<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 SEPTEMBER 30, 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
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 10, 1999: 9,925,645
<PAGE>
VYSIS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Balance Sheets
As of September 30, 1999 and December 31, 1998 ............... 2
Consolidated Statements of Operations
For the three months ended September 30, 1999 and 1998 ....... 3
Consolidated Statements of Operations
For the nine months ended September 30, 1999 and 1998 ........ 4
Consolidated Statements of Comprehensive Operations
For the three months ended September 30, 1999 and 1998 ....... 5
Consolidated Statements of Comprehensive Operations
For the nine months ended September 30, 1999 and 1998 ........ 6
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1999 and 1998 ........ 7
Notes to Consolidated Financial Statements ...................... 8
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 13
ITEM 3: Quantitative and Qualitative Disclosure About Market Risk ............ 19
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings .................................................... 19
ITEM 2: Changes in Securities and Use of Proceeds ............................ 20
ITEM 6: Exhibits and Reports on Form 8-K ..................................... 20
SIGNATURE ........................................................................... 21
</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>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 1,876 $ 4,672
Short-term investments ...................................................... 8,103 13,667
Accounts receivable, net .................................................... 3,602 6,106
Other receivables ........................................................... 933 --
Current portion of long-term lease receivables .............................. 490 378
Inventories ................................................................. 2,238 2,487
Other current assets ........................................................ 1,457 782
-------- --------
Total current assets .................................................... 18,699 28,092
Property and equipment, net ...................................................... 3,267 3,879
Investment ....................................................................... 466 562
Long-term lease receivables ...................................................... 154 626
Other assets ..................................................................... 1,488 1,884
-------- --------
Total assets ............................................................ $ 24,074 $ 35,043
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................................... $ 444 $ 553
Accounts payable and accrued liabilities .................................... 7,100 9,475
Deferred revenue ............................................................ 1,553 966
-------- --------
Total current liabilities ............................................... 9,097 10,994
-------- --------
Long-term debt ................................................................... 139 523
-------- --------
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 September 30, 1999 and December 31, 1998 ............... -- --
Series B; 553,126 shares designated; none issued and outstanding
at September 30, 1999 and December 31, 1998 ........................... -- --
Common stock, $0.001 par value; 35,000,000 shares authorized; 9,918,693
issued and outstanding at September 30, 1999; 9,788,401
issued and outstanding at December 31, 1998 ............................. 10 10
Additional paid-in capital .................................................. 72,232 71,862
Deferred compensation ....................................................... (34) (81)
Unrealized gain (loss) on investment ........................................ (62) 462
Cumulative translation adjustment ........................................... (397) (101)
Accumulated deficit ......................................................... (56,911) (48,626)
-------- --------
Total stockholders' equity .............................................. 14,838 23,526
-------- --------
Total liabilities and stockholders' equity .............................. $ 24,074 $ 35,043
-------- --------
-------- --------
</TABLE>
See notes to the consolidated financial statements.
2
<PAGE>
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 SEPTEMBER 30,
------------------------------------
1999 1998
-------------- -----------------
<S> <C> <C>
Revenues:
Product revenue ................................................. $ 3,915 $ 4,590
Grant and other revenue ......................................... 124 466
------- -------
Total revenues .............................................. 4,039 5,056
Cost of goods sold ................................................... 1,297 2,241
------- -------
Gross profit ......................................................... 2,742 2,815
------- -------
Operating expenses:
Research and development ........................................ 1,998 2,976
Acquired research-related patents ............................... 536 --
Selling, general and administrative ............................. 3,982 3,872
------- -------
Total operating expenses .................................... 6,516 6,848
------- -------
Loss from operations ................................................. (3,774) (4,033)
Gain on sale of the Imaging business ................................. 1,700 --
Interest income ...................................................... 138 454
Interest expense ..................................................... (53) (143)
------- -------
Net loss ............................................................. $(1,989) $(3,722)
------- -------
------ -------
Basic and diluted net loss per share ................................. $ (0.20) $ (0.38)
------- -------
------- -------
Shares used in computing basic and diluted net loss per share ........ 9,899 9,729
</TABLE>
See notes to the consolidated financial statements.
