<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-23659
VYSIS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3803405
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
3100 WOODCREEK DRIVE 60515-5400
DOWNERS GROVE, ILLINOIS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 271-7000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Number of shares of Common Stock, par value $.001 per share,
outstanding as of April 26, 2000: 10,073,084
<PAGE>
VYSIS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I: FINANCIAL INFORMATION ----
<S> <C>
ITEM 1: Financial Statements
Consolidated Balance Sheets
As of March 31, 2000 and December 31, 1999.................... 2
Consolidated Statements of Operations
For the three months ended March 31, 2000 and 1999............ 3
Consolidated Statements of Comprehensive Operations
For the three months ended March 31, 2000 and 1999............ 4
Consolidated Statements of Cash Flows
For the three months ended March 31, 2000 and 1999............ 5
Notes to Consolidated Financial Statements....................... 6
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 11
ITEM 3: Quantitative and Qualitative Disclosure About Market Risk.......... 15
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings.................................................. 16
ITEM 2: Changes in Securities and Use of Proceeds.......................... 17
ITEM 6: Exhibits and Reports on Form 8-K................................... 17
SIGNATURE................................................................... 18
</TABLE>
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 4,510 $ 4,818
Short-term investments .................................................. 3,258 3,597
Marketable securities ................................................... 1,399 622
Accounts receivable, net ................................................ 2,931 3,093
Other receivables ....................................................... 1,330 1,963
Inventories ............................................................. 2,105 2,012
Other current assets .................................................... 1,172 503
-------------- ---------------
Total current assets ................................................ 16,705 16,608
Property and equipment, net .................................................. 2,823 2,986
Other assets ................................................................. 1,496 1,441
-------------- ---------------
Total assets ........................................................ $ 21,024 $ 21,035
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ................................ $ 6,366 $ 6,153
Deferred revenue ........................................................ 1,316 1,391
-------------- ---------------
Total current liabilities ........................................... 7,682 7,544
-------------- ---------------
Long-term liability 250 --
-------------- ---------------
Commitment and contingency (Note 12)
Stockholders' equity:
Convertible preferred stock, $0.001 par value; 10,000,000 shares
authorized:
Series A; 6,200,000 shares designated; none issued and
outstanding at March 31, 2000 and December 31, 1999 ................. -- --
Series B; 553,126 shares designated; none issued and outstanding
at March 31, 2000 and December 31, 1999 ............................. -- --
Common stock, $0.001 par value; 35,000,000 shares authorized;
10,060,719 issued and outstanding at March 31, 2000; 9,945,346
issued and outstanding at December 31, 1999 ......................... 10 10
Additional paid-in capital .............................................. 72,444 72,192
Unrealized gain on investment ........................................... 870 93
Cumulative translation adjustment ....................................... (445) (336)
Accumulated deficit ..................................................... (59,787) (58,468)
-------------- ---------------
Total stockholders' equity .......................................... 13,092 13,491
-------------- ---------------
Total liabilities and stockholders' equity .......................... $ 21,024 $ 21,035
============== ===============
</TABLE>
See notes to the consolidated financial statements.
2
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VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
2000 1999
---------------- -----------------
<S> <C> <C>
Revenues:
Product revenue .................................................. $ 4,950 $ 5,283
Grant and other revenue .......................................... 181 161
---------------- -----------------
Total revenues ............................................... 5,131 5,444
Cost of goods sold .................................................... 1,239 2,047
---------------- -----------------
Gross profit .......................................................... 3,892 3,397
---------------- -----------------
Operating expenses:
Research and development ......................................... 1,809 2,477
Selling, general and administrative .............................. 3,511 4,421
Restructuring expense ............................................ -- 541
---------------- -----------------
Total operating expenses ..................................... 5,320 7,439
---------------- -----------------
Loss from operations .................................................. (1,428) (4,042)
Gain on sale of investment ............................................ -- 357
Interest income ....................................................... 109 220
Interest expense ...................................................... -- (33)
---------------- -----------------
Net loss .............................................................. $(1,319) $(3,498)
================ =================
Basic and diluted net loss per share .................................. $ (0.13) $ (0.36)
================ =================
Shares used in computing basic and diluted net loss per share ......... 10,007 9,792
</TABLE>
See notes to the consolidated financial statements.
