<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
COMMISSION FILE NO. 0-23659
VYSIS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3803405
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3100 WOODCREEK DRIVE 60515-5400
DOWNERS GROVE, ILLINOIS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 271-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Number of shares of Common Stock, par value $.001 per share, outstanding as of
November 12, 1998: 9,759,758
<PAGE>
VYSIS, INC.
FORM 10-Q/A
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
PAGE
-----
PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Balance Sheet
As of September 30, 1998 and December 31, 1997........... 2
Consolidated Statement of Operations
For the three months ended September 30, 1998 and 1997... 3
Consolidated Statement of Operations
For the nine months ended September 30, 1998 and 1997 ... 4
Consolidated Statement of Cash Flows
For the nine months ended September 30, 1998 and 1997 ... 5
Notes to Consolidated Financial Statements.................... 6-9
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 9-15
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings............................................. 15
ITEM 2: Changes in Securities and Use of Proceeds..................... 16
ITEM 4: Submission of Matters to a Vote of Security Holders........... 16-17
ITEM 6: Exhibits and Reports on Form 8-K.............................. 17
SIGNATURE................................................................. 18
The accompany notes are an integral part of these financial statements
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF AMOCO CORPORATION)
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 13,199 $ 669
Short-term investments..................................................... 8,639 ---
Accounts receivable, net................................................... 5,561 4,629
Current portion of long-term lease receivables............................. 549 ---
Inventories................................................................ 2,637 2,733
Other current assets....................................................... 1,102 1,108
-------------- ---------------
Total current assets................................................... 31,687 9,139
Property and equipment, net..................................................... 4,110 4,646
Investment...................................................................... 320 677
Long-term lease receivables..................................................... 839 ---
Other assets.................................................................... 2,020 2,478
-------------- ---------------
-------------- ---------------
Total assets........................................................... $ 38,976 $ 16,940
-------------- ---------------
-------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt.......................................... $ 534 $ ---
Accounts payable and accrued liabilities................................... 8,265 8,538
Note payable--Amoco........................................................ --- 9,202
Deferred revenue........................................................... 948 537
-------------- ---------------
Total current liabilities.............................................. 9,747 18,277
-------------- ---------------
Long-term debt.................................................................. 664 ---
-------------- ---------------
Stockholders' equity (deficit):
Convertible Preferred Stock, $0.001 par value; 10,000,000 shares
authorized: Series A; 6,200,000 shares designated; none issued and
outstanding at September 30, 1998; 6,200,000 issued and outstanding at
December 31, 1997....................................................... --- 6
Series B; 553,126 shares designated; none issued and outstanding at
September 30, 1998; 553,126 issued and outstanding at December 31, --- 1
1997....................................................................
Common stock, $0.001 par value; 35,000,000 shares authorized; 9,756,669
issued and outstanding at September 30, 1998; 1,071,970
issued and outstanding at December 31, 1997............................. 10 1
Additional paid-in capital.................................................. 71,712 30,396
Deferred compensation....................................................... (109) (206)
Unrealized gain on investment............................................... 220 577
Cumulative translation adjustment........................................... (77) (241)
Accumulated deficit......................................................... (43,191) (31,871)
-------------- ---------------
Total stockholders' equity (deficit).................................... 28,565 (1,337)
-------------- ---------------
-------------- ---------------
Total liabilities and stockholders' equity.............................. $ 38,976 $ 16,940
-------------- ---------------
-------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF AMOCO CORPORATION)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
1998 1997
---------------- -----------------
<S> <C> <C>
Revenues:
Product revenue............................................... $ 4,590 $ 3,627
Grant and other revenues...................................... 466 531
---------------- -----------------
Total revenues............................................ 5,056 4,158
Cost of goods sold................................................. 1,991 1,589
---------------- -----------------
Gross profit....................................................... 3,065 2,569
---------------- -----------------
Operating expenses:
Research and development...................................... 2,916 2,449
Selling, general and administrative........................... 4,182 3,708
---------------- -----------------
Total operating expenses.................................. 7,098 6,157
---------------- -----------------
Loss from operations............................................... (4,033) (3,588)
Interest income.................................................... 454 ---