3
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Revenues:
Product revenue ................................................. $ 15,552 $ 15,435
Grant and other revenue ......................................... 403 1,354
Legal settlement ................................................ -- 384
-------- --------
Total revenues .............................................. 15,955 17,173
Cost of goods sold ................................................... 5,983 7,115
-------- --------
Gross profit ......................................................... 9,972 10,058
-------- --------
Operating expenses:
Research and development ........................................ 6,826 8,503
Acquired research-related patents ............................... 536 --
Selling, general and administrative ............................. 12,816 13,588
Restructuring expense ........................................... 541 --
-------- --------
Total operating expenses .................................... 20,719 22,091
-------- --------
Loss from operations ................................................. (10,747) (12,033)
Interest income ...................................................... 508 1,026
Gain on sale of the Imaging business ................................. 1,700 --
Gain on sale of investment ........................................... 357 --
Interest expense ..................................................... (103) (313)
-------- --------
Net loss ............................................................. $ (8,285) $(11,320)
-------- --------
-------- --------
Basic and diluted net loss per share ................................. $ (0.84) $ (1.35)
-------- --------
-------- --------
Shares used in computing basic and diluted net loss per share ........ 9,833 8,410
</TABLE>
See notes to the consolidated financial statements.
4
<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 SEPTEMBER 30,
---------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Net loss .............................................. $(1,989) $(3,722)
Other comprehensive income (loss):
Cumulative translation adjustment ................ 110 69
Unrealized holding loss on investment ............ (62) (193)
------- -------
Total other comprehensive income (loss) ...... 48 (124)
------- -------
Comprehensive loss .................................... $(1,941) $(3,846)
------- -------
------- -------
</TABLE>
See notes to the consolidated financial statements.
5
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
Net loss ......................................... $ (8,285) $(11,320)
Other comprehensive income (loss):
Cumulative translation adjustment ........... (296) 164
Unrealized holding loss on investment ....... (167) (357)
Realized loss on investment ................. (357) --
-------- --------
Total other comprehensive loss .......... (820) (193)
-------- --------
Comprehensive loss ............................... $ (9,105) $(11,513)
-------- --------
-------- --------
</TABLE>
See notes to the consolidated financial statements.
6
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................ $ (8,285) $(11,320)
Reconciliation of net loss to net cash used in operating
activities:
Depreciation and amortization ............................... 1,262 1,713
Gain on sale of the Imaging business ........................ (1,700) --
Gain on sale of investment .................................. (357) --
Stock compensation .......................................... 47 117
Changes in assets and liabilities:
Accounts receivable .................................... 2,037 (709)
Inventories ............................................ (555) 186
Other current assets ................................... (621) 108
Lease receivables ...................................... 255 (1,388)
Other assets ........................................... 108 (151)
Accounts payable and accrued liabilities ............... (2,614) (426)
Deferred revenue ....................................... 1,000 397
-------- --------
Net cash used in operating activities ....................... (9,423) (11,473)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds, net of transaction-related expenditures, from
sale of the Imaging business ................................... 1,294 --
Proceeds from sale of investment ................................ 457 --
Proceeds from maturities of short-term investments .............. 24,887 8,469
Purchases of short-term investments ............................. (19,324) (17,108)
Purchases of property and equipment ............................. (537) (534)
Increase in other assets ........................................ (70) (82)
-------- --------
Net cash provided by (used in) investing activities ......... 6,707 (9,255)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Expenses funded by stock issuance ............................... 286 --
Proceeds from option plan exercises ............................. 84 60
Proceeds from issuance of common stock .......................... -- 32,142
Increase in note payable--BP Amoco .............................. -- 1,665
Expenses funded by BP Amoco ..................................... -- 153
Loan repayment to BP Amoco ...................................... -- (2,000)
Proceeds from long-term borrowings .............................. -- 1,488
Principal payments on long-term borrowings ...................... (379) (287)
-------- --------
Net cash provided by (used in) financing activities ......... (9) 33,221
Effect of exchange rate changes on cash .............................. (71) 37
-------- --------
Net increase (decrease) in cash and cash equivalents ................. (2,796) 12,530
Cash and cash equivalents at beginning of period ..................... 4,672 669
-------- --------
Cash and cash equivalents at end of period ........................... $ 1,876 $ 13,199
-------- --------
-------- --------
</TABLE>
See notes to the consolidated financial statements.