3
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VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2000 1999
---------------- -------------
<S> <C> <C>
Net loss.................................................................. $(1,319) $(3,498)
Other comprehensive income (loss):
Cumulative translation adjustment.................................... (109) (283)
Unrealized holding gain (loss) on investment......................... 777 (105)
Reclassification adjustment, realized gain on investment............. -- (357)
---------------- -------------
Total other comprehensive income (loss).......................... 668 (745)
---------------- -------------
Comprehensive loss........................................................ $ (651) $(4,243)
================ =============
</TABLE>
See notes to the consolidated financial statements.
4
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VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................... $(1,319) $(3,498)
Reconciliation of net loss to net cash used in operating
activities:
Depreciation and amortization ................................. 377 429
Effects of changes in foreign currency ........................ 10 --
Foreign currency exchange rate losses ......................... 16 --
Gain on sale of investment .................................... -- (357)
Stock compensation ............................................ -- 19
Changes in assets and liabilities:
Accounts receivable ...................................... 206 807
Inventories .............................................. (115) (209)
Other current assets ..................................... (671) (481)
Lease receivables ........................................ -- 58
Other assets ............................................. 10 35
Accounts payable and accrued liabilities ................. 252 (1,623)
Deferred revenue ......................................... (75) (50)
----------------- -----------------
Net cash used in operating activities ......................... (1,309) (4,870)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds, net of cash sold, from French distributor ............... 651 --
Proceeds, net of transaction-related expenses, from sale of
Imaging business .............................................. 39 --
Proceeds from maturities of short-term investments ................ 3,585 10,005
Proceeds from sale of investment .................................. -- 457
Purchases of short-term investments ............................... (3,244) (7,133)
Purchases of property and equipment ............................... (191) (125)
Proceeds from sale of property and equipment ...................... 23 --
Increase in other assets .......................................... (53) (42)
----------------- -----------------
Net cash provided by investing activities ..................... 810 3,162
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from option plan exercises ............................... 125 10
Expenses funded by BP Amoco ....................................... 115 --
Principal payments on long-term borrowings ........................ -- (125)
----------------- -----------------
Net cash provided by (used in) financing activities ........... 240 (115)
Effect of exchange rate changes on cash ................................ (49) (36)
----------------- -----------------
Net decrease in cash and cash equivalents .............................. (308) (1,859)
Cash and cash equivalents at beginning of period ....................... 4,818 4,517
----------------- -----------------
Cash and cash equivalents at end of period ............................. $ 4,510 $ 2,658
================= =================
</TABLE>
See notes to the consolidated financial statements.
5
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VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--ORGANIZATION AND BUSINESS:
Vysis, Inc. ("Vysis" or the "Company") is a Genomic Disease
Management company that develops, commercializes and markets clinical
products that provide information critical to the evaluation and management
of cancer, prenatal disorders and other genetic diseases. Vysis currently
markets six U.S. Food and Drug Administration ("FDA") or foreign cleared or
approved clinical ("Clinical") products in addition to distributing over 275
Analyte Specific Reagent and research ("ASR/Research") products through its
direct sales operations in the United States and Europe and a worldwide
distribution network covering 59 countries. The Company's wholly owned
subsidiary, Gene-Trak Systems Industrial Diagnostics Corporation,
manufactures and markets food testing kits based on Deoxyribonucleic Acid
("DNA") 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.
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 "Offering"). The net proceeds of the
Offering after deducting expenses were approximately $32.1 million.
Concurrent with the consummation of the Offering, 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
April 26, 2000, BP Amoco beneficially owned approximately 66 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 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, 1999, as filed with the Securities and Exchange Commission.
6
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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 1999 have been reclassified to conform to the
fiscal 2000 presentation. These changes had no impact on previously reported
results of operations or stockholders' equity. The results of operations for
the interim periods are not necessarily indicative of the results of
operations to be expected for a full year.
