<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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 May 17, 1999: 9,808,157
<PAGE>
VYSIS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Balance Sheets
As of March 31, 1999 and December 31, 1998 ........................ 2
Consolidated Statements of Operations
For the three months ended March 31, 1999 and 1998 ................ 3
Consolidated Statements of Comprehensive Operations
For the three months ended March 31, 1999 and 1998 ................ 4
Consolidated Statements of Cash Flows
For the three months ended March 31, 1999 and 1998 ................ 5
Notes to Consolidated Financial Statements ........................... 6
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................ 10
ITEM 3: Quantitative and Qualitative Disclosure About Market Risk ................. 15
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings ......................................................... 16
ITEM 2: Changes in Securities and Use of Proceeds ................................. 17
ITEM 6: Exhibits and Reports on Form 8-K .......................................... 17
SIGNATURE ................................................................................ 18
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 2,658 $ 4,672
Short-term investments ......................................................... 10,950 13,667
Accounts receivable, net ....................................................... 4,975 6,106
Current portion of long-term lease receivables ................................ 429 378
Inventories .................................................................... 2,623 2,487
Other current assets ........................................................... 1,300 782
-------- --------
Total current assets ....................................................... 22,935 28,092
Property and equipment, net ......................................................... 3,627 3,879
Investment .......................................................................... --- 562
Long-term lease receivables ......................................................... 469 626
Other assets ........................................................................ 1,816 1,884
-------- --------
Total assets ............................................................... $ 28,847 $ 35,043
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .............................................. $ 517 $ 553
Accounts payable and accrued liabilities ....................................... 7,758 9,475
Deferred revenue ............................................................... 908 966
-------- --------
Total current liabilities .................................................. 9,183 10,994
-------- --------
Long-term debt ...................................................................... 352 523
-------- --------
-------- --------
Contingency (Note 9)
Stockholders' equity:
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, 1999 and December 31, 1998 ....................... --- ---
Series B; 553,126 shares designated; none issued and outstanding
at March 31, 1999 and December 31, 1998 ................................... --- ---
Common stock, $0.001 par value; 35,000,000 shares authorized; 9,806,888
issued and outstanding at March 31, 1999; 9,788,401 issued and outstanding
at December 31, 1998 ....................................................... 10 10
Additional paid-in capital ..................................................... 71,872 71,862
Deferred compensation .......................................................... (62) (81)
Unrealized gain on investment .................................................. --- 462
Cumulative translation adjustment .............................................. (384) (101)
Accumulated deficit ............................................................ (52,124) (48,626)
-------- --------
Total stockholders' equity ................................................. 19,312 23,526
-------- --------
Total liabilities and stockholders' equity ................................. $ 28,847 $ 35,043
-------- --------
-------- --------
</TABLE>
See notes to the consolidated financial statements.
2
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VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1999 1998
---------- -------------
<S> <C> <C>
Revenues:
Product revenue ................................................. $ 5,283 $ 4,559
Grant and other revenue ......................................... 161 492
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Total revenues .............................................. 5,444 5,051
Cost of goods sold ................................................... 2,047 2,061
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Gross profit ......................................................... 3,397 2,990
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Operating expenses:
Research and development ........................................ 2,477 2,577
Selling, general and administrative ............................. 4,421 5,046
Restructuring expense ........................................... 541 ---
------- -------
Total operating expenses .................................... 7,439 7,623
------- -------
Loss from operations ................................................. (4,042) (4,633)
Interest income ...................................................... 220 213
Gain on sale of investment ........................................... 357 ---
Interest expense ..................................................... (33) (131)
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Net loss ............................................................. $(3,498) $(4,551)
------- -------
------- -------
Basic and diluted net loss per share ................................. $ (0.36) $ (0.79)
------- -------
------- -------
Shares used in computing basic and diluted net loss per share ........ 9,792 5,759
</TABLE>
See notes to the consolidated financial statements.
3
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1999 1998
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<S> <C> <C>
Net loss ................................................. $(3,498) $(4,551)
Other comprehensive income:
Cumulative translation adjustment ................... (283) (3)
Unrealized holding gain (loss) on investment ........ (105) 26
Realized loss on investment ......................... (357) ---
------- -------
Total other comprehensive income ................ (745) 23
------- -------
Comprehensive loss ....................................... $(4,243) $(4,528)
------- -------
------- -------
</TABLE>
See notes to the consolidated financial statements.