7
<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 five 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'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 November 10, 1999, BP Amoco beneficially owned
approximately 67 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 Commission. Accordingly, certain information and footnote disclosures
normally
8
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 2--FINANCIAL INFORMATION: (Continued)
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, and the
Company's Quarterly Reports on Form 10-Q for the three months ended March 31,
1999 and June 30, 1999, 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 PRONOUNCEMENT:
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
originally effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999; it has since been delayed one year. 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>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- -------------
<S> <C> <C>
Raw materials and supplies ........ $1,280 $ 900
Finished goods .................... 958 1,587
------ ------
$2,238 $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 two years and bears
9
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 5--LEASE RECEIVABLES AND LONG-TERM DEBT: (Continued)
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>
2000 .......................................... $490 $444
2001 .......................................... 465 139
2002 .......................................... 23 --
------------ ------------
$978 $583
------------ ------------
------------ ------------
</TABLE>
The components of net lease receivables are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
--------------
<S> <C>
Gross lease receivables ................ $ 978
Allowance for doubtful accounts ........ (325)
Unearned income ........................ (9)
--------------
$ 644
--------------
--------------
</TABLE>
NOTE 6--GAIN ON SALE OF THE IMAGING BUSINESS:
During July 1999, the Company sold its cytogenetic imaging
instrumentation ("Imaging") business, which represented nearly all of the
Company's current genetic instrument product line, to Applied Imaging Corp.
("AI") for a purchase price of $2.3 million plus additional consideration of
approximately $0.7 million for the purchase of certain imaging component
inventory, resulting in a gain of $1.7 million. Of the $3.0 million in total
consideration, the Company has received $1.4 million in cash and $0.5 million
of AI common stock. In addition, in accordance with the sale agreement, AI is
obligated to pay in cash $0.1 million in November 1999, $0.2 million in
January 2000, $0.5 million in July 2000, and $0.3 million in January 2001. As
of September 1999, the investment balance of $0.5 million represents the
market value of the common stock, and an unrealized loss of $0.1 million has
been included as a component of stockholders' equity.
NOTE 7--ACQUIRED RESEARCH-RELATED PATENTS:
During July 1999, the Company acquired Aprogenex, Inc.'s
intellectual property portfolio for $250,000 plus the issuance of 80,291
shares of the Company's common stock for a total value of $0.5 million. The
intellectual property portfolio included 12 United States patents which
primarily relate to diagnostic assays using the identification of fetal cells
in maternal blood. The Company has expensed the entire value of the acquired
portfolio as the the Company's research has not yet established that the
assays utilizing these patents has sufficient diagnostic capability and the
Company is not currently allocating significant research expenditures to this
area.
10
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 8--LEGAL SETTLEMENT:
During the second quarter of 1998, the Company recognized a $0.4
million nonrecurring gain with respect to a settlement agreement with Oncor,
Inc. which ended a patent infringement suit brought by the Company, as exclusive
licensee, and its licensor.
