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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
COMMISSION FILE NO. 0-23659
VYSIS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3803405
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
3100 WOODCREEK DRIVE 60515-5400
DOWNERS GROVE, ILLINOIS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 271-7000
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
--- ---
Number of shares of Common Stock, par value $.001 per share, outstanding as of
July 31, 1998: 9,705,629
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VYSIS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
TABLE OF CONTENTS
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PAGE
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PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Balance Sheet
As of June 30, 1998 and December 31, 1997................. 2
Consolidated Statement of Operations
For the three months ended June 30, 1998 and 1997 ........ 3
Consolidated Statement of Operations
For the six months ended June 30, 1998 and 1997 .......... 4
Consolidated Statement of Cash Flows
For the six months ended June 30, 1998 and 1997 .......... 5
Notes to Consolidated Financial Statements ................. 6-8
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 8-12
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings ............................................ 13
ITEM 2: Changes in Securities and Use of Proceeds .................... 13-14
ITEM 6: Exhibits and Reports on Form 8-K ............................. 14
SIGNATURE ............................................................ 15
</TABLE>
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF AMOCO CORPORATION)
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
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ASSETS
Current assets:
Cash and cash equivalents .................................. $ 10,483 $ 669
Short-term investments ..................................... 13,346 --
Accounts receivable, net ................................... 6,386 4,629
Inventories ................................................ 2,840 2,733
Other current assets ....................................... 895 1,108
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Total current assets ..................................... 33,950 9,139
Property and equipment, net .................................. 4,335 4,646
Investment ................................................... 513 677
Other assets ................................................. 2,092 2,478
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Total assets ............................................. $ 40,890 $ 16,940
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities ................... $ 8,286 $ 8,538
Note payable--Amoco ........................................ -- 9,202
Deferred revenue ........................................... 270 537
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Total current liabilities ................................ 8,556 18,277
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Stockholders' equity (deficit):
Convertible Preferred Stock, $0.001 par value;
10,000,000 shares authorized:
Series A; 6,200,000 shares designated; none
issued and outstanding at June 30, 1998;
6,200,000 issued and outstanding at December 31, 1997 ..... -- 6
Series B; 553,126 shares designated; none issued and
outstanding at June 30, 1998; 553,126 issued and
outstanding at December 31, 1997 .......................... -- 1
Common stock, $0.001 par value; 35,000,000 shares
authorized; 9,711,211 issued and outstanding at
June 30, 1998; 1,071,970 issued and outstanding at
December 31, 1997 ......................................... 10 1
Additional paid-in capital .................................. 71,670 30,396
Deferred compensation ....................................... (144) (206)
Unrealized gains on investment .............................. 413 577
Cumulative translation adjustment ........................... (146) (241)
Accumulated deficit ......................................... (39,469) (31,871)
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Total stockholders' equity (deficit) ...................... 32,334 (1,337)
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Total liabilities and stockholders' equity ................ $ 40,890 $ 16,940
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</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF AMOCO CORPORATION)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1998 1997
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Revenues:
Product sales .............................. $ 6,286 $ 3,646
Grant and other revenues ................... 780 601
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Total revenues ........................... 7,066 4,247
Cost of goods sold ........................... 2,596 1,619
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Gross profit ................................. 4,470 2,628
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Operating expenses:
Research and development ................... 2,900 2,753
Selling, general and administrative ........ 4,937 3,797
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Total operating expenses ................. 7,837 6,550
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Loss from operations ......................... (3,367) (3,922)
Interest income .............................. 359 --
Interest expense ............................. (39) (90)
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Net loss ..................................... $(3,047) $(4,012)
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Basic and diluted net loss per share ......... $ (0.31) $ (3.79)
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Shares used in computing basic and diluted
net loss per share ......................... 9,700 1,058
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF AMOCO CORPORATION)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
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Revenues:
Product sales .................................. $10,845 $ 6,931
Grant and other revenues ....................... 1,272 1,136
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Total revenues ............................... 12,117 8,067
Cost of goods sold ............................... 4,420 3,184
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Gross profit ..................................... 7,697 4,883