4
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
------------ ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................... $ (3,498) $ (4,551)
Reconciliation of net loss to net cash used in operating activities:
Depreciation and amortization .................................. 429 443
Gain on sale of investment ..................................... (357) ---
Stock compensation ............................................. 19 41
Changes in assets and liabilities:
Accounts receivable ....................................... 807 (762)
Inventories ............................................... (209) (172)
Other current assets ...................................... (481) 601
Lease receivables ......................................... 58 ---
Other assets .............................................. 35 (208)
Accounts payable and accrued liabilities .................. (1,623) (755)
Deferred revenue .......................................... (50) (171)
-------- --------
Net cash used in operating activities .......................... (4,870) (5,534)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of short-term investments ................. 9,850 ---
Proceeds from sale of investment ................................... 457 ---
Purchases of short-term investments ................................ (7,133) (7,806)
Purchases of property and equipment ................................ (125) (151)
Increase in other assets ........................................... (42) (20)
-------- --------
Net cash provided by (used in) investing activities ............ 3,007 (7,977)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............................. --- 32,145
Proceeds from option plan exercises ................................ 10 ---
Increase in note payable--BP Amoco ................................. --- 1,665
Expenses funded by BP Amoco ........................................ --- 153
Loan repayment to BP Amoco ......................................... --- (2,000)
Principal payments on long-term borrowings ......................... (125) ---
-------- --------
Net cash provided by (used in) financing activities ............ (115) 31,963
Effect of exchange rate changes on cash ................................. (36) (25)
-------- --------
Net increase (decrease) in cash and cash equivalents .................... (2,014) 18,427
Cash and cash equivalents at beginning of period ........................ 4,672 669
-------- --------
Cash and cash equivalents at end of period .............................. $ 2,658 $ 19,096
-------- --------
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</TABLE>
See notes to the consolidated financial statements.
5
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--ORGANIZATION AND BUSINESS:
Vysis, Inc. ("Vysis" or the "Company") is a 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. Vysis currently
markets six U.S. Food and Drug Administration ("FDA") cleared or approved
clinical products in addition to distributing over 300 research products
through its direct sales operations in the United States and Europe and a
worldwide distribution network covering 51 countries. The Company has an
installed base of over 550 proprietary genetic workstations in 32 countries.
The Company's wholly owned subsidiary, Gene-Trak Systems Industrial
Diagnostics Corporation, manufactures and markets food testing kits based on
DNA ("Deoxyribonucleic Acid") probes.
The Company was incorporated in Delaware on April 18, 1991. The
Company's business represents the consolidation of multiple research units
and programs of the former Amoco Corporation. On December 31, 1998, Amoco
Corporation merged with the former British Petroleum Corporation, and as a
result of the merger became a wholly-owned subsidiary of BP Amoco p.l.c. As
used herein, "BP Amoco" refers to BP Amoco p.l.c. and its wholly owned
subsidiaries. In 1994, BP Amoco began consolidation of all of its medical
diagnostic businesses and related research under the Company. In March 1994,
BP Amoco contributed to the Company all of its genetic disease related
assets, including the stock of Imagenetics Incorporated (an Illinois
corporation). Also in March 1994, BP Amoco contributed all of its infectious
disease related assets and the stock of Gene-Trak, Inc. to the Company.
Gene-Trak, Inc. had previously acquired certain infectious disease related
assets from Genzyme Corporation and BP Amoco, including all of the interest
in Gene-Trak Systems, a joint venture partnership for infectious disease
diagnostics established by BP Amoco and Integrated Genetics in 1986.
On February 10, 1998, the Company completed the initial public
offering of 3 million shares of its Common Stock, par value $0.001 per share,
at a price of $12.00 per share (the "IPO"). The net proceeds of the IPO after
deducting expenses were approximately $32.1 million. Concurrent with the
consummation of the IPO, the Company issued 675,000 shares of Common Stock at
$12.00 per share to BP Amoco in exchange for a reduction of $8.1 million in
the Company's note payable to BP Amoco. As of May 17, 1999, BP Amoco
beneficially owns approximately 68 percent of the Company's outstanding
Common Stock.