NOTE 3--RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS 133 will require the Company, to the extent it makes use of derivative
financial instruments, to record them on the balance sheet at fair value.
Changes of the fair value of derivatives will be recognized to earnings or
other comprehensive income, depending on whether the derivative is designated
as part of a hedge transaction. In June 1999, FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement 133," which postponed the effective date
of SFAS 133 until calendar year 2001. The Company anticipates that due to its
current non-use of derivative instruments, the adoption of SFAS 133 will not
have a significant effect on the Company's financial position or results of
operations.
NOTE 4--COMPOSITION OF BALANCE SHEET COMPONENT:
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
Raw materials and supplies.......................... $1,044 $1,136
Finished goods...................................... 1,061 876
------------- -------------
$2,105 $2,012
============= =============
</TABLE>
NOTE 5--CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS CLASSIFIED AS HELD TO
MATURITY:
Cash equivalents and short-term investments are classified as held to
maturity, are carried at amortized cost and are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, 2000
-----------------------------------------
UNREALIZED FAIR
AMORTIZED COST LOSS VALUE
-------------- ---------- ---------
<S> <C> <C> <C>
U.S. government agencies ......................... $1,237 $ (3) $1,234
Corporate debt securities......................... 5,468 -- 5,468
-------------- ---------- ---------
$6,705 $ (3) $6,702
============== ========== =========
</TABLE>
7
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<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------------
UNREALIZED FAIR
AMORTIZED COST GAIN (LOSS) VALUE
-------------- ---------------- -------------
<S> <C> <C> <C>
U.S. government agencies.......................... $2,727 $(11) $2,716
Corporate debt securities......................... 2,770 1 2,771
-------------- ---------------- -------------
$5,497 $(10) $5,487
============== ================ =============
</TABLE>
A summary of securities classified as held to maturity at March 31,
2000 are as follows (in thousands):
<TABLE>
<CAPTION>
DUE IN AMORTIZED COST FAIR VALUE
---------------------------- ---------------- --------------
<S> <C> <C>
1-90 Days..................... $3,449 $3,449
91-180 Days................... 3,256 3,253
---------------- --------------
$6,705 $6,702
================ ==============
</TABLE>
NOTE 6--GAIN ON SALE OF FRENCH DISTRIBUTOR:
On December 31, 1999, the Company sold its wholly-owned French
distribution subsidiary to Applied Genetics Services, Ltd. for a French franc
purchase price the equivalent of $1,272,000 in U.S. dollars as of December 31,
1999, resulting in a gain of $166,000. At March 31, 2000, the Company has
received $651,000 and recorded a loss on foreign currency transactions of
$55,000. The Company and its foreign subsidiaries will receive by the end of May
2000 the final payments in French francs aggregating the equivalent of $464,000
in U.S. dollars as of March 31, 2000.
NOTE 7--RELATED PARTY TRANSACTION:
During the three months ended March 31, 2000, the Company received
certain consulting services provided for and paid by BP Amoco valued at
$115,000. The Company has recorded the benefit of these services as a capital
contribution with a corresponding charge to selling, general and administrative
expense.
NOTE 8--RESTRUCTURING:
During 1999, the Company completed two restructuring plans that included
the elimination of 25 employees in total at various levels throughout the
Company, which resulted in an aggregate restructuring charge of $918,000 in 1999
for employee severance costs, of which $514,000 was recorded during the
restructuring plan implemented during the first quarter of 1999. At March 31,
2000, the Company had paid all but $122,000 of the $918,000 of 1999 charges.
NOTE 9--GAIN ON SALE OF THE IMAGING BUSINESS:
During July 1999, the Company sold its Quips cytogenetic imaging
instrumentation ("Imaging") business, which represented nearly all of the
Company's current genetic
8
<PAGE>
instrument product line, to Applied Imaging Corp. ("AI") for a purchase price
of $2,278,000 plus additional consideration of $749,000 for the purchase of
certain Imaging component inventory, resulting in a gain of $1,700,000. Of
the $3,027,000 in total consideration, the Company has received $1,718,000 in
cash and 497,368 shares of AI common stock that was valued upon its receipt
at $529,000. In addition, in accordance with the sale agreement, AI is
obligated to pay in cash $30,000 currently, $500,000 plus interest in July
2000, and $250,000 plus interest in January 2001. As of March 31, 2000, the
marketable securities balance of $1,399,000 represents the market value of
the common stock, and an unrealized gain of $870,000 has been included as a
component of stockholders' equity.
