<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 JUNE 30, 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
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 August 1, 2000: 10,099,720
<PAGE>
VYSIS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I: FINANCIAL INFORMATION ----
<S> <C> <C>
ITEM 1: Financial Statements
Consolidated Balance Sheets
As of June 30, 2000 and December 31, 1999 .................. 2
Consolidated Statements of Operations
For the three months ended June 30, 2000 and 1999 .......... 3
Consolidated Statements of Operations
For the six months ended June 30, 2000 and 1999 ............ 4
Consolidated Statements of Comprehensive Operations
For the three months ended June 30, 2000 and 1999 .......... 5
Consolidated Statements of Comprehensive Operations
For the six months ended June 30, 2000 and 1999 ............ 6
Consolidated Statements of Cash Flows
For the six months ended June 30, 2000 and 1999 ............ 7
Notes to Consolidated Financial Statements .................... 8
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 14
ITEM 3: Quantitative and Qualitative Disclosure About Market Risk .......... 19
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings .................................................. 20
ITEM 2: Changes in Securities and Use of Proceeds .......................... 20
ITEM 4: Submission of Matters to a Vote of Security Holders ................ 21
ITEM 6: Exhibits and Reports on Form 8-K ................................... 22
SIGNATURE ...................................................................... 22
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 563 $ 4,818
Short-term investments .................................................... 6,683 3,597
Marketable securities ..................................................... 1,119 622
Accounts receivable, net .................................................. 3,367 3,093
Other receivables ......................................................... 1,151 1,963
Inventories ............................................................... 1,952 2,012
Other current assets ...................................................... 979 503
-------- --------
Total current assets .................................................. 15,814 16,608
Property and equipment, net .................................................... 2,702 2,986
Other assets ................................................................... 1,453 1,441
-------- --------
Total assets .......................................................... $ 19,969 $ 21,035
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities .................................. $ 6,706 $ 6,153
Deferred revenue .......................................................... 200 236
-------- --------
Total current liabilities ............................................. 6,906 6,389
Deferred revenue ............................................................... 1,061 1,155
Long-term liability ............................................................ 100 --
Commitment and contingencies (Notes 7 & 14)
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 June 30, 2000 and December 31, 1999 .................... -- --
Series B; 553,126 shares designated; none issued and outstanding
at June 30, 2000 and December 31, 1999 ................................ -- --
Common stock, $0.001 par value; 35,000,000 shares authorized; 10,092,420
issued and outstanding at June 30, 2000; 9,945,346
issued and outstanding at December 31, 1999 ........................... 10 10
Additional paid-in capital ................................................ 72,533 72,192
Unrealized gain on investment ............................................. 590 93
Cumulative translation adjustment ......................................... (449) (336)
Accumulated deficit ....................................................... (60,782) (58,468)
-------- --------
Total stockholders' equity ............................................ 11,902 13,491
-------- --------
Total liabilities and stockholders' equity ............................ $ 19,969 $ 21,035
======== ========
</TABLE>
See notes to the consolidated financial statements.
2
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
2000 1999
--------- --------
<S> <C> <C>
Revenues:
Product revenue ........................................ $ 5,261 $ 6,354
License and other revenue .............................. 1,564 118
-------- -------
Total revenues ..................................... 6,825 6,472
Cost of goods sold .......................................... 1,490 2,639
-------- -------
Gross profit ................................................ 5,335 3,833
-------- -------
Operating expenses:
Research and development ............................... 1,712 2,351
Acquired clinical trial data ........................... 1,500 --
Selling, general and administrative .................... 3,250 4,413
-------- -------
Total operating expenses ........................... 6,462 6,764
-------- -------
Loss from operations ........................................ (1,127) (2,931)
Interest income ............................................. 132 150
Interest expense ............................................ -- (17)
-------- -------
Net loss .................................................... $ (995) $(2,798)
======== =======
Basic and diluted net loss per share ........................ $ (0.10) $ (0.29)
======== =======
Shares used in computing basic and diluted net loss per share 10,079 9,808
</TABLE>
See notes to the consolidated financial statements.
