60,042,507 at December 31, 1999 as compared to $47,410,710 at December 31, 1998. This increase in cash and investments is primarily attributable to the private sale of approximately $10,000,000 of Company Common Stock, as well as advance payments received by the company from its collaborators. These cash receipts were offset by expenditures incurred in the ordinary course of business. As a result of the Company's increased cash position, the Company's interest income for the six months ended December 31, 1999 was $1,310,453 as compared to $1,275,690 for the six month period ended December 31, 1998. Interest expense for the six months ended December 31, 1998, amounting to $6,279, was due entirely to borrowings under the Company's equipment financing facility. The loss on disposition of assets of $360,082 in the six months ended December 31, 1999 is primarily the result of the Company retiring an unproductive asset. Liquidity and Capital Resources Net cash provided by operating activities was $11,493,157 during the six months ended December 31, 1999 as compared to net cash used by operating activities of $7,570,474 during the same six months of 1998. Trade receivables for the six months ended December 31, 1999 increased by $510,936, from $1,396,389 to $1,907,325. This increase is primarily attributable to the increase in molecular diagnostic revenue for the six month period ended December 31, 1999. Other receivables decreased $1,742,247, from $1,855,696 to $113,449, for the six months ended December 31, 1999 primarily as a result of the receipt of collaborative partner payments for research work 11
performed in prior periods. Prepaid expenses decreased by $289,080 during the six months ended December 31, 1999. The decrease is primarily due to advance royalties and insurance premiums being expensed during the six month period. Accounts payable and accrued expenses increased by $1,071,170 between June 30, 1999 and December 31, 1999 primarily as a result of a large order of laboratory supplies which was received by the Company in December 1999 but not paid for until after December 31, 1999. Deferred revenue, representing the difference in collaborative payments received and research revenue recognized, increased by $11,966,662, from $662,760 to $12,629,422, during the six months ended December 31, 1999 in large part due to an upfront payment by NADII. The Company's investing activities used cash in the amount of $440,792 in the six months ended December 31, 1999. Investing activities were comprised primarily of capital expenditures for research equipment, office furniture, and facility improvements and marketable investment securities. During the six month period ended December 31, 1999, the Company shifted a portion of its investment in marketable securities from longer term investments to cash and cash equivalents in order to take advantage of more favorable interest rates. Financing activities provided $11,222,686 during the six months ended December 31, 1999. Proceeds were recognized from two separate financings during the period. In September 1999, the Company entered into a Subscription Agreement pursuant to which the Company sold 355,000 shares of the Company's unregistered Common Stock, $.01 par value per share (the "Shares") for a purchase price of $4,987,750. The Company has no obligation to register the Shares with the Securities and Exchange Commission. In conjunction with the Subscription Agreement, the Company issued a 3-year warrant to purchase an additional 17,750 Shares at a premium of 10%. In October 1999, the Company entered into a Securities Purchase Agreement and a Standstill Agreement with Schering Berlin to sell to Schering Berlin 303,030 Shares. Schering Berlin agreed to acquire the Shares for an aggregate purchase price of $5,000,000. Additional cash was provided from the exercise of stock options during the six months ended December 31, 1999. The Company anticipates that its existing capital resources will be adequate to maintain its current and planned operations for at least the next two years, although no assurance can be given that changes will not occur that would consume available capital resources before such time. The Company's future capital requirements will be substantial and will depend on many factors, including progress of the Company's research and development programs and drug discovery and drug development programs; the cost of developing and launching additional molecular diagnostic tests; results and costs of clinical correlation testing of the Company's molecular diagnostic tests; the costs of filing, prosecuting and enforcing patent claims; competing technological and market developments; payments received under collaborative agreements and changes in collaborative research relationships; the costs associated with potential commercialization of its gene discoveries, if any, including the development of manufacturing, marketing and sales capabilities; the cost and availability of third-party financing for capital expenditures and administrative and legal expenses. Because of the Company's significant long-term capital requirements, the Company intends to raise funds when conditions are favorable, even if it does not have an immediate need for additional capital at such time. Impact of the Year 2000 Issue The Year 2000 Issue