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
6
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VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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, 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.
Certain amounts in fiscal 1998 have been reclassified to conform to the
fiscal 1999 presentation. These changes had no impact on previously reported
results of operations or stockholders' equity. 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--RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities,"
effective for all fiscal quarters of all fiscal years beginning after June
15, 1999. It establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company anticipates
that, due to its current non-use 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 4--COMPOSITION OF BALANCE SHEET COMPONENT:
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
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<S> <C> <C>
Raw materials and supplies ........ $1,339 $ 900
Finished goods .................... 1,284 1,587
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$2,623 $2,487
------- -------
------- -------
</TABLE>
NOTE 5--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
7
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VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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 March 31,
are as follows:
<TABLE>
<CAPTION>
GROSS LONG-TERM
RECEIVABLES DEBT
------------ -----------
<S> <C> <C>
2000 ........ $ 456 $ 517
2001 ........ 498 328
2002 ........ 288 24
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$1,242 $ 869
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</TABLE>
The components of net lease receivables are as follows:
<TABLE>
<CAPTION>
MARCH 31,
1999
----------
<S> <C>
Gross lease receivables............................. $1,242
Allowance for doubtful accounts..................... (322)
Unearned income..................................... (22)
----------
$ 898
----------
----------
</TABLE>
NOTE 6--RESTRUCTURING:
On March 17, 1999, the Company's Board of Directors approved a
restructuring plan that resulted in the elimination of 20 positions within
the Company. The Company recorded a restructuring charge for severance costs
of $0.5 million during the first quarter of 1999.
NOTE 7--GAIN ON SALE OF INVESTMENT:
During the first quarter of 1999, the Company sold its
available-for-sale investment of Incyte Pharmaceuticals, Inc. ("Incyte")
common stock for $0.5 million, resulting in a gain on the sale of $0.4
million.
NOTE 8--SEGMENT AND GEOGRAPHIC INFORMATION:
The Company operates in one reportable business segment: the
development, manufacture and sale of genetic testing products. The Company's
revenues by product line are as follows (in thousands):
8
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
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<S> <C> <C>
FDA/ADM approved clinical genetic testing products........ $ 881 $ 446
Research and other genetic testing products .............. 2,077 1,747
Genetic instrument products .............................. 1,468 1,531
Genetic research grants and license revenue .............. 161 492
Distributed laboratory products........................... 158 220
Food testing products..................................... 699 615
------- -------
Consolidated total revenues............................... $5,444 $5,051
------- -------
------- -------
</TABLE>
The Company's revenues by geographic area based on location of
customers are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
--------- -----------
<S> <C> <C>
United States ......................... $ 2,506 $ 2,103
Europe, Middle East and Africa ........ 3,718 3,196
Other ................................. 614 495
Eliminations .......................... (1,394) (743)
------- -------
Consolidated total revenues ........... $ 5,444 $ 5,051
------- -------
------- -------
</TABLE>
NOTE 9--CONTINGENCY:
The Company and BP Amoco are defendants in a law suit pending in the
U.S. District Court in California alleging infringement of certain patents.
The allegedly infringing activities are the manufacture, use and sale of
reagents and kits for detecting certain food and environmental pathogens
currently used in the Company's food testing business. The previous stay in
this suit has been lifted and the litigation is in the early stages of
discovery. The Company is vigorously defending the suit. As part of the suit,
the Company has brought a counter-claim of infringement of a patent assigned
to the Company relating to assays for a particular pathogen due to the
plaintiff's manufacture, use and sale of tests that detect the pathogen in
foodstuffs. The Company has indemnified BP Amoco against damages from the
patent infringement claims in the suit. Although the Company believes that it
has meritorious defenses in the suit, there can be no assurance that the
Company will ultimately prevail. An unfavorable outcome for the Company is
considered neither probable nor remote by management. An estimate of a
possible loss or range of a possible loss cannot currently be made. However,
an adverse determination against the Company, which may include a finding of
willful infringement and the awarding of plaintiff's attorney's fees, could
have a material adverse effect on the Company's financial statements. At
March 31, 1999, the Company has accrued estimated future minimum legal costs
related to this matter of $0.8 million.