NOTE 9--RESTRUCTURING:
During the first quarter of 1999, the Company implemented 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 10--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 11--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 for the three months and nine months ended September
30, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT 30,
-----------------------------
1999 1998
------------ -------------
<S> <C> <C>
FDA/AFSSAPS approved clinical genetic testing products ....... $1,012 $ 600
Research and other genetic testing products .................. 1,893 1,660
Genetic instrument products .................................. 48 1,448
Genetic research grants and license revenue .................. 124 466
Distributed laboratory products .............................. 201 224
Food testing products ........................................ 761 658
------------ -------------
Consolidated total revenues .................................. $4,039 $5,056
------------ -------------
------------ -------------
</TABLE>
11
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 11--SEGMENT AND GEOGRAPHIC INFORMATION: (Continued)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPT 30,
-----------------------------
1999 1998
-------------- -----------
<S> <C> <C>
FDA/AFSSAPS approved clinical genetic testing products ....... $ 2,935 $ 1,811
Research and other genetic testing products .................. 6,948 6,383
Genetic instrument products .................................. 2,878 4,547
Genetic research grants and license revenue .................. 403 1,354
Distributed laboratory products .............................. 642 758
Food testing products ........................................ 2,149 1,936
Leal settlement .............................................. -- 384
-------------- -----------
Consolidated total revenues .................................. $15,955 $17,173
-------------- -----------
-------------- -----------
</TABLE>
The Company's revenues by geographic area based on location of
customers for the three months and nine months ended September 30, 1999 and 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT 30,
----------------------------
1999 1998
----------- ---------
<S> <C> <C>
United States ....................................... $ 2,416 $ 2,551
Europe, Middle East and Africa ...................... 1,551 2,443
Other ............................................... 529 607
Eliminations ........................................ (457) (545)
----------- ---------
Consolidated total revenues ......................... $ 4,039 $ 5,056
----------- ---------
----------- ---------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPT 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
United States ....................................... $ 7,905 $ 7,727
Europe, Middle East and Africa ...................... 8,458 9,481
Other ............................................... 1,696 1,658
Eliminations ........................................ (2,104) (1,693)
----------- ---------
Consolidated total revenues ......... ............... $ 15,955 $ 17,173
----------- ---------
----------- ---------
</TABLE>
NOTE 12--SUBSEQUENT EVENT:
Upon completion of the sale of the Imaging business, the Company has
refocused on its core technologies and, as a result, during the 1999 fourth
quarter 37 positions, including open positions as well as certain positions
previously associated with the Imaging business, have been eliminated. The
Company expects to record a charge for severance costs of approximately $0.3
million in the fourth quarter.
12
<PAGE>
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. The statements concerning
the Company's future financial results as well as any other statements which
are not historical facts, are forward-looking statements and are subject to
risks and uncertainties inherent in the Company's business. These risks and
uncertainties, which could cause actual results to differ materially from
those expressed or implied by the forward-looking statements, include: the
market acceptance of the Company's clinical products; the extent to which the
clinicians or laboratories performing procedures with the Company's products
are able to obtain third-party reimbursement; the ability of the Company to
successfully market and sell its clinical products, other products and
equipment; competition; compliance by the Company with regulatory
requirements and the timely receipt of necessary governmental approvals; 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; the success of the Company's collaborators
and licensees; and the success of the Company's cost control efforts.
OVERVIEW
Vysis 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. 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 and grant and other revenues for the three months ended
September 30, 1999 were $3.9 million and $0.1 million, respectively, a decrease
of $0.7 million and $0.3 million, respectively, compared to the third quarter of
1998. As a result, total revenues for the third quarter were $4.0 million, a
decrease of $1.0 million as compared to the prior year quarter. For the nine
months ended September 30, 1999, product revenue was $15.6 million, an increase
of $0.1 million over the same prior year period, while grant and other revenue
was $0.4 million, a decrease of $1.0 million. Total revenues for the first three
quarters of 1999 decreased by $1.2 million to $16.0 million in comparison to the
prior year period. The decline in product revenue for the three months
13
<PAGE>
VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
ended September 30, 1999 was attributable to a $1.4 million decrease in
genetic instrument sales as a result of the Company selling its Imaging
business during July, 1999, which represented nearly all of its genetic
instrument business. The $1.4 million decline in genetic instrument products
for the third quarter was partially offset by a $0.4 million, or 69%,
increase in FDA/AFSSAPS clinically approved genetic testing products
("Clinical"), and a $0.2 million, or 14%, increase in research and other
genetic testing products ("Research"). The slight increase in product revenue
for the nine months ended September 30, 1999 resulted from a $1.7 million
decline in genetic instrument products primarily due to the July, 1999 sale
of the Imaging business, offset by a $1.1 million, or 62%, increase in
Clinical products and a $0.6 million, or 9%, increase in Research products as
compared to the prior year period. The increase in Clinical sales is
primarily due to sales in the U.S. of the Company's PathVysion-TM- HER-2 DNA
probe kit that was approved by the U.S. Food and Drug Administration in
December, 1998. The increase in Research sales was primarily due to a general
increase in worldwide market demand for the products. The decrease in grant
and other revenue for the three months and nine months ended September 30,
1999 was primarily due to the completion of two United States Department of
Commerce research grants in February, 1998 and July, 1998. In addition, the
Company received $0.4 million of nonrecurring other revenue during the second
quarter of 1998 related to a litigation settlement agreement.