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Operating expenses:
Research and development ....................... 5,366 5,313
Selling, general and administrative ............ 10,331 7,077
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Total operating expenses ..................... 15,697 12,390
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Loss from operations ............................. (8,000) (7,507)
Interest income .................................. 572 --
Interest expense ................................. (170) (122)
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Net loss ......................................... $(7,598) $(7,629)
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Basic and diluted net loss per share ............. $ (0.98) $ (7.21)
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Shares used in computing basic and diluted
net loss per share ............................. 7,739 1,058
Pro forma basic and diluted net loss per share ... $ (0.83)
--------
--------
Shares used in computing pro forma basic and
diluted net loss per share ..................... 9,009
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF AMOCO CORPORATION)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................... $ (7,598) $(7,629)
Reconciliation of net loss to net cash used
in operating activities:
Depreciation and amortization .................... 1,364 1,676
Stock compensation ............................... 82 52
Changes in assets and liabilities:
Accounts receivable ............................ (1,759) (190)
Inventories .................................... (28) (291)
Other current assets ........................... 294 (32)
Other assets ................................... (180) --
Accounts payable and accrued liabilities ....... (281) (355)
Deferred revenue ............................... (180) (313)
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Net cash used in operating activities ............ (8,286) (7,082)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments ................ (13,346) --
Purchases of property and equipment ................ (423) (200)
Increase in other assets ........................... (102) (296)
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Net cash used in investing activities ............ (13,871) (496)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............. 32,161 --
Increase in note payable--Amoco .................... 1,665 7,512
Expenses funded by Amoco ........................... 153 245
Loan repayment to Amoco ............................ (2,000) --
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Net cash provided by financing activities ........ 31,979 7,757
Effect of exchange rate changes on cash .............. (8) (56)
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Net increase in cash ................................. 9,814 123
Cash and cash equivalents at beginning of period ..... 669 48
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Cash and cash equivalents at end of period ........... $ 10,483 $ 171
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</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--ORGANIZATION AND BUSINESS:
Vysis, Inc. ("Vysis" or the "Company") was incorporated in Delaware in
1991. The Company's principal stockholder is Amoco Technology Company
("ATC"), which is a wholly owned subsidiary of Amoco Corporation ("Amoco").
In 1991, ATC acquired from Genzyme its remaining interest in Gene-Trak
Systems, a joint venture focused on infectious disease diagnostics originally
formed by Amoco and Integrated Genetics in 1986, and established Gene-Trak,
Inc., a Delaware corporation, which at that time was named Gene-Trak Systems
Corporation. In March 1994, ATC contributed all of its infectious disease
business related assets and the stock of Gene-Trak, Inc. to the Company.
Also, in March 1994, ATC contributed to the Company all of its genetic
disease business related assets, including the stock of Vysis, Inc., an
Illinois corporation, which at that time was named Imagenetics Incorporated.
In January 1995, ATC contributed to the Company all of the assets of its
bioinformatics software activities. All assets contributed by Amoco were
recorded by the Company at Amoco's net book value at the date of transfer.
All references to Amoco shall mean Amoco Corporation, an Indiana corporation,
and its wholly owned subsidiary, Amoco Technology Company, a Delaware
corporation.
Vysis is a genomic disease management company focused on developing and
marketing clinical products to assess the structure and function of the human
genome. The Company's DNA probe technologies provide the clinician with an
enhanced ability to manage disease by assessing the human genome at all
levels, including the ability to determine the presence, absence, number and
structure of chromosomes, individual genes, and specific base pair mutations
within genes. The Company currently markets its genomic testing products for
research and clinical use and markets its food testing products for
commercial use.
The Company completed an initial public offering of 3,000,000 shares of
its Common Stock (the "Offering") on February 10, 1998, resulting in net cash
proceeds of approximately $32.1 million. In connection with the Offering,
6,200,000 and 553,126 shares of Series A and Series B Convertible Preferred
Stock, respectively, automatically converted into 4,525,547 and 403,741
shares of Common Stock, respectively. In addition, concurrent with the
completion of the Offering, the Company converted $8.1 million of the note
payable-Amoco, which was net of a capital contribution of approximately $1
million related to the tax effect of including the Company's results of
operations through February 10, 1998 in Amoco's consolidated federal income
tax return, into 675,000 shares of Common Stock and repaid the remaining note
balance of $2.0 million. Upon completion of the Offering, the Company had
approximately 9.7 million shares of Common Stock issued and outstanding.
6
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VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 2--FINANCIAL INFORMATION:
The unaudited interim consolidated financial statements of the Company
have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 and the Company's Quarterly Report on Form 10-Q for the
three months ended March 31, 1998, as filed with the Securities and Exchange
Commission.