9
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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, 1998 as well as the financial statements
of the Company and notes thereto. This Quarterly Report on 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: competition; compliance by
the Company with regulatory requirements; the ability of the Company to
successfully market and sell its products and equipment; delays in the
acceptance and adoption rates for the Company's clinical products; the
Company's ability to manufacture products in sufficient quantities; the
Company's ability to maintain intellectual property protection for its
proprietary products, to defend its existing intellectual property rights
from challenges by third parties, and to avoid infringing intellectual
property rights of third parties; and the extent to which the clinicians or
laboratories using the Company's products are able to obtain third-party
reimbursement.
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 ("FDA") and the French
Agence du Medicament ("ADM"), and a line of research products, imaging
workstations and other instruments for genetic analysis. During March 1998,
the Company received registration from the 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(R) X/Y,
CEP(R) 8 and CEP(R) 12 DNA Probe Kits for use as adjuncts to standard
cytogenetic analysis to identify and enumerate the presence of chromosomes X
and Y in bone marrow and chromosomes 8 and 12 in blood specimens, thus aiding
in the diagnosis and treatment of leukemia patients. The Company's
PathVysion(TM) HER-2 DNA probe kit was approved by the FDA in December 1998
for the assessment of the HER-2 gene status in node positive Stage II breast
cancer patients and for the prediction of the therapeutic outcome of using
adriamycin based chemotherapy in breast cancer patients. Vysis currently
10
<PAGE>
VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
markets six FDA cleared clinical products, including PathVysion(TM) HER-2,
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 300 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 ended March 31, 1999 was $5.3
million, an increase of $0.7 million, or 16%, as compared to the first
quarter of 1998, while grant and other revenue of $0.2 million represented a
$0.3 million decrease as compared to the prior year quarter. As a result,
total revenues for the first quarter of 1999 were $5.4 million, an increase
of $0.4 million, or 8%, over the prior year quarter. The product revenue
increase in 1999 is primarily attributable to a $0.4 million, or 98%,
increase in worldwide shipments of FDA/ADM approved clinical genetic testing
products ("Clinical") and a $0.3 million, or 19%, increase in worldwide
shipments of research and other genetic testing products ("Research"). For
the first quarter of 1999, genetic instrument sales of $1.5 million declined
4% as compared to the prior year. The increase in Clinical sales was
primarily due to sales of the Company's PathVysion(TM) HER-2 DNA Probe Kit
that was approved by the FDA in December 1998 and an increase in utilization
of the Company's AneuVysion(TM) assay. The increase in Research sales was
primarily due to a general increase in United States market demand for the
Company's products. The slight decline in instrument sales reflects the
continued weakness of the overall instrument market. For the three months
ended March 31, 1999, grant and other revenue decreased $0.3 million,
primarily due to the completion of two United States Department of Commerce
research grants in February 1998 and July 1998.
Cost of goods sold for the three months ended March 31, 1999 of $2.0
million was consistent with the prior year quarter. As a percentage of
product revenue, gross profit increased to 61.3% for the first quarter of
1999 as compared to 54.8% for the prior year quarter, primarily due to a
better product mix as the aforementioned significant growth in the higher
margin Clinical and Research products represented a higher percentage of
total product sales versus the prior year. The Company's remaining product
lines carry significantly lower margins than the Clinical and Research
products. For the three months ended March 31, 1999, product gross profit was
$3.2 million, an increase of $0.7 million, or 30%, over the prior year
quarter, primarily attributable to the increase in product revenue and gross
margin improvement.
Operating expenses for the three months ended March 31, 1999 were
$7.4 million, a decrease of $0.2 million, or 2%, as compared to the first
quarter of 1998, despite the first quarter of 1999 including a $0.5 million
restructuring charge associated with the elimination of 20 positions.