Cost of goods sold for the three months and nine months ended
September 30, 1999 were $1.3 million and $6.0 million, respectively,
representing a decrease of $0.9 million, or 42%, and $1.1 million, or 16%,
from the respective prior year periods. The decline in cost of goods sold
resulted in gross profit as a percentage of product revenue increasing to 67%
and 62% for the three months and nine months ended September 30, 1999,
respectively, from 51% and 54% for the three months and nine months ended
September 30, 1998, respectively. While product revenue decreased and was
relatively flat for the three months and nine months ended September 30,
1999, respectively, the resulting product gross profit increased by $0.3
million, or 11%, to $2.6 million and $1.2 million, or 15%, to $9.6 million
over the respective prior year periods, primarily due to the continuing
revenue growth in the higher margin Clinical and Research products versus the
comparable prior year periods.
Operating expenses for the three months and nine months ended
September 30, 1999 were $6.5 million and $20.7 million, a decrease of $0.3
million, or 5%, and $1.4 million, or 6%, as compared to the three months and
nine months ended September 30, 1998, even though the three months ended
September 30, 1999 included a nonrecurring charge of $0.5 million for
acquired research-related patents. In addition, the first quarter included a
restructuring charge of $0.5 million associated with the elimination of 20
positions within the Company. Research and development expenses of $2.0
million and $6.8 million for the three months and nine months ended September
30, 1999 represented a decrease of $1.0 million, or 33%, and $1.7 million, or
20%, as compared to the respective prior year periods. These decreases were
primarily attributable to lower expenditures in software development,
contract research, and clinical trials, and resulting
14
<PAGE>
VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
savings from the elimination of certain positions in connection with the
Company's restructuring during the first quarter of 1999. Selling, general
and administrative expenses of $4.0 million for the three months ended
September 30, 1999 represented an increase of $0.1 million, or 3%, over the
prior year quarter, primarily due to an increase in bad debt expense. For the
first three quarters of 1999, selling, general and administrative expenses of
$12.8 million represented a decrease of $0.8 million, or 6%, primarily due
to lower litigation expense of approximately $1.2 million offset by higher
information system expenses in comparison to the respective prior year period.
During the third quarter of 1999, the gain on sale of the Imaging
business, as further discussed in Note 12 to the Consolidated Financial
Statements, was $1.7 million. The gain on sale of investment for the nine
months ended September 30, 1999 was $0.4 million that resulted from the $0.5
million sale during the 1999 first quarter of the Company's investment in
Incyte common stock.
Interest income for the three months and nine months ended September 30,
1999 was $0.1 million and $0.5 million, respectively, representing a decline of
$0.3 million and $0.5 million for the comparable prior year periods as a result
of utilizing the proceeds from the February 10, 1998 IPO. Interest expense for
the nine months ended September 30, 1999 decreased $0.2 million as a result of a
note payable with BP Amoco remaining outstanding until the completion of the
Company's IPO.
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 has filed separate federal income tax returns. As the
Company was in a loss position for the nine months ended September 30, 1999,
no federal provision is recorded. For state income taxes, the Company's
results of operations will continue to be included with BP Amoco's state
returns, due to its 67 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 and nine months ended September
30, 1999 and, accordingly, no state tax benefit is
15
<PAGE>
VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
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
and nine months ended September 30, 1999.
A full valuation allowance has been provided for all deferred tax
assets (net of liabilities) at September 30, 1999 as management does not
consider realization of such amounts more likely than not.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the nine months ended
September 30, 1999 was $9.4 million, a decrease of $2.1 million over the
prior year, driven primarily by the $1.3 million reduction in operating
losses during the first three quarters of 1999, and a $1.3 million decrease
in working capital requirements, offset by a $0.5 million reduction in
depreciation and amortization as compared to the prior year.
Net cash provided by investing activities for the nine months ended
September 30, 1999 was $6.7 million, resulting primarily from maturities, net
of purchases, of short-term investments and the net proceeds from the gain on
sale of the Imaging business. During the prior year, the $9.3 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 nine months ended
September 30, 1999 was minimal, an increase of $33.2 million from the prior
period primarily due to receiving the net proceeds from the IPO during
February 1998.
