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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
_____________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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 NO.)
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
_____________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
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 No X
------ -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-----
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 23, 1998 was approximately $33.1 million.
Number of shares of Common Stock outstanding as of March 23, 1998:
9,676,258
_____________________
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C> <C>
PART I
ITEM 1: Business...................................................... 3
General..................................................... 3
Genomic Disease Management.................................. 3
Technology Platforms........................................ 3
Products.................................................... 5
Food Testing Products....................................... 15
Sales and Marketing......................................... 15
Manufacturing............................................... 16
Collaborations.............................................. 16
Patents, License Rights and Proprietary Information......... 17
Ability to Practice Technology.............................. 18
Competition................................................. 20
Government Regulation....................................... 20
Employees................................................... 21
Executive Officers.......................................... 21
Scientific Advisory Board................................... 22
ITEM 2: Properties.................................................... 24
ITEM 3: Legal Proceedings............................................. 24
ITEM 4: Submission of Matters to a Vote of Security Holders........... 25
PART II
ITEM 5: Market for the Registrant's Common Equity and Related
Stockholder Matters........................................... 25
ITEM 6: Selected Financial Data....................................... 26
ITEM 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 27
Overview.................................................... 27
Results of Operations....................................... 27
Income Taxes................................................ 29
Liquidity and Capital Resources............................. 29
Recent Accounting Pronouncements............................ 30
ITEM 8: Financial Statements.......................................... 30
ITEM 9: Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure...................................... 30
PART III
ITEM 10: Directors and Executive Officers of the Registrant............ 31
ITEM 11: Executive Compensation........................................ 32
ITEM 12: Security Ownership of Certain Beneficial Owners and Management 34
ITEM 13: Certain Relationships and Related Transactions................ 35
PART IV
ITEM 14: Exhibits, Financial Statement Schedules and Reports on
Form 8-K...................................................... 37
SIGNATURES.............................................................. 56
</TABLE>
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain statements which
describe the Company's beliefs concerning future business conditions and the
outlook for the Company based on currently available information. Whenever
possible, the Company has identified these "forward-looking" statements (as
defined in Section 21E of the Securities Exchange Act of 1934) by words such
as "anticipates", believes", estimates", "expects", and similar expressions.
These forward-looking statements are subject to risks and uncertainties which
could cause the Company's actual results, performance and achievements to
differ materially from those expressed in or implied by these statements.
These risks and uncertainties include, but are not limited to, the following:
the acceptance of DNA based genetic probes by the medical community, the
receipt by the Company of necessary regulatory approvals in a timely fashion,
compliance by the Company with regulatory requirements, dependence by the
Company on gene discovery and disease correlation efforts of others, the
acquisition by the Company of rights to develop tests utilizing intellectual
property of others, uncertainties relating to the development of new
technologies, dependence on the success of collaborative partners and the
Company's success in defending its own intellectual property rights and
avoiding infringing those of others. Further information concerning factors
that could significantly impact expected results is included in the following
sections of this Form 10-K: Business--Ability to Practice Technology;
Business--Competition; Business--Government Regulation; Legal Proceedings;
and Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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PART I
ITEM 1. BUSINESS
GENERAL
Vysis, Inc. ("Vysis" or the "Company") is a Genomic Disease Management
company that develops, commercializes and markets clinical products that
provide information critical to the evaluation and management of cancer,
prenatal disorders and other genetic diseases. Vysis currently markets five
U.S. Food and Drug Administration ("FDA") cleared clinical products in
addition to distributing over 240 research products through its direct sales
operations in the United States and Europe and a worldwide distribution
network covering 41 countries. The Company has an installed base of over 440
proprietary genetic workstations in 20 countries. The Company's wholly owned
subsidiary, Gene-Trak Systems Industrial Diagnostics Corporation,
manufactures and markets food testing kits based on DNA ("Deoxyribonucleic
Acid") probes.
The Company was incorporated in Delaware on April 18, 1991. The
Company's business represents the consolidation of multiple research units
and programs of Amoco Corporation. As used herein, "Amoco" refers to Amoco
Corporation, or its wholly owned subsidiary, Amoco Technology Company
("ATC"). In 1994, Amoco began consolidation of all of its medical diagnostic
businesses and related research under the Company. In March 1994, Amoco
contributed to the Company all of its genetic disease related assets,
including the stock of Imagenetics Incorporated (an Illinois corporation).
Also in March 1994, Amoco contributed all of its infectious disease related
assets and the stock of Gene-Trak, Inc. to the Company. Gene-Trak, Inc. had
previously acquired certain infectious disease related assets from Genzyme
Corporation and Amoco, including all of the interest in Gene-Trak Systems, a
joint venture partnership for infectious disease diagnostics established by
Amoco and Integrated Genetics in 1986.
On February 10, 1998, the Company completed the initial public offering
of 3 million shares of its Common Stock, par value $.001 per share (the
"Common Stock") at a price of $12.00 per share (the "IPO"). The net proceeds
of the IPO after deducting expenses were approximately $32.3 million.
Concurrent with the consummation of the IPO, the Company issued 675,000
shares of Common Stock at $12.00 per share to Amoco in exchange for a
reduction of $8.1 million in the Company's note payable to Amoco. As of
March 23, 1998, Amoco beneficially owns approximately 69 percent of the
Company's outstanding Common Stock through ATC.
The Company's executive offices are located at 3100 Woodcreek Drive,
Downers Grove, Illinois 60515 and its telephone number is (630) 271-7000.
GENOMIC DISEASE MANAGEMENT
Genetic abnormalities are a fundamental source of human disease. Genetic
based diseases and disorders include cancer, birth defects, mental
retardation, coronary artery disease, autoimmune diseases and diabetes.
Genomic Disease Management is an emerging field that seeks to develop new
genetic tests based on correlations between genetic abnormalities and
disease. Genomic Disease Management products, by providing new information
not currently available through existing methods, enable physicians to
diagnose disease more quickly and accurately, to determine the most
appropriate treatment and to monitor disease progression and recurrence
during therapy. Genomic Disease Management products also enable the detection
of disease at the very early or developing stages when treatment is likely to
be most effective. In addition, Genomic Disease Management products allow
physicians to identify genetic predisposition to disease well before the
disease is manifested, thus enabling early intervention either through
lifestyle changes or preventive therapy.
TECHNOLOGY PLATFORMS
Genomic Disease Management requires the ability to assess abnormalities
of chromosomes, individual genes within chromosomes and specific DNA
sequences within genes. No single technology is capable of assessing
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all of these different types of abnormalities. To address this issue, the
Company has developed three complementary technology platforms that detect
the full range of genetic abnormalities from large chromosomal aberrations to
smaller abnormalities associated with abnormal numbers of the same gene and
the smallest mutations within specific gene sequences. The Company believes
these complementary technologies will enable the clinician to provide a
comprehensive approach to genomic assessment in the management of disease.
Vysis' three technology platforms include: the FISH ("FLUORESCENT IN
SITU HYBRIDIZATION") System, which detects chromosomal copy number and
rearrangement (large genetic structures), the gCGH-TM- ARRAY SYSTEM, which
detects gene copy number and expression (smaller genetic structures), and the
Molecular Lawn-TM- System, which detects specific gene sequences and their
mutations (smallest genetic structures). Each platform provides the advantage
of being able to simultaneously detect multiple genetic abnormalities in the
same specimen. Vysis expects to introduce a broad range of products based on
each of these platforms. Each of these three technology platforms also relies
upon the Company's image analysis software, which is comprised of proprietary
algorithms that enable the automated display and analysis of FISH, gCGH Array
and Molecular Lawn tests.
FISH SYSTEM
The FISH System provides the ability to simultaneously assess multiple
chromosomal and gene abnormalities in a single intact cell. FISH also
provides the ability to perform cell by cell quantitative assessment of
genetic changes in tissue specimens routinely used by pathologists for
diagnosis. FISH is useful primarily to detect gross or large chromosomal
changes, such as extra chromosomes, missing chromosomes, chromosomal
translocations, and gene amplifications and deletions. The Company's FISH
System consists of instruments and image analysis workstations used with the
Company's patented direct label FISH DNA probes.
Vysis has developed and is continuing to refine instruments and image
analysis workstations used in conjunction with the Company's direct label
FISH probes. The Company's HYBrite-TM- instrument automates
the hybridization process in a temperature controlled environment. The
Company's Quips Genetic Workstations provide integrated solutions to enhance
and automate the visualization, analysis, and storage of FISH images. The
Company is currently undertaking development of a high throughput instrument
that will automate both specimen preparation and the hybridization process.
gCGH-TM- ARRAY SYSTEM
The gCGH Array System uses the Company's patented comparative genomic
hybridization ("CGH") technology to survey the entire genome for chromosomal
changes in a single test. The fundamental principle of CGH is to compare an
abnormal or test DNA or RNA ("Ribonucleic Acid") specimen to a reference DNA
or RNA in order to detect genetic aberrations. This method, like the FISH
System, does not require culturing of "metaphase cells" for a metaphase
spread preparation from the sample. For this reason, CGH enables genetic
testing of tissues that are not amenable to culture such as tumor tissues. In
contrast to traditional FISH technology that typically involves use of a
specific probe to a known chromosomal abnormality, CGH can be used to
investigate an entire genome even when a suspected genetic aberration is
unknown.
Vysis is developing a ready-to-use array of DNA probes on a miniaturized
chip ("gCGH array") which incorporates its patented CGH technology. Each
element of the array will contain DNA from a defined location on a normal
human chromosome and, in total, the collection of elements may represent the
entire genome. This system is intended to enable simultaneous assessment of a
large number of genes in a patient's specimen for abnormalities in the
specific gene count. The gCGH Array System, consisting of individual arrays,
a high speed camera based reader and specimen processing reagents is
currently at the prototype stage of development. The Company currently has
the capability of manufacturing research quantities of gCGH Arrays and is
developing a high throughput robotic system for production of commercial
quantities of arrays.
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Molecular Lawn System
The Molecular Lawn System uses the Company's patented Q-beta replicase
("QBR") amplification technology to detect specific gene sequences. QBR
provides a quantitative measure of a specific gene sequence in either human,
viral or bacterial DNA. A Molecular Lawn consists of individual or multiple
probe sequences attached to the surface of a miniaturized solid support,
similar to the blades of grass on a lawn. Because the Molecular Lawn is a
self contained system and is being specifically designed for clinical use,
this QBR based product is intended to provide a more accurate, simple and
cost-effective alternative to other amplification technologies such as
polymerase chain reaction ("PCR"). This technology platform enables the
detection of small genetic targets associated with disease predisposition and
early detection of disease. The system includes a disposable test device and
an automated reader that will provide both qualitative and quantitative
results. The Company's initial product will be designed for the detection of
Human Papilloma Virus ("HPV"), which causes cervical cancer.
PRODUCTS
CLINICAL DIAGNOSTIC PRODUCTS
Vysis is developing, commercializing and marketing clinical products
that provide information critical to the evaluation and management of cancer,
prenatal disorders and other genetic diseases. The Company's
AneuVysion-TM- Assay Panel for the detection of Down
Syndrome and other prenatal birth defects, which had been approved by the FDA
in October 1997, received regulatory approval for marketing in France from
the French Agence du Medicament (ADM) in March 1998. The Company's clinical
diagnostic product commercialization process involves four distinct stages
prior to marketing which include, in order, research, development, clinical
trials and regulatory review.
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CLINICAL PRODUCTS
<TABLE>
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PRODUCT TECHNOLOGY PLATFORM DISEASE/PROCEDURE INTENDED UTILITY STAGE
- ------- ------------------- ------------------ ---------------- ------
<S> <C> <C> <C> <C>
CANCER
CEP-Registered Trademark- 8 FISH System Chronic Disease monitoring MARKETING
Myelogenous (FDA 510(k)
Leukemia, myeloid cleared November
disorders 1996)
CEP-Registered Trademark- 12 FISH System Chronic Disease progression and MARKETING
Lymphocytic disease monitoring (FDA 510(k)
Leukemia cleared January
1997)
CEP-Registered Trademark- X/Y FISH System Bone marrow Disease monitoring MARKETING
transplantation (FDA 510(k)
cleared January
1997)
HER-2/neu FISH System Breast cancer Selection of therapy and CLINICAL
prognosis TRIALS
bcr/abl ES FISH System Chronic Diagnosis and disease DEVELOPMENT
Myelogenous monitoring
Leukemia
Breast Panel gCGH Array System Breast cancer Selection of therapy and RESEARCH
prognosis
Bladder Panel FISH System Bladder cancer Disease recurrence RESEARCH
monitoring
Prostate Panel gCGH Array System Prostate cancer Disease progression RESEARCH
Human Papilloma Molecular Lawn System Cervical cancer Early disease detection RESEARCH
Virus Panel
</TABLE>
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<TABLE>
<CAPTION>
PRODUCT TECHNOLOGY PLATFORM DISEASE/PROCEDURE INTENDED UTILITY STAGE
- ------- ------------------- ------------------ ---------------- ------
<S> <C> <C> <C> <C>
TriGen-TM- FISH System Down syndrome, Detection of mental MARKETING
Panel sex chromosome retardation and other (ADM registered in
disorders birth defects June 1997)
AneuVysion-TM- FISH System Down syndrome, Detection of mental MARKETING
and other retardation and other (FDA 510(k)
chromosomal birth defects cleared October
disorders 1997; ADM
registered in March
1998)
Aneu-Del-Tel-TM- gCGH Array System Down syndrome, Detection of essentially RESEARCH
Chip and other all chromosomal abnormalities causing
chromosomal common mental
disorders retardation and other
birth defects
Fetal Screen FISH System Down syndrome, Detection of mental RESEARCH
and other retardation and other
chromosomal birth defects from fetal
disorders cells in maternal blood
circulation
</TABLE>
CANCER PRODUCTS
The Company is currently focusing its cancer product development efforts
on leukemia, breast, bladder, prostate and cervical cancers. The American
Cancer Society estimates that approximately 1.4 million people in the United
States were diagnosed with some form of cancer in 1997. Approximately 27,600
patients developed some form of leukemia in 1996. Breast cancer is the second
leading cause of death from cancer among women aged 35 to 54, and prostate
cancer is the second leading cause of death from cancer in men. The American
Cancer Society estimates that in 1996 there were approximately 52,900 new
cases of bladder cancer. Approximately 62 million Papanicolaou ("PAP") tests
are performed annually in the United States to screen for cervical cancer.
LEUKEMIA. The Company's first clinical product, CEP 8 Probe Kit, which
is based on the FISH System, was cleared by the FDA in November 1996 by a
510(k) premarket notification. The CEP 8 Probe Kit is used for the detection
of the abnormal occurrence of three copies of chromosome 8. Used in
conjunction with other tests, this product is used to monitor disease
activity during treatment to assess therapeutic effectiveness and during
remission for disease recurrence. This information provides the physician
with an indication of early blast crisis which is important when considering
bone marrow transplantation therapy.
The Company's second clinical product, CEP 12 Probe Kit, which is based
on the FISH System, was cleared by the FDA in January 1997 by a 510(k)
premarket notification. The CEP 12 Probe Kit is used for the detection of the
abnormal occurrence of three copies (trisomy) of chromosome 12, one of the
more common genetic abnormalities in chronic lymphocytic leukemia ("CLL").
The incidence of CLL in the United States is approximately 7,200 new cases
per year with about 60,000 individuals currently afflicted with this disease.
These patients have a widely variable clinical course and many do not require
therapy at the time of diagnosis. The detection of trisomy 12 provides the
physician the ability to distinguish patients whose disease will rapidly
progress. These patients may require immediate treatment while others may be
monitored for disease progression without therapeutic intervention.
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The Company's third clinical product, CEP X/Y Probe Kit, which is based
on the FISH System, was cleared by the FDA in January 1997 by a 510(k)
premarket notification. The CEP X/Y Probe Kit is used to assess how well
donor cells are accepted by the recipient in sex-mismatched bone marrow
transplantation and to determine the recurrence of malignant cells. In the
management of many leukemias and other myeloid disorders, bone marrow
transplantation is a critical therapeutic strategy. Approximately 4,200
sex-mismatched transplantations were performed in the United States in 1996.
Having an estimate of the proportions of donor and recipient cells following
a transplantation can be useful in assessing the success of the procedure and
to diagnose recurrence. The improved sensitivity and precision of the CEP X/Y
product, as compared to standard cytogenetic analysis, permits a more
reliable detection of therapeutic efficacy or failure at a stage when
modification of therapy will still be possible.
A fourth product, a bcr/abl translocation probe currently under
development, is expected to be submitted for regulatory review in the United
States and Europe. The bcr/abl ES product, which is based on the FISH System,
is intended to be used to confirm the diagnosis of CML and to monitor the
presence of residual disease.
BREAST CANCER. The Company has completed clinical trials and is
currently preparing a submission to the FDA for its first breast cancer
product, HER-2/neu. Results from the HER-2/neu test are intended to rapidly
assess the amplification of HER-2/neu gene for use as a predictive marker for
response to chemotherapy and/or hormone therapy. Results will also be used as
a prognostic marker for risk assessment.
The Company's HER-2/neu product, which is based on the FISH System, is a
locus specific, direct label DNA probe for the HER-2/neu gene. This assay is
designed for the detection and quantification of the HER-2/neu gene and
chromosome 17 in cells. Occasionally, extra copies of the chromosome 17 will
result in a false positive HER-2/neu result. The Company's product includes a
second DNA probe specific for chromosome 17, which is intended to serve as a
built in control for false positive results due to extra copies of chromosome
17. The Company, in collaboration with independent laboratories, conducted
performance studies of the Company's HER-2/neu gene product which indicate
that the product may be able to detect HER-2/neu amplification in 50 percent
more women with breast cancer than detected by antibody based
immunohistochemistry in standard paraffin tissue sections.
Because cancer is considered a multi-gene event, the Company believes
that appropriate patient management may require simultaneous testing for
multiple genetic abnormalities, such as amplification of the c-myc gene, the
Cyclin D1 gene and the q13.2 region on chromosome 20 in addition to
HER-2/neu. The Company is developing products based on the Company's gCGH
Array System which are intended to provide the ability to simultaneously
detect both gene amplification abnormalities and gene deletion abnormalities,
such as deletion of the p53 tumor suppressor gene.
BLADDER CANCER. The Company is developing a highly sensitive product
based on the FISH System technology platform intended to provide simultaneous
analysis of multiple genetic markers for bladder cancer from a routine urine
specimen. A number of published studies have demonstrated that these genetic
markers are correlated to bladder cancer.
PROSTATE CANCER. The Company believes that information regarding the
genetic composition of prostate cancer tumors could distinguish between men
who should be monitored without surgical intervention and those whose
prostates should be removed. The Company is developing a product that
includes a panel of genetic markers designed to provide information
indicating which patients should receive more aggressive therapeutic
intervention. Because prostate cancer is also considered a multi-gene event,
the Company believes that appropriate patient management will require
simultaneous testing for multiple genetic abnormalities. Products based on
the Company's gCGH Array System are intended to provide the ability to
simultaneously detect both gene amplification abnormalities and gene deletion
abnormalities, each of which have been associated with disease progression.
In conjunction with the Mayo Clinic, the Company is evaluating several
potential leads for its initial gCGH Array product panel.
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CERVICAL CANCER. Vysis is developing a product for the simultaneous
detection of specific high and low risk types of HPV based on the Company's
Molecular Lawn System technology platform. The initial product application
will be to test patient specimens classified as atypical with PAP testing.
The Company expects that this product would be introduced as a patient
screening test performed in conjunction with a PAP test. The Company believes
this product will be easier to use and more cost effective than currently
available technologies.
Additionally, the Company believes that assessing changes in the genetic
composition of cervical cells will also be important for the early
identification of cells in a pre-cancerous state. Combined with HPV testing,
genetic screening has a high potential for accurately predicting malignant
transformation not currently possible. The Company is assessing potential
genetic targets to be combined with its HPV tests.