Interest expense................................................... (143) (245)
---------------- -----------------
Net loss........................................................... $(3,722) $(3,833)
---------------- -----------------
---------------- -----------------
Basic and diluted net loss per share............................... $ (0.38) $ (3.62)
---------------- -----------------
---------------- -----------------
Shares used in computing basic and diluted net loss per share...... 9,729 1,058
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF AMOCO CORPORATION)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
1998 1997
---------------- -----------------
<S> <C> <C>
Revenues:
Product revenue......................................................... $15,435 $ 10,558
Grant and other revenues................................................ 1,738 1,667
---------------- -----------------
Total revenues...................................................... 17,173 12,225
Cost of goods sold........................................................... 6,411 4,773
---------------- -----------------
Gross profit................................................................. 10,762 7,452
---------------- -----------------
Operating expenses:
Research and development................................................ 8,282 7,762
Selling, general and administrative..................................... 14,513 10,785
---------------- -----------------
Total operating expenses............................................ 22,795 18,547
---------------- -----------------
Loss from operations......................................................... (12,033) (11,095)
Interest income.............................................................. 1,026 ---
Interest expense............................................................. (313) (367)
---------------- -----------------
Net loss..................................................................... $(11,320) $(11,462)
---------------- -----------------
---------------- -----------------
Basic and diluted net loss per share......................................... $ (1.35) $ (10.83)
---------------- -----------------
---------------- -----------------
Shares used in computing basic and diluted net loss per share................ 8,410 1,058
Pro forma basic and diluted net loss per share............................... $ (1.21)
----------------
----------------
Shares used in computing pro forma basic and diluted net loss per share 9,252
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF AMOCO CORPORATION)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................ $(11,320) $(11,462)
Reconciliation of net loss to net cash used in operating
activities:
Depreciation and amortization....................................... 1,713 2,360
Loss on disposition of property and equipment....................... --- 5
Stock compensation.................................................. 117 108
Changes in assets and liabilities:
Accounts receivable............................................ (709) (756)
Inventories.................................................... 186 (380)
Other current assets........................................... 108 (176)
Lease receivables.............................................. (1,388) ---
Other assets................................................... (151) ---
Accounts payable and accrued liabilities....................... (426) (178)
Deferred revenue............................................... 397 145
----------------- -----------------
Net cash used in operating activities............................... (11,473) (10,334)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of short-term investments...................... 8,469 ---
Purchases of short-term investments..................................... (17,108) ---
Purchases of property and equipment..................................... (534) (249)
Proceeds from the sale of property and equipment........................ --- 7
Increase in other assets................................................ (82) (629)
----------------- -----------------
Net cash used in investing activities............................... (9,255) (871)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................................. 32,142 ---
Proceeds from option plan exercises..................................... 60 8
Increase in note payable--Amoco......................................... 1,665 10,939
Expenses funded by Amoco................................................ 153 509
Loan repayment to Amoco................................................. (2,000) ---
Proceeds from long-term borrowings...................................... 1,488 ---
Principal payments on long-term borrowings.............................. (287) ---
----------------- -----------------
Net cash provided by financing activities........................... 33,221 11,456
Effect of exchange rate changes on cash...................................... 37 (5)
----------------- -----------------
Net increase in cash......................................................... 12,530 246
Cash and cash equivalents at beginning of period............................. 669 48
----------------- -----------------
Cash and cash equivalents at end of period................................... $13,199 $ 294
----------------- -----------------
----------------- -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--ORGANIZATION AND BUSINESS:
Vysis, Inc. ("Vysis" or the "Company") was incorporated in Delaware in
1991. The Company's principal stockholder is Amoco Technology Company
("ATC"), which is a wholly owned subsidiary of Amoco Corporation ("Amoco").
In 1991, ATC acquired from Genzyme its remaining interest in Gene-Trak
Systems, a joint venture focused on infectious disease diagnostics originally
formed by Amoco and Integrated Genetics in 1986, and established Gene-Trak,
Inc., a Delaware corporation, which at that time was named Gene-Trak Systems
Corporation. In March 1994, ATC contributed all of its infectious disease
business related assets and the stock of Gene-Trak, Inc. to the Company.
