<PAGE>
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 SEPTEMBER 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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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
November 12, 1998: 9,759,758
<PAGE>
VYSIS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I: FINANCIAL INFORMATION
<S> <C>
ITEM 1: Financial Statements
Consolidated Balance Sheet
As of September 30, 1998 and December 31, 1997............ 2
Consolidated Statement of Operations
For the three months ended September 30, 1998 and 1997.... 3
Consolidated Statement of Operations
For the nine months ended September 30, 1998 and 1997..... 4
Consolidated Statement of Cash Flows
For the nine months ended September 30, 1998 and 1997..... 5
Notes to Consolidated Financial Statements..................... 6-9
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 9-13
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings................................................... 13-14
ITEM 2: Changes in Securities and Use of Proceeds........................... 14
ITEM 4: Submission of Matters to a Vote of Security Holders................. 15
ITEM 6: Exhibits and Reports on Form 8-K.................................... 15
SIGNATURE....................................................................... 16
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF AMOCO CORPORATION)
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 13,199 $ 669
Short-term investments .................................................... 8,639 --
Accounts receivable, net .................................................. 5,561 4,629
Current portion of long-term lease receivables ............................ 549 --
Inventories ............................................................... 2,637 2,733
Other current assets ...................................................... 1,102 1,108
-------- --------
Total current assets .................................................. 31,687 9,139
Property and equipment, net .................................................... 4,110 4,646
Investment ..................................................................... 320 677
Long-term lease receivables .................................................... 839 --
Other assets ................................................................... 2,020 2,478
-------- --------
Total assets .......................................................... $ 38,976 $ 16,940
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt ......................................... $ 534 $ --
Accounts payable and accrued liabilities .................................. 8,265 8,538
Note payable--Amoco ....................................................... -- 9,202
Deferred revenue .......................................................... 948 537
-------- --------
Total current liabilities ............................................. 9,747 18,277
-------- --------
Long-term debt ................................................................. 664 --
-------- --------
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 September 30, 1998; 6,200,000 issued and outstanding at
December 31, 1997...................,.................................. -- 6
Series B; 553,126 shares designated; none issued and outstanding at
September 30, 1998; 553,126 issued and outstanding at December 31,
1997................................................................... -- 1
Common stock, $0.001 par value; 35,000,000 shares authorized; 9,756,669
issued and outstanding at September 30, 1998; 1,071,970
issued and outstanding at December 31, 1997 ........................... 10 1
Additional paid-in capital ................................................ 71,712 30,396
Deferred compensation ..................................................... (109) (206)
Unrealized gain on investment ............................................. 220 577
Cumulative translation adjustment ......................................... (77) (241)
Accumulated deficit ....................................................... (43,191) (31,871)
-------- --------
Total stockholders' equity (deficit) .................................. 28,565 (1,337)
-------- --------
Total liabilities and stockholders' equity ............................ $ 38,976 $ 16,940
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF AMOCO CORPORATION)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1997
------- -------
<S> <C> <C>
Revenues:
Product revenue ............................................. $ 4,590 $ 3,627
Grant and other revenues .................................... 466 531
------- -------
Total revenues .......................................... 5,056 4,158
Cost of goods sold ............................................... 1,991 1,589
------- -------
Gross profit ..................................................... 3,065 2,569
------- -------
Operating expenses:
Research and development .................................... 2,916 2,449
Selling, general and administrative ......................... 4,182 3,708
------- -------
Total operating expenses ................................ 7,098 6,157
------- -------
Loss from operations ............................................. (4,033) (3,588)
Interest income .................................................. 454 --
Interest expense ................................................. (143) (245)
------- -------
Net loss ......................................................... $(3,722) $(3,833)
------- -------
------- -------
Basic and diluted net loss per share ............................. $ (0.38) $ (3.62)
------- -------
------- -------
Shares used in computing basic and diluted net loss per share .... 9,729 1,058
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF AMOCO CORPORATION)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues:
Product revenue ............................................. $ 15,435 $ 10,558
Grant and other revenues .................................... 1,738 1,667
-------- --------
Total revenues .......................................... 17,173 12,225
Cost of goods sold ............................................... 6,411 4,773
-------- --------
Gross profit ..................................................... 10,762 7,452
-------- --------
Operating expenses:
Research and development .................................... 8,282 7,762
Selling, general and administrative ......................... 14,513 10,785
-------- --------
Total operating expenses ................................ 22,795 18,547