PRENATAL PRODUCTS
The Company's prenatal testing products provide information on genetic
abnormalities involved in mental retardation and other birth defects. The
Company estimates that in the United States and Western Europe more than
600,000 amniocentesis procedures were performed in 1996.
AMNIOCENTESIS TESTING. Amniocentesis is an invasive procedure required
to obtain the fetal cells for diagnosis of chromosomal abnormalities. In
amniocentesis, amniotic fluid containing fetal cells is removed from the
uterus with an ultrasound-guided needle passed through the abdominal wall.
Traditional testing of the fetal cells is accomplished by direct
visualization of stained chromosomes. This analysis, which is known as
karyotyping, is a standard cytogenetic method which requires 7 to 10 days for
completion at an estimated patient cost of $400 to $800 per analysis.
The Company's first prenatal diagnostic product, based on the FISH
System, is the TriGen Assay for the direct diagnosis of Down syndrome (three
copies of chromosome 21) and sex chromosome abnormalities (aneuploidies of
chromosomes X and Y). The product is designed to diagnose these abnormalities
on a single slide within 24 hours from cells obtained by amniocentesis.
Clinical trials conducted by the Company at 18 laboratories involving 558
patients demonstrated 100 percent correlation of TriGen results to standard
karyotyping results. The French regulatory agency, Agence du Medicament
("ADM"), registered the product in May 1997, as a stand alone diagnostic
test.
The Company's AneuVysion-TM- product is a FISH System for the direct
diagnosis of Down syndrome, sex chromosome abnormalities and two additional
chromosomal abnormalities. The Company's submission on its AneuVysion
prenatal product was cleared by the FDA as a 510(k) in October 1997 and
approved by the French ADM in March 1998. Clinical trials conducted by the
Company at 31 laboratories involving 1,516 patients demonstrated 99.9 percent
correlation of AneuVysion results to standard karyotyping for those
chromosomal abnormalities that represent 85 percent to 90 percent of the
chromosomal abnormalities associated with mental retardation and other birth
defects. In the United States, the AneuVysion product is cleared as an
adjunct to standard cytogenetic testing of amniocentesis specimens and in
Europe is registered as a stand alone diagnostic test.
The Company is developing a gCGH Array prenatal product that is intended
to simultaneously detect multiple chromosome aneusomies, microdeletions and
unbalanced chromosome translocations. These abnormalities may account for
essentially all of the causes of common mental retardation and other birth
defects detectable with conventional amniocentesis and karyotyping.
MATERNAL BLOOD TESTING. Due to the invasive nature of the amniocentesis
procedure, current prenatal genetic testing is indicated only in high risk
pregnancies. Although the risk of having a child with Down syndrome increases
with maternal age, most pregnancies occur in younger women and, hence, most
births of children with Down syndrome occur to younger women for whom
amniocentesis is not indicated. The ability to detect and analyze fetal cells
in maternal blood would permit women to be routinely screened for genetic
abnormalities associated with mental retardation and birth defects by direct
genetic analysis of fetal cells.
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Maternal blood has been shown to contain cells derived from the fetus,
although these cells are exceedingly rare. The feasibility of genetic
analysis of fetal cells isolated from maternal blood has been demonstrated,
but obtaining a sufficient number of fetal blood cells for analysis has been
difficult and generally not suitable to routine clinical application. Vysis
is currently researching a system to identify fetal cells in maternal blood
specimens and detect chromosomal abnormalities in those cells. Such a system
is expected to include reagents to identify fetal cells, the Company's
currently developed FISH probe products (for chromosomes 13, 18, 21, X and Y)
and a rapid imaging system.
RESEARCH PRODUCTS
Vysis currently markets over 240 research use only ("RUO") DNA probes
and related reagent products. The Company's principal customers are genetics
testing laboratories and research centers around the world. The Company
introduced 41 new RUO products in 1997. The research reagent product line
represented approximately $4.6 million of the Company's $16.0 million of
product revenues in 1997, approximately $2.8 million of the Company's $11.0
million of product revenues in 1996 and approximately $1.5 million of the
Company's $6.3 million of product revenues in 1995.
The Company's research product commercialization process involves three
distinct stages prior to marketing which include, in order, research,
development and trials.
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RESEARCH PRODUCTS
<TABLE>
<CAPTION>
PRODUCT TECHNOLOGY PLATFORM DISEASE/PROCEDURE POSSIBLE UTILITY STAGE
- ------- ------------------- ------------------ ---------------- -----
<S> <C> <C> <C> <C>
WCP-Registered FISH system Prenatal, postnatal Analysis of metaphase MARKETING
Trademark- Probes and cancer chromosomes, additions,
(103 products) deletions and
translocations
CEP-Registered FISH System Prenatal, postnatal Determination of MARKETING
Trademark- Probes and cancer chromosome copy
(45 products) number
LSI-Registered FISH System Prenatal, postnatal Determination of gene MARKETING
Trademark- Probes and cancer copy number,
(41 products) chromosomal
translocations, and
presence of
microdeletions
CGH Probes and FISH System Prenatal, postnatal Determination of MARKETING
solutions and cancer chromosome region of
(10 products) amplification and
deletion
MultiVysion-TM- FISH System Preimplantation Improved success rate of MARKETING
PGT genetic testing IN VITRO fertilization
implantation and
successful birth
Telomere Probes FISH System Mental retardation Detects hidden MARKETING
analysis chromosomal deletions
and/or translocations not
possible with traditional
karyotyping
Spectral FISH System Cancer and prenatal Detects hidden DEVELOPMENT
Karyotyping karyotyping analysis chromosomal
Reagent in 24 colors rearrangements not
possible with traditional
karyotyping
Ampli-Onc-TM- gCGH Array System All cancers Detects substantially all RESEARCH
Chip genes amplified in cancer
Onc-Express-TM- gCGH Array System All cancers Detects genes expressed RESEARCH
Chip in cancer
</TABLE>
The Company markets three FISH probe product lines, respectively
marketed as WCP-Registered Trademark-, CEP-Registered Trademark- and
LSI-Registered Trademark- probes and various reagents. These products are
used in a wide range of genetic research.
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WCP WHOLE CHROMOSOME PAINT FISH PROBES. WCP probes fluorescently label
or "paint" the unique sequences of an entire chromosome allowing analysis of
the chromosome number as well as indicating chromosome additions and simple
and complex translocations in human metaphase cells.
CEP CHROMOSOME ENUMERATION FISH PROBES. CEP probes hybridize to repeat
sequence targets on specific chromosomes. This allows for rapid counting of
chromosomes to determine if there are too few or too many chromosomes within
interphase or metaphase cells.
LSI LOCUS SPECIFIC IDENTIFIER FISH PROBES. LSI probes hybridize to
specific locations on individual chromosomes and identify specific sequences
of DNA, which are typically gene or disease specific. By highlighting
specific regions of the chromosome, these probes quickly identify if specific
genes are present as expected or whether certain gross chromosomal changes
exist.
COMPARATIVE GENOMIC HYBRIDIZATION (CGH) REAGENTS. CGH reagents are a
line of products for performing comparative genomic hybridization, a tool for
determining previously unidentified gene amplifications and deletions in
genetic diseases and cancers.
PREIMPLANTATION GENETIC TESTING ("PGT"). The Company in late 1997
introduced its first PGT product, MultiVysion PGT, based on the FISH System,
which simultaneously detects abnormalities of chromosomes 13, 18, 21, X and Y
in a single cell within 4 hours. The Company believes that completing a PGT
analysis using Vysis' patented multi-color probes will increase the
probability of a successful implantation and birth at a substantially lower
cost for patients undergoing IN VITRO fertilization.
TELOMERE PROBES. Telomeres are unique sequences of DNA at the end of
chromosomes that contain a large number of genes. Telomeres play an integral
role in chromosome biology, structure, and function. Changes in telomeres,
such as deletions or translocations frequently missed by traditional
karyotyping, have been implicated as causes of mental retardation and cancer.
There are approximately 60,000 peripheral blood lymphocyte specimens tested
each year to evaluate patients for chromosomal causes of mental retardation.
The Company is developing a line of individual locus specific FISH probes and
a multi-color telomere panel for research in chromosomal causes of mental
retardation and cancer.
SPECTRAL KARYOTYPING REAGENT. Traditional karyotypes employ black and
white images of chromosomes and interpretation of these karyotypes requires
sophisticated training in recognition of chromosome patterns and changes in
the chromosomes. Frequently subtle translocations are missed utilizing
traditional black and white karyotyping. The Company's Spectral Karyotyping
Reagent is intended to simplify and improve the accuracy of karyotyping by
providing a unique color to each chromosome, thus allowing the detection of
chromosomal rearrangements not possible with traditional karyotyping. The
Company is developing a spectral karyotyping system comprised of a 24 color
probe reagent set and a genetic workstation that incorporates proprietary
software for image analysis of the multi-color karyotype provided by the
reagent.
AMPLI-ONC AND ONC-EXPRESS CHIPS. The Company is developing an Ampli-Onc
Chip based on its gCGH Array System that will detect substantially all
currently known genes amplified in cancer. This ready-to-use array of DNA
probes on a miniaturized chip is intended to enable simultaneous assessment
of a large number of genes in patient specimens for abnormalities in specific
gene counts. The Company is also developing Onc-Express Chip, an array of DNA
probes for the simultaneous assessment of a large number of expressed genes
in patient specimens. The Company believes that simultaneous testing for
multiple genetic abnormalities is likely to accelerate research and provide
clinical correlations between chromosomal abnormalities and disease. Both of
these products may enable researchers to discover new correlations that may
yield genomic products for improved diagnosis, prognosis and predictive
outcome.
INSTRUMENT PRODUCTS
Vysis currently markets a line of instrument products which includes
genetic imaging workstations and other processing instruments. Because
instrument products are developed for use in connection with both clinical
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<PAGE>
and research products, the commercialization process for instrument products
mirrors the previously described commercialization process for clinical or
research reagent products. These workstations provide an integrated solution
to enhance and automate the visualization, analysis, and storage of FISH,
mFISH (simultaneous imaging of multiple FISH probes), CGH, and karyotype
images. These workstations integrate proprietary software, and readily
available hardware, such as high-resolution cameras, microscopes and desktop
computer systems. The Company's principal customers for these workstations
are genetic testing laboratories and research centers around the world. The
Company has an installed base of over 440 proprietary genetic workstations in
20 countries. The Company introduced three new instrument products in 1997.
The instrument product line represented approximately $7.0 million of the
Company's $16.0 million of product revenues in 1997, approximately $4.3
million of the Company's $11.0 million of product revenues in 1996 and
approximately $2.2 million of the Company's $6.3 million of product revenues
in 1995.
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<PAGE>
INSTRUMENT PRODUCTS
<TABLE>
<CAPTION>
PRODUCT TECHNOLOGY PLATFORM DISEASE/PROCEDURE UTILITY STAGE
- ------- ------------------- ----------------- ------- ------
<S> <C> <C> <C> <C>
Karyotyping Image Analysis Software Cancer and Clinical and research MARKETING
Software prenatal testing automated classification of (FDA 510(k)
chromosomes cleared
February
1990)
FISH Software FISH System Cancer and Clinical and research MARKETING
prenatal testing imaging of FISH probes
CGH Software FISH System All cancers Research for chromosomal MARKETING
amplifications and
deletions
Lab Manager-TM- Database Software Cancer and Patient data management MARKETING
Software prenatal testing incorporated in
karyotyping, CGH and
FISH software
HYBrite-TM- FISH System Cancer and Clinical and research MARKETING
System prenatal testing semi-automated
hybridization of FISH
probes
Quips mFISH FISH System Cancer and Clinical and research MARKETING
Software prenatal testing simultaneous imaging of
multiple FISH probes
gCGH Array gCGH Array System Cancer and Reads gCGH Arrays DEVELOPMENT
Reader prenatal testing
Spectral FISH System Cancer and Clinical and research DEVELOPMENT
Karyotyping prenatal testing automated classification
Software and imaging of
chromosomes in 24-colors
Automated FISH System, gCGH Cancer, prenatal Automates steps of FISH, RESEARCH
Specimen Arrays System, and viral testing gCGH Array and Molecular
Processor and Molecular Lawn System Lawn assays
Test Instrument
Molecular Lawn Molecular Lawn System Cancer, prenatal Reads Molecular Lawn RESEARCH
Reader and viral testing tests
</TABLE>
QUIPS-TM- GENETIC WORKSTATIONS AND IMAGING SOFTWARE. Genetic
workstations consist of computer hardware, imaging cameras, microscopes
purchased from third party vendors and proprietary software designed to
capture, analyze, document and store data required for cytogenetic analyses.
The genetic workstation product line includes various combinations of
hardware and software for karyotyping, FISH, mFISH (multi-target FISH) and
CGH.
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<PAGE>
Hybrite-TM-. HYBrite is a semi-automated instrument for denaturation
and hybridization of FISH probes. The HYBrite system eliminates the need for
denaturation reagents and other temperature devices. The HYBrite shortens
assay time, eliminates steps and reduces user variability.
FOOD TESTING PRODUCTS
The Company develops, manufactures and commercializes products for the
detection and identification of food-borne pathogens to food processors and
quality control laboratories. These products, marketed under the
Gene-Trak-Registered Trademark- name, include both DNA probe products and
antibody kits for the detection of organisms found to contaminate food such
as Salmonella, E. coli, Listeria and Listeria monocytogenes. The Company's
food testing product revenues were approximately $2.5 million in 1997, 1996
and 1995, respectively.
SALES AND MARKETING
MARKETS AND CUSTOMERS
There are approximately 350 cytogenetics laboratories in the United
States that include hospital- based laboratories and non-hospital-based
reference laboratories. In addition, there are approximately 5,200
hospital-based pathology laboratories and approximately 200 cancer research
laboratories in the United States. The combination of these laboratories
creates more than 5,750 potential customers for the Company's products in the
United States alone. The Company estimates the international market for its
products to be approximately two times the size of the United States market.
MARKETING STRATEGY
The Company currently markets its products to cytogenetic laboratories,
hospitals, reference laboratories, academic and commercial research
institutions and managed care organizations. Vysis expects that the principal
customers for its clinical diagnostic products will include cytogeneticists,
pathologists, oncologists and other physicians. In order to accelerate
clinical market acceptance of its Genomic Disease Management products, the
Company is developing programs designed to (i) increase the level of
awareness of FISH System products among the clinical laboratories and the
physicians who are expected to order these tests, (ii) educate the medical
community regarding the benefits of managing disease with genomic testing
products, and (iii) provide data demonstrating clinical correlation of the
disease target to disease outcome, progression and predisposition. The
Company will pursue these programs through the use of collaborations with
external laboratories and scientists who are influential opinion leaders, the
use of third-party published articles and the publication of data obtained in
product clinical trials.
SALES STRATEGY
Sales in the United States are conducted by a direct sales force,
currently consisting of a national sales manager and nine technical sales
representatives. Five representatives are dedicated to clinical and research
reagent sales. The remaining four representatives are dedicated to sales of
genetic workstations. European sales are managed by country specific managers
supported by a ten person direct sales organization for Germany, France and
the United Kingdom.
Sales and marketing in Japan is conducted through a marketing
partnership with Fujisawa Pharmaceutical Co., Ltd. ("Fujisawa"). The
partnership, entered into in July 1995, provides Fujisawa with a ten-year
exclusive distribution right to market Vysis FISH probes and genetic
workstations in Japan. Fujisawa is responsible for funding all clinical
regulatory compliance for the Japanese market. Vysis will supply all of its
United States and European clinical trial data for its FISH products to
assist Fujisawa in its regulatory approval efforts. The agreement provides
that Fujisawa will pay the Company $600,000 per year through July 1999.
Fujisawa introduced the Company's clinical research reagent product line in
December 1995 and released the Company's genetic workstations in 1996.
15
<PAGE>
Sales in the other world markets are conducted through the use of local
distributors. These distributors are supported through the Company's United
States and European offices. See Note 10 of Notes to Consolidated Financial
Statements for financial information of the Company organized by geographic
area and export sales.
MANUFACTURING
The Company's manufacturing operations encompass the production and
packaging of DNA probes and reagents, as well as the integration of the
Company's imaging software with off-the-shelf electronic cameras, computer
systems and other computer peripheral equipment. The Company's manufacturing
operations utilize a complete material requirements planning system fully
integrated with the Company's finance department for operational control. The
Company believes that current manufacturing processes are readily scaleable
to meet expected growth.
The reagent and instrument manufacturing processes are performed
according to the FDA's Quality System Regulation ("QSR"), which replaced the
FDA's Good Manufacturing Practices ("GMP") criteria. The Company trains
employees for compliance with current QSR requirements as specified by the
FDA. See "Business-Government Regulation." The Company is ISO 9001 certified.
ISO 9001 is the most comprehensive of all the International Organization for
Standardization quality standards and is an important element of the
Company's strategy to commercialize its products globally.
COLLABORATIONS
The Company has established a series of collaborations designed to
accelerate gene discovery efforts and correlation studies to link genetic
abnormalities to disease outcomes, from which it will obtain diagnostic and
therapeutic rights. In addition, the Company has collaborations for the
further development of its technology platforms.
UNIVERSITY OF CALIFORNIA, SAN FRANCISCO
The Company funds research at the Department of Laboratory Medicine,
University of California, San Francisco ("UCSF") Cancer Center at the UCSF
Medical School, directed by Dr. Joe Gray, which examines correlations of
chromosome abnormalities to disease and discovery of genes related to
regions of abnormalities identified by CGH.
THE MAYO CLINIC
The Company funds research by Dr. Robert Jenkins at the Mayo Clinic's
Department of Cytology in the area of correlation of chromosomal
abnormalities to aggressive forms of prostate cancer and genes associated
with metastatic potential.
DIGITAL SCIENTIFIC
In January 1996, the Company and Digital Scientific Ltd. ("Digital")
entered into an exclusive marketing and software co-development agreement to
market Digital's SmartCapture-TM- FISH imaging software under which the
Company also acquired a worldwide exclusive license to market all of
Digital's imaging software products. In addition, the Company and Digital
agreed to co-develop imaging software to be marketed by the Company as part
of its Quips Genetic Workstations.
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<PAGE>
PUBLIC HEALTH RESEARCH INSTITUTE OF NEW YORK
The Company funds a research and development collaboration and supports
broad based QBR research activities in the laboratory of Dr. Fred Kramer at
the Public Health Research Institute ("PHRI") of New York in New York City.
INCYTE PHARMACEUTICALS
In July 1996, the Company entered into a collaboration with Incyte
Pharmaceuticals, Inc. ("Incyte"), a leading genomic database company, and
with Genome Systems, Inc., a subsidiary of Incyte providing positional
cloning and library screening services, to produce a "bottoms-up" genomic map
which will map expressed human gene sequences to their human chromosome
locations. As part of the collaboration, the Company will have access to
Incyte's LifeSeq-TM- database for sequence data on expressed human gene
sequences and use of the developed genomic map.
NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY GRANTS
The Company has been awarded two United States Department of Commerce
grants totaling $4 million for research related to the Company's
technologies. These grants are administered through the Advanced Technology
Program ("ATP") of the National Institute of Standards and Technology
("NIST") within the United States Department of Commerce. The first grant,
for research related to the gCGH technology platform, was initiated in March
1995 and runs through March 1998. The second grant, for research related to
the development of the Company's Molecular Lawn technology platform and other
research, was initiated in August 1995 and will run through August 1998.
OTHER COLLABORATIONS
The Company has also established additional research collaborations
aimed at generating clinical product opportunities, although there can be no
assurances of successful development of clinical reagent products based upon
any of these research efforts. A collaboration with the University of Chicago
is aimed at producing a set of telomere probes for each human chromosome and
establishing clinical use of these probes for the diagnosis of mental
retardation. The Company is developing a RUO FISH probe for detection of a
chromosomal translocation in pediatric leukemia under an exclusive license
from St. Jude Children's Research Hospital. The Company's collaboration with
the Reproductive Genetics Institute is directed at establishing the utility
of the Company's FISH probes in pre-implantation genetic testing.