Research and development expenses of $2.5 million were relatively consistent
with the first quarter of 1998. Selling, general and administrative expenses
of $4.4 million represented a decrease of $0.6 million, or 12%, in comparison
11
<PAGE>
VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
to the prior year quarter. This decrease was due to a reduction in general
and administrative expenses of $1.0 million primarily due to lower
litigation expense, partially offset by a $0.4 million increase in selling
expense primarily attributable to the hiring of additional sales personnel
and marketing expenses incurred to launch the Company's December 1998 FDA
approved PathVysion-(TM)- product.
Interest income for the three months ended March 31, 1999 of $0.2
million was consistent with the prior year. Interest expense decreased $0.1
million due to the Note Payable--BP Amoco remaining outstanding until the
completion on February 10, 1998 of the Company's IPO.
The gain on sale of investment for the three months ended March 31,
1999 was $0.4 million that resulted from the $0.5 million sale of the
Company's investment in Incyte common stock.
INCOME TAXES
Prior to the completion of the Company's IPO, the results of
operations were included in the consolidated income tax returns of BP Amoco;
accordingly, the domestic net operating losses through February 10, 1998 have
been utilized by BP Amoco in its consolidated income tax returns and are not
available to offset the Company's future taxable income. Subsequent to the
IPO, the Company is filing separate federal income tax returns. As the
Company was in a loss position for the three months ended March 31, 1999, no
federal provision is recorded. For state income taxes, the Company's results
of operations will continue to be included with BP Amoco, due to its 68
percent ownership interest in the Company, in those states where required by
state tax law. Under state tax laws in a number of states, including Illinois
(the state in which much of the Company's business is taxed), the Company is
required by law to be included in BP Amoco's unitary state tax returns as
long as BP Amoco owns or controls 50 percent or more of the voting equity.
For unitary state filings, the tax sharing agreement with BP Amoco requires
BP Amoco to pay the Company the incremental tax savings, if any, received by
BP Amoco as a result of including the Company's results of operations in such
filings. The agreement also requires the Company to pay BP Amoco the
incremental tax liability, if any, incurred by BP Amoco as a result of
including the Company's results of operations in such filings. The Company
and BP Amoco are currently unable to estimate the amount of state income tax
benefit to be received by the Company as a result of its operating losses for
the three months ended March 31, 1999 and, accordingly, no state tax benefit
is recorded. For state income taxes in non-unitary states, the Company has
not recorded any benefit as a result of its loss position for the three
months ended March 31, 1999.
A full valuation allowance has been provided for all deferred tax
assets (net of liabilities) at March 31, 1999 as management does not consider
realization of such amounts more likely than not.
12
<PAGE>
VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the three months ended
March 31, 1999 was $4.9 million, a decrease of $0.7 million over the prior
year quarter, driven primarily by the reduction in operating losses during
the first quarter of 1999 as compared to the prior year quarter.
Net cash provided by investing activities for the three months ended
March 31, 1999 was $3.0 million, resulting primarily from maturities of
short-term investments. During the prior year quarter, the $8.0 million of
net cash flows used in investing activities resulted primarily from the
purchase of short-term investments with a portion of the net proceeds from
the February 1998 IPO.
Net cash used in financing activities for the three months ended
March 31, 1999 was $0.1 million, an increase of $32.1 million from the prior
period primarily due to receiving the net proceeds from the IPO during
February 1998.
At March 31, 1999, the Company had cash, cash equivalents and
short-term investments of $13.6 million and an accumulated deficit of $52.1
million. Since its inception, the Company has experienced negative cash flows
from operations. In order to preserve the Company's cash position and to
reduce cash used in operating activities, the Company's Board of Directors
approved during March 1999 a restructuring plan that resulted in the
elimination of 20 positions in the U.S., representing a 12 percent reduction
of the U.S. work force, thereby reducing ongoing annual cash expenditures by
an estimated $1.6 million. The Company recorded a restructuring charge for
severance costs of $0.5 million during the first quarter of 1999.
The Company believes that its current cash and short-term investment
position, and the interest to be earned thereon, will be sufficient to fund
the Company's operations 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 factors, including growth in product revenue; 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
prosecution, 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 of the IPO 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
13
<PAGE>
VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
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 results of
operations.
READINESS FOR THE YEAR 2000
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. As the Year
2000 approaches, these code fields will need to accept four digit entries to
distinguish years beginning with "19" from those beginning with "20". As a
result, computer systems and/or software products used by many companies may
need to be upgraded to comply with such Year 2000 requirements.