3
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Revenues:
Product revenue ........................................ $ 10,211 $ 11,637
License and other revenue .............................. 1,745 279
-------- --------
Total revenues ..................................... 11,956 11,916
Cost of goods sold .......................................... 2,729 4,686
-------- --------
Gross profit ................................................ 9,227 7,230
-------- --------
Operating expenses:
Research and development ............................... 3,521 4,828
Acquired clinical trial data ........................... 1,500 --
Selling, general and administrative .................... 6,761 8,834
Restructuring expense .................................. -- 541
-------- --------
Total operating expenses ........................... 11,782 14,203
-------- --------
Loss from operations ........................................ (2,555) (6,973)
Interest income ............................................. 241 370
Gain on sale of investment .................................. -- 357
Interest expense ............................................ -- (50)
-------- --------
Net loss .................................................... $ (2,314) $ (6,296)
======== ========
Basic and diluted net loss per share ........................ $ (0.23) $ (0.64)
======== ========
Shares used in computing basic and diluted net loss per share 10,043 9,800
</TABLE>
See notes to the consolidated financial statements.
4
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
2000 1999
------------- -------------
<S> <C> <C>
Net loss ................................. $ (995) $(2,798)
Other comprehensive loss:
Cumulative translation adjustment ... (4) (123)
Unrealized holding loss on investment (280) --
------- -------
Total other comprehensive loss .. (284) (123)
------- -------
Comprehensive loss ....................... $(1,279) $(2,921)
======= =======
</TABLE>
See notes to the consolidated financial statements.
5
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
------- -------
<S> <C> <C>
Net loss .................................................... $(2,314) $(6,296)
Other comprehensive income (loss):
Cumulative translation adjustment ...................... (113) (406)
Unrealized holding gain (loss) on investment ........... 497 (105)
Reclassification adjustment, realized gain on investment -- (357)
------- -------
Total other comprehensive income (loss) ............ 384 (868)
------- -------
Comprehensive loss .......................................... $(1,930) $(7,164)
======= =======
</TABLE>
See notes to the consolidated financial statements.
6
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................ $(2,314) $ (6,296)
Reconciliation of net loss to net cash used in operating
activities:
Depreciation and amortization ....................... 761 868
Effects of changes in foreign currency .............. 62 --
Gain on sale of investment .......................... -- (357)
Stock compensation .................................. 12 35
Changes in assets and liabilities:
Accounts receivable ............................ (341) 399
Inventories .................................... 37 (408)
Other current assets ........................... (476) (504)
Lease receivables .............................. -- 179
Other assets ................................... 10 80
Accounts payable and accrued liabilities ....... 558 (1,711)
Deferred revenue ............................... (130) (189)
------- --------
Net cash used in operating activities ............... (1,821) (7,904)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds, net of cash sold, from French distributor ..... 843 --
Transaction-related expenses, net of proceeds, related to
the sale of Imaging business ........................ (17) --
Proceeds from maturities of short-term investments ...... 6,388 17,887
Proceeds from sale of investment ........................ -- 457
Purchases of short-term investments ..................... (9,474) (12,510)
Purchases of property and equipment ..................... (408) (384)
Proceeds from sale of property and equipment ............ 20 --
Increase in other assets ................................ (50) (64)
------- --------
Net cash (used in) provided by investing activities . (2,698) 5,386
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock option plan exercises ............... 214 16
Expenses funded by BP Amoco ............................. 115 --
Principal payments on long-term borrowings .............. -- (272)
------- --------
Net cash provided by (used in) financing activities . 329 (256)
Effect of exchange rate changes on cash ...................... (65) (63)
------- --------
Net decrease in cash and cash equivalents .................... (4,255) (2,837)
Cash and cash equivalents at beginning of period ............. 4,818 4,517
------- --------
Cash and cash equivalents at end of period ................... $ 563 $ 1,680
======= ========
</TABLE>
See notes to the consolidated financial statements.