PATENTS, LICENSE RIGHTS AND PROPRIETARY INFORMATION
The Company currently holds or has exclusive licenses to 92 issued
United States patents or allowed United States patent applications, to 69
pending United States patent applications, and to additional foreign patents
and pending patent applications in various areas of genetic and infectious
disease testing. The following describes significant patent assets of the
Company.
FISH TECHNOLOGY
U.S. Patent 5,447,841, issued September 5, 1995, licensed exclusively
from the University of California covers methods of IN SITU hybridization
using unique sequence probes and unlabeled blocking DNA. These methods permit
the use as DNA probes of DNA sequences which are produced by standard cloning
procedures without removal of any repeat DNA sequences which are present. The
Company believes that the alternative manufacturing technologies to produce
labeled FISH probes which do not contain the repeat DNA sequences are
difficult to implement and are not proven commercially. The Company is also
licensed exclusively under three pending United States divisional patent
applications stemming from the '841 patent. Each of these applications claims
priority of the '841 patent applications filed on January 16, 1986 and
December 1, 1986. The divisional applications cover
17
<PAGE>
other embodiments of IN SITU hybridization using unique sequence probes,
including detection of abnormalities on chromosome 21 and detection of gene
amplification or gene deletion.
DIRECT LABELING TECHNOLOGY
U.S. Patent 5,491,224, issued February 13, 1996, and its pending foreign
counterpart applications, claim the Company's direct label FISH DNA probes
and their manufacture. U.S. Patent 5,663,319, issued September 2, 1997 covers
multiple direct label FISH probe compositions. The Company has received a
counterpart European patent on its direct label FISH DNA probes and on
methods of IN SITU hybridization using multiple direct label FISH DNA probes.
The Company has a pending United States divisional patent application of the
'224 patent claiming use of direct label FISH DNA probes. The Company
believes its direct label probes are superior to other probes because they
produce sharper and brighter fluorescent signals and decrease assay time by
eliminating procedural steps and reagents, which are required with indirect
label probes.
CGH AND gCGH TECHNOLOGY
The Company is exclusively licensed by the University of California
under U.S. Patent 5,665,549, issued September 9, 1997, and other pending
United States and foreign patent applications claiming basic CGH methods to
detect changes in copy number of DNA sequences at a particular chromosome
location. The Company also holds an option from the University of California
to obtain an exclusive license to pending U.S. and foreign patent
applications claiming gCGH assays.
Q-BETA REPLICASE TECHNOLOGY
The Company holds exclusive licenses from Columbia University/Salk
Institute and from PHRI on United States and foreign patents and pending
patent applications relating to the use of QBR as an amplification technology
to detect nucleic acid targets. These include U.S. Patent 4,786,600 issued
November 22, 1988, claiming "substrate" molecules having inserted probe
sequences which are replicatable by QBR and U.S. Patent 4,957,858, issued
September 18, 1990, claiming nucleic acid detection assays using QBR. The
Company also has a number of United States and foreign patents and pending
patent applications covering QBR and the Molecular Lawn technology.
CORRELATIONS OF CHROMOSOMAL ABNORMALITIES TO DISEASE
The Company is pursuing a strategy to acquire rights to methods
correlating particular genetic aberrations to disease. These rights will
potentially provide opportunities for exclusive positions on clinical assays.
For example, U.S. Patent 5,472,842 and its pending foreign counterpart
applications, licensed exclusively from the University of California, cover
methods of detection of a chromosomal abnormality on chromosome 20 at locus
20q13 which has been correlated to certain forms of breast cancer. The
Company holds an option from the University of California for an exclusive
license for therapeutic and diagnostic uses to United States and foreign
patent applications claiming gene sequences in the chromosome 20q13 locus.
The Company is also exclusively licensed under United States and foreign
patent applications from the University of California, St. Jude Children's
Research Hospital and Canji, Inc. claiming methods to diagnose disease based
upon correlations of particular chromosomal abnormalities for colon cancer,
breast cancer, lung cancer, bladder cancer, ovarian cancer, prostate cancer,
gliomas and leukemias.
ABILITY TO PRACTICE TECHNOLOGY
The Company's success will depend to a substantial degree upon its
ability to operate its business and to develop, manufacture, market and sell
its products without infringing the proprietary rights of third parties.
However, numerous United States and foreign issued patents and pending patent
applications, which are owned by third parties, exist in the general fields
of nucleic acid technology and clinical diagnostic technology. A partial list
of more specific technologies in these general fields includes patents and
patent applications relevant to nucleic acid probe manufacturing, labels for
nucleic acid probes, nucleic acid probe compositions, nucleic acid probe
18
<PAGE>
hybridization assays, nucleic acid amplification methods, full length gene
sequences, full length expressed gene sequences, partial gene and expressed
gene sequences, gene expression assays, correlations of chromosome or gene
abnormalities to disease, gene point mutation detection assays,
oligonucleotide array hybridization methods, patient sample processing, fetal
cell identification and separation, imaging apparatus and methods, infectious
disease detection assays, food testing assays and apparatus related to these
technologies. The Company expects that additional United States and foreign
patents owned by third parties will issue and additional United States and
foreign patent applications owned by third parties will be filed in these
fields. The Company further believes that the level of patent competition in
these fields is sufficiently high that patent litigation in these fields is
likely to occur.
Consequently, the Company believes that its management of the business
risks presented by the intense patent competition in these fields is critical
to its ability to operate its business and to develop, manufacture, market
and sell its products. There can be no assurance that the Company will be
able to successfully manage these patent business risks to avoid infringing
the proprietary rights of others nor can there be any assurance that patent
infringement suits will not be brought against the Company. Any failure in
its management of these patent business risks may have a material adverse
impact on the Company's business, financial condition and results of
operations.
The patent position of a company utilizing biotechnology generally is
highly uncertain and involves complex legal and factual questions. There can
be no assurance that any patents owned by or licensed to the Company will not
be challenged and subsequently invalidated or circumvented, or that such
patents will be sufficiently broad to afford protection against third parties
who develop or use similar technology, or that any of such patents will be
successfully asserted against any infringing activity, or that any of the
Company's patent rights will be successfully cross-licensed to third parties
in exchange for a license under their patent rights. In addition, there can
be no assurance that any pending United States or foreign patent applications
owned or licensed by the Company or those acquired or licensed by the Company
in the future will result in issued patents, or that such applications will
not be subject to foreign opposition seeking the revocation of a Company
patent or to United States patent interference seeking a determination that
the Company or its collaborators were not the first inventor of a particular
patent or patent application, or that the Company or its collaborators will
develop additional technologies that are patentable, or that any patents
owned or licensed to the Company will provide a basis for commercially viable
products or services.
The Company is also aware of issued United States and foreign patents
and pending patent applications owned or controlled by third parties, which
are related to the Company's current or anticipated technologies.
Specifically, the Company is aware of issued United States and foreign
patents and pending patent applications owned or controlled by third parties,
which are related to significant elements of the Company's FISH, CGH and
direct labeling technologies, or to significant elements of the Company
anticipated use of its QBR technologies, or to reagents useful in the
performance of CGH or gCGH assays. Although the Company believes that certain
of these issued patents are not infringed by the Company's current and
planned operations, there can be no assurance that the Company would be able
to successfully assert such a position in the courts, nor that such a
position could be asserted without the Company incurring substantial or
prohibitive costs. Furthermore, because United States patent applications
are maintained under conditions of confidentiality while the applications are
pending in the United States Patent and Trademark Office, there may be
pending patent applications filed by third parties of which the Company is
unaware and which relate to the Company's current or planned technologies. In
addition, third parties may in the future file patent applications having
claims that relate to the Company's services, processes or products. Persons
holding or licensing patent rights could bring legal actions against the
Company claiming that any of the Company's marketing, services, processes or
products, or the Company's collaborators' or its suppliers' services or
products or of the Company's customers' use of the Company's services or
products infringe one or more of their patents, and seek damages or
injunctive relief. Patent litigation is costly, and there can be no assurance
that the Company would prevail in any patent litigation brought against it.
Further, the Company could be subject to significant liabilities to such
persons, may be required to obtain licenses from such persons, or may be
required to cease certain activities, and any of these could have a material
adverse effect upon the Company's business, financial condition or results of
operations. In addition, there can be no assurance that the Company will be
able to obtain such licenses on commercially reasonable terms, or at all.
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<PAGE>
COMPETITION
Competition in clinical diagnostics and genomics is intense and is
expected to increase as the market for Genomic Disease Management products
develops. Competition is and will continue to be based on quality,
reliability, accuracy, ease of use, price and product line offering. Oncor,
Inc. ("Oncor") is a major competitor in the supply of FISH products to the
research market and has recently entered the clinical market with a HER-2/neu
FISH product. Applied Imaging Corp. and Perceptive Scientific Instruments,
Inc. compete with Vysis in the marketing of genetic imaging workstations. The
Company is aware of other entities that currently market RUO nucleic acid
products, which may have the ability to compete with the Company in the
clinical market. In addition, many reference laboratories and research
institutions produce their own FISH probes for internal use.
Other companies are developing genomic assessment products including
"DNA Chip" products for assessment of gene expression or gene sequence with
potential use for clinical diagnostics. Other diagnostic companies may enter
the genetic disease diagnostic market with nucleic acid based technologies.
Many of the Company's existing and potential competitors have substantially
greater financial, marketing, sales, distribution and technological resources
than the Company or may have substantial advantages over the Company in terms
of research and development expertise, experience in conducting clinical
trials, experience in regulatory matters, manufacturing efficiency, name
recognition, ability to obtain necessary intellectual property licenses,
sales and marketing expertise and distribution channels.
GOVERNMENT REGULATION
The preclinical and clinical testing, manufacturing, labeling,
distribution and promotion of the Company's products are subject to extensive
and rigorous government regulation in the United States and other countries.
Noncompliance with applicable requirements can result in enforcement action
by the Food and Drug Administration ("FDA") or comparable foreign regulatory
bodies including, among other things, warning letters, fines, injunctions,
civil penalties, recall or seizure of products, refusal to grant premarket
clearances or approvals, withdrawal of marketing approvals and criminal
prosecution.
The Company generally is prohibited from marketing its diagnostic
products in the United States unless it obtains either 510(k) clearance or
premarket application ("PMA") approval from the FDA. The Company believes
that it usually takes from four to 12 months from submission to obtain 510(k)
clearance, but it can take longer. The process of obtaining PMA approval is
much more costly, lengthy and uncertain. In any event, there can be no
assurance that 510(k) clearance or PMA approval will be obtained in a timely
fashion or at all. Such clearance or approval may also have limitations on
how the device may be marketed that will limit its sales potential.
The Company has completed clinical trials for the FISH detection of
HER-2/neu amplification in breast cancer. The clinical trial protocols were
reviewed by the FDA for adequate design to meet the intended use and clinical
utility claims. The Company obtained verbal permission in March 1997 to
conduct these trials. A PMA submission is expected to be made to the FDA in the
first half of 1998. There can be no assurance, however, that the FDA's PMA
Advisory Panel will agree with the adequacy of the study design. There can be
no assurance that this product will be approved by the FDA.
Some clinical laboratories prepare their own finished diagnostic tests
using purchased reagents. The FDA has generally not exercised regulatory
authority over these individual reagents or such finished tests. In November
1997, the FDA issued new rules for these reagents, individually termed an
analyte specific reagent ("ASR"), that would apply a regulatory framework to
them, including restrictions on sales or promotional claims that could be
made about these products and the restriction of sales to clinical
laboratories certified under the Clinical Laboratories Improvement Act as
high complexity testing laboratories. The Company sells on an RUO basis a
number of individual reagents that likely fall within the ASR regulatory
framework, which may therefore require changes in the Company's marketing and
labeling of such products. The Company is currently evaluating the new ASR
regulatory framework in order to assess the possible impact upon the
Company's ongoing operations and the marketing of its products as ASRs.
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Any devices manufactured or distributed by the Company pursuant to FDA
clearances or approvals will be subject to pervasive and continuing
regulation by the FDA and certain state agencies. The Company will be subject
to routine inspection by the FDA and will have to comply with the host of
regulatory requirements that usually apply to medical devices marketed in the
United States, including labeling regulations, the QSR, the Medical Device
Reporting regulation (which requires a manufacturer to report to the FDA
certain types of adverse events involving its products), and the FDA's
prohibitions against promoting products for unapproved or "off-label" uses.
Unanticipated changes in existing regulatory requirements or adoption of new
requirements could have a material adverse effect on the Company. The
Company's failure to comply with applicable regulatory requirements could
result in enforcement action by the FDA or foreign governments, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The President recently signed into law the Food and Drug Administration
Modernization Act of 1997. This legislation makes changes to the device
provisions of the Food, Drug and Cosmetic Act and other provisions in the Act
affecting the regulation of devices. Among other things, the changes will
affect the 510(k) and PMA processes, and also will affect device standards
and data requirements, procedures relating to humanitarian and breakthrough
devices, tracking and postmarket surveillance, accredited third party review,
and the dissemination of off-label information. The Company cannot predict
how or when these changes will be implemented or what effect the changes will
have on the regulation of the Company's products. There can be no assurance
that the new legislation will not impose additional costs or lengthen review
times for the Company's products.
EMPLOYEES
As of March 1, 1998, the Company had 153 full-time employees, of whom 33
hold Ph.D. degrees, one holds an M.D. degree and 21 hold other advanced
degrees. Of the Company's total work force, 45 are in research and
development, 47 are in sales/marketing, 16 are in regulatory affairs, 23 are
in operations, and 22 are in business development, legal, finance, human
resources, and administration. The Company believes that its future success
will depend, in part, on its continuing ability to attract, retain, and
motivate qualified scientific, technical, and managerial personnel. The
Company faces intense competition in this regard from other companies,
research and academic institutions, government entities and other
organizations. None of the Company's employees is represented by a collective
bargaining agreement, nor has the Company experienced work stoppages. The
Company believes that its relations with its employees are good.
EXECUTIVE OFFICERS
The executive officers of the Company, their ages as of January 1, 1998
and their present positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John L. Bishop. . . . . . . . 53 President, Chief Executive Officer and Director
George R. Kennedy . . . . . . 44 Senior Vice President, Sales and Marketing
Russel K. Enns. . . . . . . . 49 Vice President, Regulatory Affairs
James J. Habschmidt . . . . . 42 Executive Vice President and Chief Financial Officer
James P. Marcella . . . . . . 55 Vice President, Operations
William E. Murray . . . . . . 44 General Counsel and Secretary
Steven A. Seelig. . . . . . . 49 Vice President, Research and Development and Chief Medical Officer
</TABLE>
MR. JOHN L. BISHOP has served as President and as a Director since
November 1993 and became Chief Executive Officer in February 1996. Mr. Bishop
has over 25 years experience in developing and operating diagnostics
businesses. From 1991 until November 1993, Mr. Bishop was Chairman and Chief
Executive Officer of MicroProbe Corporation, a manufacturer of DNA probe
diagnostics and therapeutics and, from 1987 until 1991 of Source Scientific
Systems, an original equipment manufacturer of automated diagnostic systems.
From 1984 until 1986, Mr. Bishop was President and Chief Operating Officer of
Gen-Probe, Inc., a developer and
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<PAGE>
manufacturer of DNA probe diagnostics for infectious diseases. From 1968
until 1984, Mr. Bishop held various management positions with American
Hospital Supply Company and its affiliates, including a three year assignment
in Japan as an Executive Vice President and Chief Executive Officer of
International Reagents Corp., a joint venture between American Hospital
Supply Company and Green Cross Corporation.
MR. GEORGE R. KENNEDY has served as Senior Vice President, Sales and
Marketing since September 1997. From April 1996 to September 1997 he served
as Vice President, Sales and Marketing. Prior to joining the Company in April
1996, Mr. Kennedy was Director of Sales and Marketing of Difco Laboratories,
a microbiology diagnostic products manufacturer, from June 1992 to April
1996. From May 1990 to June 1992, Mr. Kennedy was Director of Marketing for
Dianon Systems, Inc., an oncology reference laboratory.
RUSSEL K. ENNS, PH.D., has served as Vice President, Regulatory Affairs
since he joined the Company in December 1995. Prior to joining the Company,
Dr. Enns was Vice President of Technical Affairs of MicroProbe Corporation
from February 1992 to November 1995. From August 1984 to February 1992, Dr.
Enns held several positions with Gen-Probe, Inc., including Director of
Product Development and Clinical Development and Director, Technical Affairs.
MR. JAMES J. HABSCHMIDT became Vice President of Finance and Chief
Financial Officer in November 1997 and was named Executive Vice President and
Chief Financial Officer in February 1998. From September 1993 until November
1997, Mr. Habschmidt served as Vice President, Development & Finance and
Chief Financial Officer of Rand McNally & Co., a maker and publisher of maps.
From January 1991 to September 1993 he served as Executive Vice President
Operations & Finance of Silvestri Corporation, a designer and marketer of
home accessories. From 1986 until 1991, Mr. Habschmidt was Vice President,
Finance and Administration of Kewaunee Scientific Corporation, a developer
and manufacturer of laboratory equipment, furnishings and accessories. From
1982 until 1986 he served in financial management positions at American
Hospital Supply Company prior to and after its acquisition by Baxter
International, a diagnostic product manufacturer.
MR. JAMES P. MARCELLA has served as Vice President, Operations since
March 1994. Prior to then Mr. Marcella held various managerial positions in
manufacturing and operations with the Company since December 1991. From April
1990 to December 1991 he served as Chief Executive Officer of Betagen
Corporation, a biotechnology company.
WILLIAM E. MURRAY, J.D., has served as Vice President and Secretary of
the Company since March 1994 and Assistant Secretary of the Company from
September 1992 to March 1994, while employed by Amoco. In January 1996, Mr.
Murray joined the Company as an executive officer, assuming the additional
role of General Counsel. Mr. Murray served from 1983 through 1995 in Amoco's
Law department in both attorney and patent attorney positions.
STEVEN A. SEELIG, M.D., PH.D., has served as Vice President, Research
and Development and Chief Medical Officer since February 1996. He has held
various research management positions with the Company and its predecessors
since May 1989. Dr. Seelig was Associate Professor and Director of pediatric
endocrinology and metabolism at the University of Minnesota from 1985 to
1989.
SCIENTIFIC ADVISORY BOARD
The following individuals comprise Vysis' Scientific Advisory Board,
which plays an active role in guiding Vysis' research and development
activities.
KURT HIRSCHHORN, M.D., is Professor of Pediatrics, Human Genetics and
Medicine, Mount Sinai School of Medicine, New York, New York. Dr. Hirschhorn
is a founding member of the American College of Medical Genetics; serves on
the Editorial Board or Committee of eight scientific journals; and has worked
on IN SITU hybridization since the early 1970's.
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<PAGE>
ROBERT B. JENKINS, M.D., PH.D., is Associate Professor of Laboratory
Medicine, and co-Director of the clinical Cytogenetics and clinical Molecular
Genetic Laboratories at the Mayo Clinic, Rochester, Minnesota. Dr. Jenkins is
the Associate Director of the Mayo Clinic's Cytogenetics Laboratory and has
on-going research programs into the molecular pathology of prostate, breast
and ovarian cancers and gliomas. Dr. Jenkins has published 43 scientific
articles on the use of FISH to assess cancer pathology.
FRED R. KRAMER, PH.D., is Chairman, Department of Molecular Genetics,
Public Health Research Institute, New York, New York. Dr. Kramer is the
co-author of over 30 scientific articles; is the inventor or co-inventor on
fundamental patents covering QBR based diagnostic assays, which are
exclusively licensed to the Company; and has led active research on QBR
assays since 1985.