The Company is in the process of evaluating the Year 2000 readiness
of the software products sold by the Company ("Products"), the information
technology systems used in its operations ("IT Systems"), and its non-IT
Systems, such as manufacturing/facility related equipment and other systems
that could impact the operations of the Company. The Company currently
anticipates that this project will consist of the following phases: (i)
identification of all Products, IT Systems, and non-IT Systems; (ii)
assessment of repair or replacement requirements; (iii) repair or
replacement; (iv) testing where necessary; (v) implementation; and (vi)
creation of contingency plans in the event of Year 2000 failures.
The Company completed the review of all current versions of its
Products and believes that all Products are Year 2000 compliant. With respect
to IT Systems, the Company has developed a plan to make its systems Year 2000
compliant and has begun implementation of the plan during the first quarter
of 1999. The Company's current IT Systems related to manufacturing are
already Year 2000 compliant. To implement the other IT Systems modules for
Year 2000 compliance requires an upgrade to a more current version of the
existing software, which was supplied to the Company at no charge. However,
the Company has elected to use this opportunity to upgrade all modules to the
most current version offered by the software vendor. The Company currently
expects this project to be substantially complete by the third quarter of
1999. Once installed and operational, the Company will assess the need to
develop contingency plans related to these IT Systems. The Company does not
expect this project to have a significant impact on its information
technology ("IT") budget or other non-related IT projects, as discussed
below. The Company will continue to implement IT systems with strategic value
and has started to implement a new European management information system
which is expected to also be completed in 1999.
In the area of non-IT Systems, the Company relies, both domestically
and internationally, upon various vendors, government agencies, research
14
<PAGE>
VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
institutions, utility companies, telecommunications service companies,
delivery service companies, and other material and service providers who are
outside of the Company's control. There is no assurance that such parties
will not suffer a Year 2000 business disruption, which could have a material
adverse effect on the Company's financial condition and results of
operations. The Company has initiated formal communications with significant
vendors and customers to determine the extent of which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company is requesting that third party vendors represent their
products and services to be Year 2000 compliant and that they have a program
to test for Year 2000 compliance. However, the response of those third
parties is beyond the Company's control. To the extent that the Company does
not receive adequate responses by June 1999, it is prepared to develop
contingency plans, with completion of these plans scheduled for no later than
September 1999. At this time, the Company cannot estimate the additional
cost, if any, that might develop from such contingency plans. With respect to
the manufacturing/facility related equipment and other systems, the Company
is in the process of assessing these systems for Year 2000 compliance.
To date, the Company has not incurred any significant expenditures
in connection with identifying or evaluating Year 2000 compliance issues.
Most of its expenses have related to the opportunity cost of time spent by
employees of the Company evaluating its Products, IT Systems, non-IT Systems,
and general Year 2000 compliance matters. Absent a significant Year 2000
compliance deficiency, the Company currently estimates that the cost to
complete its Year 2000 compliance programs, including updating its IT System
modules to the most current version available, will be less than $100,000 of
expense and $75,000 of capitalized costs.
Breakdowns in the Company's IT Systems and non-IT Systems, such as
its manufacturing application software and the computer chips embedded in its
plant equipment, as well as other Year 2000-related problems such as
disruptions in the delivery of materials, power, heat or water to the
Company's facilities, could prevent the Company from being able to
manufacture and ship its products. If the Company were to fail to correct a
material Year 2000 problem, its normal business activities and operations
could be interrupted. Such interruptions could materially and adversely
affect the Company's results of operations, liquidity and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company is subject to market risk associated with changes in
foreign currency exchange rates and interest rates. The Company's exchange
rate risk is limited to its operations in England, Germany, France and Italy.
The exchange rate risk is mitigated through local purchases for the majority
of their expenditures. The Company's primary foreign currency exchange rate
risk results from the foreign operations' intercompany purchases of clinical
and research products as well as certain instrument system components. The
15
<PAGE>
VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
majority of the intercompany purchases are not expected to be repaid in the
foreseeable future as these operations have required more working capital as
a result of their significant growth. Sales throughout the rest of the world
are denoted in U.S. dollars. The Company does not believe that the impact
from foreign currency exchange rate fluctuations will have a material impact
on its financial statements. The net impact of foreign exchange activities on
earnings was immaterial for the three months ended March 31, 1999 and 1998.