In the opinion of management, the interim consolidated financial
statements reflect all adjustments necessary for a fair presentation of the
interim periods. All such adjustments are of a normal, recurring nature.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for a full year.
NOTE 3--NET LOSS PER SHARE:
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
requires presentation of both basic and diluted earnings per share. Basic
earnings per share is computed using the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share also
includes the impact of potential common shares during the period. No
reconciliation is presented of basic and diluted net loss per share as
potential common shares are antidilutive. Certain prior period amounts have
been restated in accordance with SFAS No. 128.
Pro forma net loss per share for the six months ended June 30, 1998 was
calculated using the weighted average number of common shares outstanding
during the period, adjusted for the conversion of the Series A and Series B
Convertible Preferred Stock into 4,929,288 shares of Common Stock and for the
conversion of $8.1 million of the note payable-Amoco into 675,000 shares of
Common Stock, all as of January 1, 1998.
NOTE 4--RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information."
SFAS No. 131 establishes new standards for reporting information about
operating segments in interim and annual financial statements. SFAS No. 131
will be effective for the Company's annual reporting requirements for the
1998 fiscal year. The Company is currently
7
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VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
evaluating the impact, if any, this statement will have on disclosures in the
notes to its consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999 and requires that all derivative instruments be recorded
on the balance sheet at their fair value. Management of the Company
anticipates that, because it does not employ derivative instruments, the
adoption of SFAS No. 133 will not have a significant effect on the Company's
results of operations or its financial position.
NOTE 5--COMPOSITION OF BALANCE SHEET COMPONENT:
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
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Raw materials and supplies ...................... $1,045 $1,198
Finished goods .................................. 1,795 1,535
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$2,840 $2,733
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NOTE 6--COMPREHENSIVE INCOME:
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
Statement requires that all items recognized under accounting standards as
components of comprehensive earnings be reported in interim and annual
financial statements in the same prominence as other interim and annual
financial statements. This Statement also requires that an entity classify
items of other comprehensive earnings by their nature in interim and annual
financial statements. Other comprehensive earnings includes foreign currency
translation adjustments and unrealized gains and losses on investments
classified as available-for-sale. No statement of comprehensive earnings is
presented as the effect of the adoption of this Standard is immaterial to the
consolidated financial statements and notes thereto.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's results and
8
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VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
financial condition. The discussion should be read in conjunction with the
audited consolidated financial statements of the Company and notes thereto,
which were included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 as well as the financial statements of the Company
and notes thereto, which were included in the Company's Quarterly Report on
Form 10-Q for the three months ended March 31, 1998. This Form 10-Q contains
certain statements which describe the Company's beliefs concerning future
business conditions and the outlook for the Company based on currently
available information. Whenever possible, the Company has identified these
"forward-looking" statements (as defined in Section 21E of the Securities
Exchange Act of 1934) by words such as "anticipates", "believes",
"estimates", "expects", and similar expressions. These forward-looking
statements are subject to risks and uncertainties which could cause the
Company's actual results, performance and achievements to differ materially
from those expressed in or implied by these statements. These risks and
uncertainties include, but are not limited to, the following: the acceptance
of DNA based genetic probes by the medical community, the receipt by the
Company of necessary regulatory approvals in a timely fashion, compliance by
the Company with regulatory requirements, dependence by the Company on gene
discovery and disease correlation efforts of others, the acquisition by the
Company of rights to develop tests utilizing intellectual property of others,
uncertainties relating to the development of new technologies, dependence on
the success of collaborative partners and the Company's success in defending
its own intellectual property rights and avoiding infringing those of others.