DAVID H. LEDBETTER, PH.D., is Professor of Genetics and Director of the
Center for Medical Genetics, University of Chicago, Chicago, Illinois. He
served as Chief, Diagnostic Development Branch of the National Center for
Human Genome Research at the National Institutes of Health from 1993 to May
1996, is a Founding Fellow of the American College of Medical Genetics, is on
the Editorial Board of HUMAN MOLECULAR GENETICS and is also the Chairman of
the Company's Scientific Advisory Board.
KENNETH L. MELMON, M.D., is Professor of Medicine and Molecular
Pharmacology, Stanford University School of Medicine, Department of Medicine
and Clinical Pharmacology, Stanford, California. Dr. Melmon was the Arthur L.
Bloomfield Professor of Medicine at Stanford University School of Medicine
from 1978-1988; was the Chairman from 1978 to 1984 and Associate Chairman
from 1989 to 1993 of the Department of Medicine at Stanford University School
of Medicine; is the Associate Dean for Postgraduate Medical Education; and
serves as an Editorial Board member or consultant for six scientific
journals.
DAVID H. PERSING, M.D., PH.D., is Associate Professor, Department of
Laboratory Medicine and Pathology and Department of Clinical Microbiology,
Mayo Clinic, Rochester, Minnesota. Dr. Persing leads active research into
infectious disease diagnosis by nucleic acid detection; is the inventor of
two pending U.S. patent applications on detection of particular pathogens by
nucleic acid amplification assays; and serves as a regular reviewer for the
NEW ENGLAND JOURNAL OF MEDICINE.
DAN PINKEL, PH.D., is Professor, Department of Laboratory Medicine, UCSF
Cancer Center, University of California, San Francisco. Dr. Pinkel is the
author or co-author of over 50 publications on the uses of FISH; is the
co-inventor of U.S. patents on FISH probes for specific chromosomal locations
and CGH; and leads active research on gCGH assays.
HANS J. TANKE, PH.D., is Chairman, Department of Cytochemistry and
Cytometry, Sylvius Laboratory, Leiden University, Leiden, The Netherlands.
Dr. Tanke is the author or co-author of over 130 publications in the fields
of cytology and molecular biology; is a member of the Editorial Board of
CYTOMETRY, ANALYTICAL CELLULAR PATHOLOGY AND BIOIMAGING; is the Chairman of
the EC Network "FISH and Image Analysis"; and leads active research programs
on detection of IN SITU hybridization results.
STEPHEN T. WARREN, PH.D., is Investigator, Howard Hughes Medical Institute,
the William Patterson Timmie Professor of Human Genetics, and Professor of
Biochemistry and of Pediatrics at Emory University School of Medicine, Atlanta,
Georgia. Dr. Warren is a Founding Fellow of the American College of Medical
Genetics and is board certified in clinical cytogenetics and clinical molecular
genetics; is on the Editorial Boards of the AMERICAN JOURNAL OF MEDICAL
GENETICS, GENOMICS, MAMMALIAN GENOME, BIOCHEMICAL AND MOLECULAR MEDICINE, and
HUMAN MOLECULAR GENETICS; and leads active research into the molecular basis of
X chromosome-linked diseases and trinucleotide repeat expansion disorders.
23
<PAGE>
ITEM 2. PROPERTIES
FACILITIES
The Company's executive offices, research and development activities,
manufacturing operations and administrative support are located in Downers
Grove, Illinois. This 56,551 square foot facility is leased pursuant to a
lease that expires on November 30, 2004. Capacity exists at such location to
expand production to accommodate future growth.
The Company also leases 3,300 square feet of space in Stuttgart, Germany
under a lease that expires in October 2000. The Company has leased 3,014
square feet near Paris, France under a lease that expires in May 2005. The
Company's food testing business leases 10,237 square feet in Hopkinton,
Massachusetts under a lease that expires in January 1999.
ITEM 3. LEGAL PROCEEDINGS
(1) The Regents of the University of California (the "Regents") and the
Company as exclusive licensee, are plaintiffs in a patent infringement suit
filed September 5, 1995, against Oncor. The suit was filed in the United
States District Court in San Francisco, California and asserts that Oncor's
marketing of various DNA probe products infringes the Regents' U.S. Patent
No. 5,447,841. The Company and the Regents share equally the legal costs of
this suit. Oncor's answer to the complaint asserts that the patent is invalid
based on prior art and the failure to disclose the best mode of practicing
the invention and that it is unenforceable due to inequitable conduct which
occurred during prosecution of the patent. On August 19, 1997, the court
issued an order which (i) granted the Regents' and Vysis' motion for claim
construction and denied Oncor's competing motion for claim construction, (ii)
granted the Regents' and Vysis' motion for summary judgment that the claims
were novel and denied Oncor's motion for summary judgment that the claims
were invalid as anticipated, (iii) granted the Regents' and Vysis' motion for
summary judgment that the claims were unobvious and denied Oncor's motion for
summary judgment that the claims were invalid as obvious, (iv) granted in
part and denied in part the Regents' and Vysis' motion for summary judgment
that Oncor's use and marketing of its challenged FISH probes infringed the
claims and denied Oncor's motion for summary judgment that none of its FISH
probes infringed, (v) granted in part and denied in part the Regents' and
Vysis' motion for summary judgment regarding the best mode of practicing the
invention, (vi) denied Oncor's motion for summary judgment that the claims
were unenforceable because of material misrepresentations made to the U.S.
Patent & Trademark Office by the Regents during prosecution of the patent,
and (vii) struck Oncor's motion for summary judgment that the claims were
unenforceable because the Regents failed to submit material prior art to the
U.S. Patent & Trademark Office. Oncor resubmitted its motion requesting
summary judgment that the patent was unenforceable because of the failure to
submit material prior art to the U.S. Patent & Trademark Office, but the
court denied this motion in an order dated December 22, 1997. On February 3,
1998, Oncor in a letter to the court advised that it would not contest at
trial the issues of whether its accused probes contained repetitive DNA
sequences and whether their use on metaphase spreads infringed. On March
20, 1998, the Company filed a motion requesting the court to (i) establish
that the use of Oncor's INFORM Her2/neu product infringes the "841 patent, or
in the alternative, bar Oncor from introducing evidence at trial that the
INFORM Her2/neu product does not infringe the patent; (ii) allow the Company
to introduce evidence at trial of Oncor's abuse of discovery, by the failure
to furnish to the Company relevant documents during discovery, and the
submission of false statements to the court; and (iii) order Oncor to pay the
Company's attorneys' fees of approximately $42,500, which were incurred due
to the discovery abuse. Oncor has not yet replied to this motion. The trial
of the remaining issues is scheduled to begin April 20, 1998. The Company
and Oncor are engaged in discussions regarding a possible settlement of the
litigation. If Oncor were to succeed in invalidating the patent or having it
declared unenforceable, this may have a material adverse effect on the
Company's market position and future business prospects.
(2) The Company and Amoco are defendants in a suit pending in the United
States District Court in San Diego, California brought by Gen-Probe, Inc.
("Gen-Probe") in June 1995. The suit alleges infringement of U.S. Patent Nos.
4,851,330 and 5,288,611 (the "Kohne Patents"). The Kohne Patents are alleged
to apply generally to the detection, identification and quantification of
non-viral organisms using DNA probes selected to target sequences of
ribosomal RNA. The allegedly infringing activities are the manufacture, use
and sale of reagents and kits for detecting certain food pathogens currently
used in the Company's food testing business. The suit also alleges various
claims that the Company competed unfairly with Gen-Probe. This suit has been
stayed pending the outcome of a separate suit brought in California Superior
Court in San Diego, California against Gen-Probe by the Center for Neurologic
Study ("CNS") challenging Gen-Probe's claim to sole ownership of the Kohne
Patents. CNS asserts that the invention of the Kohne Patents were made by
David Kohne while he was affiliated with CNS and supported by a grant from
the National Institutes of Health naming CNS as the grantee institution. CNS
seeks
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<PAGE>
damages and title in the Kohne Patents. Pursuant to separate agreements
between Amoco and CNS, which has been assigned to the Company by Amoco, the
Company reimburses CNS for legal costs incurred in the suits. In return, the
Company receives contingent rights to acquire an exclusive license with the
right to grant sub-licenses under such rights as CNS may obtain in the Kohne
Patents. Further, the Company has contractually agreed with CNS to grant
sub-licenses at commercially fair and reasonable terms under the Kohne
Patents should it acquire the exclusive license. CNS' suit against Gen-Probe
was bifurcated into two phases. The first phase would be tried by a jury in
December 1997 and would decide whether certain claims were barred as
untimely. If the claims were not found to be untimely, the second phase would
be tried separately in March 1998 and would decide the remaining issues
raised by CNS. On December 16, 1997, upon completion of the first phase of
the trial, the jury determined that the claims before it were barred as
untimely. As of March 24, 1998, the court has not yet entered the jury
verdict as a final judgment of the court. The Company understands that CNS
and Gen-Probe are also disputing whether the jury verdict applied to all of
CNS' claims. The court held a hearing on this issue in late February 1998,
but as of March 24, 1998 has not decided this dispute. There can be no
assurance that the Company will obtain rights under the Kohne Patents.
Counterpart applications to the Kohne Patents were filed in Europe,
Japan and elsewhere. Patents were granted and the Company has opposed these
patents in Europe and Japan. In Europe the opposition has resulted in the
withdrawal of the patent. However, the opposition proceeding is not yet
complete and the withdrawal may be appealed. In Japan, the Company's
opposition has been rejected and the patent maintained. There can be no
assurance that Gen-Probe will not assert additional counts of infringement
based on any additional patents issued from the applications underlying the
Kohne Patents or will not assert additional causes of action against the
Company. Although the Company believes that it has meritorious defenses to
the suit by Gen-Probe against the Company, there can be no assurance that the
Company will ultimately prevail. An adverse determination could include an
award of treble damages and/or attorneys' fees, which could have a material
adverse effect on the financial condition and results of operations of the
Company. Furthermore, an adverse determination in such suit may limit future
business opportunities that the Company might otherwise be able to exploit in
the area of bacterial infectious disease detection.
The Company and Amoco have entered into a Cooperation Agreement relating
to the establishment of the Company as a stand-alone entity. The Cooperation
Agreement provides that Amoco and the Company will cooperate in the defense
of the suit brought by Gen-Probe and includes an allocation of any liability
arising from the Gen-Probe suit or the suit brought by CNS. Under this
allocation, Amoco has agreed to indemnify the Company against any loss or
damage based upon Gen-Probe's allegations of unfair competition and related
claims in the suit. The Company has agreed to indemnify Amoco against any
loss or damage based upon the patent infringement count in the suit or any
other cause of action not yet asserted by Gen-Probe. Under this indemnity the
Company will also be responsible for the attorney's fees and costs associated
with the defense of the patent infringement count. There can be no assurance
that the indemnity of the Company by Amoco will prevent an adverse
determination from having a material adverse impact upon the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In November 1997, Amoco, at the time the owner of approximately 99
percent of the Company's outstanding Common Stock and all of its outstanding
preferred stock, approved by written consent (i) a reverse stock split of
1.37 shares of Common Stock into 1 share of Common Stock, which was effected
thereafter on November 20, 1997, and (ii) an increase in the authorized share
capital of the Company to 35 million shares of Common Stock and 10 million
shares of preferred stock.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the NASDAQ National Market
System, ticker symbol VYSI. Trading in the Company's Common Stock commenced
on February 5, 1998.
25
<PAGE>
As of March 23, 1998, there were 9,676,258 shares of Common Stock
outstanding held by approximately 14 shareholders of record.
The Company has never paid a dividend on its Common Stock. The Company
currently intends to retain its earnings to finance future growth and does
not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. Any determination as to the payment of dividends will
depend upon the future results of operations, capital requirements and
financial condition of the Company and its subsidiaries and such other facts
as the Board of Directors of the Company may consider, including any
contractual or statutory restrictions on the Company's ability to pay
dividends.
On February 28, 1997, the Company granted an option to purchase 1,095
shares of Common Stock at $2.74 per share to each of the following members of
the Company's Scientific Advisory Board: Kurt Hirschhorn, M.D., Fred R.
Kramer, Ph.D., David H. Ledbetter, Ph.D., Kenneth L. Melmon, M.D., Dan
Pinkel, Ph.D., Hans J. Tanke, Ph.D., and Stephen T. Warren, Ph.D. Each option
was granted in reliance upon Rule 701 under the Securities Act of 1933, as
amended, (the "Securities Act") as consideration for bona fide advisory
services provided by each such individual.
On September 17, 1997, the Company issued 553,126 shares of Series B
Preferred Stock to ATC, the Company's principal stockholder, in reliance upon
the exemption contained in Section 4(2) of the Securities Act. The shares of
Series B Preferred Stock were issued in settlement of a $5,106,000
intercompany balance between the Company and ATC.
On September 30, 1997, the Company issued an aggregate of 13,576 shares
of Common Stock to five individuals upon exercise of employee stock options
held by them, in reliance upon Rule 701 under the Securities Act. The
aggregate exercise price of such options was $7,195.
On October 15, 1997, the Company agreed to issue, upon the closing of
the transaction which is expected to occur in June 1998, an aggregate of
80,291 shares of Common Stock to Aprogenex, Inc., a corporation engaged in
the development of diagnostic test systems, as partial consideration for
certain patents and other intellectual property rights of such corporation.
The shares are to be issued in reliance upon the exemption contained in
Section 4(2) of the Securities Act.
The Company's Form S-1 Registration Statement (File No. 333-38109) which
registered the Common Stock sold in the Company's IPO was declared effective
on February 4, 1998. A total of 4,025,000 shares of Common Stock were
registered on that Registration Statement, representing a proposed maximum
aggregate offering price of $60,375,000. The offering commenced on the
effective date of the Registration Statement and the purchase of shares of
Common Stock in the offering closed on February 10, 1998. A total of three
million shares of Common Stock were sold in the offering for an aggregate
offering price of $36,000,000. The managing underwriters for the offering
were Furman Selz LLC, Deutsche Morgan Grenfell Inc. and EVEREN Securities,
Inc. The Company incurred an aggregate of approximately $3.7 million of
expenses in connection with the offering, consisting of $2.5 million of
underwriting discounts and commissions and approximately $1.2 million of
other expenses. None of such expenses represented direct or indirect
payments to (i) directors or officers of the Company or their associates,
(ii) persons owing 10 percent or more of any class of equity securities of
the Company or (iii) affiliates of the Company. Information regarding the
application of the net offering proceeds of $32.3 million will be included in
subsequent periodic filings of the Company filed pursuant to sections 13(a)
and 15(d) of the Securities Exchange Act of 1934 commencing with the first
filing for a reporting period ending after the effective date of the
Registration Statement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data presented below for the years ended
December 31, 1994, 1995, 1996 and 1997, and the balance sheet data presented
below at December 31, 1995, 1996 and 1997 have been derived from the
financial statements of the Company, which have been audited by Price
Waterhouse LLP, independent accountants. The statement of operations data for
the year ended December 31, 1993, the balance sheet data at December 31,
1993 and 1994, are unaudited but have been prepared on the same basis as the
audited consolidated financial statements and in the opinion of management
include all adjustments, consisting of normal recurring
26
<PAGE>
adjustments, necessary for the fair presentation thereof. The data presented
below should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................ $ 18,233 $ 13,238 $ 7,217 $ 5,403 $ 3,580
Cost of goods sold............ 7,287 5,529 4,022 3,486 2,831
-------- -------- -------- -------- --------
Gross profit.................. 10,946 7,709 3,195 1,917 749
Research and development...... 10,136 9,456 8,871 11,639 10,550
Selling, general and
administrative.............. 17,050 16,286 12,025 8,937 4,541
-------- -------- -------- -------- --------
Loss from operations.......... (16,240) (18,033) (17,701) (18,659) (14,342)
Interest expense, net......... 636 (148) -- -- --
-------- -------- -------- -------- --------
Net loss...................... $(16,876) $(18,181) $(17,701) $(18,659) $(14,342)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net loss per basic and
diluted common share(1).... $(15.89) $(17.18) $(16.72) $(17.64) $(13.56)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Shares used in computing net
loss per basic and
diluted share (1)........... 1,062 1,058 1,058 1,058 1,058
DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(in thousands)
BALANCE SHEET DATA:
Cash.......................... $ 669 $ 48 $ 247 $ 10 $ --
Working capital (deficit)..... (9,138) (6,622) (2,625) 758 1,045
Total assets.................. 16,940 15,115 19,167 17,574 12,718
Notes payable--Amoco.......... 9,202 5,106 -- -- --
</TABLE>
___________
(1) See "Recent Accounting Pronouncements" Section for information concerning
the number of shares used in computing net loss per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Vysis is a leading Genomic Disease Management company that develops,
commercializes and markets clinical products that provide information
critical to the evaluation and management of cancer, prenatal disorders and
other genetic diseases. Vysis currently markets five FDA cleared clinical
products in addition to distributing over 240 research products through its
direct sales operations in the United States and Europe and a worldwide
distribution network covering 41 countries. It also markets proprietary
genetic imaging workstations for clinical and research use, with an installed
base of over 440 proprietary genetic workstations in 20 countries. The
Company also develops, manufactures and commercializes products used by food
processors and quality control laboratories for the detection and
identification of food-borne pathogens. See Note 10 of Notes to Consolidated
Financial Statements for financial information of the Company by geographic
area.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1997 AND 1996
Total revenues increased to $18.2 million for the twelve months ended
December 31, 1997 from $13.2 million for the twelve months ended December 31,
1996, an increase of $5.0 million or 38 percent. Product sales accounted for
all of this increase, primarily as a result of increased product shipments in
the United States and the incorporation of twelve full months of operations
in France and the United Kingdom. Grant and other revenue in 1997 of $2.2
million included $1.4 million earned under two United States Department of
Commerce research
27
<PAGE>
grants awarded to Vysis in 1995. Both grants are administered through the
Advanced Technology Program of the National Institute of Standards and
Technology. Grant and other revenue in 1997 also included revenue of $600,000
from Fujisawa Pharmaceutical Co., Ltd. ("Fujisawa") pursuant to a
distribution agreement signed in July 1995. Grant and other revenue for the
twelve months ended December 31, 1996 of $2.2 million consisted primarily of
$2.1 million earned under the Company's two above mentioned research grants
and the Fujisawa agreement.
Cost of goods sold increased to $7.3 million for the twelve months ended
December 31, 1997 from $5.5 million for the twelve months ended December 31,
1996. The increase in cost of goods sold resulted from an increase in the
volume of product sold. As a percentage of total revenues, gross profit
increased from 58.2 percent for the twelve months ended December 31, 1996 to
60.0 percent for the twelve months ended December 31, 1997, primarily as a
result of a change in product sales mix toward higher margin products.
Research and development expense increased to $10.1 million for the
twelve months ended December 31, 1997 from $9.5 million for the twelve months
ended December 31, 1996. The $0.6 million increase is primarily due to
additional contract research with a collaborative partner.
Selling, general and administrative expense increased to $17.1 million
for the twelve months ended December 31, 1997 from $16.3 million for the
twelve months ended December 31, 1996. This increase was due to an increase
in selling expense of $2.1 million primarily due to the hiring of additional
sales and marketing personnel and other expenses incurred in line with the
overall expansion of operations, partially offset by reduced general and
administrative expenses of $1.3 million.
The Company sold two buildings in Framingham, Massachusetts in January
1996 for $6.7 million in cash. The Company earned interest income from Amoco
of $107,000 during the twelve months ended December 31, 1996 as a result of
Amoco's investment of the Company's real estate sale proceeds. The Company
incurred interest expense of $636,000 during the twelve months ended December
31, 1997 and $255,000 during the twelve months ended December 31, 1996
related to the note payable to Amoco.