7
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--ORGANIZATION AND BUSINESS:
Vysis, Inc. ("Vysis" or the "Company") is a Genomic Disease Management
company that develops, commercializes and markets clinical products that provide
information critical to the evaluation and management of cancer, prenatal
disorders and other genetic diseases. Vysis currently markets 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 August 1, 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, and the
Company's Quarterly Report on Form 10-Q
8
<PAGE>
for the three months ended March 31, 2000 as filed with the Securities and
Exchange Commission.
In the opinion of management, the interim consolidated financial statements
reflect all adjustments necessary for a fair presentation of the interim
periods. All such adjustments are of a normal, recurring nature. Certain amounts
in fiscal 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 December 1999, the Securities and Exchanges Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), which provides guidance on the recognition of revenues for various
technology access fees and license agreements. The Company has adopted SAB 101,
which had no impact on the Company's results of operations. In accordance with
SAB 101, the Company recognizes upfront nonrefundable patent license fees upon
the signing of an agreement where there is no future obligation to perform.
Ongoing patent royalty fees are recognized as revenue as earned over the life of
the agreement. Milestone payments are recognized as revenue when earned in
accordance with the terms of the agreement.
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>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Raw materials and supplies ........................ $1,085 $1,136
Finished goods .................................... 867 876
------ ------
$1,952 $2,012
====== ======
</TABLE>
9
<PAGE>
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>
JUNE 30, 2000
----------------------------------------------
AMORTIZED UNREALIZED FAIR
COST LOSS VALUE
--------- ---------- -----
<S> <C> <C> <C>
U.S. government agencies ...... $1,538 $(1) $1,537
Corporate debt securities ..... 5,145 (2) 5,143
------ --- ------
$6,683 $(3) $6,680
====== === ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------
AMORTIZED UNREALIZED FAIR
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 June 30, 2000 are
as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED
DUE IN COSTS FAIR VALUE
------------- --------- ----------
<S> <C> <C>
1-90 Days ... $4,639 $4,638
91-180 Days . 2,044 2,042
------ ------
$6,683 $6,680
====== ======
</TABLE>
NOTE 6--LICENSE REVENUES:
During the second quarter of 2000, the Company entered into a patent
license agreement and an option to a patent license agreement to license certain
of the Company's patent technology. Under the terms of these agreements, the
Company recognized $1,250,000 of nonrefundable license/option fees as license
revenue.
NOTE 7--ACQUIRED CLINICAL TRIAL DATA:
During May 2000, the Company entered into a collaborative agreement with
Genentech Inc., the developer of the Herceptin-Registered Trademark- monoclonal
antibody treatment for metastatic breast cancer, to extend the use of the
Company's PathVysion-TM- HER-2 breast cancer test kit. In accordance with the
agreement, the Company incurred a charge of $1,500,000 for the right to utilize
Genentech clinical trials data for the Company's regulatory submission to the
United States Food and Drug Administration (FDA) to expand the use of the
Company's PathVysion-TM- HER-2 kit to include the use of the kit to select
patients for treatment with Herceptin. The Company has paid $1,000,000 with the
10
<PAGE>
remaining $500,000 due in May, 2001. Additionally, if the FDA approves the
product, the Company must make a final additional payment of $500,000 to be paid
the later of FDA approval or May, 2001.
NOTE 8--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 June 30, 2000, the Company has received $843,000 and
recorded a loss on foreign currency transactions of $36,000. In accordance with
the sale agreement, the Company and its foreign subsidiaries will receive by
March 2001 the remaining payments in French francs aggregating the equivalent of
$296,000 in U.S. dollars as of June 30, 2000.
NOTE 9--RELATED PARTY TRANSACTION:
During the first quarter of 2000, the Company received certain consulting
services provided for and to be paid by BP Amoco, accrued 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 10--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 June 30,
2000, the Company had paid all but $40,000 of the total 1999 charges.