-------- --------
Loss from operations ............................................. (12,033) (11,095)
Interest income .................................................. 1,026 --
Interest expense ................................................. (313) (367)
-------- --------
Net loss ......................................................... $(11,320) $(11,462)
-------- --------
-------- --------
Basic and diluted net loss per share ............................. $ (1.35) $ (10.83)
-------- --------
-------- --------
Shares used in computing basic and diluted net loss per share .... 8,410 1,058
Pro forma basic and diluted net loss per share ................... $ (1.21)
--------
--------
Shares used in computing pro forma basic and diluted net loss
per share ........................................................ 9,252
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF AMOCO CORPORATION)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................... $(11,320) $(11,462)
Reconciliation of net loss to net cash used in operating
activities:
Depreciation and amortization .............................. 1,713 2,360
Loss on disposition of property and equipment .............. -- 5
Stock compensation ......................................... 117 108
Changes in assets and liabilities:
Accounts receivable ................................... (709) (756)
Inventories ........................................... 186 (380)
Other current assets .................................. 108 (176)
Lease receivables ..................................... (1,388) --
Other assets .......................................... (151) --
Accounts payable and accrued liabilities .............. (426) (178)
Deferred revenue ...................................... 397 145
-------- --------
Net cash used in operating activities ...................... (11,473) (10,334)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of short-term investments ............. 8,469 --
Purchases of short-term investments ............................ (17,108) --
Purchases of property and equipment ............................ (534) (249)
Proceeds from the sale of property and equipment ............... -- 7
Increase in other assets ....................................... (82) (629)
-------- --------
Net cash used in investing activities ...................... (9,255) (871)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ......................... 32,142 --
Proceeds from option plan exercises ............................ 60 8
Increase in note payable--Amoco ................................ 1,665 10,939
Expenses funded by Amoco ....................................... 153 509
Loan repayment to Amoco ........................................ (2,000) --
Proceeds from long-term borrowings ............................. 1,488 --
Principal payments on long-term borrowings ..................... (287) --
-------- --------
Net cash provided by financing activities .................. 33,221 11,456
Effect of exchange rate changes on cash ............................. 37 (5)
-------- --------
Net increase in cash ................................................ 12,530 246
Cash and cash equivalents at beginning of period .................... 669 48
-------- --------
Cash and cash equivalents at end of period .......................... $ 13,199 $ 294
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
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 Reports on Form 10-Q for the
three months ended March 31, 1998 and June 30, 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 nine months ended September 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, due to its nonuse of 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>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Raw materials and supplies................... $1,040 $1,198
Finished goods............................... 1,597 1,535
------ ------
$2,637 $2,733
------ ------
------ ------
</TABLE>
NOTE 6--LEASE RECEIVABLES AND LONG-TERM DEBT:
A wholly-owned foreign subsidiary of the Company has entered into
certain sales-type leasing transactions with customers. In order to comply with
local regulations with respect to such leasing transactions, the subsidiary must
borrow money and has assigned to the lender a security interest in the lease
receivables and related equipment. The debt is payable in monthly or quarterly
installments, matures over the next three years and bears interest at rates
ranging from 6.4% to 9.5%. The aggregate maturities of gross lease receivables
and long-term debt for the years ending September 30, are as follows:
<TABLE>
<CAPTION>
Gross Long-Term
Receivables Debt
----------- ---------
<S> <C> <C>
1999................................... $ 621 $ 534
2000................................... 566 510
2001................................... 284 154
------ ------
$1,471 $1,198
------ ------
------ ------
</TABLE>
The components of net lease receivables are as follows:
8
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30,
1998
-------------
<S> <C>
Gross lease receivables......................... $1,471
Unearned income................................. (83)
------
$1,388
------
------
</TABLE>
NOTE 7--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 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 Reports on Form 10-Q for the three months ended March 31, 1998 and
June 30, 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
9
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VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
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. The Company currently markets clinical products
cleared by the U.S. Food and Drug Administration and the French Agence du
Medicament, and a line of research products, imaging workstations and other
instruments for genetic analysis. 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 November 1998, the Immunology Devices Panel of the
U.S. Food and Drug Administration ("FDA") unanimously recommended FDA
conditional approval of the Company's PathVysion-TM- HER-2 DNA probe kit,
which is intended to detect and rapidly assess the amplification of the HER-2
gene for use as a predictive marker for response to adriamycin based
chemotherapy in node positive Stage II breast cancer patients. 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, and over 310 research products. The
company has direct sales operations in the United States and Europe, a
marketing partnership in Japan with Fujisawa Pharmaceutical Co., and a
worldwide distribution network.