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 $457,000, resulting in a gain on the sale of $357,000.
NOTE 11--SEGMENT AND GEOGRAPHIC INFORMATION:
The Company operates in two reportable business segments: genetic
and food testing products. The genetics business develops, commercializes,
manufactures and markets products that use nucleic acid probes for the
evaluation and management of cancer, prenatal disorders and other genetic
diseases. The food business manufactures and markets food testing kits based
on DNA probes.
The tables below present information (in thousands) about reported
segments for the three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
MARCH 31, 2000
---------------------------------------
GENETICS FOOD TOTAL
------------ ----------- ---------
<S> <C> <C> <C>
Revenues from external
customers......................................... $ 4,412 $719 $ 5,131
Segment income (loss)............................... (1,339) 20 (1,319)
Segment assets...................................... 20,270 754 21,024
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------------
GENETICS FOOD TOTAL
------------ ----------- -----------
<S> <C> <C> <C>
Revenues from external
customers........................................ $ 4,745 $699 $ 5,444
Segment loss....................................... 3,487 11 3,498
Segment assets..................................... 28,159 688 28,847
</TABLE>
The Company's revenues by product line for the three months ended March
31, 2000 and 1999 are as follows (in thousands):
9
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<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2000 1999
------------------ -------------
<S> <C> <C>
FDA/ADM approved clinical genetic testing products.............. $1,297 $ 881
ASR/Research genetic testing products........................... 2,642 2,077
Genetic instrument products..................................... 292 1,468
Genetic research grants and license revenue..................... 181 161
Distributed laboratory products................................. -- 158
Food testing products........................................... 719 699
------------------ -------------
Consolidated total revenues..................................... $5,131 $5,444
================== =============
</TABLE>
The Company's revenues by geographic area based on location of
customers are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
2000 1999
------------------ ------------
<S> <C> <C>
United States.................................................... $2,612 $2,506
Europe, Middle East and Africa................................... 1,888 2,324
Other............................................................ 631 614
------------------ ------------
Consolidated total revenues...................................... $5,131 $5,444
================== ============
</TABLE>
NOTE 12--COMMITMENT AND CONTINGENCY:
On December 22, 1999, the Company was named as a defendant in a
Complaint For Declaratory Relief filed by Gen-Probe in the United States
District Court in the Southern District of California (San Diego). Gen-Probe
filed a First Amended Complaint For Declaratory Relief And Unfair Competition on
January 25, 2000. Gen-Probe's amended complaint seeks a declaration that the
`338 patent is invalid and not infringed by certain products for detecting the
presence of hepatitis C virus (HCV) and human immunodeficiency virus (HIV) in
blood specimens and an injunction restraining the Company from interfering with
the manufacture, sale, license or use of Gen-Probe's products by Gen-Probe, its
partners and customers among others. The complaint also seeks damages and other
monetary relief for the unfair competition.
The Gen-Probe products identified in the suit use nucleic acid testing
methodology for detecting HCV and HIV in blood specimens. The `338 patent
license applies to Gen-Probe's blood testing products which are marketed by
Chiron Corporation in France and are expected to be marketed in the U.S. and
elsewhere, and other products which the Company understands will be introduced
commercially by Gen-Probe and its partners later in 2000 and thereafter.
Gen-Probe also seeks a declaration from the Court regarding its rights and
obligations under the license.