The Year 2000 Issue arose because many computer programs use a two-digit format, as opposed to four digits, to indicate the year. Any of the Company's computer programs or other information systems that have time-sensitive software or embedded microcontrollers may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations. State of Readiness The Company completed its Year 2000 readiness testing in the quarter ended December 31, 1999. Testing was performed on all of the Company's critical systems and any necessary modifications have taken place. Where possible, third-party certification of Year 2000 readiness was obtained on systems purchased by the Company. Third-party systems which were not certified by the supplier were tested internally or upgraded to compliant versions. The Company has received assurances from its significant suppliers and customers that they are Year 2000 ready. The Company has not experienced any significant Year 2000 problems, either before or after December 31, 1999. 12
Risks of the Year 2000 Issue The Company is not aware of any Year 2000 compliance problems relating to its information technology or non-information technology systems that would have a material adverse effect on its business. If critical systems fail due to a lack of Year 2000 readiness, or if any of the Company's suppliers or customers do not successfully deal with the Year 2000 Issue, the Year 2000 Issue could have a material impact on the operations of the Company. The Company could experience delays in receiving or sending its molecular diagnostic products that would increase its costs and that could cause the Company to lose business and even customers and could subject the Company to claims for damages. Problems with the Year 2000 Issue could also result in delays in the Company invoicing its molecular diagnostic customers or in the Company receiving payments from them. In addition, the Company's research and development efforts which rely heavily on the storage and retrieval of electronic information could be interrupted resulting in significant delays in discovering genes, the loss of current collaborations, and the impairment of the Company's ability to enter into new collaborations. The severity of these possible problems would depend on the nature of the problem and how quickly it could be corrected or an alternative implemented, which is unknown at this time. In the extreme, such problems could bring the Company to a standstill. Contingency Plan As discussed above, the Company has conducted a Year 2000 assessment and has not found it necessary to implement any contingency plans. Contingency plans will be implemented if it appears that the Company or any of its vendors will not be Year 2000 compliant and such noncompliance is expected to have a material adverse impact on the Company's operations. The cost of developing and implementing such plans may itself be material. Certain Factors That May Affect Future Results of Operations The Company believes that this report on Form 10-Q contains certain forward- looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements. The Company cautions investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, the following: the timely implementation by the Company of its plan to prepare its computer systems for the Year 2000, the costs to the Company of such preparation, and the timely conversion by other parties on which the Company's business relies; intense competition related to the discovery of disease-related genes and the possibility that others may discover, and the Company may not be able to gain rights with respect to, genes important to the establishment of a successful molecular diagnostic business; difficulties inherent in developing genetic tests once genes have been discovered; the Company's limited experience in operating a molecular diagnostic laboratory; the Company's limited marketing and sales experience and the risk that tests which the Company has or may develop may not be able to be marketed at acceptable prices or receive commercial acceptance in the markets that the Company is targeting or expects to target; uncertainty as to whether there will exist adequate reimbursement for the Company's services from government, private health care insurers and third-party payors; uncertainties as to the extent of future government regulation of the Company's business; uncertainties as to whether the Company and its collaborators will be successful in developing and obtaining regulatory approval for, and commercial acceptance of, therapeutics based on the discovery of disease-related genes and proteins; uncertainties as to the Company's ability to develop therapeutic lead compounds, which is a new business area for the Company; and the risk that markets will not exist for therapeutic lead compounds that the Company develops or if such markets exist, that the Company will not be able to sell compounds which it develops at acceptable prices. As a result, the Company's future development efforts involve a high degree of risk. For further information, refer to the more specific risks and uncertainties disclosed throughout this Quarterly Report on Form 10-Q. 13
