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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 MARCH 31, 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 May 12, 1998: 9,703,940
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VYSIS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 March 31, 1998 and December 31, 1997. . . . . . . . . . 2
Consolidated Statement of Operations
For the three months ended March 31, 1998 and 1997. . . . . . 3
Consolidated Statement of Cash Flows
For the three months ended March 31, 1998 and 1997. . . . . . 4
Notes to Consolidated Financial Statements. . . . . . . . . . . 5-7
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . 8-11
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 11
ITEM 2: Changes in Securities and Use of Proceeds. . . . . . . . . . 12
ITEM 6: Exhibits and Reports on Form 10-K. . . . . . . . . . . . . . 12
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</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>
MARCH 31, DECEMBER 31,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $19,096 $ 669
Short-term investments. . . . . . . . . . . . . . . . . . . 7,806 --
Accounts receivable, net. . . . . . . . . . . . . . . . . . 5,353 4,629
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 2,904 2,733
Other current assets. . . . . . . . . . . . . . . . . . . . 581 1,108
------- -------
Total current assets . . . . . . . . . . . . . . . . . 35,740 9,139
Property and equipment, net. . . . . . . . . . . . . . . . . . . 4,445 4,646
Investment . . . . . . . . . . . . . . . . . . . . . . . . . 703 677
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 2,614 2,478
------- -------
Total assets . . . . . . . . . . . . . . . . . . . . . $43,502 $16,940
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities. . . . . . . . . . $ 7,719 $ 8,538
Notes payable--Amoco. . . . . . . . . . . . . . . . . . . . -- 9,202
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . 367 537
------- -------
Total current liabilities. . . . . . . . . . . . . . . 8,086 18,277
------- -------
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 March 31,
1998; 6,200,000 issued and outstanding at
December 31, 1997. . . . . . . . . . . . . . . . . . . -- 6
Series B; 553,126 shares designated; none
issued and outstanding at March 31, 1998;
553,126 issued and outstanding at
December 31, 1997. . . . . . . . . . . . . . . . . . . -- 1
Common stock, $0.001 par value; 35,000,000
shares authorized; 9,682,844 issued and
outstanding at March 31, 1998; 1,071,970 issued
and outstanding at December 31, 1997 . . . . . . . . . 10 1
Additional paid-in capital. . . . . . . . . . . . . . . . . 71,634 30,396
Deferred compensation . . . . . . . . . . . . . . . . . . . (165) (206)
Unrealized gains on investment. . . . . . . . . . . . . . . 603 577
Cumulative translation adjustment . . . . . . . . . . . . . (244) (241)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (36,422) (31,871)
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Total stockholders' equity (deficit) . . . . . . . . . 35,416 (1,337)
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Total liabilities and stockholders' equity . . . . . . $ 43,502 $ 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 MARCH 31,
----------------------------
1998 1997
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Revenues:
Product sales . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,559 $ 3,285
Grant and other revenue . . . . . . . . . . . . . . . . . . . . . 492 535
-------- ---------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . 5,051 3,820
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . 1,824 1,565
-------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,227 2,255
-------- ---------
Operating expenses:
Research and development. . . . . . . . . . . . . . . . . . . . . 2,466 2,560
Selling, general and administrative . . . . . . . . . . . . . . . 5,394 3,280
-------- ---------
Total operating expenses. . . . . . . . . . . . . . . . . . . 7,860 5,840
-------- ---------
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . (4,633) (3,585)
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 --
Interest expense--Amoco. . . . . . . . . . . . . . . . . . . . . . . . (131) (32)
-------- ---------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,551) $ (3,617)
-------- ---------
-------- ---------
Basic and diluted net loss per share . . . . . . . . . . . . . . . . . $ (0.79) $ (3.42)
-------- ---------
-------- ---------
Shares used in computing basic and diluted net loss per share. . . . . 5,759 1,058
Pro forma basic and diluted net loss per share . . . . . . . . . . . . $ (0.53)
--------
--------
Shares used in computing pro forma basic and diluted net loss per share 8,312
</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 CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
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1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(4,551) $(3,617)
Reconciliation of net loss to net cash used in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . 443 854
Stock compensation . . . . . . . . . . . . . . . . . . . . . . 41 27
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . (762) 181
Inventories . . . . . . . . . . . . . . . . . . . . . . . (172) 50
Other current assets. . . . . . . . . . . . . . . . . . . 601 (403)
Other assets. . . . . . . . . . . . . . . . . . . . . . . (208) --
Accounts payable and accrued liabilities. . . . . . . . . (755) (435)