The Company expects to answer the complaint and to defend the suit
vigorously. The Company further believes Gen-Probe's claim for damages is
without merit. A loss of this suit would not limit the sales or marketing of
any of the Company's present or planned products, but could result in the
loss of revenue under the license granted to Gen-Probe and the loss of other
licensing opportunities for the `338 patent. Although there can be no
assurance as to the ultimate disposition of this matter, it is the opinion of
the Company's management, based upon the information available at this time,
that the expected outcome of this matter will not have a material adverse
effect on the Company's business, results of operations and financial
condition.
10
<PAGE>
The Company has a minimum purchase commitment with an instrument
manufacturer. The agreement expires at December 31, 2000 and contains a
remaining commitment of $412,000.
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, 1999 as well as the financial statements of
the Company and notes thereto. This Quarterly Report on Form 10-Q contains
certain statements which describe the Company's beliefs concerning future
business conditions and the outlook for the Company based on currently available
information. Whenever possible, the Company has identified these
"forward-looking" statements (as defined in Section 21E of the Securities
Exchange Act of 1934) by words such as "anticipates," "believes," "estimates,"
"expects," and similar expressions. These forward-looking statements are subject
to risks and uncertainties which could cause the Company's actual results,
performance and achievements to differ materially from those expressed in or
implied by these statements. These risks and uncertainties, 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; product liability claims; the
success of the Company's collaborators and licensees; and the Company's cost
control efforts.
OVERVIEW
Vysis, Inc. ("Vysis" or the "Company") is a Genomic Disease Management
company that develops, commercializes and markets clinical products that provide
information critical to the evaluation and management of cancer, prenatal
disorders and other genetic diseases. Vysis currently markets six U.S. Food and
Drug Administration ("FDA") or foreign cleared or approved clinical ("Clinical")
products in addition to distributing over 275 Analyte Specific Reagent and
research ("ASR/Research") products through its direct sales operations in the
United States and Europe and a worldwide distribution network covering 59
countries. The Company's wholly owned subsidiary, Gene-Trak Systems Industrial
Diagnostics Corporation, manufactures and markets food testing kits based on
Deoxyribonucleic Acid ("DNA") probes.
11
<PAGE>
RESULTS OF OPERATIONS
For the three months ended March 31, 2000, total revenues were $5.1
million, a decrease of $0.3 million, or six percent, from the prior year. For
the three months ended March 31, 2000, product revenues decreased $0.3
million, or six percent, to $5.0 million, from $5.3 million in 1999 while
grant and other revenue of $0.2 million was unchanged from the prior year
quarter. The decrease in 2000 product revenue was primarily attributable to a
$1.2 million reduction in instrument product sales as a result of the Company
selling its Quips cytogenetic imaging instrumentation ("Imaging") business
during July 1999, which represented nearly all of its genetic instrument
business. In addition, product revenue decreased by $0.2 million in
distributed laboratory products resulting from the Company's December 1999
sale of its French distribution operations, which included the entire
distributed laboratory product line. The $1.4 million decline in instrument
and distributed laboratory product revenues was partially offset by a $0.4
million, or 47 percent, increase in worldwide shipments of Clinical products,
and a $0.6 million, or 27 percent, increase in worldwide shipments of
ASR/Research products. The increase in Clinical sales was primarily due to
growth in the U.S. adoption rate of the Company's PathVysion(TM) breast
cancer product and AneuVysion-Registered Trademark- prenatal product. The
increase in ASR/Research sales was primarily due to a general increase in
worldwide market demand for the products.
Cost of goods sold were $1.2 million for the three months ended March
31, 2000, a decrease of $0.8 million, or 39 percent, from the prior year quarter
primarily as a result of the decline in the volume of the instrument products
sold following the divestiture of the Imaging business during July 1999. As a
percentage of product revenue, 2000 product gross profit increased to 75 percent
for the first quarter of 2000 as compared to 61 percent for the prior year
quarter due to the Company's shift in focus to the higher margin Clinical and
ASR/Research products. While product revenue for the first quarter of 2000
decreased $0.3 million, the resulting product gross profit increased by $0.5
million, or 15 percent, to $3.7 million as compared to 1999 due to the revenue
growth in the Company's higher margin products.