PART II - Other Information Item 1. Legal Proceedings. The Company is not a party to any legal proceedings. Item 2. Changes in Securities. (c) Sales of Unregistered Securities -------------------------------- During the three months ended December 31, 1999, the Company issued a total of 25,269 shares of Common Stock to an employee, a director, and consultants of the Company pursuant to the exercise of stock options at a weighted average price of $1.03 per share. During the same period, the Company issued a total of 1,654 shares of Common Stock to a holder of warrants issued to Trautman Kramer & Company, the placement agent for the Company's 1995 private placement of Series B convertible Preferred Stock, at a weighted average exercise price of $15.40 per share. On October 15, 1999, the Company entered into a Securities Purchase Agreement and a Standstill Agreement pursuant to which the Company sold 303,030 Shares for an aggregate purchase price of $5,000,000. The sale was made to an accredited investor in a private placement that was exempt from registration under Rule 506 of Regulation D of the Securities Act. No person acted as an underwriter with respect to the transactions set forth above. In each of the foregoing instances, the Company relied on Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") or Rule 701 promulgated under the Securities Act for the exemption from the registration requirements of the Securities Act, since no public offerings were involved. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. On November 10, 1999, the Company held its Annual Meeting of Shareholders (the "Annual Meeting"). A quorum of 6,089,755 shares of Common Stock of the Company (of a total 9,438,989 outstanding shares, or approximately 64.5%) was represented at the Annual Meeting in person or by proxy, which was held to vote on the following proposals: 1. To elect three members to the Board of Directors. Nominees for Directors were Walter Gilbert, Ph.D., Arthur H. Hayes, Jr., M.D., and John J. Horan. 2. To consider and act upon a proposal to amend the Company's 1992 Employee, Director and Consultant Stock Option Plan to increase, from 2,000,000 to 3,000,000, the aggregate number of shares of Common Stock authorized for issuance thereunder. 3. To consider and act upon a proposal to ratify the appointment of KPMG LLP as the Company's independent public accountants for the fiscal year ending June 30, 2000. Each of the proposals was adopted, with the vote totals as follows: Proposal 1: - ----------- FOR WITHHELD --------- -------- Walter Gilbert, Ph.D. 5,910,122 179,633 14
Arthur H. Hayes, Jr., M.D. 5,541,214 548,541 John J. Horan 5,905,372 184,383 Michael J. Berendt, Ph.D., Alan J. Main, Ph.D., and Dale A. Stringfellow, Ph.D. continue to serve as Directors for terms which expire in 2000 and Peter D. Meldrum and Mark H. Skolnick, Ph.D., continue to serve as Directors for terms which expire in 2001 and until their successors are duly elected and qualified. Proposal 2: - ----------- For 2,752,713 Against 688,040 Abstain 36,043 Broker Non-Vote 2,612,959 Proposal 3: - ----------- For 6,070,354 Against 13,801 Abstain 5,600 Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits -------- The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q. Exhibit Number Description - ------ ----------- 10.1 Master Lease Agreement dated October 25 between Comdisco Laboratory and Scientific Group, a Division of Comdisco Healthcare Group, Inc. and the Company. 10.2 Addendum to the Master Lease Agreement dated October 25, 1999 between Comdisco Laboratory and Scientific Group, a Division of Comdisco Healthcare Group, Inc. and the Company. 10.3 Amendment No. 1 to the Master Lease Agreement dated October 25, 1999 between Comdisco Laboratory and Scientific Group, a Division of Comdisco Healthcare Group, Inc. and the Company. 10.4 Equipment Schedule No. SG01 dated November 10, 1999 to Master Lease Agreement dated October 25, 1999 between Comdisco Laboratory and Scientific Group, a Division of Comdisco Healthcare Group, Inc. and the Company. 27.1 Financial Data Schedule (b) Reports on Form 8-K ------------------- No reports on Form 8-K were filed during the quarter ended December 31, 1999. 15
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. MYRIAD GENETICS, INC. Date: February 14, 1999 By: /s/ Peter D. Meldrum ------------------ --------------------------------------- Peter D. Meldrum President and Chief Executive Officer Date: February 14, 1999 /s/ Jay M. Moyes ------------------ ------------------------------------------ Jay M. Moyes Vice President of Finance (principal financial and accounting officer) 16
MYRIAD GENETICS, INC. EXHIBIT INDEX Exhibit Number Description - ------ ----------- 10.1 Master Lease Agreement dated October 25 between Comdisco Laboratory and Scientific Group, a Division of Comdisco Healthcare Group, Inc. and the Company. 10.2 Addendum to the Master Lease Agreement dated October 25, 1999 between Comdisco Laboratory and Scientific Group, a Division of Comdisco Healthcare Group, Inc. and the Company. 10.3 Amendment No. 1 to the Master Lease Agreement dated October 25, 1999 between Comdisco Laboratory and Scientific Group, a Division of Comdisco Healthcare Group, Inc. and the Company. 10.4 Equipment Schedule No. SG01 dated November 10, 1999 to Master Lease Agreement dated October 25, 1999 between Comdisco Laboratory and Scientific Group, a Division of Comdisco Healthcare Group, Inc. and the Company. 27.1 Financial Data Schedule 17