OVERVIEW
Vysis is a leading genomic disease management company that develops,
commercializes and markets clinical products that provide information
critical to the evaluation and management of cancer, prenatal disorders and
other genetic diseases. During March 1998, the Company received registration
from the Agence du Medicament ("ADM") to market throughout Europe the
AneuVysion-TM- EC Assay for Down Syndrome and other chromosomal disorders
associated with mental retardation and birth defects. The Company has a
pending application for registration with the ADM to market CEP-Registered
Trademark- X SpectrumOrange-TM-/Y SpectrumGreen-TM- ("CEP X/Y"),
CEP-Registered Trademark- 8 SpectrumOrange-TM-("CEP 8") and CEP-Registered
Trademark- 12 SpectrumOrange-TM- ("CEP 12") DNA Probe Kits, in vitro
diagnostics, for use as adjuncts to standard cytogenetic analysis to identify
and enumerate the presence of chromosomes X, Y, 8 and 12 in bone marrow and
blood specimens, thus aiding in the diagnosis and treatment of leukemia
patients. During June 1998, the Company filed a premarket approval ("PMA")
application with the U.S. Food and Drug Administration ("FDA") for a breast
cancer test, the PathVysion-TM- HER-2/neu DNA probe kit, which is intended to
rapidly assess the amplification of the HER-2/neu gene for use as a
predictive marker for response to chemotherapy. Vysis currently markets five
FDA cleared clinical products, including the U.S. versions of CEP X/Y, CEP 8
and CEP 12 and AneuVysion-TM- which received 510(k) clearance by the FDA
during 1997, in addition to distributing over 290 research products through
its direct sales
9
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VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
operations in the United States and Europe and a worldwide distribution
network covering 41 countries. It also markets proprietary genetic imaging
workstations for clinical and research use, with an installed base of over
510 proprietary genetic workstations in 21 countries. The Company also
develops, manufactures and commercializes products used by food processors
and quality control laboratories for the detection and identification of
food-borne pathogens.
RESULTS OF OPERATIONS
Total revenues for the three months ending June 30, 1998 increased 66%
to $7.1 million compared to the second quarter of 1997. This increase was
the result of a 72% increase in product sales, slightly offset by a 30%
increase in grant and other revenues. For the six months ended June 30,
1998, total revenues increased 50% to $12.1 million compared to the first
half of 1997. This increase for the first six months was the result of a 56%
increase in product sales, partially offset by a 12% increase in grant and
other revenues. Sales of the Company's genetic testing products increased 86%
and 68% for the three months and six months ended June 30, 1998,
respectively, in comparison to the related prior year periods. This genetic
testing product sales increase accounted for the growth in product revenues
during the second quarter as well as the first half of 1998, which were
primarily the result of an increased number of shipments of Vysis genetic
testing research and clinical reagents to both domestic and international
customers. In addition, the increase in genetic testing product revenues
during the three and six months ended June 30, 1998 was partially the result
of sales attributable to receiving the assets of Oncor, Inc.'s ("Oncor")
non-oncology Fluorescence in situ Hybridization ("FISH") business as part of
a definitive agreement signed April 9, 1998, which ended a patent
infringement suit brought by the Company, as exclusive licensee, and its
licensor. See Item 1 in Part II for further discussion of the settlement.
Sales of the Company's food testing products for the three and six months
ended June 30, 1998 were relatively flat compared to the same periods in the
prior year. For the three and six months ended June 30, 1998, grant and
other revenues increased $.2 million and $.1 million, respectively, in
comparison to respective prior year periods primarily due to $.4 million of
nonrecurring license and other revenue related to the Oncor agreement. These
were partially offset by a reduction in grant revenue resulting from the
completion of one of two United States Department of Commerce research
grants.
Cost of goods sold increased to $2.6 million and $4.4 million for the
three and six months ended June 30, 1998, respectively, from $1.6 million and
$3.2 million for the comparative 1997 periods. These increases in cost of
goods sold resulted from an increase in the volume of products sold. As a
percentage of total revenue, gross profit increased to 63.3% and 63.5% for
the three and six months ended June 30, 1998, respectively, from 61.9% and
60.5% for the three and six months ended June 30, 1997, respectively. These
increases, offset by the decrease in grant revenue as a percentage of total
revenues, were primarily attributable to a shift in the product mix of
genetic testing products. During the three and six months ended June 30,
1998, higher margin reagent
10
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VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
sales accounted for a larger percentage of the Company's total product
revenues than did lower margin instrument sales, compared to the same periods
of the prior year.
Operating expenses increased to $7.8 million and $15.7 million for the
three and six months ended June 30, 1998, respectively, representing a $1.3
million and $3.3 million increase over the comparative prior year periods.
Research and development expenses of $2.9 million and $5.4 million represent
an increase of $.1 million for both the three and six months ended June 30,
1998 as compared to the respective prior year periods. Selling, general and
administrative expenses increased to $4.9 million and $10.3 million for the
three and six months ended June 30, 1998, respectively, representing an
increase of $1.1 million and $3.2 million as compared to the respective prior
year periods. These overall increases were primarily driven by the expansion
of sales and marketing effort as well as an increase in other expenses
incurred to manage the overall Company growth and expansion of operations.