Research and development expense, including clinical trial costs,
decreased to $1.8 million for the three months ended March 31, 2000 from $2.5
million in the prior year quarter. The $0.7 million decrease was due to lower
general research and development expenditures of $0.9 million primarily related
to reduced salaries and contract research expenses resulting from the Company's
1999 restructuring plans which included the elimination of certain positions
primarily related to the deferral of research and development on the Company's
Molecular Lawn platform and the divestiture of the Imaging business. The $0.9
million decrease in general research and development was partially offset by an
increase of $0.2 million related to additional clinical trial expenses
associated with the Company's bladder cancer product.
Selling, general and administrative expense decreased to $3.5 million
for the three months ended March 31, 2000 from $4.4 million in the prior year
quarter. The $0.9 million decrease was due to a decrease of $1.2 million in
selling expense primarily due to the reduction in the number of sales and
marketing employees and related costs as a result of divesting the Imaging
business and due to the elimination of certain positions, partially offset by a
$0.3 million increase in general and administrative expense primarily due to
higher litigation expense.
During the first quarter of 1999, the Company implemented the first of
two restructuring plans in 1999. During the first quarter of 1999, the Company
eliminated 20
12
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positions at various levels throughout the Company, which resulted
in a $0.5 million restructuring charge for employee severance costs.
The gain on the sale of investment for the three months ended March 31,
1999 was $0.4 million that resulted from the $0.5 million sale of the Company's
investment in Incyte common stock.
Interest income was $0.1 million for the three months ended March 31,
2000, a $0.1 million decrease from the prior year quarter. The decrease is the
result of the Company utilizing the proceeds from its February 10, 1998
Offering.
INCOME TAXES
Prior to the completion of the Company's Offering, 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
Offering, the Company has filed a separate federal income tax return. As the
Company was in a loss position for the three months ended March 31, 1999 and
2000, no federal provision is recorded. For state income taxes, the Company's
results of operations will continue to be included with BP Amoco, due to its 66
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. As a result of BP Amoco's apportionment
factors combined with minimal U.S. based tax losses, the Company has not
recorded any state tax benefit for the
13
<PAGE>
three months ended March 31, 2000. For state income taxes in non-unitary
states, the Company has not recorded any benefit as a result of its loss
position.
A full valuation allowance has been provided for all deferred tax
assets (net of liabilities) at March 31, 2000 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 three months ended March
31, 2000 was $1.3 million, a decrease of $3.6 million over the prior year
quarter, driven primarily by the $2.2 million reduction in operating losses and
the $1.1 million reduction in working capital requirements during the first
quarter of 2000 as compared to the prior year quarter.
Net cash provided by investing activities for the three months ended
March 31, 2000 was $0.8 million, resulting primarily from $0.7 million in
proceeds from the sale of the French distribution subsidiary. During the prior
year quarter, the $3.2 million of net cash flows provided by investing
activities resulted primarily from the proceeds from the maturities of
short-term investments, net of purchases, and from the sale of the Incyte
investment.
Net cash provided by financing activities for the three months ended
March 31, 2000 was $0.2 million, an increase of $0.4 million from the prior
period primarily due to the elimination of debt payments and the increase in
proceeds from stock option exercises as well as the contribution of certain
services provided by BP Amoco.
At March 31, 2000, the Company had cash, cash equivalents and
short-term investments of $7.8 million and an accumulated deficit of $59.8
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, including open positions, thereby reducing ongoing expenditures by
approximately $1.6 million. 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 $1.7 million in cash and 497,368 shares of AI common stock that was
valued upon its receipt at $0.5 million. At March 31, 2000, the market value of
those securities is $1.4 million. In addition, AI is obligated to pay in cash
$0.5 million plus interest in July 2000 and $0.3 million plus interest in
January 2001. Upon completion of the Imaging business sale, the Company
refocused on its core technologies and during the fourth quarter eliminated 37
positions, including open positions as well as certain positions previously
associated with the Imaging business, thereby reducing ongoing annual cash
expenditures by approximately $2.7 million. At March 31, 2000, the Company paid
all but $0.1 million of severance costs related to the 1999 restructuring plans.