Also, in March 1994, ATC contributed to the Company all of its genetic
disease business related assets, including the stock of Vysis, Inc., an
Illinois corporation, which at that time was named Imagenetics Incorporated.
In January 1995, ATC contributed to the Company all of the assets of its
bioinformatics software activities. All assets contributed by Amoco were
recorded by the Company at Amoco's net book value at the date of transfer.
All references to Amoco shall mean Amoco Corporation, an Indiana corporation,
and its wholly owned subsidiary, Amoco Technology Company, a Delaware
corporation.
Vysis is a genomic disease management company focused on developing and
marketing clinical products to assess the structure and function of the human
genome. The Company's DNA probe technologies provide the clinician with an
enhanced ability to manage disease by assessing the human genome at all
levels, including the ability to determine the presence, absence, number and
structure of chromosomes, individual genes, and specific base pair mutations
within genes. The Company currently markets its genomic testing products for
research and clinical use and markets its food testing products for
commercial use.
The Company completed an initial public offering of 3,000,000 shares of
its Common Stock (the "Offering") on February 10, 1998, resulting in net cash
proceeds of approximately $32.1 million. In connection with the Offering,
6,200,000 and 553,126 shares of Series A and Series B Convertible Preferred
Stock, respectively, automatically converted into 4,525,547 and 403,741
shares of Common Stock, respectively. In addition, concurrent with the
completion of the Offering, the Company converted $8.1 million of the note
payable-Amoco, which was net of a capital contribution of approximately $1
million related to the tax effect of including the Company's results of
operations through February 10, 1998 in Amoco's consolidated federal income
tax return, into 675,000 shares of Common Stock and repaid the remaining note
balance of $2.0 million. Upon completion of the Offering, the Company had
approximately 9.7 million shares of Common Stock issued and outstanding.
6
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 2--FINANCIAL INFORMATION:
The unaudited interim consolidated financial statements of the Company have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 and the
Company's Quarterly Reports on Form 10-Q for the three months ended March 31,
1998 and June 30, 1998, as filed with the Securities and Exchange Commission.
In the opinion of management, the interim consolidated financial statements
reflect all adjustments necessary for a fair presentation of the interim
periods. All such adjustments are of a normal, recurring nature. The results of
operations for the interim periods are not necessarily indicative of the results
of operations to be expected for a full year.
NOTE 3--NET LOSS PER SHARE:
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
requires presentation of both basic and diluted earnings per share. Basic
earnings per share is computed using the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share also
includes the impact of potential common shares during the period. No
reconciliation is presented of basic and diluted net loss per share as potential
common shares are antidilutive. Certain prior period amounts have been restated
in accordance with SFAS No. 128.
Pro forma net loss per share for the nine months ended September 30, 1998
was calculated using the weighted average number of common shares outstanding
during the period, adjusted for the conversion of the Series A and Series B
Convertible Preferred Stock into 4,929,288 shares of Common Stock and for the
conversion of $8.1 million of the note payable-Amoco into 675,000 shares of
Common Stock, all as of January 1, 1998.
NOTE 4--RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS No.
131 establishes new standards for reporting information about operating segments
in interim and annual financial statements. SFAS No. 131 will be effective for
the Company's annual reporting requirements for the 1998 fiscal year. The
Company is currently
7
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
evaluating the impact, if any, this statement will have on disclosures in the
notes to its consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999 and requires that all derivative instruments be recorded on the
balance sheet at their fair value. Management of the Company anticipates
that, due to its nonuse of derivative instruments, the adoption of SFAS No.
133 will not have a significant effect on the Company's results of operations
or its financial position.