The foreign currency translation loss included in shareholders' equity
resulting from the translation of the financial statements of the Company's
international subsidiaries into U.S. dollars increased by $0.3 million in the
first quarter of 1999 due to the strengthening of the U.S. dollar against the
functional currency of the Company's international subsidiaries. Interest
rate exposure is primarily limited to the $10.9 million of short-term
investments owned by the Company. Such securities are debt instruments which
generate interest income for the Company on excess cash balances. The Company
does not actively manage the risk of interest rate fluctuations; however,
such risk is mitigated by the relatively short term, less than 12 months,
nature of these investments.
The Company does not consider the present rate of inflation to have a
significant impact on its business.
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, 1998 for
discussion of litigation matters relating to the Company. The Company, BP
Amoco and other parties have been named as defendants in a suit brought by
Gen-Probe in the United States District Court in the Southern District of
California (San Diego). The suit alleges direct infringement of the Kohne
Patents by the Company's subsidiaries Gene-Trak, Inc. and Gene-Trak Systems
Industrial Diagnostics and inducement of infringement by the Company and BP
Amoco. The Company denies infringement and intends to vigorously contest the
action. The Company is defending and indemnifying the claims against BP Amoco
pursuant to an agreement between the two companies. The Company has also
filed a counter-claim against Gen-Probe for infringement of the Company's
U.S. Patent No. 5,089,386. The litigation is at an early stage and trial is
scheduled to occur in about May 2000.
The Company and other parties have been named as defendants in a
suit pending in California state court by D.E. Kohne, the named inventor of
the Kohne Patents. The suit alleges that the Company participated maliciously
in the prosecution of two separate lawsuits challenging Gen-Probe's title in
the Kohne Patents. The Company is being defended and indemnified by BP Amoco,
also a defendant in the suit, pursuant to an agreement between the two
companies. Discovery is ongoing. This case and a similar case brought by
Gen-Probe against BP Amoco are expected to be tried in mid summer 1999.
16
<PAGE>
VYSIS, INC.
OTHER INFORMATION--(CONTINUED)
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the IPO (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 IPO, February 10, 1998, to March 31,
1999, the Company used such net offering proceeds as follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
Purchase of short-term investments and cash equivalents ................................... $ 13.6
Repayment of note payable-BP Amoco ........................................................ 2.0
Acceleration of product development, expansion of sales and
marketing capabilities and funding of increased working capital
requirements and ongoing operations.................................................... 16.5
-------
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 IPO. Other than the
repayment of a note payable to BP 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
Exhibit 27.1, Financial Data Schedule (included only in the electronic
filing of this document).
REPORTS ON FORM 8-K
On January 7, 1999, the Company filed a Form 8-K with respect to the
Company's change in auditors for the fiscal 1998 examination. There were no
other Form 8-K reports filed during the quarter.
17
<PAGE>
VYSIS, INC.
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 17, 1999 By: /s/ ALFRED H. ELLSWORTH
--------------------------------------
Name: Alfred H. Ellsworth
TITLE: VICE PRESIDENT, FINANCE
AND CHIEF ACCOUNTING OFFICER
18
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,658
<SECURITIES> 10,950
<RECEIVABLES> 7,140
<ALLOWANCES> (1,267)
<INVENTORY> 2,623
<CURRENT-ASSETS> 22,935
<PP&E> 11,853
<DEPRECIATION> (8,226)
<TOTAL-ASSETS> 28,847
<CURRENT-LIABILITIES> 9,183
<BONDS> 869
0
0
<COMMON> 10
<OTHER-SE> 19,302
<TOTAL-LIABILITY-AND-EQUITY> 28,847
<SALES> 5,283
<TOTAL-REVENUES> 5,444
<CGS> 2,047
<TOTAL-COSTS> 8,945
<OTHER-EXPENSES> 541
<LOSS-PROVISION> 26
<INTEREST-EXPENSE> 33
<INCOME-PRETAX> (3,498)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,498)
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