TWELVE MONTHS ENDED DECEMBER 31, 1996 AND 1995
Total revenues increased to $13.2 million for the twelve months ended
December 31, 1996 from $7.2 million for the twelve months ended December 31,
1995, an increase of $6.0 million or 83 percent. Product sales, primarily DNA
probe products and genetic imaging workstations, increased by $4.7 million
primarily as a result of increased product shipments in the United States and
Germany and the incorporation of approximately nine months of operations in
France and the United Kingdom. Grant and other revenue in 1996 of $2.2
million consisted primarily of $1.4 million earned in connection with the two
United States Department of Commerce grants and approximately $600,000
recognized pursuant to the Fujisawa agreement. Grant and other revenue in
1995 of $900,000 included $559,000 earned in connection with the two United
States Department of Commerce grants and approximately $300,000 recognized
pursuant to the Fujisawa agreement.
Cost of goods sold increased to $5.5 million for the twelve months ended
December 31, 1996 from $4.0 million for the twelve months ended December 31,
1995. The increase in cost of goods sold resulted from an increase in the
volume of product sold. As a percentage of total revenues, gross profit
increased from 44.3 percent during 1995 to 58.2 percent for 1996, primarily
as a result of an increase in grant and other revenue and as a result of a
change in product sales mix toward higher margin products.
Research and development expense increased to $9.5 million for the
twelve months ended December 31, 1996 from $8.9 million for the twelve months
ended December 31, 1995. The hiring of additional scientists in 1996 to
support development of the Company's three technology platforms and DNA probe
products accounted for a majority of the $600,000 increase.
28
<PAGE>
Selling, general and administrative expense increased to $16.3 million
for the twelve months ended December 31, 1996 from $12.0 million for the
twelve months ended December 31, 1995. This increase was due to incremental
general and administrative expenses of $2.2 million primarily attributable to
the hiring of additional administrative personnel and other expenses incurred
to support the Company's growth and incremental selling expense of $2.1
million primarily due to the hiring of additional sales and marketing
personnel and other expenses incurred in line with the overall expansion of
operations.
Interest income in 1996 totaled $107,000 from Amoco based on the
proceeds from the sale of two facilities in Framingham, Massachusetts.
Interest expense in 1996 of $255,000 related to the note payable to Amoco.
INCOME TAXES
During the years ended December 31, 1997, 1996 and 1995, the Company's
results of operations were included in the consolidated income tax returns of
Amoco. Accordingly, the Company's domestic net operating losses have been
utilized by Amoco in its consolidated income tax returns and are not
available to offset the Company's future taxable income.
A full valuation allowance has been provided for all deferred tax assets
(net of liabilities) at December 31, 1997, as management does not consider
realization of such amounts more likely than not. On an unaudited pro forma
separate income tax return basis, assuming the Company was not included in
the consolidated income tax returns of Amoco, no tax provision or benefit
would have been recorded in the consolidated financial statements due to the
ongoing losses of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily
through capital contributions and loans from Amoco. Capital contributions
totaled $2.3 million and $15.4 million for the years ended December 31, 1996
and 1995, respectively. Loans from Amoco totaled $16.7 million and $10.1
million during the years ended December 31, 1997 and 1996, respectively. The
amounts due to Amoco under these loans were reduced by $7.5 million and $5.0
million, respectively, for the tax benefits recorded by Amoco resulting from
the inclusion of the Company's domestic net operating losses in Amoco's
consolidated income tax returns. Additional working capital was provided as a
result of the Company having sold, in January 1996, its two facilities in
Framingham, Massachusetts. Net sale proceeds totaled $6.7 million and were
sufficient to fund the Company's operations for the first five months of
1996. The net amount due under the note payable to Amoco of $5.1 million at
December 31, 1996 was converted into 553,126 shares of Series B Preferred
Stock during September 1997. Amounts received under research grants and a
distribution agreement have provided cumulative funding of approximately $4.9
million through December 31, 1997.
Net cash used in operating activities was $15.2 million, $17.4 million
and $11.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Cash used in operating activities relates primarily to ongoing
operating losses associated with research and development of the Company's
products and the development of a sales and administrative infrastructure to
support the Company's business plan.
Net cash used in investing activities was $0.8 million and $3.4 million
for the years ended December 31, 1997 and 1995, respectively, primarily
relating to the purchase of property and equipment and the increase in other
assets. Net cash provided by investing activities was $4.7 million for the
year ended December 31, 1996, primarily resulting from the sales of two
properties in Framingham, Massachusetts. The Company does not have any
current material commitments for capital expenditures.
Net cash provided by financing activities was $16.7 million, $12.4
million and $14.9 million for the years ended December 31, 1997, 1996 and
1995, respectively, resulting from loans and capital contributions received
from Amoco.
29
<PAGE>
The Company has entered into various license agreements pursuant to
which it has been granted use of certain patented technologies. The
agreements require the Company to pay royalties ranging from 0.5 percent to
8.0 percent on net sales of specified products, with certain minimum
royalties due each year. As additional consideration for certain of the
licenses, the Company is obligated to fund certain research of the licensors.
Future minimum amounts due under all such agreements range from $300,000 to
$1.8 million per year for 1998 through 2002. See Note 7 of Notes to
Consolidated Financial Statements.
At December 31, 1997, the Company had cash of $669,000 and an
accumulated deficit of $31.9 million (post-recapitalization). The Company has
experienced negative cash flows from operations for the three years ended
December 31, 1997. On February 10, 1998, the Company completed an initial
public offering and issued 3 million shares of Common Stock resulting in net
cash proceeds of approximately $32.3 million. From this amount, the Company
repaid $2.0 million of the remaining note payable to Amoco.
The Company believes that the net proceeds from the IPO, and the
interest to be earned thereon, will be sufficient to fund the Company's
operations well into 1999. 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 payments received under existing and potential
collaborative agreements; the availability of government research grant
payments; the progress of the Company's collaborative and independent
research and development projects; the costs of preclinical and clinical
trials for the Company's products; the prosecution, defense and enforcement
of patent claims and other intellectual property rights; and the development
of manufacturing, sales and marketing capabilities. To the extent capital
resources, including payments from existing and possible future collaborative
agreements and grants, together with the net proceeds of the IPO are
insufficient to meet future capital requirements, the Company will have to
raise additional funds to continue the development of its technologies. There
can be no assurance that such funds will be available on favorable terms, or
at all. To the extent that additional capital is raised through the sale of
equity or convertible debt 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, the Company adopted SFAS No. 128, "Earnings per Share," which
requires presentation of both basic and diluted earnings per share. Loss per
share data presented in 1993 through 1996 assumes that the shares issued in
connection with the 1996 recapitalization (see Note 8 of Notes to
Consolidated Financial Statements for further discussion) were outstanding
throughout the entire period 1993 through 1996.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes new
standards for reporting information about operating segments in interim and
annual financial statements. SFAS No. 131 will be effective for the Company
in 1998. The Company is currently evaluating the impact, if any, this
statement will have on disclosures in the consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS
The financial statements of the Company on pages 40 to 43 of this
Form 10-K are indexed herein under Item 14(a) (1). See also the financial
statement schedules appearing herein, as indexed under Item 14(a) (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Company's Executive Officers is included in Part
I under the caption "Executive Officers." Listed below are the Company's
Directors and their ages as of January 1, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert C. Carr . . . . . . . . . . . . 57 Chairman of the Board of Directors
William M. Bartlett. . . . . . . . . . 65 Director
John L. Bishop . . . . . . . . . . . . 53 President, Chief Executive Officer and Director
Kenneth L. Melmon. . . . . . . . . . . 63 Director
Walter R. Quanstrom. . . . . . . . . . 55 Director
Frank J. Sroka . . . . . . . . . . . . 49 Director
Richard C. Williams. . . . . . . . . . 54 Director
</TABLE>
All Directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Officers
serve at the pleasure of the Board of Directors.
MR. ROBERT C. CARR was appointed to the Board of Directors of the
Company in October 1993 and was elected Chairman of the Company's Board of
Directors in February 1997. Mr. Carr has served as President of ATC since
October 1993. Mr. Carr joined Amoco in 1990 and has held various positions
with Amoco, including Vice President of Chemicals Development and
Diversification, Vice President and Treasurer, Vice President of Planning and
Administration, and Vice President and Controller. He has served as Vice
President Corporate Planning since May 1997.
MR. WILLIAM M. BARTLETT has been a Director since September 1997. For
more than the last five years, Mr. Bartlett has served as a consultant to
various companies in the healthcare industry. Mr. Bartlett is a director of
Medco Research, Inc., an adenosine technology and cardiovascular development
company. Mr. Bartlett has a significant amount of experience in the health
care industry, having been Chief Executive Officer-Medical Products Group and
Corporate Vice President for G.D. Searle & Co., a manufacturer and
distributor of hospital equipment and diagnostic equipment from 1978 to 1982.
He was also President, Atlantic International Division of American Hospital
Supply Company from 1975 to 1978 and of the V. Mueller Surgical Instrument
Division from 1971 to 1975.
KENNETH L. MELMON, M.D., has been a Director since September 1997. Dr.
Melmon has been a Scientific Advisory Board member of the Company since
August 1994. He is also a director of Epoch, Inc. a biotechnology
corporation. Since July 1994 he has been Associate Dean, Postgraduate Medical
Education at Stanford University School of Medicine. Dr. Melmon was Associate
Chairman, Department of Medicine at the Stanford University School of
Medicine from July 1989 to July 1993 and was Chairman, Stanford University
Hospital Technology Transfer Program from July 1988 to July 1993. He was
Chairman, Department of Medicine at the Stanford University School of
Medicine from 1978 to 1984 and has been Professor of Medicine and Molecular
Pharmacology since 1978.
WALTER R. QUANSTROM, PH.D., has been a Director since September 1997.
Dr. Quanstrom is presently Vice President of Environment, Health and Safety
and has held such position with Amoco since 1987.
MR. FRANK J. SROKA, J.D., was appointed to the Board of Directors of the
Company in September 1993. Mr. Sroka has served as General Attorney for Amoco
with responsibility for the legal matters of ATC and its subsidiaries since
September 1993. Prior to such position, Mr. Sroka held positions in the
Research, Patents & Licensing and Law departments of Amoco since 1970.
31
<PAGE>
MR. RICHARD C. WILLIAMS has been a Director since September 1997. Mr.
Williams has served as President of Connor-Thoele Limited, a consulting and
financial advisory firm which serves the healthcare and pharmaceuticals
industry since March 1989. Mr. Williams has served as Chairman of the Board
of Directors since October 1992 and as a director of Medco Research, Inc.
since January 1991, as a director of Centaur, Inc., a private equine
diagnostic company, since January 1991 and as a director of Immunomedics,
Inc., a biopharmaceutical research company, since March 1993. Prior to these
positions Mr. Williams has gained extensive experience in the healthcare
industry, most notably as Vice President and Chief Financial Officer of
Erbamont, N.V., a pharmaceutical company, and at Abbott Laboratories and
American Hospital Supply Company where he held a variety of financial
management positions.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth the amounts paid by the Company during the
fiscal year indicated to (i) the Company's Chief Executive Officer (the "CEO")
and (ii) the four other most highly compensated executive officers (the "Named
Executive Officers") whose compensation exceeded $100,000 for services rendered
to the Company.
<TABLE>
<CAPTION>
NAMES AND PRINCIPAL STOCK ALL OTHER
POSITION YEAR SALARY BONUS OPTIONS # COMPENSATION(1)
- --------------------------- ---- -------- ------- --------- -----------------
<S> <C> <C> <C> <C> <C>
John L. Bishop............. 1997 $224,035 $25,000 -- $ 4,750
President and 1996 210,000 36,500 131,387 18,946
Chief Executive Officer
George R. Kennedy.......... 1997 153,877 -- 7,300 3,468
Senior Vice President 1996 123,258 -- 36,497 36,480
Sales and Marketing
Steven A. Seelig........... 1997 138,910 -- -- 2,240
Vice President 1996 130,200 -- 65,694 4,007
Research and Development
and Chief Medical Officer
James P. Marcella.......... 1997 129,385 -- -- 3,882
Vice President 1996 125,000 15,000 32,847 3,822
Operations
Russel K. Enns............. 1997 116,654 -- 10,949 74,219
Vice President 1996 110,000 -- 21,898 635
Regulatory Affairs
</TABLE>
___________
(1) Amounts represent the Company's 401(k) contributions made on behalf of each
of the named individuals and the reimbursement of 1996 relocation expenses
in the amounts of $14,446 for Mr. Bishop and $34,305 for Mr. Kennedy and
1997 relocation expenses in the amount of $74,219 for Dr. Enns.
DIRECTOR COMPENSATION
Messrs. Bartlett, Melmon and Williams each receive a fee of $2,000 per
month and $2,000 per board meeting attended. None of the remaining directors
receive any compensation for serving on the Board of Directors.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table summarizes options to purchase shares of the
Company's Common Stock granted during the fiscal year ended December 31, 1997
to the Company's CEO and the Named Executive Officers. The
32
<PAGE>
amounts shown as potential realizable values on the options identified in the
table are based on assumed annualized rates of appreciation in the price of
the Common Stock of five percent and ten percent over the term of the
options, as set forth in the rules of the Securities and Exchange Commission.
Actual gains, if any, on stock option exercises depend on the future
performance of the Common Stock. There can be no assurance that the potential
realizable values reflected in this table will be achieved.
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE
% OF TOTAL AT ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK PRICE
SHARES GRANTED TO APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES TERM
OPTIONS IN FISCAL EXERCISE EXPIRATION -------------------------
NAME GRANTED YEAR PRICE DATE 5% 10%
- ---- ---------- ---------- -------- ---------- ---- -----
<S> <C> <C> <C> <C> <C> <C>
George R. Kennedy. . 7,300 4.5% $6.85 8/29/07 $31,448 $ 79,695
Russel K. Enns . . . 10,949 2.5 6.85 8/29/07 47,168 119,532
</TABLE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth for the Company's CEO and the Named
Executive Officers aggregated information concerning each exercise of stock
options during the fiscal year ended December 31, 1997, and the fiscal year-end
value of unexercised options.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL AT FISCAL YEAR-END
SHARES YEAR-END (#) ($)(1)
ACQUIRED VALUE ----------------- --------------------
ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
- ---- ---- ---- ------------- -------------
<S> <C> <C> <C> <C>
John L. Bishop . . . . -- -- 71,181/60,206 $887,627/750,769
Steven A. Seelig . . . -- -- 35,591/30,103 443,820/375,384
James P. Marcella. . . -- -- 17,796/15,051 221,916/187,686
George R. Kennedy. . . -- -- 15,970/27,827 199,146/300,867
Russel K. Enns . . . . -- -- 11,864/20,983 147,944/192,460
</TABLE>
___________
(1) Based on a December 31, 1997 estimate of fair market value of $13.00 per
share.
CONSULTING AGREEMENTS
Prior to their appointment to the Board of Directors in September 1997,
each of Messrs. Bartlett, Melmon and Williams was a party to an advisory
board consulting agreement with the Company pursuant to which each of such
individuals provided consulting services to the Company through service on
the Company's advisory board. Such advisory board had been maintained since
August 1994 for the purpose of rendering informal advice to the Company
regarding medical and technology issues as well as business, operational and
financial matters. Under such consulting agreements, these individuals were
paid in cash the following amounts in 1997: Mr. Bartlett, $53,253; Dr.
Melmon, $45,625; and Mr. Williams, $59,575. (In the case of Mr. Williams, the
amounts shown include amounts paid to Conner-Thoele Limited, an advisory firm
of which Mr. Williams is president). Such consulting agreements have been
terminated.
In addition, as consideration for rendering services relating to
attendance at meetings of the Board of Directors, the Company granted during
1997 to each of Messrs. Bartlett, Melmon and Williams, options to
33
<PAGE>
purchase an aggregate of 25,549 shares of Common Stock at an exercise price
of $2.74 per share as follows: Mr. Bartlett, 7,300 shares; Dr. Melmon, 10,949
shares; and Mr. Williams, 7,300 shares. Dr. Melmon also was granted an option
to purchase 1,095 shares of Common Stock in 1997, with an exercise price of
$2.74 per share as consideration for rendering consulting services as a
member of the Company's Scientific Advisory Board.
COMPENSATION COMMITTEE
Compensation information with respect to the Company's CEO and the Named
Executive Officers for 1996 reflects compensation earned while the Company
was an indirect, wholly owned subsidiary of Amoco. During 1996, the Company
had no compensation committee. Executive compensation levels during 1996 were
established by the Company's Board of Directors. Executive compensation
levels for 1997 were also established by the Company's Board of Directors
prior to the formation of the compensation committee in October 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF COMPANY COMMON STOCK
The following table sets forth certain information regarding the
beneficial ownership of Common Stock by each person known by the Company to
be the beneficial owner of 5 percent or more of the outstanding Common Stock,
by each of the Company's directors and the Named Executive Officers and by
all directors and executive officers of the Company as a group, as of March
1, 1998. The beneficial ownership reflected in the following table is
calculated in accordance with Section 13(d) of the Exchange Act. Unless
otherwise indicated, ownership includes sole voting and investment power.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED (1)
-----------------------
NUMBER PERCENT
------------ -------
<S> <C> <C>
Amoco Corporation . . . . . . . . . . . . . . 6,662,682(2) 68.9%
200 East Randolph Drive
Chicago, Illinois 60601
John L. Bishop. . . . . . . . . . . . . . . . 82,133 *
Russel K. Enns. . . . . . . . . . . . . . . . 13,689 *
George R. Kennedy . . . . . . . . . . . . . . 19,013 *
James P. Marcella . . . . . . . . . . . . . . 20,534 *
Steven A. Seelig. . . . . . . . . . . . . . . 41,067 *
William M. Bartlett . . . . . . . . . . . . . 11,789 *
Robert C. Carr. . . . . . . . . . . . . . . . -- *
Kenneth L. Melmon . . . . . . . . . . . . . . 12,701 *
Walter R. Quanstrom . . . . . . . . . . . . . -- *
Frank J. Sroka. . . . . . . . . . . . . . . . -- *
Richard C. Williams . . . . . . . . . . . . . 16,789 *
Directors and Executive Officers as a Group
(13 persons). . . . . . . . . . . . . . . . 276,842 2.8%
</TABLE>
___________
* Less than 1 percent
(1) The share amounts include those shares as to which the following persons
had a right to acquire beneficial ownership by exercising stock options as
of March 1, 1998, or within 60 days after that date; Mr. Bishop, 82,133
shares; Dr. Enns, 13,689 shares; Mr. Kennedy, 19,013 shares; Mr. Marcella,
20,534 shares; Dr. Seelig, 41,067 shares; Mr. Bartlett, 11,789 shares; Dr.
Melmon, 12,701 shares; Mr. Williams, 11,789 shares; and all directors and
executive officers as a group, 221,842 shares.
34
<PAGE>
(2) All such shares of Common Stock are owned of record by ATC, a wholly owned
subsidiary of Amoco.
OWNERSHIP OF PARENT STOCK
The following table sets forth at January 1, 1998, the ownership of common
stock, no par value per share, of Amoco Corporation by the Company's directors,
the Named Executive Officers, and all directors and executive officers of the
Company as a group. Unless otherwise indicated, the persons named below have
sole voting and investment power with respect to the shares beneficially owned
by them. The directors and executive officers of Vysis own in the aggregate less
than one percent of the common stock of Amoco Corporation.
<TABLE>
<CAPTION>
TOTAL SHARES
NAME BENEFICIALLY OWNED(1)
- ---- ---------------------
<S> <C>
John L. Bishop . . . . . . . . . . . . . . . . . . . . . . 55
Russel K. Enns . . . . . . . . . . . . . . . . . . . . . . --
George R. Kennedy. . . . . . . . . . . . . . . . . . . . . --
James P. Marcella. . . . . . . . . . . . . . . . . . . . . --
Steven A. Seelig . . . . . . . . . . . . . . . . . . . . . 3,646
William M. Bartlett. . . . . . . . . . . . . . . . . . . . --
Robert C. Carr . . . . . . . . . . . . . . . . . . . . . . 62,243
Kenneth L. Melmon. . . . . . . . . . . . . . . . . . . . . --
Walter R. Quanstrom(2) . . . . . . . . . . . . . . . . . . 72,071
Frank J. Sroka(3). . . . . . . . . . . . . . . . . . . . . 29,652
Richard C. Williams. . . . . . . . . . . . . . . . . . . . --
Directors and Executive Officers as a Group
(13 persons)(2)(3). . . . . . . . . . . . . . . . . . . 167,423
</TABLE>
___________
(1) The share amounts include those shares as to which the following persons
had a right to acquire beneficial ownership by exercising stock options as
of January 1, 1998, or within 60 days after that date; Dr. Seelig, 800
shares; Mr. Carr, 59,500 shares; Dr. Quanstrom, 55,000 shares; Mr. Sroka,
19,800; and all directors and executive officers as a group, 135,100
shares. Also included are shares owned in the Amoco Performance Share Plan
and those allocable to the Amoco Stock Fund accounts of participants in the
Amoco Employee Savings Plan.