Interest income increased to $.4 million and $.6 million for the three
and six months ended June 30, 1998, respectively, representing a $.4 million
and $.6 million increase over the comparative prior year periods as a result
of the investment of the proceeds from the Offering. For the three months
ended June 30, 1998, interest expense decreased slightly as compared to the
prior year as the Company no longer carries a balance owed to Amoco as it did
in 1997 when it was a wholly owned subsidiary. For the six months ended June
30, 1998, interest expense increased slightly as compared to the first half
of 1997 due to the higher weighted average balance of the note payable-Amoco
through the Offering date in comparison to the six months ended June 30, 1997.
The Company's results of operations have been included in the
consolidated income tax returns of Amoco from inception through February 10,
1998. Accordingly, the Company's domestic net operating losses through this
date have been utilized by Amoco and are not available to offset the
Company's future taxable income. As a result of the Offering, the Company
will no longer be included in the Amoco consolidated federal income tax
return. Accordingly, net operating losses incurred from February 10, 1998
can be carried forward by the Company to offset future taxable income. A
full valuation allowance has been provided for all net deferred tax assets at
June 30, 1998 as management does not consider realization of such amounts
more likely than not.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
Net cash used in operating activities was $8.3 million for the six
months ended June 30, 1998, an increase of $1.2 million over the same period
in 1997 driven primarily by an increase in working capital requirements. Net
loss was $7.6 million for each of the respective six month periods ended June
30, 1998 and 1997. Depreciation and amortization decreased $0.3 million in
the first half of 1998 primarily as a result of two significant licenses that
became fully amortized during 1997. Primary working capital (accounts
receivable and inventory, less payables) requirements increased in 1998 to
$2.1
11
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VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
million from $0.8 million in 1997. This principally resulted from the
additional accounts receivable due to the increase in total revenues. In
addition, operating cash flow requirements increased as a result of a $.2
million increase in other assets during 1998 as compared to 1997.
Net cash flows used in investing activities increased to $13.9 million
for the first half of 1998 from $0.5 million in the prior year. This
increase resulted primarily from the purchase of short-term investments
subsequent to the receipt of the proceeds from the Offering.
Net cash flows provided by financing activities for the first six months
of 1998 were $32.0 million compared to $7.8 million in the same period of
1997. The $24.2 million increase resulted from the receipt of $32.1 million
in proceeds from the Offering, partially offset by the reduced borrowings
from Amoco. Such borrowings ceased February 10, 1998 upon the completion of
the Offering, at which time the remaining $2.0 million note balance with Amoco
was repaid.
The Company believes that the net proceeds from the Offering, and the
interest to be earned thereon, will be sufficient to fund the Company's
operations well into 1999. The Company's estimate of the time period for
which cash funds will be adequate to fund its operations is a forward looking
estimate subject to risks and uncertainty, and actual results may differ
materially. The Company's requirements for additional capital will depend on
many factors, including payments received under existing and potential
collaborative agreements; the availability of government research grant
payments; the progress of the Company's collaborative and independent
research and development projects; the costs of preclinical and clinical
trials for the Company's products; the prosecutions, defense and enforcement
of patent claims and other intellectual property rights; and the development
of manufacturing, sales and marketing capabilities. To the extent capital
resources, including payments from existing and possible future collaborative
agreements and grants, together with the net proceeds from the Offering, are
insufficient to meet future capital requirements, the Company will have to
raise additional funds to continue the development of its technologies.
There can be no assurance that such funds will be available on favorable
terms, or at all. To the extent that additional capital is raised through
the sale of equity or convertible debt securities, the issuance of such
securities could result in dilution to the Company's shareholders. If
adequate funds are not available, the Company may be required to curtail
operations significantly or to obtain funds through entering into
collaborative agreements on unattractive terms. The Company's inability to
raise capital as and when needed would have a material adverse effect on the
Company's business, financial condition and the results of operations.