Deferred revenue. . . . . . . . . . . . . . . . . . . . . (171) (170)
-------- -------
Net cash used in operating activities. . . . . . . . . . . . . (5,534) (3,513)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments . . . . . . . . . . . . . . . . (7,806) --
Purchases of property and equipment . . . . . . . . . . . . . . . . (151) (143)
Increase in other assets. . . . . . . . . . . . . . . . . . . . . . (20) (234)
-------- -------
Net cash used in investing activities. . . . . . . . . . . . . (7,977) (377)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock. . . . . . . . . . . . . . . 32,145 --
Increase in note payable--Amoco . . . . . . . . . . . . . . . . . . 1,665 3,845
Expenses funded by Amoco. . . . . . . . . . . . . . . . . . . . . . 153 100
Loan repayment to Amoco . . . . . . . . . . . . . . . . . . . . . . (2,000) --
-------- -------
Net cash provided by financing activities. . . . . . . . . . . 31,963 3,945
Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . . (25) (82)
-------- -------
Net increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . 18,427 (27)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . 669 48
-------- -------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . $19,096 $ 21
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</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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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 $1.0
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.
5
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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, 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 quarter ended March 31, 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 PRONOUNCEMENT:
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 evaluating the impact, if any,
this statement will have on disclosures in the notes to its consolidated
financial statements.
6
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VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 5--COMPOSITION OF BALANCE SHEET COMPONENT:
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
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Raw materials and supplies $1,009 $1,198
Finished goods 1,895 1,535
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$2,904 $2,733
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</TABLE>
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.
NOTE 7--SUBSEQUENT EVENT:
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.
7
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VYSIS, INC.
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. 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
approval 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. In addition, the
Company currently anticipates filing a premarket approval ("PMA") application
with the U.S. Food and Drug Administration ("FDA") during the second quarter
of 1998 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. version of
AneuVysion-TM- which received 510(k) clearance by the FDA in October of 1997,
in addition to distributing over 280 research products through its direct
sales operations in the United States and Europe and a worldwide distribution
network covering 41 countries, including recently signed agreements for
distribution in Mexico, Brazil and Southern African countries. It also
markets proprietary genetic imaging workstations for clinical and research
use, with an installed base of over 440 proprietary genetic workstations in
8
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VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--(CONTINUED)
20 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 revenue for the first quarter of 1998 increased 32.2% to $5.1
million compared to the same quarter in 1997. This increase was primarily
attributable to a 39% increase in product sales between the two quarters,
partially offset by a slight decline in grant and other revenue. Sales of
the Company's food testing products were flat compared to the same period in
the prior year. Sales of the Company's genetic testing products accounted
for the increase in revenues as a result of increased unit shipments to both
domestic and international customers of research and clinical reagents.
Cost of goods sold increased to $1.8 million for the three months ended
March 31, 1998 from $1.6 million for the comparative 1997 period. The
increase in cost of goods sold resulted from an increase in the volume of
products sold. As a percentage of total revenue, gross profit increased from
59.0% for the first quarter of 1997 to 63.9% for the first quarter of 1998.
This increase, offset slightly by the decrease in grant revenue as a
percentage of total revenue, is primarily attributable to a shift in the
product mix of genetic testing products. In the first quarter of 1998,
higher margin reagent sales accounted for a larger percentage of the
Company's total product revenues than did instrument sales when compared to
the same period of the prior year.
Research and development expenses were substantially unchanged between
the first quarters of 1998 and 1997. When taking into consideration
amortization expense of approximately $0.4 million included in the first
quarter of 1997 for items fully amortized before the start of 1998, cash
expenditures in the first quarter of 1998 increased approximately $0.3
million. This increase in cash expenditures was incurred in line with the
expansion of operations.