NOTE 5--COMPOSITION OF BALANCE SHEET COMPONENT:
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------ ------------------
<S> <C> <C>
Raw materials and supplies................ $1,040 $1,198
Finished goods............................... 1,597 1,535
------------------ ------------------
$2,637 $2,733
------------------ ------------------
------------------ ------------------
</TABLE>
NOTE 6--LEASE RECEIVABLES AND LONG-TERM DEBT:
A wholly-owned foreign subsidiary of the Company has entered into certain
sales-type leasing transactions with customers. In order to comply with local
regulations with respect to such leasing transactions, the subsidiary must
borrow money and has assigned to the lender a security interest in the lease
receivables and related equipment. The debt is payable in monthly or quarterly
installments, matures over the next three years and bears interest at rates
ranging from 6.4% to 9.5%. The aggregate maturities of gross lease receivables
and long-term debt for the years ending September 30, are as follows:
<TABLE>
<CAPTION>
Gross Long-Term
Receivables Debt
------------------ ------------------
<S> <C> <C>
1999................................................ $ 621 $ 534
2000................................................ 566 510
2001................................................ 284 154
------------------ ------------------
$1,471 $1,198
------------------ ------------------
------------------ ------------------
</TABLE>
The components of net lease receivables are as follows:
8
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30,
1998
-------------------
<S> <C>
Gross lease receivables........................ $1,471
Unearned income................................ (83)
-------------------
$1,388
-------------------
-------------------
</TABLE>
NOTE 7--COMPREHENSIVE INCOME:
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
requires that all items recognized under accounting standards as components of
comprehensive earnings be reported in interim and annual financial statements in
the same prominence as other interim and annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
earnings by their nature in interim and annual financial statements. Other
comprehensive earnings includes foreign currency translation adjustments and
unrealized gains and losses on investments classified as available-for-sale. No
statement of comprehensive earnings is presented as the effect of the adoption
of this Standard is immaterial to the consolidated financial statements and
notes thereto.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
and financial condition. The discussion should be read in conjunction with the
audited consolidated financial statements of the Company and notes thereto,
which were included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 as well as the financial statements of the Company and
notes thereto, which were included in the Company's Quarterly Reports on Form
10-Q for the three months ended March 31, 1998 and June 30, 1998. This Form 10-Q
contains certain statements which describe the Company's beliefs concerning
future business conditions and the outlook for the Company based on currently
available information. Whenever possible, the Company has identified these
"forward-looking" statements (as defined in Section 21E of the Securities
Exchange Act of 1934) by words such as "anticipates", "believes", "estimates",
"expects", and similar expressions. These forward-looking statements are subject
to risks and uncertainties which could cause the Company's actual results,
performance and achievements to differ materially from those expressed in or
implied by
9
<PAGE>
VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
these statements. These risks and uncertainties include, but are not limited to,
the following: the acceptance of DNA based genetic probes by the medical
community, the receipt by the Company of necessary regulatory approvals in a
timely fashion, compliance by the Company with regulatory requirements,
dependence by the Company on gene discovery and disease correlation efforts of
others, the acquisition by the Company of rights to develop tests utilizing
intellectual property of others, uncertainties relating to the development of
new technologies, dependence on the success of collaborative partners and the
Company's success in defending its own intellectual property rights and avoiding
infringing those of others.
OVERVIEW
Vysis is a leading genomic disease management company that develops,
commercializes and markets clinical products that provide information
critical to the evaluation and management of cancer, prenatal disorders and
other genetic diseases. The Company currently markets clinical products
cleared by the U.S. Food and Drug Administration and the French Agence du
Medicament, and a line of research products, imaging workstations and other
instruments for genetic analysis. During March 1998, the Company received
registration from the Agence du Medicament ("ADM") to market throughout
Europe the AneuVysion-TM-EC Assay for Down Syndrome and other chromosomal
disorders associated with mental retardation and birth defects. The Company
has a pending application for registration with the ADM to market
CEP-Registered Trademark- X SpectrumOrange-TM-/Y SpectrumGreen-TM- ("CEP
X/Y"), CEP-Registered Trademark- 8 SpectrumOrange-TM- ("CEP 8") and
CEP-Registered Trademark-12 SpectrumOrange-TM- ("CEP 12") DNA Probe Kits, IN
VITRO diagnostics, for use as adjuncts to standard cytogenetic analysis to
identify and enumerate the presence of chromosomes X, Y, 8 and 12 in bone
marrow and blood specimens, thus aiding in the diagnosis and treatment of
leukemia patients. During November 1998, the Immunology Devices Panel of the
U.S. Food and Drug Administration ("FDA") unanimously recommended FDA
conditional approval of the Company's PathVysion-TM- HER-2 DNA probe kit,
which is intended to detect and rapidly assess the amplification of the HER-2
gene for use as a predictive marker for response to adriamycin based
chemotherapy in node positive Stage II breast cancer patients. Vysis
currently markets five FDA cleared clinical products, including the U.S.
versions of CEP X/Y, CEP 8 and CEP 12 and AneuVysion-TM-which received 510(k)
clearance by the FDA during 1997, and over 310 research products. The company
has direct sales operations in the United States and Europe, a marketing
partnership in Japan with Fujisawa Pharmaceutical Co., and a worldwide
distribution network.