RESULTS OF OPERATIONS
Product revenue for the three months ending September 30, 1998 was
$4.6 million, an increase of 27% compared to the third quarter of 1997, while
grant and other revenues of $0.5 million represented a 12% decrease as
compared to the prior year
10
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VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
quarter. As a result, total revenues for the third quarter increased by 22%
to $5.1 million in comparison to $4.2 million in the prior year quarter. For
the nine months ended September 30, 1998, product revenue increased 46% to
$15.4 million over the same prior year period, while grant and other revenues
increased 4% to $1.7 million. As a result, total revenues for the first three
quarters of 1998 increased by 40% to $17.2 million as compared to $12.2
million in the prior year period. The growth in product revenue during the
third quarter as well as the first nine months of 1998 was primarily the
result of an increased number of shipments of Vysis developed research and
clinical reagents to both domestic and international customers. In addition,
the increase in genetic testing product revenue during the nine months ended
September 30, 1998 was partially the result of sales attributable to
receiving Oncor Inc.'s ("Oncor") non-oncology Fluorescence IN SITU
Hybridization ("FISH") business as part of a settlement agreement ending a
patent infringement suit brought by the Company, as exclusive licensee, and
its licensor against Oncor, Inc. For the three months ended September 30,
1998, grant and other revenues decreased $0.1 million primarily due to the
completion in 1998 of two United States' Department of Commerce research
grants. For the nine months ended September 30, 1998, grant and other
revenues increased $0.1 million primarily due to nonrecurring license and other
revenues related to the previously mentioned agreement with Oncor, partially
offset by the aforementioned completion of the two research grants.
Cost of goods sold increased to $2.0 million and $6.4 million for the
three and nine months ended September 30, 1998, respectively, from $1.6
million and $4.8 million for the comparative 1997 periods. The increase in
cost of goods sold during the three and nine month periods resulted from an
increase in the volume of products sold. As a percentage of total revenue,
gross profit decreased to 60.6% for the third quarter of 1998 from 61.8% for
the comparative 1997 period primarily due to the previously mentioned
reduction in grant and other revenues. For the nine months ended September
30, 1998, the gross margin percentage increased to 62.7% as compared to 61.0%
for the same period in 1997, primarily attributable to higher margin reagent
revenue accounting for a larger percentage of the Company's total product
revenue than did lower margin instrument revenue.
Operating expenses increased to $7.1 million and $22.8 million for
the three and nine months ended September 30, 1998, respectively,
representing a $0.9 million and $4.2 million increase over the comparative
prior year periods. Research and development expenses of $2.9 million and
$8.3 million for the three and nine months ended September 30, 1998,
respectively, represent an increase of $0.4 million and $0.5 million as
compared to the respective prior year periods. Selling, general and
administrative expenses increased to $4.2 million and $14.5 million for the
three and nine months ended September 30, 1998, respectively, representing an
increase of $0.5 million and $3.7 million as compared to the respective prior
year periods. These operating expense increases were primarily driven by
increased research and development activities, the expansion of sales and
marketing efforts and additional general and administrative expenses incurred
to manage the overall Company growth and expansion of operations.
11
<PAGE>
VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
Interest income increased to $0.5 million and $1.0 million for the
three and nine months ended September 30, 1998, respectively, representing a
$0.5 million and $1.0 million increase over the comparative prior year periods
primarily as a result of the investment of the proceeds from the Offering.
For the three and nine months ended September 30, 1998, interest expense
decreased slightly as compared to the prior year primarily due to the Company
no longer carrying a balance due to Amoco as it did in 1997 when it was a
wholly owned subsidiary.
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
September 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 $11.5 million for the nine
months ended September 30, 1998, an increase of $1.1 million over the same
period in 1997 driven primarily by an increase in working capital
requirements. Net loss was $11.3 million and $11.5 million for the nine
months ended September 30, 1998 and 1997, respectively. Depreciation and
amortization decreased $0.6 million during the first nine months of 1998
primarily as a result of two significant licenses that became fully amortized
during 1997. Primary working capital (accounts and lease receivables and
inventories, less accounts payables and accrued liabilities) requirements
increased in 1998 to $2.3 million from $1.3 million in 1997 primarily due to
an increase in receivables. In addition, operating cash flow requirements
decreased as a result of a $.3 million increase in deferred revenue during
1998 as compared to 1997.
Net cash flows used in investing activities increased to $9.3 million
for the first nine months of 1998 from $0.9 million in the prior year. This
increase resulted primarily from the purchase of short-term investments, net
of proceeds from maturities, as a result of investing a portion of the
proceeds from the Offering.