Selling, general and administrative expense increased to $5.4 million
for the three months ending March 31, 1998 from $3.3 million for the same
period of the prior year. This increase was primarily driven by increased
legal expenses for the Oncor and CNS litigation matters (see Item 1 in Part
II) and the hiring of additional sales personnel as well as an increase in
other expenses incurred in line with the overall expansion of operations.
Interest income increased from $0 in the first quarter of 1997 to $0.2
million in 1998 due to the investment of the proceeds from the Offering.
Interest expense increased by $0.1 million for the same period due to a
significantly larger weighted average balance of the note payable-Amoco for
the first quarter of 1998 in comparison to the same quarter of 1997.
9
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VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--(CONTINUED)
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 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 March 31, 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 $5.5 million for the quarter
ended March 31, 1998, an increase of $2 million over the same period in 1997
driven primarily by an increase in working capital requirements. Net loss
was $4.6 million and $3.6 million for the first quarter of 1998 and 1997,
respectively. Depreciation and amortization decreased $0.4 million in the
first quarter of 1998 as two significant licenses were fully amortized during
1997. Primary working capital (accounts receivable and inventory, less
payables) requirements increased to $1.7 million from $0.2 million in 1997.
This increase principally resulted from the increase in accounts receivable
due to the increase in total revenues. The combination of the increases in
operating cash flow requirements noted above is partially offset by a
decrease in other assets. In the first quarter of 1998, certain prepaid
Offering costs were reclassified to the equity section of the balance sheet
in conjunction with the Offering.
Net cash flows used in investing activities increased to $8.0 million
for the first quarter of 1998 from $0.4 million in the prior year. This
increase resulted 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 quarter of
1998 were $32.0 million compared to $4.0 million in the first quarter of
1997. The $28.0 million increase resulted from the receipt of $32.1 million
in proceeds from the Offering, partially offset by the reduced borrowings
from Amoco (which ceased February 10, 1998) and the repayment of the
remaining $2.0 million note balance with Amoco.
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
10
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VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--(CONTINUED)
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. Although 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
court has not yet entered the jury verdict as a final judgment: an issue
remains as to whether the jury verdict applied to all of CNS' pending claims.
The court has requested further briefing from CNS and Gen-Probe regarding
this issue. The additional briefing is expected to be completed by May 15,
1998. There can be no assurances that the Company will acquire rights in the
Kohne Patents.
During the first quarter of 1998, the Company entered into a definitive
agreement with Oncor, Inc. ending a patent infringement suit brought by the
Company and the Regents and the University of California. (See Note 7 of the
Notes to Consolidated Financial Statements in Part I. above for further
discussion.)
11
<PAGE>
VYSIS, INC.
OTHER INFORMATION--(CONTINUED)
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 March 31,
1998, the Company used such net Offering proceeds as follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
Purchase of short-term investments and cash equivalents....... $ 27.4
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.................. 2.7
-------
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 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.
12
<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: May 12, 1998 By: /s/ JAMES J. HABSCHMIDT
---------------------------
Name: James J. Habschmidt
TITLE: EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 19,096 0
<SECURITIES> 7,806 0
<RECEIVABLES> 5,562 0
<ALLOWANCES> (209) 0
<INVENTORY> 2,904 0
<CURRENT-ASSETS> 35,740 0
<PP&E> 11,154 0
<DEPRECIATION> (6,709) 0
<TOTAL-ASSETS> 43,502 0
<CURRENT-LIABILITIES> 8,086 0
<BONDS> 0 0
0 0
0 0
<COMMON> 10 0
<OTHER-SE> 35,406 0
<TOTAL-LIABILITY-AND-EQUITY> 43,502 0
<SALES> 4,559 3,285
<TOTAL-REVENUES> 5,051 3,820
<CGS> 1,824 1,565
<TOTAL-COSTS> 9,684 7,405
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 43 12
<INTEREST-EXPENSE> 131 32
<INCOME-PRETAX> (4,551) (3,617)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,551) (3,617)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,551) (3,617)
<EPS-PRIMARY> (0.79) (3.42)
<EPS-DILUTED> (0.79) (3.42)
</TABLE>