RESULTS OF OPERATIONS
Product revenue for the three months ending September 30, 1998 was $4.6
million, an increase of 27% compared to the third quarter of 1997, while grant
and other revenues of $0.5 million represented a 12% decrease as compared to the
prior year
10
<PAGE>
VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
quarter. As a result, total revenues for the third quarter increased by 22%
to $5.1 million in comparison to $4.2 million in the prior year quarter. For
the nine months ended September 30, 1998, product revenue increased 46% to
$15.4 million over the same prior year period, while grant and other revenues
increased 4% to $1.7 million. As a result, total revenues for the first three
quarters of 1998 increased by 40% to $17.2 million as compared to $12.2
million in the prior year period. The growth in product revenue during the
third quarter as well as the first nine months of 1998 was primarily the
result of an increased number of shipments of Vysis developed research and
clinical reagents to both domestic and international customers. In addition,
the increase in genetic testing product revenue during the nine months ended
September 30, 1998 was partially the result of sales attributable to
receiving Oncor Inc.'s ("Oncor") non-oncology Fluorescence IN SITU
Hybridization ("FISH") business as part of a settlement agreement ending a
patent infringement suit brought by the Company, as exclusive licensee, and
its licensor against Oncor, Inc. For the three months ended September 30,
1998, grant and other revenues decreased $0.1 million primarily due to the
completion in 1998 of two United States' Department of Commerce research
grants. For the nine months ended September 30, 1998, grant and other
revenues increased $0.1 million primarily due to nonrecurring license and
other revenues related to the previously mentioned agreement with Oncor,
partially offset by the aforementioned completion of the two research grants.
Cost of goods sold increased to $2.0 million and $6.4 million for the three
and nine months ended September 30, 1998, respectively, from $1.6 million and
$4.8 million for the comparative 1997 periods. The increase in cost of goods
sold during the three and nine month periods resulted from an increase in the
volume of products sold. As a percentage of total revenue, gross profit
decreased to 60.6% for the third quarter of 1998 from 61.8% for the comparative
1997 period primarily due to the previously mentioned reduction in grant and
other revenues. For the nine months ended September 30, 1998, the gross margin
percentage increased to 62.7% as compared to 61.0% for the same period in 1997,
primarily attributable to higher margin reagent revenue accounting for a larger
percentage of the Company's total product revenue than did lower margin
instrument revenue.
Operating expenses increased to $7.1 million and $22.8 million for the
three and nine months ended September 30, 1998, respectively, representing a
$0.9 million and $4.2 million increase over the comparative prior year periods.
Research and development expenses of $2.9 million and $8.3 million for the three
and nine months ended September 30, 1998, respectively, represent an increase of
$0.4 million and $0.5 million as compared to the respective prior year periods.
Selling, general and administrative expenses increased to $4.2 million and $14.5
million for the three and nine months ended September 30, 1998, respectively,
representing an increase of $0.5 million and $3.7 million as compared to the
respective prior year periods. These operating expense increases were primarily
driven by increased research and development activities, the expansion of sales
and marketing efforts and additional general and administrative expenses
incurred to manage the overall Company growth and expansion of operations.
11
<PAGE>
VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
Interest income increased to $0.5 million and $1.0 million for the three
and nine months ended September 30, 1998, respectively, representing a $0.5
million and $1.0 million increase over the comparative prior year periods
primarily as a result of the investment of the proceeds from the Offering. For
the three and nine months ended September 30, 1998, interest expense decreased
slightly as compared to the prior year primarily due to the Company no longer
carrying a balance due to Amoco as it did in 1997 when it was a wholly owned
subsidiary.