Net cash flows provided by financing activities for the first nine
months of 1998 were $33.2 million, an increase of $21.8 million over the
prior year period. This increase primarily resulted from the receipt of $32.1
million in proceeds from the Offering and $1.2 million of long-term debt
borrowings, net of repayments (see Note 6 for further discussion of long-term
debt), partially offset by the reduced borrowings from Amoco. Such borrowings
from Amoco ceased February 10, 1998, upon the completion of the Offering at
which time the remaining $2.0 million note balance with Amoco was repaid.
12
<PAGE>
VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
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 2000. 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 other 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.
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. The Company understands
that the court dismissed all remaining claims on July 21, 1998 and that a
final judgment has now been entered in CNS' matter. The Company understands
that
13
<PAGE>
VYSIS, INC.
OTHER INFORMATION--(CONTINUED)
CNS has filed a notice of appeal and continues to evaluate its options. There
can be no assurances the Company will acquire rights in the Kohne Patents.
The Company and other parties have been defendants in a suit pending
in the United States District Court in the Southern District of California
(San Diego). The suit was brought by Gen-Probe, Inc. and alleged infringement
of the Kohne Patents and various claims that the defendants competed unfairly
with Gen-Probe. The suit had been stayed pending the outcome of the suit
filed by CNS. That stay was lifted recently and Gen-Probe has filed an
amended complaint. The amended complaint alleges that the Company, Amoco
Corporation and Amoco Technology Company induced infringement of the Kohne
Patents at issue in the earlier complaint. The amended complaint further
alleges direct infringement by the Company's subsidiary Gene-Trak, Inc. and
its division Gene-Trak Systems Industrial Diagnostics. No other claims are
pending in Gen-Probe's complaint at this time. The Company has not yet filed
an answer to the complaint and intends to vigorously contest this action.
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
September 30, 1998, the Company used such net offering proceeds as follows
(in millions):
<TABLE>
<CAPTION>
<S> <C>
Purchase of short-term investments and cash equivalents........ $21.8
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................ 8.3
-----
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
million, none of such amounts (with the exception of salaries and directors'
fees and working capital advances to affiliates 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.
14
<PAGE>
VYSIS, INC.
OTHER INFORMATION--(CONTINUED)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On or about July 1, 1998, proxy materials were distributed to all
shareholders of record as of the close of business on June 26, 1998. The
results of the shareholders' votes were disclosed at the 1998 annual meeting
of shareholders (the "Annual Meeting") of the Company which convened on
July 22, 1998.
At the Annual Meeting, the following individuals were elected by the
votes indicated as directors of the Company until the 1999 Annual Meeting and
their successors have been elected and qualified:
<TABLE>
<CAPTION>
Nominee For Withheld
------------------------ ------- ------------
<S> <C> <C>
Robert C. Carr 8,945,993 2,500
William M. Bartlett 8,946,193 2.300
John L. Bishop 8,946,193 2,300
Kenneth L. Melmon 8,946,193 2,300
Walter R. Quanstrom 8,945,993 2,500
Frank J. Sroka 8,945,993 2,500
Richard C. Williams 8,946,193 2,300
</TABLE>
The other item acted upon at the Annual Meeting was the adoption of
the 1998 Long Term Incentive Plan (the "Plan") described in the proxy
materials. The plan was approved by the following vote:
<TABLE>
<CAPTION>
For Against Abstained Non-vote
------------- ----------- ------------- ------------
<S> <C> <C> <C>
7,197,421 648,297 4,300 1,098,475
</TABLE>
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.
15
<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: November 13, 1998 By: /s/ JAMES J. HABSCHMIDT
-------------------------------------
Name: James J. Habschmidt
TITLE: EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 13,199
<SECURITIES> 8,639
<RECEIVABLES> 6,983
<ALLOWANCES> 873
<INVENTORY> 2,637
<CURRENT-ASSETS> 31,687
<PP&E> 11,402
<DEPRECIATION> 7,292
<TOTAL-ASSETS> 38,976
<CURRENT-LIABILITIES> 9,747
<BONDS> 664
0
0
<COMMON> 10
<OTHER-SE> 28,555
<TOTAL-LIABILITY-AND-EQUITY> 38,976
<SALES> 15,435
<TOTAL-REVENUES> 17,173
<CGS> 6,411
<TOTAL-COSTS> 29,206
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 614
<INTEREST-EXPENSE> 313
<INCOME-PRETAX> (11,320)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,320)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,320)
<EPS-PRIMARY> (1.21)
<EPS-DILUTED> (1.21)
</TABLE>