At September 30, 1999, the Company had cash, cash equivalents and
short-term investments of $10.0 million and an accumulated deficit of $56.9
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 implemented during the
first quarter of 1999 a restructuring plan that resulted in the elimination
of 20 positions. During the third quarter of 1999 the Company sold its
Imaging business to Applied Imaging Corp. ("AI") for total consideration of
$3.0 million. Of the $3.0 million in total consideration, the Company has
received $1.4 million in cash and $0.5 million of AI common stock. In
addition, AI is obligated to pay in cash $0.1 million in November 1999, $0.2
million in January 2000, $0.5 million in July 2000, and $0.3 million in
January 2001. Upon completion of the Imaging business sale, the Company has
refocused on its core technologies and during the fourth quarter has
eliminated 37 positions, including open positions as well as certain
positions previously associated with the Imaging business, thereby reducing
ongoing annual cash expenditures by an estimated $2.7 million. The Company
expects to record a charge for severance costs of approximately $0.3 million
during the fourth quarter.
16
<PAGE>
VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
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 late 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 and license agreements;
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; the development of manufacturing,
sales and marketing capabilities; and the Company's ability to control costs.
To the extent capital resources, including payments from existing and
possible future collaborative or license agreements, 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 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 or to obtain funds through entering into
collaborative or license 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 has evaluated 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. This project evaluation consists 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
17
<PAGE>
VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
Company began implementing a plan during the first quarter of 1999 which has
now been completed, and the Company believes its IT Systems are Year 2000
compliant.
In the area of non-IT Systems, the Company relies, both domestically
and internationally, upon various vendors, government agencies, research
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 to determine the extent
of which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 issues. The Company has requested 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. The Company has received and
evaluated nearly all of its necessary responses and is following up with several
vendors in order to better assess any potential Year 2000 compliance issues.
This evaluation is currently ongoing and is expected to be complete by the end
of November. To the extent that the Company does not receive adequate responses
during this final follow-up period, it is prepared to develop appropriate
contingency plans. 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 has
assessed all known equipment and systems and believes that they are Year 2000
compliant.
To date, the Company has incurred expenditures in connection with Year
2000 compliance issues aggregating approximately $300,000 of expenditures.
Unless a currently unknown Year 2000 contingency requirement is identified, the
Company currently estimates that the remaining cost to complete its Year 2000
compliance programs will be less than $50,000 of expenditures.
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.
18
<PAGE>
VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
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 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 and nine months ended September 30, 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 decreased by $0.1 million for the
three months ended September 30, 1999 and increased $0.3 million for the nine
months ended September 30, 1999, respectively, due to the fluctuations of the
U.S. dollar against the functional currency of the Company's international
subsidiaries. Interest rate exposure is primarily limited to the $8.1 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 and
the Company's Quarterly Report on Form 10-Q for the periods ending March 31,
1999 and June 30, 1999, for discussion of litigation matters relating to the
Company. The Company, BP Amoco and other parties were named as defendants in
a patent infringement suit brought by Gen-Probe Incorporated in the United
States District Court in the Southern District of California (San Diego).
During August 1999, the parties to the suit agreed to a settlement which has
been approved by the Court and resulted in dismissal of the action. The
settlement provided for an exchange of certain immunities and licenses among
the parties. No material
19
<PAGE>
VYSIS, INC.
OTHER INFORMATION--(CONTINUED)
amounts of cash were paid by or received by the Company upon completion of
the settlement.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the IPO (see Note 1 of the Notes to 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 September 30, 1999, the Company used such
net offering proceeds as follows (in millions):
<TABLE>
<S> <C>
Purchase of short-term investments and cash equivalents ................ $10.0
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 ..................................................... 20.1
------
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
There were no Form 8-K reports filed during the quarter.
20
<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: November 15, 1999 By: /s/ ALFRED H. ELLSWORTH
----------------------------------
Name: Alfred H. Ellsworth
TITLE: VICE PRESIDENT, FINANCE
AND CHIEF ACCOUNTING
OFFICER
21
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