In addition, the Company sold during December 1999 its French distribution
14
<PAGE>
subsidiary for approximately $1.2 million, which has been adjusted for the
effect of foreign currency translation. As of March 31, 2000, the Company has
received $0.7 million with the remaining balance of $0.5 million due by the end
of May 2000.
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 through the end of year 2001. 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 revenues, payments received
under potential collaborative agreements; the availability of government
research grant payments; the progress of the Company's collaborative and
independent research and development projects; the costs of preclinical and
clinical trials for the Company's products; the prosecution, defense and
enforcement of patent claims and other intellectual property rights; costs of
product liability claims; and the development of manufacturing, sales and
marketing capabilities. To the extent capital resources, including payments from
existing and possible future collaborative agreements and grants, together with
the net proceeds of the 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 results of operations.
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 and France. The Company's
primary foreign currency exchange rate risk results from the foreign operations'
intercompany purchases of inventory. The majority of intercompany purchases are
to be paid for within standard payment terms of 30 days. Sales throughout the
rest of the world are denoted in U.S. dollars. The Company does not believe that
the impact from foreign currency exchange rate fluctuations will have a material
impact on its financial statements. The net impact of foreign exchange
activities on earnings was immaterial for the three months ended March 31, 2000
and 1999. The foreign currency translation loss included in shareholders' equity
resulting from the translation of the financial statements of the Company's
international subsidiaries into U.S. dollars increased by $0.1 million in the
first quarter of 2000 due to the strengthening of the U.S. dollar against the
functional currency of the Company's international subsidiaries. Interest rate
exposure is primarily limited to the $3.3 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.
15
<PAGE>
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
On December 22, 1999, the Company was named as a defendant in a
Complaint For Declaratory Relief filed by Gen-Probe in the United States
District Court in the Southern District of California (San Diego). Gen-Probe
filed a First Amended Complaint For Declaratory Relief And Unfair Competition on
January 25, 2000. Gen-Probe's amended complaint seeks a declaration that the
`338 patent is invalid and not infringed by certain products for detecting the
presence of hepatitis C virus (HCV) and human immunodeficiency virus (HIV) in
blood specimens and an injunction restraining the Company from interfering with
the manufacture, sale, license or use of Gen-Probe's products by Gen-Probe, its
partners and customers among others. The complaint also seeks damages and other
monetary relief for the unfair competition.
The Gen-Probe products identified in the suit use nucleic acid testing
methodology for detecting HCV and HIV in blood specimens. The `338 patent
license applies to Gen-Probe's blood testing products which are marketed by
Chiron Corporation in France and are expected to be marketed in the U.S. and
elsewhere, and other products which the Company understands will be introduced
commercially by Gen-Probe and its partners later in 2000 and thereafter.
Gen-Probe also seeks a declaration from the Court regarding its rights and
obligations under the license.
The Company expects to answer the complaint and to defend the suit
vigorously. The Company further believes Gen-Probe's claim for damages is
without merit. A loss of this suit would not limit the sales or marketing of
any of the Company's present or planned products, but could result in the
loss of revenue under the license granted to Gen-Probe and the loss of other
licensing opportunities for the `338 patent. Although there can be no
assurance as to the ultimate disposition of this matter, it is the opinion of
the Company's management, based upon the information available at this time,
that the expected outcome of this matter will not have a material adverse
effect on the Company's business, results of operations and financial
condition.
16
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the Offering (see Note 1 of the Notes to Consolidated
Financial Statements for further discussion), the Company received net proceeds
of $32.1 million from the sale of 3,000,000 shares of its Common Stock. From the
closing date of the Offering, February 10, 1998, to March 31, 2000, the Company
used such net offering proceeds as follows (in millions):
<TABLE>
<S> <C>
Purchase of short-term investments and cash equivalents............. $ 7.8
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....................... 22.3
------
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 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.
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: May 4, 2000 By: /s/ ALFRED H. ELLSWORTH
-----------------------------------
Name: Alfred H. Ellsworth
TITLE: VICE PRESIDENT, FINANCE
AND CHIEF ACCOUNTING OFFICER
18
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