(2) Includes 500 shares as to which Dr. Quanstrom shares voting and dispositive
authority.
(3) Includes 2,068 shares as to which Mr. Sroka shares voting and dispositive
authority.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the consummation of the Initial Public Offering (IPO), the
Company operated as a subsidiary of Amoco. In connection therewith, the
Company engaged in a variety of transactions with Amoco and may continue to
do so on a more limited basis in the future.
The Company has in the past received certain legal services (internal
and external), research and development support, and administrative support
from Amoco and has paid for such services and support on an actual usage or
pro rata basis. The amount of these costs allocated to the Company aggregated
$182,000, $304,000 and $3,058,000 in 1997, 1996 and 1995, respectively. In
addition, the Company received funding requirements and assets from Amoco.
35
<PAGE>
The costs of these services, funding requirements and asset transfers
were accounted for by Amoco as intercompany receivables from Vysis. These
receivables were periodically converted into equity of Vysis. This investment
by Amoco in the Company aggregated $2,315,000 and $15,384,000 in 1996 and
1995. Additionally in 1996, such amounts were also represented by a note
payable to Amoco. At December 31, 1996, the balance of the note payable was
$5,106,000. This note was subsequently converted into 553,126 shares of
Series B Preferred Stock. The sharing of costs and funding continued during
1997 and the first quarter of 1998, with the aggregate amount of such costs
and funding represented by a promissory note that accrued interest at 7.5
percent per annum. As of February 10, 1998, the balance of the note payable
was approximately $10.1 million due from the Company to Amoco. Upon
consummation of the IPO, $8.1 million of the principal of this note was
converted into Common Stock of the Company and approximately $2.0 million of
the principal and accrued interest was repaid with a portion of the proceeds
of the IPO.
The Company and Amoco have entered into a Cooperation Agreement, which
sets out the terms on which Amoco and the Company will cooperate in handling
various matters. These matters include (i) documentation of the assignment to
the Company of certain intellectual property rights, (ii) the Gen-Probe
litigation, (iii) retention by Amoco of certain liabilities relating to ATC's
discontinued operations, and (iv) access to Amoco's and the Company's
business records. See "Legal Proceedings."
Prior to the completion of the IPO, the Company has been included in the
consolidated or combined federal and state income tax returns of Amoco. For
periods after the completion of the IPO, the Company will no longer be
included in Amoco's federal consolidated returns, although it may continue to
be included in one or more state or local combined returns. Pursuant to an
Amended and Restated Tax Allocation Agreement, for periods during which the
Company is included in Amoco's federal consolidated return, the Company
generally receives no credit for tax benefits accruing during such periods to
other members of the Amoco consolidated group as a result of any deductions
or losses incurred by the Company; except that beginning in 1996, debt
obligations of the Company owed to Amoco are to be reduced by approximately
35 percent of the Company's estimated income or loss for income tax purposes,
resulting in an aggregate reduction of the Company's debt to Amoco with an
offsetting increase to contributed capital of approximately $5.0 million for
1996 and $7.5 million for 1997. Subsequent to the completion of the IPO, the
Company will no longer be included in the consolidated federal tax return of
Amoco.
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 Amoco's unitary state tax returns as long
as Amoco owns or controls 50 percent or more of the voting equity of the
Company. Immediately subsequent to the IPO, Amoco owned approximately 69
percent of the voting equity. Under the Amended and Restated Tax Allocation
Agreement, for tax periods subsequent to the IPO, the Company pays Amoco, or
Amoco pays the Company, as the case may be, an amount determined on the basis
of a comparison between the actual combined tax liability of Amoco and the
liability that would have arisen had the Company been excluded from Amoco's
unitary return. For tax periods prior to the IPO, the Company's state tax
liability is determined by Amoco based upon their internal allocation
methodology. The application of this methodology resulted in a charge to the
Company of $53,000 for unitary state taxes in 1996. Such charge, if any, for
state income taxes from the period January 1, 1997 through the effective date
of the IPO will also be immaterial. In addition, in such unitary states the
Company will not have the future benefit of tax loss carry-forwards that
would have arisen but for the legal requirement that the Company be included
in Amoco's unitary tax return.
Immediately prior to the completion of the IPO, Vysis and Amoco entered
into a registration rights agreement (the "Registration Agreement") pursuant to
which Vysis granted Amoco registration rights under the Securities Act with
respect to the shares of Common Stock owned by Amoco. Under the Registration
Agreement, Amoco will have the right commencing on August 3, 1998 to demand that
the Company register its shares under the Securities Act. However, Amoco has
agreed with the underwriters of the Company's IPO that it will not sell any
shares of Common Stock prior to February 4, 1999 without the prior written
consent of Furman Selz LLC (other than the 675,000 shares issuable to Amoco upon
consummation of the IPO, which may not be sold prior to August 3, 1998 without
such consent). Under the Registration Agreement, Amoco may only sell securities
under one effective demand registration per calendar year and the right may only
be exercised with respect to specified
36
<PAGE>
minimum amounts of shares of Common Stock. The Company may postpone such a
demand under certain circumstances. Amoco will have the right to include
shares of Common Stock owned by it in any registration proposed by the
Company under the Securities Act, subject to certain limitations.
Three current directors of the Company (Messrs. Bartlett, Melmon and
Williams) have provided consulting services to the Company from time to time.
See "Executive Compensation--Consulting Agreements."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
14(a)(1) CONSOLIDATED FINANCIAL STATEMENTS
Set forth below is a listing of the Consolidated Financial Statements of
the Company with reference to the page numbers in this Form 10-K at which
such Statements are disclosed.
<TABLE>
<CAPTION>
PAGE NUMBERS OF
THIS FORM 10-K
---------------
<S> <C>
Report of Management. . . . . . . . . . . . . . . . . . . . . . 38
Report of Independent Accountants . . . . . . . . . . . . . . . 39
Consolidated Balance Sheet--December 31, 1997 and 1996. . . . . 40
Consolidated Statement of Operations for the Years Ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . 41
Consolidated Statement of Stockholders' Equity (Deficit) for
the Years Ended December 31, 1997, 1996 and 1995 . . . . . . 42
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . 43
Notes to Consolidated Financial Statements. . . . . . . . . . . 44
</TABLE>
14(a)(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
The documents and schedules listed below are filed as part of this report:
<TABLE>
<CAPTION>
PAGE NUMBER OF
THIS FORM 10-K
---------------
<S> <C>
Schedule II--Allowance for Doubtful Accounts . . . . . . . . . 55
</TABLE>
All other schedules have been omitted since they are not required, not
applicable, or the information is included in the Consolidated Financial
Statements or notes thereto.
14(a)(3) EXHIBITS
The exhibits filed as part of this annual report are listed in the
Exhibit Index immediately preceding the exhibits. The Company has identified
in the Exhibit Index each management contract and compensation plan filed as
an exhibit to this Form 10-K in response to Item 14(c) of Form 10-K.
14(b) REPORTS ON FORM 8-K
No Form 8-K reports were filed during the fourth quarter of 1997.
37
<PAGE>
REPORT OF MANAGEMENT
The accompanying consolidated financial statements and related
information of Vysis, Inc. and subsidiaries (the "Company") have been
prepared by management, which is responsible for their integrity and
objectivity. The statements have been prepared in conformity with generally
accepted accounting principles and necessarily include some amounts based on
management's best estimates and judgments.
Management is also responsible for maintaining a system of internal
controls as a fundamental requirement for the operational and financial
integrity of results. The Company has established and maintains a system of
internal controls designed to provide reasonable assurance that the books and
records reflect the transactions of the Company and that its established
policies and procedures are carefully followed. The Company's internal
control system is based upon standard procedures, policies and guidelines and
organizational structures that provide an appropriate division of
responsibility and the careful selection and training of qualified personnel.
On an ongoing basis, the system of internal controls is reviewed, evaluated
and revised as necessary in light of the results of constant management
oversight, independent audits, changes in Vysis' business and other
conditions.
The Company's accompanying consolidated financial statements have been
audited by Price Waterhouse LLP, independent accountants, whose audit was
made in accordance with generally accepted auditing standards. Management
has made available to Price Waterhouse LLP all of the Company's financial
records and related data, as well as the minutes of stockholders' and
directors' meetings. Furthermore, management believes that all
representations made to Price Waterhouse LLP during its audit were valid and
appropriate. The Report of Independent Accountants appears herein.
The Board of Directors exercises its oversight responsibility for the
consolidated financial statements through its Audit Committee, comprised of
Directors who are not employees of the Company. To assure independence, Price
Waterhouse LLP has full and free access to the Audit Committee to discuss
internal accounting control, auditing and financial reporting matters.
JOHN L. BISHOP JAMES J. HABSCHMIDT
President and Chief Executive Vice President and
Executive Officer Chief Financial Officer
38
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Vysis, Inc.
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)(1) and Item (14)(a)(2) on page 37 present
fairly, in all material respects, the financial position of Vysis, Inc. (an
indirect subsidiary of Amoco Corporation) and its subsidiaries at December
31, 1997 and 1996, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of Vysis, Inc.'s management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Chicago, Illinois
March 13, 1998
39
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF AMOCO CORPORATION)
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 669 $ 48
Accounts receivable, net.................................. 4,629 2,801
Inventories............................................... 2,733 2,390
Other current assets...................................... 1,108 761
-------- --------
Total current assets................................ 9,139 6,000
Property and equipment, net................................. 4,646 5,557
Investment.................................................. 677 100
Goodwill, net............................................... 297 388
Other assets................................................ 2,181 3,070
-------- --------
Total assets........................................ $ 16,940 $ 15,115
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities.................. $ 8,538 $ 7,109
Notes payable--Amoco...................................... 9,202 5,106
Deferred revenue.......................................... 537 407
-------- --------
Total current liabilities........................... 18,277 12,622
-------- --------
Commitments and contingencies (Notes 7, 11 and 13)
Stockholders' equity (deficit):
Convertible Preferred Stock, $0.001 par value; 10,000,000
shares authorized:
Series A; 6,200,000 shares designated, issued and
outstanding at December 31, 1997 and December 31,
1996................................................... 6 6
Series B; 553,126 designated, issued and outstanding at
December 31, 1997; none issued and outstanding at
December 31, 1996...................................... 1 --
Common stock, $0.001 par value; 35,000,000 shares
authorized; 1,071,970 issued and outstanding at December
31, 1997; 1,058,394 shares issued and outstanding at
December 31, 1996....................................... 1 1
Additional paid-in capital................................ 30,396 17,555
Deferred compensation..................................... (206) (90)
Unrealized gain on investment............................. 577 --
Cumulative translation adjustment......................... (241) 16
Accumulated deficit....................................... (31,871) (14,995)
-------- --------
Total stockholders' equity (deficit)................ (1,337) 2,493
-------- --------
Total liabilities and stockholders' equity.......... $ 16,940 $ 15,115
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF AMOCO CORPORATION)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product sales................................... $ 16,021 $ 11,022 $ 6,296
Grant and other revenue......................... 2,212 2,216 921
-------- -------- --------
Total revenues............................ 18,233 13,238 7,217
Cost of goods sold................................ 7,287 5,529 4,022
-------- -------- --------
Gross profit...................................... 10,946 7,709 3,195
-------- -------- --------
Operating expenses:
Research and development........................ 10,136 9,456 8,871
Selling, general and administrative............. 17,050 16,286 12,025
-------- -------- --------
Total operating expenses.................. 27,186 25,742 20,896
-------- -------- --------
Loss from operations.............................. (16,240) (18,033) (17,701)
-------- -------- --------
Interest income--Amoco............................ -- 107 --
Interest expense--Amoco........................... (636) (255) --
-------- -------- --------
Net loss.......................................... $(16,876) $(18,181) $(17,701)
-------- -------- --------
-------- -------- --------
Basic and diluted net loss per share.............. $ (15.89) $ (17.18) $ (16.72)
-------- -------- --------
-------- -------- --------
Shares used in computing basic and diluted
net loss per share............................ 1,062 1,058 1,058
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF AMOCO CORPORATION)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Convertible Preferred Stock:
Beginning balance............................... $ 6 $ -- $ --
Recapitalization................................ -- 6 --
Issuance of Series B convertible Preferred
Stock......................................... 1 -- --
-------- -------- --------
Ending balance.................................. 7 6 --
-------- -------- --------
Common stock:
Beginning balance............................... 1 -- --
Recapitalization................................ -- 1 --
-------- -------- --------
Ending balance.................................. 1 1 --
-------- -------- --------
Additional paid-in capital:
Beginning balance............................... 17,555 -- --
Recapitalization................................ -- 12,311 --
Income tax benefit from Amoco................... 7,451 5,031 --
Deferred compensation........................... 277 213 --
Conversion of note payable--Amoco............... 5,105 -- --
Exercise of stock options....................... 8 -- --
-------- -------- --------
Ending balance.................................. 30,396 17,555 --
-------- -------- --------
Capital contribution--Amoco:
Beginning balance............................... -- 13,189 15,506
Net loss (pre-recapitalization)................. -- (3,186) (17,701)
Advances from Amoco............................. -- 2,315 15,384
Recapitalization................................ -- (12,318) --
-------- -------- --------
Ending balance.................................. -- 13,189 --
-------- -------- --------
Deferred compensation:
Beginning balance............................... (90) -- --
Stock option grants............................. (277) (213) --
Amortization.................................... 161 123 --
-------- -------- --------
Ending balance.................................. (206) (90) --
-------- -------- --------
Unrealized gain on investments:
Beginning balance............................... -- -- --
Current year activity........................... 577 -- --
-------- -------- --------
Ending balance.................................. 577 -- --
-------- -------- --------
Cumulative translation adjustment:
Beginning balance............................... 16 (4) 4
Current year activity........................... (257) 20 (8)
-------- -------- --------
Ending balance.................................. (241) 16 (4)
-------- -------- --------
Accumulated deficit:
Beginning balance............................... (14,995) -- --
Net loss (post-recapitalization)................ (16,876) (14,995) --
-------- -------- --------
Ending balance.................................. (31,871) (14,995) --
-------- -------- --------
Total stockholders' equity (deficit).............. $ (1,337) $ 2,493 $ 13,185
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF AMOCO CORPORATION)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $(16,876) $(18,181) $(17,701)
Reconciliation of net loss to net cash used in
operating activities:
Depreciation and amortization................. 2,885 1,805 2,065
Loss (gain) on disposition of assets.......... (30) (246) 305
Donation of marketable securities............. -- 515 --
Stock compensation............................ 161 123 --
Changes in assets and liabilities:
Accounts receivable......................... (2,054) (943) (480)
Inventories................................. (473) (804) 204
Other current assets........................ (336) (467) 353
Accounts payable and accrued liabilities.... 1,380 770 3,568
Deferred revenue............................ 129 57 350
-------- -------- --------
Net cash used in operating activities......... (15,214) (17,371) (11,336)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............. (280) (509) (2,873)
Acquisition of Techgen.......................... -- (295) --
Proceeds from sale of property and equipment.... 30 6,778 --
Proceeds from sale of investment................ -- 314 --
Increase in other assets........................ (557) (1,548) (485)
-------- -------- --------
Net cash provided by (used in) investing
activities................................... (807) 4,740 (3,358)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions--Amoco, net............... -- 2,315 11,882
Increase in notes payable--Amoco................ 15,697 9,649 --
Expenses funded by Amoco........................ 956 452 3,058
Proceeds from exercise of stock options......... 8 -- --
-------- -------- --------
Net cash provided by financing activities..... 16,661 12,416 14,940
Effect of exchange rate changes on cash........... (19) 16 (9)
-------- -------- --------
Net increase (decrease) in cash................... 621 (199) 237
Cash at beginning of period....................... 48 247 10
-------- -------- --------
Cash at end of period............................. $ 669 $ 48 $ 247
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
VYSIS, INC.
(An indirect subsidiary of Amoco Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS
Vysis, Inc. ("Vysis" or the "Company") was incorporated in Delaware in
1991. The Company's principal stockholder is Amoco Technology Company
("ATC"), which is a wholly owned subsidiary of Amoco Corporation ("Amoco").
In 1991, ATC acquired from Genzyme its remaining interest in Gene-Trak
Systems, a joint venture focused on infectious disease diagnostics originally
formed by Amoco and Integrated Genetics in 1986, and established Gene-Trak,
Inc., a Delaware corporation, which at that time was named Gene-Trak Systems
Corporation. In March 1994, ATC contributed all of its infectious disease
business related assets and the stock of Gene-Trak, Inc. to the Company.
Also, in March 1994, ATC contributed to the Company all of its genetic
disease business related assets, including the stock of Vysis, Inc. (an
Illinois corporation), which at that time was named Imagenetics Incorporated.
In January 1995, ATC contributed to the Company all of the assets of its
bioinformatics software activities. All assets contributed by Amoco were
recorded by the Company at Amoco's net book value at the date of transfer.
All references to Amoco shall mean Amoco Corporation, an Indiana corporation,
and its wholly owned subsidiary Amoco Technology Company, a Delaware
corporation.
Vysis is a genomic disease management company focused on developing and
marketing clinical products to assess the structure and function of the human
genome. The Company's DNA probe technologies provide the clinician with an
enhanced ability to manage disease by assessing the human genome at all
levels, including the ability to determine the presence, absence, number and
structure of chromosomes, individual genes, and specific base pair mutations
within genes. The Company currently markets its genomic testing products for
research and clinical use and markets its food testing products for
commercial use.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include those assets,
liabilities, revenues and expenses directly attributable to the Company's
operations. The Company's organization, capitalization and outstanding shares
prior to the 1996 recapitalization, as described in Note 8, are not
indicative of the Company's future structure. Consequently, the accumulated
deficit, net loss and equity contributions are reflected as a single line
item "Capital Contribution - Amoco" in the accompanying consolidated
financial statements prior to February 29, 1996.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts. Actual results may differ
from those estimates.
44
<PAGE>
REVENUE RECOGNITION
Product sales revenue is recognized upon shipment of products to
customers. No rights to return products exist other than under normal
warranty provisions. Grant and license fee revenue is recognized as earned
pursuant to the related agreement and is not subject to repayment. Payments
received under these agreements prior to the completion of the related work
are recorded as deferred revenue. Revenue on equipment maintenance contracts
is deferred and recognized ratably over the period of the contract, generally
one year.
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development costs are expensed as incurred and include
amounts relating to grant revenues.
LOSS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
requires presentation of both basic and diluted earnings per share. Loss per
share data presented in 1996 and 1995 assumes that the shares issued in
connection with the 1996 recapitalization (see Note 8 for further discussion)
were outstanding throughout 1996 and 1995. No reconciliation is presented of
basic and diluted loss per share as no potentially dilutive Common Stock
equivalents existed prior to the 1996 recapitalization, and for periods after
the recapitalization Common Stock equivalents outstanding are antidilutive to
the net loss per share.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out method. Inventories are reassessed
periodically to determine whether any potential impairment exists. Provision
for potentially obsolete or slow moving inventory is made based on
management's analysis of inventory levels and anticipated future sales.