NOTE 11--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 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, in July 2000 AI paid $535,000 including interest and is further
obligated to pay $250,000 plus interest in January 2001. As of June 30, 2000,
the marketable securities balance of $1,119,000 represents the market value of
the common stock, and an unrealized gain of $590,000 has been included as a
component of stockholders' equity. See Note 15 for discussion regarding the July
2000 sale of the AI marketable securities.
11
<PAGE>
NOTE 12--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 13--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 and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000
-----------------------------------
GENETICS FOOD TOTAL
---------- ------- --------
<S> <C> <C> <C>
Revenues from external
customers ........... $ 6,101 $ 724 $ 6,825
Segment income (loss) (882) (113) (995)
Segment assets ....... 19,323 646 19,969
THREE MONTHS ENDED JUNE 30, 1999
-----------------------------------
GENETICS FOOD TOTAL
---------- ------- --------
Revenues from external
customers .......... $ 5,783 $ 689 $ 6,472
Segment income (loss) (2,807) 9 (2,798)
Segment assets ....... 24,765 692 25,457
SIX MONTHS ENDED JUNE 30, 2000
-----------------------------------
GENETICS FOOD TOTAL
---------- ------- --------
Revenues from external
customers .......... $ 10,513 $ 1,443 $ 11,956
Segment income (loss) (2,221) (93) (2,314)
SIX MONTHS ENDED JUNE 30, 1999
-----------------------------------
GENETICS FOOD TOTAL
---------- ------- --------
Revenues from external
customers .......... $ 10,528 $ 1,388 $ 11,916
Segment income (loss) (6,294) (2) (6,296)
</TABLE>
The Company's revenues by product line for the three and six months
ended June 30, 2000 and 1999 are as follows (in thousands):
12
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
2000 1999
------------- ------------
<S> <C> <C>
FDA/AFSSAPS approved clinical genetic testing
products ........................................ $ 1,315 $ 1,042
ASR/Research genetic testing products ............. 2,573 2,978
Genetic instrument products ....................... 649 1,363
Genetic research license and other revenue ........ 1,564 118
Distributed laboratory products ................... -- 282
Food testing products ............................. 724 689
------- -------
Consolidated total revenues ....................... $ 6,825 $ 6,472
======= =======
SIX MONTHS ENDED JUNE 30,
---------------------------
2000 1999
------------- ------------
FDA/AFFSSAPS approved clinical genetic testing
products ........................................ $ 2,612 $ 1,923
ASR/Research genetic testing products ............. 5,215 5,055
Genetic instrument products ....................... 941 2,831
Genetic research license and other revenue ........ 1,745 279
Distributed laboratory products ................... -- 440
Food testing products ............................. 1,443 1,388
------- -------
Consolidated total revenues ....................... $11,956 $11,916
======= =======
</TABLE>
The Company's revenues by geographic area based on location of customers
for the three and six months ended June 30, 2000 and 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
2000 1999
------------- ------------
<S> <C> <C>
United States ..................................... $ 4,221 $ 2,983
Europe, Middle East and Africa .................... 1,941 2,936
Other ............................................. 663 553
------- -------
Consolidated total revenues ....................... $ 6,825 $ 6,472
======= =======
SIX MONTHS ENDED JUNE 30,
---------------------------
2000 1999
------------- ------------
United States ..................................... $ 6,833 $ 5,489
Europe, Middle East and Africa .................... 3,829 5,260
Other ............................................. 1,294 1,167
------- -------
Consolidated total revenues ....................... $11,956 $11,916
======= =======
</TABLE>
NOTE 14--COMMITMENT AND CONTINGENCY:
As previously disclosed in the Company's Form 10-Q for the quarter ending
March 31, 2000, the Company has been named as the defendant in a declaratory
judgment suit filed in the United States District Court in the Southern District
of
13
<PAGE>
California (San Diego) by Gen-Probe, Inc. The suit seeks a declaration that
the Company's U.S. Patent No. 5,750,338 is invalid and not infringed by certain
products for detecting the presence of hepatitis C virus and human
immunodeficiency virus in blood specimens. The Company understands that Chiron
is currently marketing the products in Australia, France and Germany pursuant to
licenses granted by the Company to Gen-Probe and Chiron. The suit also seeks an
injunction restraining the Company from interfering with activities by Gen-Probe
and its partners regarding these and other products in development; damages and
other relief for unfair competition; and a declaration of Gen-Probe's rights and
obligations under its license to the '338 patent. The parties have begun to take
discovery and the trial is projected to occur in late 2001. The Company believes
Gen-Probe's claims are without merit and intends to defend its rights
vigorously.