The Company's results of operations have been included in the consolidated
income tax returns of Amoco from inception through February 10, 1998.
Accordingly, the Company's domestic net operating losses through this date have
been utilized by Amoco and are not available to offset the Company's future
taxable income. As a result of the Offering, the Company will no longer be
included in the Amoco consolidated federal income tax return. Accordingly, net
operating losses incurred from February 10, 1998 can be carried forward by the
Company to offset future taxable income. A full valuation allowance has been
provided for all net deferred tax assets at September 30, 1998 as management
does not consider realization of such amounts more likely than not.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
Net cash used in operating activities was $11.5 million for the nine months
ended September 30, 1998, an increase of $1.1 million over the same period in
1997 driven primarily by an increase in working capital requirements. Net loss
was $11.3 million and $11.5 million for the nine months ended September 30, 1998
and 1997, respectively. Depreciation and amortization decreased $0.6 million
during the first nine months of 1998 primarily as a result of two significant
licenses that became fully amortized during 1997. Primary working capital
(accounts and lease receivables and inventories, less accounts payables and
accrued liabilities) requirements increased in 1998 to $2.3 million from $1.3
million in 1997 primarily due to an increase in receivables. In addition,
operating cash flow requirements decreased as a result of a $.3 million increase
in deferred revenue during 1998 as compared to 1997.
Net cash flows used in investing activities increased to $9.3 million for
the first nine months of 1998 from $0.9 million in the prior year. This increase
resulted primarily from the purchase of short-term investments, net of proceeds
from maturities, as a result of investing a portion of the proceeds from the
Offering.
Net cash flows provided by financing activities for the first nine months
of 1998 were $33.2 million, an increase of $21.8 million over the prior year
period. This increase primarily resulted from the receipt of $32.1 million in
proceeds from the Offering and $1.2 million of long-term debt borrowings, net of
repayments (see Note 6 for further discussion of long-term debt), partially
offset by the reduced borrowings from Amoco. Such borrowings from Amoco ceased
February 10, 1998, upon the completion of the Offering at which time the
remaining $2.0 million note balance with Amoco was repaid.
12
<PAGE>
VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
The Company believes that the net proceeds from the Offering, and the
interest to be earned thereon, will be sufficient to fund the Company's
operations well into 2000. The Company's estimate of the time period for which
cash funds will be adequate to fund its operations is a forward looking estimate
subject to risks and uncertainty, and actual results may differ materially. The
Company's requirements for additional capital will depend on many other factors,
including payments received under existing and potential collaborative
agreements; the availability of government research grant payments; the progress
of the Company's collaborative and independent research and development
projects; the costs of preclinical and clinical trials for the Company's
products; the prosecutions, defense and enforcement of patent claims and other
intellectual property rights; and the development of manufacturing, sales and
marketing capabilities. To the extent capital resources, including payments from
existing and possible future collaborative agreements and grants, together with
the net proceeds from the Offering are insufficient to meet future capital
requirements, the Company will have to raise additional funds to continue the
development of its technologies. There can be no assurance that such funds will
be available on favorable terms, or at all. To the extent that additional
capital is raised through the sale of equity or convertible debt securities, the
issuance of such securities could result in dilution to the Company's
shareholders. If adequate funds are not available, the Company may be required
to curtail operations significantly or to obtain funds through entering into
collaborative agreements on unattractive terms. The Company's inability to raise
capital as and when needed would have a material adverse effect on the Company's
business, financial condition and the results of operations.
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.
13
<PAGE>
VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
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
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 early 1999, it is prepared to develop
contingency plans, with completion of these plans scheduled for no later than
mid-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.
14
<PAGE>
VYSIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3. Legal Proceedings in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 for discussion
of litigation matters relating to the Company. The Company holds contingent
rights from the Center for Neurologic Study ("CNS") to a license under U.S.
Patent Nos. 4,851,330 and 5,288,611 (the "Kohne Patents") assigned to Gen-Probe,
Inc. ("Gen-Probe"). CNS has sued Gen-Probe in California state court challenging
Gen-Probe's title to the Kohne Patents. The Company reimburses CNS' legal
expenses from this litigation. A California state court jury rendered a verdict
in December 1997 that certain of CNS' claims of title to the Kohne Patents were
barred as untimely raised. The Company understands that the court dismissed all
remaining claims on July 21, 1998 and that a final judgment has now been entered
in CNS' matter. The Company understands that CNS has filed a notice of appeal
and continues to evaluate its options. There can be no assurances the Company
will acquire rights in the Kohne Patents.