CAPITALIZED SOFTWARE COSTS
Software development costs incurred subsequent to the establishment of
technological feasibility are capitalized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Cost of
Computer Software to be Sold, Leased, or Otherwise Marketed." Amortization of
capitalized software development costs is the greater of the amount computed
using (a) the ratio of current revenues to the total of current and
anticipated future revenues or (b) the straight-line method over the
estimated economic life of the product.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided on
the straight-line basis over the following expected useful lives:
<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements 10 to 45 years
Furniture, fixtures and equipment 3 to 7 years
</TABLE>
Leasehold improvements are depreciated over the shorter of their useful life
or lease term. Significant improvements are capitalized and repairs and
maintenance charges are expensed as incurred.
45
<PAGE>
INTANGIBLE ASSETS
Intangible assets include capitalized license fees, which are carried at
cost less accumulated amortization, and goodwill. Amortization expense is
calculated on a straight-line basis over the estimated economic useful lives
of the assets, ranging from one to seventeen years. The Company periodically
reviews the recoverability of these assets based primarily upon estimated
future cash flows.
FINANCIAL INSTRUMENTS
The carrying value of accounts receivable, accounts payable and the note
payable to Amoco approximates their fair value. Financial instruments that
potentially subject the Company to concentrations of credit risk consist
principally of accounts receivable. Such credit risk is generally limited due
to the large number of organizations comprising the Company's customer base
and their dispersion across different geographic locations. The Company
maintains an allowance for potentially doubtful accounts based upon specific
circumstances, historical trends and other information.
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign subsidiaries is the
local currency. Translation from the applicable foreign currency to U.S.
dollars is performed for assets and liabilities using exchange rates in
effect at the balance sheet date and for the statement of operations using
the average exchange rates in effect during the period. Gains or losses from
such translations are accumulated in a separate component of stockholders'
equity. Gains and losses resulting from foreign currency transactions are
included in the results of operations and have not been significant.
STOCK-BASED COMPENSATION
Effective January 1, 1996, the Company adopted the disclosure
requirements of SFAS No. 123 "Accounting for Stock-Based Compensation." As
permitted, the Company continues to recognize stock-based compensation costs
under the intrinsic value based method of accounting as prescribed by
Accounting Principles Board Opinion No. 25. The pro forma effects of applying
the provisions of SFAS No. 123 are shown in Note 9 to the consolidated
financial statements.
INCOME TAXES
Amoco has utilized the tax benefits associated with the Company's net
operating losses for the years ended December 31, 1997, 1996 and 1995,
pursuant to the terms of a tax sharing agreement (see Note 3).
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 establishes new standards for reporting information about
operating segments in interim and annual financial statements. SFAS No. 131
will be effective for the Company in 1998. The Company is currently
evaluating the impact, if any, this statement will have on disclosures in its
consolidated financial statements.
NOTE 2--INITIAL PUBLIC OFFERING
During October 1997, the Board of Directors authorized the Company to
proceed with an initial public offering of the Company's Common Stock (the
"Offering"). The Company completed the Offering on February 10, 1998 and
issued 3 million shares of Common Stock, resulting in net cash proceeds of
approximately $32.3 million. In connection with the Offering, 6,200,000 and
553,126 shares of Series A and Series B Convertible Preferred Stock,
respectively, automatically converted into 4,525,547 and 403,741 shares of
Common Stock, respectively. In addition, concurrent with the consummation of
the Offering, the Company converted $8.1 million of the Note
46
<PAGE>
Payable-Amoco into 675,000 shares of Common Stock and repaid the balance of
the note. Upon completion of the Offering, the Company had approximately 9.7
million shares of Common Stock issued and outstanding.
NOTE 3--RELATED PARTY TRANSACTIONS:
The Company has in the past received certain legal services, research
and development support, and administrative support from Amoco and has paid
for such services and support on an actual usage or pro rata basis. The
amounts of these costs included in the consolidated statement of operations
were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Research and development. . . . . . . . $ -- $ -- $2,099
Selling, general and administrative . . 182 304 959
------- ------- ------
$182 $304 $3,058
------- ------- ------
------ ------ ------
</TABLE>
Management of the Company believes these costs are reasonable under the
circumstances. These charges may not be indicative of the actual costs that
would have been incurred if the Company had operated independently. In
addition, during 1997 Amoco paid on behalf of the Company certain expenses
aggregating $138,000. The Company also received cash advances, to meet its
working capital requirements, and other capital assets from Amoco. For the
year ended December 31, 1997 such amounts consisted of advances of
$15,697,000 under a note payable to Amoco. During 1996, such amounts
consisted of contributed capital of $2,315,000 and advances of $10,137,000
under a note payable to Amoco. During 1995, all such amounts aggregated
$15,384,000 and were recorded as contributed capital.
The Company has entered into a tax sharing agreement with Amoco,
effective January 1, 1996, which provides for a capital contribution to the
Company in an amount approximating the tax effect of including the Company's
results of operations in Amoco's consolidated federal income tax return.
Under this agreement, $7,451,000 and $5,031,000 were recorded as contributed
capital and a related reduction of the note payable to Amoco during 1997 and
1996, respectively. The Company did not record any tax benefit associated
with its losses for the year ended December 31, 1995. Under the terms of the
tax sharing agreement, the Company will continue to receive through February
10, 1998, a capital contribution approximating the amounts realized by Amoco,
which relate to deductions or losses to be generated by the Company.
Pursuant to the terms of the agreement, state income taxes have not been
material.
The note payable to Amoco of $9,202,000 at December 31, 1997 included
accrued interest expense of $636,000, bears interest at 7.5 percent and is
due on the earlier of the date the Company completes the Offering or December
31, 1998 (see Note 2). The note payable to Amoco of $5,106,000 at December
31, 1996 included accrued interest of $148,000. The note bore interest at 7.5
percent and was converted into 553,126 shares of Series B Preferred Stock in
September 1997 (see Notes 2 and 8).
NOTE 4--COMPOSITION OF BALANCE SHEET COMPONENTS:
Accounts receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Accounts receivable . . . . . . . . . . . $4,826 $2,957
Less: allowance for doubtful accounts . . (197) (156)
-------- --------
$4,629 $2,801
-------- --------
-------- --------
</TABLE>
47
<PAGE>
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Raw materials and supplies . . . . . . . $1,198 $ 997
Finished goods . . . . . . . . . . . . . 1,535 1,393
-------- --------
$2,733 $2,390
-------- --------
-------- --------
</TABLE>
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Leasehold improvements . . . . . . . . . $ 2,382 $ 2,382
Furniture, fixtures and equipment. . . . 8,713 8,191
-------- --------
11,095 10,573
-------- --------
Less: accumulated depreciation. . . . . (6,449) (5,016)
-------- --------
$ 4,646 $ 5,557
-------- --------
-------- --------
</TABLE>
Other assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
License fees (net of accumulated amortization
of $1,509 and $309 in 1997 and 1996,
respectively) . . . . . . . . . . . . . . . . . $1,192 $2,535
Software development costs (net of accumulated
amortization of $143 and $40 in 1997 and 1996,
respectively) . . . . . . . . . . . . . . 989 535
-------- --------
$2,181 $3,070
-------- --------
-------- --------
</TABLE>
Accounts payable and accrued liabilities consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Trade accounts payable . . . . . . . . . . $3,017 $3,546
Accrued rent . . . . . . . . . . . . . . . 1,107 1,141
Employee related costs . . . . . . . . . . 1,084 743
Accrued professional fees. . . . . . . . . 1,534 504
Other taxes payable. . . . . . . . . . . . 356 423
Other. . . . . . . . . . . . . . . . . . . 1,440 752
-------- --------
$8,538 $7,109
-------- --------
-------- --------
</TABLE>
NOTE 5--INVESTMENT:
In 1994, the Company acquired 1,400 shares of preferred stock in Genome
Systems, Inc. for cash consideration of $200,000. In 1996, Genome Systems,
Inc. was acquired by Incyte Pharmaceuticals, Inc. ("Incyte") and the
Company's investment was exchanged for restricted common stock of Incyte, a
publicly held company. During 1996, a portion of this investment with a cost
of $100,000 was sold and a gain of $214,000 was included in the Company's
results of operations. As of December 31, 1996, the investment balance
consisted of Incyte restricted common stock and is therefore recorded at cost
of $100,000. During 1997, the restriction expired and, as a result, the
investment balance of $677,000 at December 31, 1997 represents the market
value of the available-for-sale Incyte common stock.
48
<PAGE>
The unrealized gain of $577,000 has been included as a component of
stockholders' equity (deficit).
NOTE 6--INCOME TAXES:
During the years ended December 31, 1997, 1996 and 1995, the Company's
results of operations were included in the consolidated income tax returns of
Amoco, accordingly, the Company's domestic net operating losses have been
utilized by Amoco in its consolidated income tax returns and are not available
to offset the Company's future taxable income.
The approximate income tax effect of each temporary difference giving rise
to deferred tax assets and liabilities is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Patents . . . . . . . . . . . . . . . . . . $ 233 $ 255
Accrued rent. . . . . . . . . . . . . . . . 443 457
Foreign net operating loss carryforwards. . 423 374
Accrued vacation. . . . . . . . . . . . . . 137 130
Inventory reserve . . . . . . . . . . . . . 122 125
Other . . . . . . . . . . . . . . . . . . . 142 95
-------- --------
Total deferred tax assets. . . . . . . . . . . 1,500 1,436
Valuation allowance. . . . . . . . . . . . . . (817) (790)
-------- --------
Net deferred tax assets. . . . . . . . . . . . 683 646
Deferred tax liabilities:
Accumulated depreciation, software
development costs and license fees. . . (683) (646)
-------- --------
Net deferred tax assets. . . . . . . . . . . . $ -- $ --
-------- --------
-------- --------
</TABLE>
The Company had foreign net operating loss carryforwards of $871,000 at
December 31, 1997, of which approximately $273,000 will expire at varying
dates through 2001 and the remainder of which may be carried forward
indefinitely.
A full valuation allowance has been provided for all deferred tax assets
(net of liabilities) as management does not consider realization of such amounts
more likely than not. On an unaudited pro forma separate income tax return
basis, assuming the Company was not included in the consolidated income tax
returns of Amoco, no tax provision or benefit would have been recorded in the
consolidated financial statements due to the ongoing losses of the Company.
NOTE 7--DEVELOPMENT AND LICENSE AGREEMENTS:
The Company has entered into various license agreements pursuant to which
it has been granted exclusive and non-exclusive licenses to certain patented
technologies. The agreements require the Company to pay royalties ranging from
0.5 to 8.0 percent on net sales of specified products, with certain agreements
requiring minimum royalties due each year. As additional consideration for
certain of the licenses, the Company is obligated to fund certain research of
the licensors. Future minimum amounts due for such licenses, minimum royalties
and research funding are as follows (in thousands):
49
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998 . . . . . . . . . . . . . . . . . . $ 645
1999 . . . . . . . . . . . . . . . . . . 1,835
2000 . . . . . . . . . . . . . . . . . . 1,800
2001 . . . . . . . . . . . . . . . . . . 600
2002 . . . . . . . . . . . . . . . . . . 300
----------
$5,180
----------
----------
</TABLE>
NOTE 8--CAPITALIZATION:
On February 29, 1996, pursuant to a recapitalization, the Company issued
6,200,000 shares of its Series A Convertible Preferred Stock, par value
$0.001 per share, and 1,058,394 shares of its Common Stock, par value $0.001
per share, to Amoco as consideration for the cumulative investment by Amoco
in the Company, which was $12,318,000. The investment by Amoco in the Company
included assets contributed by Amoco which were recorded at Amoco's net book
value at the date of transfer. In connection with the recapitalization,
$6,000 and $1,000 was assigned to the par value of the Series A Convertible
Preferred Stock and Common Stock, respectively, while the remaining
$12,311,000 was credited to additional paid-in capital.
In September 1997, the Company converted $5,106,000 of the note payable
due to Amoco into 553,126 shares of its Series B Convertible Preferred Stock,
par value $0.001 per share.
The holder of Series A and Series B Convertible Preferred Stock is
entitled to receive cumulative dividends at an annual rate of 6 percent of
the Series A and Series B liquidation value (initially $8.0645 and $9.23 per
share, respectively), when and if declared by the Board of Directors. In the
event of a liquidation, the holder of the Series A and Series B Convertible
Preferred Stock shall receive the sum of $8.0645 and $9.23 per share,
respectively, and any declared but unpaid dividends. Additionally, the holder
of the Series A and Series B Convertible Preferred Stock is entitled to share
in any dividends paid on Common Stock.
The holder of the Series A and Series B Convertible Preferred Stock is
entitled to vote together with the holders of Common Stock, as a single class
in all matters. The Series A and Series B holder is entitled to votes equal
to the number of common shares into which such holder's shares are
convertible. Each share of Series A and Series B Convertible Preferred Stock
shall be automatically converted into .73 share of Common Stock upon the
closing of an initial public offering of the Company's Common Stock resulting
in aggregate net proceeds of not less than $10 million (see Note 2).
On November 20, 1997 the Company effected a 1 for 1.37 reverse stock
split of its Common Stock. All share and per share amounts in the
consolidated financial statements and notes thereto have been adjusted
retroactively to reflect this stock split.
NOTE 9--EMPLOYEE BENEFIT PLANS:
In February 1996, the Company adopted the 1996 Stock Incentive Plan (the
"1996 Plan"). A total of 985,402 shares of Common Stock have been authorized
for issuance under the 1996 Plan, subject to anti-dilution and other
adjustments. In general, under the 1996 Plan, incentive or nonqualified stock
options may be granted at a price not less than 100 percent of the estimated
fair value of the Common Stock on the date of grant, as determined by the
Compensation Committee of the Board of Directors. Options generally vest over
4 years and expire within 10 years from the date of grant.
50
<PAGE>
Option activity under the 1996 Plan is summarized below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES AVERAGE PRICE
--------- -------------
<S> <C> <C>
Granted . . . . . . . . . . . . . . . . . . . 878,994 $0.58
Exercised . . . . . . . . . . . . . . . . . . -- --
Surrendered or terminated . . . . . . . . . . 21,642 $0.60
---------
Balance at December 31, 1996. . . . . . . . . 857,352 $0.58
Granted . . . . . . . . . . . . . . . . . . . 162,007 $3.59
Exercised . . . . . . . . . . . . . . . . . . 13,576 $0.53
Surrendered or terminated . . . . . . . . . . 54,064 $0.60
---------
Balance at December 31, 1997. . . . . . . . . 951,719 $1.08
Options exercisable at December 31, 1997 . . . . 402,262 $0.56
Options available for future grant at
December 31, 1997 . . . . . . . . . . . . . . 20,107
Weighted-average fair value of options granted
during the year ended December 31, 1996 . . . $0.34
Weighted-average fair value of options granted
during the year ended December 31, 1997 . . . $2.69
Weighted-average fair value of options granted
below estimated fair value during the
year ended December 31, 1997. . . . . . . . . $3.54
</TABLE>
During 1997, the Company issued options to employees to purchase 78,249
shares of Common Stock at an exercise price of $2.74 per share, exercisable
through 2007. The Company recorded deferred compensation of $277,000 in
connection with these options based upon differences between the estimated
fair value of the underlying stock and the exercise price of the related
options. During 1996, the Company issued options to consultants to purchase
44,162 shares of Common Stock at an exercise price of $0.53 per share,
exercisable through 2006. The Company recorded deferred compensation of
$213,000 in connection with these options, based upon the difference between
the estimated fair value of the services received and the exercise price of
the options granted. The Company recognized $161,000 and $123,000 as stock
compensation expense during the years ended December 31, 1997 and 1996,
respectively.
The following summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------ -----------------------
WEIGHTED
AVERAGE WEIGHTED
RANGE OF REMAINING AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER
PRICES OUTSTANDING LIFE PRICE EXERCISABLE
-------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
$0.53 753,382 8.2 $0.53 387,804
1.34 37,211 8.6 1.34 14,458
2.74 127,549 9.4 2.74 --
6.85 33,577 9.7 6.85 --
----------- -----------
951,719 402,262
----------- -----------
----------- -----------
</TABLE>
The fair value of each option was estimated on the date of grant using the
Black-Scholes option pricing model. The principal determinants of option pricing
are: the estimated fair value of the Company's Common Stock
51
<PAGE>
at the date of grant, expected volatility, risk-free interest rate, expected
option lives and dividend yields. Weighted average assumptions employed by
the Company were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Expected volatility . . . . . . . . . 47.5% 50.3%
Risk free interest rate . . . . . . . 6.4% 6.2%
Expected option life (years). . . . . 7 7
Dividend yield. . . . . . . . . . . . 0 0
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 in
accounting for its fixed stock option plan and, accordingly, has not
recognized compensation cost in the accompanying consolidated statement of
operations for options granted and exercisable at their estimated fair value
on the grant date. Had compensation cost been recognized based on fair value
as of the grant dates as defined in SFAS No. 123, the Company's net loss
would have increased by approximately $100,000 and $57,000, or $0.09 and
$0.05 per share basic and diluted, for the years ended December 31, 1997 and
1996, respectively.
The Company also maintains the Vysis, Inc. Savings and Investment Plan
(the "Savings Plan"), as amended, which allows for participant contributions
pursuant to Section 401(k) of the Internal Revenue Code. Substantially all
the Company's U.S. employees are eligible to participate in the Savings Plan
and may contribute up to 17 percent of their eligible compensation to the
Savings Plan. The Company made contributions to the Savings Plan of $187,000,
$164,000 and $210,000 in 1997, 1996 and 1995, respectively.
NOTE 10--SEGMENT AND GEOGRAPHIC INFORMATION:
The Company operates in one business segment. Substantially all revenues
result from the sale of genomic testing products and related instrumentation
and the receipt of grant and other revenue. All significant intercompany
revenues and expenses are eliminated in the presentation of revenues and net
loss. Certain geographic information is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Revenues:
United States. . . . . . . $ 10,286 $ 8,655 $ 5,488
Europe . . . . . . . . . . 7,947 4,583 1,729
-------- -------- ---------
Total . . . . . . . . . . $ 18,233 $ 13,238 $ 7,217
-------- -------- ---------
-------- -------- ---------
Net loss:
United States. . . . . . . $(16,828) $(18,094) $(17,334)
Europe . . . . . . . . . . (48) (87) (367)
-------- -------- ---------
Total . . . . . . . . . . $(16,876) $(18,181) $(17,701)
-------- -------- ---------
-------- -------- ---------
<CAPTION>
DECEMBER 31,
-----------------------------------
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Assets:
United States. . . . . . . $ 11,958 $ 12,166 $ 17,155
Europe . . . . . . . . . . 4,982 2,949 2,012
-------- -------- ---------
Total . . . . . . . . . . $ 16,940 $ 15,115 $ 19,167
-------- -------- ---------
-------- -------- ---------
</TABLE>
Export sales from U.S. operations amounted to approximately $1,422,000,
$694,000 and $547,000 for the years ended December 31, 1997, 1996 and 1995,
respectively, and consisted of sales principally to customers in the Far East.
There were no sales to individual customers that exceeded 10 percent of total
revenues for any year.
52
<PAGE>
NOTE 11--LEASE OBLIGATIONS:
The Company operates in leased facilities and also leases certain
manufacturing and other equipment. These leases generally require the Company to
pay taxes, maintenance, insurance and certain other operating costs of the
leased property. Most of the Company's leases contain renewal clauses.
Future minimum lease payments under non-cancelable operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998. . . . . . . . . . . . . $ 935
1999. . . . . . . . . . . . . 741
2000. . . . . . . . . . . . . 681
2001. . . . . . . . . . . . . 604
2002. . . . . . . . . . . . . 687
Thereafter. . . . . . . . . . 1,301
--------
$4,949
--------
--------
</TABLE>
Rental expense totaled $669,000, $606,000 and $695,000 in 1997, 1996 and
1995, respectively.