12
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VYSIS, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3. Legal Proceedings in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 for
discussion of litigation matters relating to the Company. The Company holds
contingent rights from the Center for Neurologic Study ("CNS") to a license
under U.S. Patent Nos. 4,851,330 and 5,288,611 (the "Kohne Patents") assigned
to Gen-Probe, Inc. ("Gen-Probe"). CNS has sued Gen-Probe in California state
court challenging Gen-Probe's title to the Kohne Patents. The Company
reimburses CNS' legal expenses from this litigation. A California state
court jury rendered a verdict in December 1997 that certain of CNS' claims of
title to the Kohne Patents were barred as untimely raised. Although the
California state court has not yet entered the jury verdict as a final
judgment, the Company understands that the court dismissed all remaining
claims on July 21, 1998. The Company understands that CNS is evaluating its
options, including an appeal. There can be no assurances the Company will
acquire rights in the Kohne Patents.
On April 9, 1998, the Company entered into a definitive agreement with Oncor,
Inc. ("Oncor"), ending a patent infringement suit brought by the Company, as
exclusive licensee, and the Regents of the University of California (the
"University"). The suit asserted that Oncor had infringed U.S. Patent
5,447,841 (the "'841 Patent"), covering methods of Fluorescence in situ
Hybridization ("FISH") using gene-specific DNA probes together with blocking
DNA. Under the agreement, the Company received Oncor's non-oncology FISH
genetic probe business, including existing inventory and associated
intellectual property. Further, as part of the settlement, the Company
granted Oncor a non-exclusive, worldwide royalty-bearing license in the field
of oncology under the '841 Patent and other patents and applications for the
sale by Oncor of its oncology FISH-based products. The Company and the
University shared equally a $500,000 license fee received pursuant to the
settlement and will share equally an additional $1.5 million license fee due
on April 9, 2000 to maintain this license in force.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the Offering (see Note 1 of the Notes to Consolidated
Financial Statements for further discussion), the Company received net
proceeds of $32.1 million from the sale of 3,000,000 shares of its Common
Stock. From the closing date of the Offering, February 10, 1998 to June 30,
1998, the Company used such net offering proceeds as follows (in millions):
13
<PAGE>
VYSIS, INC.
PART II. OTHER INFORMATION--(CONTINUED)
<TABLE>
<S> <C>
Purchase of short-term investments and cash equivalents ..... $23.8
Repayment of note payable-Amoco ............................. 2.0
Acceleration of product development, expansion of sales and
marketing capabilities and funding of increased working
capital requirements and ongoing operations ............... 6.3
-----
Total ....................................................... $32.1
-----
-----
</TABLE>
Each of these amounts is a reasonable estimate of the application of the
net offering proceeds. This use of proceeds does not represent a material
change in the use of proceeds described in the Prospectus for the Offering.
Other than the repayment of a note payable to Amoco in the amount of $2.0
million, none of such amounts (with the exception of salaries and directors'
fees and working capital advances to subsidiaries incurred in the ordinary
course of business) represented direct or indirect payments to (i) directors
or officers of the Company or their associates, (ii) persons owning 10% or
more of any class of equity securities of the Company or (iii) affiliates of
the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
Exhibit 27, Financial Data Schedule (included only in the electronic
filing of this document).
REPORTS ON FORM 8-K
The registrant did not file any reports on Form 8-K during the quarter.
14
<PAGE>
SIGNATURE
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.
VYSIS, INC.
Date: August 12, 1998 By: /s/ JAMES J. HABSCHMIDT
-----------------------------
Name: James J. Habschmidt
TITLE: EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 10,483 0
<SECURITIES> 13,346 0
<RECEIVABLES> 7,177 0
<ALLOWANCES> (791) 0
<INVENTORY> 2,840 0
<CURRENT-ASSETS> 33,950 0
<PP&E> 11,392 0
<DEPRECIATION> 7,057 0
<TOTAL-ASSETS> 40,890 0
<CURRENT-LIABILITIES> 8,556 0
<BONDS> 0 0
0 0
0 0
<COMMON> 10 0
<OTHER-SE> 32,324 0
<TOTAL-LIABILITY-AND-EQUITY> 40,890 0
<SALES> 10,845 6,931
<TOTAL-REVENUES> 1,272 1,136
<CGS> 4,420 3,184
<TOTAL-COSTS> 20,117 15,574
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 624 24
<INTEREST-EXPENSE> 170 122
<INCOME-PRETAX> (7,598) (7,627)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (7,598) (7,627)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,598) (7,627)
<EPS-PRIMARY> (0.98) (7.21)
<EPS-DILUTED> (0.98) (7.21)
</TABLE>