The Company and other parties have been defendants in a suit pending in the
United States District Court in the Southern District of California (San Diego).
The suit was brought by Gen-Probe, Inc. and alleged infringement of the Kohne
Patents and various claims that the defendants competed unfairly with Gen-Probe.
The suit had been stayed pending the outcome of the suit filed by CNS. That stay
was lifted recently and Gen-Probe has filed an amended complaint. The amended
complaint alleges that the Company, Amoco Corporation and Amoco Technology
Company induced infringement of the Kohne Patents at issue in the earlier
complaint. The amended complaint further alleges direct infringement by the
Company's subsidiary Gene-Trak, Inc. and its division Gene-Trak Systems
Industrial Diagnostics. No other claims are pending in Gen-Probe's complaint at
this time. The Company has not yet filed an answer to the complaint and intends
to vigorously contest this action.
15
<PAGE>
VYSIS, INC.
OTHER INFORMATION--(CONTINUED)
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the Offering (see Note 1 of the Notes to Consolidated
Financial Statements for further discussion), the Company received net proceeds
of $32.1 million from the sale of 3,000,000 shares of its Common Stock. From the
closing date of the Offering, February 10, 1998 to September 30, 1998, the
Company used such net offering proceeds as follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
Purchase of short-term investments and cash equivalents...................... $ 21.8
Repayment of note payable-Amoco.............................................. 2.0
Acceleration of product development, expansion of sales and
marketing capabilities and funding of increased working
capital requirements and ongoing operations............................... 8.3
--------
Total........................................................................ $ 32.1
========
</TABLE>
Each of these amounts is a reasonable estimate of the application of the
net offering proceeds. This use of proceeds does not represent a material
change in the use of proceeds described in the Prospectus for the Offering.
Other than the repayment of a note payable to Amoco in the amount of $2
million, none of such amounts (with the exception of salaries and directors'
fees and working capital advances to affiliates incurred in the ordinary
course of business) represented direct or indirect payments to (i) directors
or officers of the Company or their associates, (ii) persons owning 10% or
more of any class of equity securities of the Company or (iii) affiliates of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On or about July 1, 1998, proxy materials were distributed to all
shareholders of record as of the close of business on June 26, 1998. The
results of the shareholders' votes were disclosed at the 1998 annual meeting
of shareholders (the "Annual Meeting") of the Company which convened on July
22, 1998.
At the Annual Meeting, the following individuals were elected by the votes
indicated as directors of the Company until the 1999 Annual Meeting and their
successors have been elected and qualified:
<TABLE>
<CAPTION>
Nominee For Withheld
------------------------------ -------- ---------------
<S> <C> <C>
Robert C. Carr 8,945,993 2,500
William M. Bartlett 8,946,193 2.300
16
<PAGE>
VYSIS, INC.
OTHER INFORMATION--(CONTINUED)
John L. Bishop 8,946,193 2,300
Kenneth L. Melmon 8,946,193 2,300
Walter R. Quanstrom 8,945,993 2,500
Frank J. Sroka 8,945,993 2,500
Richard C. Williams 8,946,193 2,300
</TABLE>
The other item acted upon at the Annual Meeting was the adoption of the
1998 Long Term Incentive Plan (the "Plan") described in the proxy materials. The
plan was approved by the following vote:
<TABLE>
<CAPTION>
For Against Abstained Non-vote
---------------- ------------ -------------- --------------
<S> <C> <C>
7,197,421 648,297 4,300 1,098,475
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
Exhibit 27, Financial Data Schedule (included only in the electronic filing
of this document).
REPORTS ON FORM 8-K
The registrant did not file any reports on Form 8-K during the quarter.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VYSIS, INC.
Date: March 9, 1999 By: /s/ JAMES J. HABSCHMIDT
------------------------------------
Name: James J. Habschmidt
TITLE: EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
18