Neither loss of the suit filed by Gen-Probe nor an adverse ruling by the
Patent Office to the reissue application would limit the sales or marketing of
any of the Company's present or planned products, but could result in the loss
of revenue resulting from the licenses granted to Gen-Probe and its partners and
other potential licenses granted under the '338 patent. Although there can be no
assurance as to the ultimate outcome of the suit, based upon the information
available at this time it is the opinion of the Company's management that the
outcome of this suit will not have a material adverse effect on the Company's
business, results of operations and financial condition.
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.
NOTE 15 -- SUBSEQUENT EVENT:
During July 2000, the Company sold all of its marketable securities, which
consisted of AI common stock, for $1,718,000, resulting in a realized gain of
$1,190,000.
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
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<PAGE>
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.
RESULTS OF OPERATIONS
Total revenues for the three and six months ended June 30, 2000 were $6.8
million and $12.0 million, respectively, an increase of $0.4 million, or 5%, and
flat in comparison to the three and six months ended June 30, 1999. Product
revenue for the three months and six months ended June 30, 2000 was $5.3 million
and $10.2 million, respectively, a decrease of $1.1 million, or 17%, and $1.4
million, or 12%, as compared to the prior year periods. License and other
revenue for the three and six months ended June 30, 2000 was $1.6 million and
$1.7 million, respectively, an increase of $1.4 million, or 1225%, and $1.5
million, or 525%, over the comparable prior year periods. The decrease in
product revenue for the second quarter and first half of 2000 was primarily
attributable to a $0.7 million and $1.9 million reduction in genetic 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 at that time. In addition, distributed
laboratory product revenues for the three and six months ended June 30, 2000,
decreased by $0.3 million and $0.4 million, respectively, resulting from the
Company's December 1999 sales of its French distribution operations, which
included the entire distributed laboratory product line. The second quarter
product
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revenues of ASR/Research genetic testing products ("Research") also declined
$0.4 million, or 14%, as compared to the prior year quarter as a result of
flat sales in the U.S. and a decline in European revenue dollars primarily
due to the conversion of the Company's French and Italian sales operations
from its own direct sales force in 1999 to more cost effective distribution
approach utilizing third party distributors in 2000, which has resulted in a
9% increase in the volume of European Research units sold. For the first half
of 2000, Research product revenues increased $0.2 million, or 3%, in
comparison to the prior year resulting from a $0.2 million increase in U.S.
sales while European revenues were flat, although unit volume increased 10%
due to the previously mentioned changes in distribution within France and
Italy. For the three and six months ended June 30, 2000, FDA/AFSSAFP approved
clinical genetic testing products ("Clinical") revenue increased $0.3
million, or 26%, and $0.7 million, or 36%, respectively, primarily due to the
growth in the U.S. adoption rate of the Company's PathVysion-TM- breast
cancer product and AneuVysion-Registered Trademark- prenatal products. The
increase in 2000 license and other revenue was primarily due to $1.3 million
of license revenue associated with a patent license agreement and an option
for a patent license agreement both of which were entered into during the
second quarter of 2000.
As a result of the divestiture of the Imaging instrument and distributed
laboratory product lines during the second half of last year, cost of goods sold
for the three and six months ended June 30, 2000 were $1.5 million and $2.7
million, respectively, representing a decrease of $1.1 million, or 44%, and $2.0
million, or 42%, from the respective prior periods. As a percentage of product
revenue, product gross profit increased to 72% and 73% for the three months and
six months ended June 30, 2000, respectively, from 58% and 60% in the respective
prior year periods due to the Company's shift in focus to the higher margin
Clinical and Research products. Although product revenues have declined during
2000, due to the above divestitures, product gross profit for the three months
and six months ended June 30, 2000, has increased by $0.1 million and $0.5
million respectively as compared to the comparable prior year periods.
Research and development expense for the three and six months ended June
30, 2000 were $1.7 million and $3.5 million, respectively, a decrease of $0.6
million, or 27%, and $1.3 million, or 27%, as compared to the prior year
periods. The decreases were primarily due 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. During May 2000, the Company
entered into a collaborative agreement with Genentech, Inc., the developer of
the Herceptin-Registered Trademark- monoclonal antibody treatment for
metastatic breast cancer, to extend the use of the Company's PathVysion-TM-
HER-2 breast cancer test kit. In accordance with the agreement, the Company
has incurred a charge of $1.5 million for its right to utilize Genentech's
clinical trial data for the Company's regulatory submission to the U.S. FDA.
Selling, general and administrative expenses for the three and six months
ended June 30, 2000 were $3.3 million and $6.8 million, respectively, a decrease
of $1.2 million, or 26%, and $2.1 million, or 23%, in comparison to the prior
year. The second
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quarter and first half reductions were due to a decrease of $1.3 million and
$2.5 million, respectively, 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 the modification of the European
organization to use of distributors in France and Italy and due to the
elimination of certain positions partially offset by an increase of $0.1 million
and $0.4 million, respectively, in general and administrative expenses primarily
due to higher litigation expenses.
During the first quarter of 1999, the Company implemented the first of two
restructuring plans in 1999. The Company eliminated 20 positions at various
levels throughout the Company during March 1999, which resulted in a $0.5
million restructuring charge for employee severance costs.
The gain on the sale of investments for the six months ended June 30, 1999
was $0.4 million that resulted from the $0.5 million sale of the Company's
investment in Incyte common stock.
Interest income for the three and six months ended June 30, 2000 was $0.1
million and $0.2 million, respectively, representing a slight decline from both
of the comparable prior year periods as a result of utilizing the proceeds from
the 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 returns. As the
Company was in a loss position for the six months ended June 30, 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 three and six months ended June 30, 2000. For state
income taxes in non-unitary states, the Company has not recorded any benefit as
a result of its loss position.
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A full valuation allowance has been provided for all deferred tax assets
(net of liabilities) at June 30, 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 six months ended June 30,
2000 was $1.8 million, a decrease of $6.1 million over the prior year, driven
primarily by the $4.0 million reduction in net loss and the $1.9 million
reduction in working capital requirements during the first half of 2000 as
compared to the prior year.
Net cash used in investing activities for the six months ended June 30,
2000 was $2.7 million, resulting primarily from purchase of short-term
investments, net of proceeds. During the prior year, the $5.4 million of net
cash flows used in investing activities resulted primarily from the proceeds
from the maturities of short-term investments, net of purchase.
Net cash provided by financing activities for the six months ended June 30,
2000 was $0.3 million, a change of $0.6 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 June 30, 2000, the Company had cash, cash equivalents and short-term
investments of $7.2 million and an accumulated deficit of $60.8 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 June 30, 2000 the market value of those securities was $1.1
million. During July 2000 the Company sold these securities for $1.7 million. In
addition, AI paid during July 2000 $0.5 million and is further obligated to pay
$0.3 million 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 June 30, 2000, the Company
has paid substantially all of the severance costs related to the 1999
restructuring plans. In addition the Company sold during December 1999 its
French distribution subsidiary for approximately $1.1 million, which has been
adjusted for the effect of foreign currency translation. As of June 2000, the
Company has received $0.8 million with the remaining balance of $0.3 million due
by March 2001.
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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 revenue; payments received
under existing and potential collaborative agreements; the availability of
government research grant payments; the progress of the Company's collaborative
and independent research and development projects; the costs of preclinical and
clinical trials for the Company's products; the prosecution, defense and
enforcement of patent claims and other intellectual property rights; 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 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 European operations. The Company's foreign currency exchange rate
risk results primarily from the foreign currency translation of its foreign
operations' financial results and from the foreign operations' intercompany
purchases of inventory. The majority of the 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. For the three and six months ended June
30, 2000, the foreign exchange rates utilized to translate the Company's
international subsidiaries' local currency financial results into U.S. dollars
declined 11% and 12%, respectively, as compared to the prior year periods due to
the strengthening of the U.S. dollar against the local currency of these
subsidiaries which resulted in a $0.2 million and $0.3 million reduction in net
earnings for the three and six months ended June 30, 2000, respectively, in
comparison to the prior year periods. 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 was
flat and increased by $0.1 million for the three and six months ended June 30,
2000, respectively. Interest rate exposure is primarily limited to the $6.7
million of short-term investments owned by the Company. Such securities are debt
instruments which generate interest income for the Company on excess cash
balances. The Company does not actively
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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.
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in the Company's Form 10-Q for the quarter
ending March 31, 2000, the Company has been named as the defendant in a
declaratory judgment suit filed in the United States District Court in the
Southern District of California (San Diego) by Gen-Probe, Inc. The suit seeks a
declaration that the Company's U.S. Patent No. 5,750,338 is invalid and not
infringed by certain products for detecting the presence of hepatitis C virus
and human immunodeficiency virus in blood specimens. The Company understands
that Chiron is currently marketing the products in Australia, France and Germany
pursuant to licenses granted by the Company to Gen-Probe and Chiron. The suit
also seeks an injunction restraining the Company from interfering with
activities by Gen-Probe and its partners regarding these and other products in
development; damages and other relief for unfair competition; and a declaration
of Gen-Probe's rights and obligations under its license to the '338 patent. The
parties have begun to take discovery and the trial is projected to occur in late
2001. The Company believes Gen-Probe's claims are without merit and intends to
defend its rights vigorously.
Apart from the suit brought by Gen-Probe, the Company has filed an
application to reissue the '338 patent with the United States Patent & Trademark
Office. The reissue application requests the Patent Office to supplement the
claims of the issued patent with new claims of intermediate scope. The Patent
Office published notice of the reissue application on July 11, 2000.
Neither loss of the suit filed by Gen-Probe nor an adverse ruling by the
Patent Office to the reissue application would limit the sales or marketing of
any of the Company's present or planned products, but could result in the loss
of revenue resulting from the licenses granted to Gen-Probe and its partners and
other potential licenses granted under the '338 patent. Although there can be no
assurance as to the ultimate outcome of the suit, based upon the information
available at this time it is the opinion of the Company's management that the
outcome of this suit will not have a material adverse effect on the Company's
business, results of operations and financial condition.
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
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from the sale of 3,000,000 shares of its Common Stock. From the closing date
of the Offering, February 10, 1998, to June 30, 2000, the Company used such
net offering proceeds as follows (in millions):
<TABLE>
<S> <C>
Purchase of short-term investments and cash equivalents ................ $ 7.2
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 ............................................... 22.9
------
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On or about May 4, 2000, proxy materials were distributed to all
shareholders of record as of the close of business on April 17, 2000. The
results of the shareholders' votes were disclosed at the 2000 annual meeting of
shareholders (the "Annual Meeting") of the Company which convened on May 31,
2000.
At the Annual Meeting, the following individuals were elected by the
votes indicated as directors of the Company until the 2001 Annual Meeting and
their successors have been elected and qualified:
NOMINEE FOR WITHHELD
-------------------- --------------------- -------------------
John L. Bishop 9,236,344 4,790
Eileen A. Kamerick 9,237,444 3,690
Kenneth L. Melmon 9,237,444 3,690
Anthony J. Nocchiero 9,131,488 109,646
Walter R. Quanstrom 9,237,444 3,690
Frank J. Sroka 9,131,488 109,646
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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.
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: August 9, 2000 By: /s/ JOHN R. SLUIS
----------------------------------------
Name: John R. Sluis
TITLE: SENIOR VICE PRESIDENT, FINANCE
AND CHIEF FINANCIAL OFFICER
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