NOTE 12--ACQUISITION:
On April 3, 1996, the Company acquired all of the outstanding common
stock of TechGen International Sarl ("TechGen") for $295,000. TechGen is a
French distributor of chemical, biological, health and hygiene products and
equipment. The acquisition has been accounted for under the purchase method
of accounting. Accordingly, the cash paid of $295,000 and liabilities assumed
of $711,000 were allocated to the tangible assets acquired. The excess of the
purchase price over the estimated fair value of net assets acquired of
$457,000 has been assigned to goodwill and is being amortized using the
straight-line method over a five year period.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and TechGen as if the
acquisition had occurred at the beginning of each fiscal year. The pro forma
information is based on historical results of operations and does not
necessarily reflect the actual results that would have occurred, nor is it
necessarily indicative of future results of operations of the combined
enterprises (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
--------- ----------
<S> <C> <C>
Revenues. . . . . . . . . . . . $ 13,285 $ 8,549
Net loss. . . . . . . . . . . . $ (18,230) $(17,796)
Loss per share. . . . . . . . . $ (17.22) $(16.81)
</TABLE>
NOTE 13--COMMITMENTS AND CONTINGENCIES:
The Company is an exclusive licensee of certain technology. The Company
and the licensor of the technology are plaintiffs in a patent infringement
suit filed in September 1995 against one of the Company's competitors. The
Company and the licensor share the legal costs of this matter equally. In
August 1997, the court ruled in favor of the Company and its licensor in
several aspects of this matter. The trial of the remaining issues has been
scheduled for April 1998. An unfavorable outcome for the Company is
considered neither probable nor remote by management. The Company does not
believe that loss of this lawsuit would have a material adverse impact on the
results of operations or the Company's financial position as set forth in the
accompanying consolidated financial statements.
53
<PAGE>
The Company and Amoco are defendants in a law suit pending in the U.S.
District Court in California alleging infringement of certain patents. The
suit has been stayed pending the outcome of another suit brought against the
plaintiff, challenging the plaintiff's claim to sole ownership to the patents
at issue in the first lawsuit. Pursuant to a separate agreement between Amoco
and the plaintiff in the latter lawsuit (the "Plaintiff"), the Company
reimburses the legal costs incurred by the Plaintiff in that suit. In return,
the Company receives contingent rights to acquire an exclusive license with
right to sublicense under such rights as the Plaintiff may obtain in the
patents. The Company has agreed with the Plaintiff to grant sub-licenses at
commercially fair and reasonable terms should it acquire the exclusive
license. The latter suit was bifurcated into two phases. On December 16,
1997, upon completion of the first phase of the trial, the jury determined
that the claims before it were barred as untimely. The court has not yet
entered the jury verdict as a final judgment of the court. The Company
understands that both parties are also disputing whether the jury verdict
applied to all of the Plaintiff's claims. The court held a hearing on this
issue in late February 1998, but has not decided this dispute. Although the
Company believes that it has meritorious defenses in the first suit, there
can be no assurance that the Company will ultimately prevail. An unfavorable
outcome for the Company is considered neither probable nor remote by
management. An estimate of a possible loss or range of a possible loss cannot
currently be made. However, an adverse determination against the Company,
which may include a finding of willful infringement and the awarding of
plaintiff's attorney's fees, could have a material adverse effect on the
Company's financial position and results of operations.
In October 1997, the Company entered into an Asset Purchase Agreement
(the "Agreement") to purchase certain patents and other intellectual
property. The Agreement calls for Vysis to pay the seller $250,000 in cash
and issue 80,291 shares of its Common Stock concurrent with the closing of
the transaction, which is expected to occur in June 1998.
NOTE 14--SUPPLEMENTAL CASH FLOW INFORMATION:
Amoco contributed property and equipment aggregating $36,000 and
$444,000 to the Company in 1996 and 1995, respectively, and did not make any
such contributions during 1997. These amounts were reflected by the Company
as a capital contribution from Amoco and recorded at Amoco's net book value.
Certain other non-cash transactions with Amoco are described in Note 3.
54
<PAGE>
SCHEDULE II
VYSIS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DESCRIPTION OF BEGINNING END OF
ALLOWANCE AND RESERVES OF PERIOD ADDITIONS DEDUCTIONS PERIOD
- ----------------------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
1997
Allowance for doubtful accounts . . $156 $82 $41 $197
1996
Allowance for doubtful accounts . . $220 $-- $64 $156
1995
Allowance for doubtful accounts . . $160 $60 $-- $220
</TABLE>
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VYSIS, INC.
Date: March 30, 1998 By: /s/ John L. Bishop
-----------------------------------
Name: John L. Bishop
TITLE: PRESIDENT AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURES TITLE (CAPACITY) DATE
---------- ---------------- ----
<S> <C> <C>
/s/ John L. Bishop President, Chief Executive
- ------------------------------ Officer and Director March 30, 1998
John L. Bishop (Principal Executive Officer
and Director)
/s/ James J. Habschmidt Vice President of Finance and
- ------------------------------ Chief Financial Officer March 30, 1998
James J. Habschmidt (Principal Financial and
Accounting Officer)
/s/ William M. Bartlett
- ------------------------------ Director March 30, 1998
William M. Bartlett
/s/ Robert C. Carr
- ------------------------------ Director March 30, 1998
Robert C. Carr
/s/ Kenneth L. Melmon
- ------------------------------ Director March 30, 1998
Kenneth L. Melmon
/s/ Walter R. Quanstrom
- ------------------------------ Director March 30, 1998
Walter R. Quanstrom
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE (CAPACITY) DATE
---------- ---------------- ----
<S> <C> <C>
/s/ Frank J. Sroka
- ------------------------------ Director March 30, 1998
Frank J. Sroka
/s/ Richard C. Williams
- ------------------------------ Director March 30, 1998
Richard C. Williams
</TABLE>
57
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- -----------------------------------------------------------------
<S> <C>
3.1.1* Certificate of Incorporation of Vysis, Inc. (formerly Framingham
Development Company) filed April 18, 1991.
3.1.2* Certificate of Amendment of Certificate of Incorporation filed
March 30, 1994.
3.1.3* Certificate of Merger filed February 1, 1996.
3.1.4* Certificate of Amendment of Certificate of Incorporation filed
February 29, 1996.
3.1.5* Certificate of Correction of Certificate of Amendment filed
July 22, 1996.
3.1.6* Certificate of Amendment of Certificate of Incorporation filed
September 16, 1997.
3.1.7* Certificate of Designations of Series B Preferred Stock, filed
September 17, 1997.
3.1.8* Certificate of Amendment of Certificate of Incorporation filed
November 21, 1997.
3.2* Bylaws of Vysis, Inc.
4.1* Form of Common Stock Certificate.
(1) 10.1* Vysis, Inc. 1996 Stock Incentive Plan.
10.2* Industrial Building Lease between American National Bank and
Trust Company of Chicago and Vysis, Inc. dated November 29, 1994.
10.3* License Agreement for Chromosome Analysis Technology with
Chromosome-Specific Probes between ATC and The Regents of The
University of California dated August 15, 1989, as amended
October 6, 1989; July 1, 1991; April 15, 1992; June 1, 1994;
June 6, 1994; June 28, 1994; July 1, 1994; September 1, 1994.
10.4* Exclusive License Agreement between The Regents of The University
of California and Imagenetics for Inventions made in the field of
Molecular Cytogenetics dated July 1, 1994.
10.5* Option Agreement between The Regents of The University of
California and Imagenetics for Inventions made in the field of
Molecular Cytogenetics dated July 1, 1994.
10.6* Exclusive Option Agreement between Vysis and the University of
California for the Glass Chromosome.
10.7* Exclusive License Agreement between the Regents of the University
of California and Vysis, Inc. for Molecular Cytogenetics Software
dated June 1, 1995.
10.8* Exclusive License Agreement between the Regents of The University
of California and ATC dated July 30, 1992, as amended,
December 7, 1994.
10.9* License Agreement between The Trustees of Columbia University,
The Salk Institute for Biological Studies and Gene-Trak Systems
dated October 7, 1988, as amended June 15, 1996.
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- -----------------------------------------------------------------
<S> <C>
10.10* Research and License Agreement between Gene-Trak Inc. and Public
Health Research Institute dated July 14, 1994 and Letter re:
Research and License Agreement dated July 18, 1994.
10.11* Exclusive Distributor Agreement between Vysis, Inc. and Fujisawa
Pharmaceutical Co., Ltd. dated July 31, 1995.
(2) 10.12* Sublicense Agreement between Ciba Corning Diagnostics Corp. and
Vysis, Inc. dated May 24, 1996.
10.13* Software Development and Marketing Agreement between Digital
Scientific Limited and Vysis, Inc. dated January 1, 1996.
10.14* Cooperation Agreement between the Company and Amoco Technology
Company.
10.15 Registration Rights Agreement between the Company and Amoco
Technology Company.
10.16* Amended and Restated Tax Allocation Agreement between the Company
and Amoco Technology Company.
21.1* Subsidiaries of Vysis, Inc.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule.
</TABLE>
___________
* Previously filed under the corresponding exhibit number in the Company's
S-1 Registration Statement No. 333-38109 and incorporated herein by
reference.
(1) Management contract or compensatory plan or arrangement.
(2) Confidential information contained in this Agreement has been omitted.
59
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS AGREEMENT, made as of February 5, 1998, is by and between Vysis,
Inc., a Delaware corporation (the "Company"), and Amoco Technology Company, a
Delaware corporation (the "Stockholder").
This Agreement is made in connection with the registration for sale to
the public of shares of common stock, $.001 par value, of the Company (the
"Common Stock") pursuant to a registration statement on Form S-1 and any
amendments thereto (the "Registration Statement") originally filed with the
Securities and Exchange Commission (the "Commission") on October 17, 1997
(File No. 333-38109) (the "Initial Public Offering").
Prior to the Initial Public Offering, the Stockholder owned
approximately 100% of the issued and outstanding shares of common stock of
the Company and upon consummation of the Initial Public Offering the
Stockholder will own approximately 63% of the outstanding Common Stock.
THE PARTIES HERETO AGREE AS FOLLOWS:
1. DEFINITIONS. As used in this Agreement, the following capitalized
terms shall have the following respective meanings:
AFFILIATE -- Of any Person is any Person which, directly or
indirectly, controls or is controlled by or is under common control with,
such Person. A Person shall be deemed to be "controlled by" any other Person
if such other Person possesses, directly or indirectly, power (i) to vote 10%
or more of the securities having ordinary voting power for the election of
managing general partners or directors (or Persons holding equivalent
positions) of such Person (or, at the time extraordinary voting powers are
available, to vote 10% or more of the securities having extraordinary voting
power); or (ii) to direct or cause the direction of the management and
policies of such Person whether by contract or otherwise.
EXCHANGE ACT - The Securities Exchange Act of 1934, as amended, or
any similar federal statute then in effect, and a reference to a particular
section thereof shall be deemed to include a reference to the comparable
section, if any, of any such similar federal statute.
HOLDER - The Stockholder and any Person to whom it has assigned
rights hereunder as permitted by Section 10(c).
PERSON - Any individual, partnership, joint venture, corporation,
trust, unincorporated organization or government or any department or agency
thereof.
<PAGE>
REGISTRABLE SECURITIES - The Common Stock owned by the Stockholder
on the date hereof, Common Stock issuable to the Stockholder upon conversion
of the Company's outstanding shares of Series A Preferred Stock or Series B
Preferred Stock and any Common Stock or other securities which may be issued
or distributed in respect thereof by way of or in connection with a stock
dividend or stock split or other distribution, recapitalization,
reclassification, combination of shares, merger, consolidation or other
reorganization. As to any particular Registrable Securities, such
Registrable Securities shall cease to be Registrable Securities when they
cease to be owned by a Holder.
SECURITIES ACT - The Securities Act of 1933, as amended, or any
similar federal statute then in effect, and a reference to a particular
section thereof shall be deemed to include a reference to the comparable
section, if any, of any such similar federal statute.
SHELF REGISTRATION STATEMENT - A registration statement on Form S-3
filed pursuant to Rule 415 under the Securities Act.
2.(a) DEMAND REGISTRATION. In the event that following 180 days after
the effective date of the Registration Statement any Holder or Holders desire
to sell shares of Registrable Securities owned by such Holder or Holders then
upon the written request of any Holder or Holders requesting that the Company
effect the registration under the Securities Act of all or part of such
Holder's or Holders' Registrable Securities and specifying the intended
method of disposition thereof, but subject to the limitations set forth
herein, the Company will promptly give written notice of such requested
registration to all other Holders of Registrable Securities, and the Company
shall file with the Commission as promptly as practicable after sending such
notice, and use its best efforts to cause to become effective, a registration
statement under the Securities Act registering the offering and sale of:
(i) the Registrable Securities which the Company has been so requested
to register by such Holder or Holders; and
(ii) all other Registrable Securities which the Company has been
requested to register by any other Holder thereof by written request given
to the Company within 15 days after the giving of such written notice by
the Company (which request shall specify the intended method of disposition
of such Registrable Securities),
all to the extent necessary to permit the disposition (in accordance with the
intended method thereof as aforesaid) of the
-2-
<PAGE>
Registrable Securities so to be registered; PROVIDED, that the Company shall
not be obligated to file a registration statement relating to any
registration request under this Section 2(a) (A) unless the aggregate
requests by the Holder or Holders for such registration cover not less than
an aggregate of 1,000,000 shares (adjusted for any stock splits, reverse
stock splits or combination of shares) or (B) with respect to more than one
such registration per calendar year; provided that a request may cover fewer
than 1,000,000 shares (but not less than 500,000 shares) if the total number
of shares of Registrable Securities then outstanding is less than 1,000,000.
A request for registration under this Section 2(a) shall not be counted
for purposes of the foregoing limitation (i) unless a registration statement
has become effective and has been kept continuously effective for the period
required under Section 4(b), (ii) if after it has become effective, use of
such registration statement is suspended by any stop order, injunction or
other order or requirement of the Commission or other governmental agency or
court, (iii) if no Registrable Securities are sold within the period during
which the registration statement has been kept continuously effective as
required under Section 4(b).
A Holder may, in connection with a request for registration under this
Section 2(a), specify that the Registrable Securities are to be sold on a
delayed or continuous basis, in which case the Company shall file a Shelf
Registration Statement with respect thereto; provided, that each of the
following conditions has been satisfied: (i) the Company is eligible to file
a registration statement on Form S-3, (ii) a period of six years has elapsed
since the effective date of the Registration Statement and (iii) the total
number of Registrable Securities outstanding constitutes 30% or less of the
total number of shares of Common Stock outstanding.
(b) PRIORITY IN REQUESTED REGISTRATIONS. If a requested registration
pursuant to this Section 2 involves an underwritten offering and the managing
underwriter advises the Company in writing that, in its opinion, the number
of securities requested to be included in such registration (including
securities of the Company which are not Registrable Securities) exceeds the
number which can be sold in such offering, the Company will include in such
registration only the Registrable Securities requested to be included in such
registration. In the event that the number of Registrable Securities
requested to be included in such registration exceeds the number which, in
the opinion of such managing underwriter, can be sold, the number of such
shall be allocated first to the Stockholder and its Affiliates, and then pro
rata among all other requesting Holders on the basis of the
-3-
<PAGE>
relative number of shares of Registrable Securities originally requested to
be included by each such Holder.
(c) LIMITATION ON REGISTRATION RIGHTS.
(i) If a request for registration pursuant to Section 2(a) hereof is
made within 30 days prior to the conclusion of the Company's then current
fiscal year, or within 40 days after the end of a fiscal year, the Company
shall not be required to file a registration statement until such time as
the Company receives its audited financial statements for such fiscal year.
(ii) The Company shall be entitled to postpone for a reasonable period
of time (not to exceed 90 days, which may not thereafter be extended
without the mutual agreement of the Company and the Holder or Holders
requesting registration) the filing of any registration statement otherwise
required to be prepared and filed by it pursuant to Section 2(a) hereof if,
at the time it receives a request for such registration, (w) the Company is
conducting or about to conduct an offering of any class of its securities
and the Company is advised by the investment banker or financial advisor
engaged by the Company to advise the Company thereon that such offering
would be affected adversely by the registration so demanded and the Company
shall have furnished to the Holder or Holders of Registrable Securities
requesting such registration an Officers' Certificate to that effect,
(x) the Company is in possession of material information that has not been
disclosed to the public and the Company deems it advisable not to disclose
such information in the registration statement, (y) the Company is engaged
in any active program for repurchase of its Common Stock or (z) the board
of directors of the Company shall determine in good faith that such
offering will interfere with a pending or contemplated financing, merger,
acquisition, sale of assets, recapitalization or other similar corporate
action of the Company and the Company shall have furnished to the Holder or
Holders of Registrable Securities requesting such registration an Officers'
Certificate to that effect. The Company may only exercise its right to
postpone the filing of registration statement under this Section 2(c)(ii)
once in any calendar year. In the event of the exercise by the Company of
such postponement right, it shall furnish the requesting Holders with an
estimate as to when the circumstances permitting the Company to postpone
such filing shall cease to exist and thereafter give the Holders prompt
notice of such cessation. After such period of postponement the Company
shall effect such registration as promptly as practicable without further
request from the Holder or Holders of Registrable Securities, unless such
request has been withdrawn.
-4-
<PAGE>
(iii) Except as otherwise provided herein, any request by a Holder or
Holders for registration of Registrable Securities pursuant to Section 2(a)
hereof, which is subsequently withdrawn prior to the registration statement
becoming effective, shall not constitute a registration statement for
purposes of determining the number of registrations to which the Holder of
such Registrable Securities is entitled pursuant to Section 2(a); PROVIDED,
HOWEVER, that the Holder of such Registrable Securities shall reimburse the
Company for all expenses incurred, including, without limitation,
reasonable fees and expenses of the Company's attorneys, accountants and
investment bankers, in connection with the preparation and filing, if
filed, of such registration statement, unless such withdrawal is the result
of a postponement by the Company under Section 2(c)(ii).
(d) In connection with any request for registration under this Section 2
involving an underwritten offering, the requesting Holders shall have the
right to select the underwriter or underwriters with the consent of the
Company, which consent shall not be unreasonably withheld.
3.(a) INCIDENTAL REGISTRATION. If the Company shall at any time propose
to file a registration statement under the Securities Act for an offering of
Common Stock of the Company for cash (other than an offering relating to (i)
a business combination that is to be filed on Form S-4 under the Securities
Act (or any successor form thereto) or (ii) an employee benefit plan or (iii)
securities of the Company convertible into Common Stock where no separate
consideration is received by the Company for such Common Stock), the Company
shall provide prompt written notice of such proposal to all Holders of
Registrable Securities of its intention to do so and of such Holders' rights
under this Section 3 and shall use its reasonable efforts to include such
number or amount of Registrable Securities in such registration statement,
which the Company has been so requested to register by the Holders thereof,
which request shall be made to the Company within 10 business days after the
Holder receives notice from the Company of such proposed registration;
PROVIDED, that (i) if, at any time after giving written notice of its
intention to register any securities and prior to the effective date of the
registration statement filed in connection with such registration, the
Company shall determine for any reason not to register such securities, the
Company may, at its election, give written notice of such determination to
each Holder of Registrable Securities and, thereupon, shall be relieved of
its obligation to register any Registrable Securities in connection with such
registration
-5-
<PAGE>
(but not from its obligation to pay the registration expenses referred to in
Section 5 incurred in connection therewith), and (ii) if such registration
involves an underwritten offering, all Holders of Registrable Securities
requesting to be included in the Company's registration must sell their
Registrable Securities to the underwriters selected by the Company on the
same terms and conditions as apply to the Company, with such differences,
including any with respect to indemnification and liability insurance, as may
be customary or appropriate in combined primary and secondary offerings. The
Holders shall have the right to revoke their election to have their shares
included in such registration at any time prior to the filing of the
registration statement.
(b) PRIORITY IN INCIDENTAL REGISTRATIONS. If a registration pursuant to
this Section 3 involves an underwritten offering and the managing underwriter
advises the Company in writing that, in its opinion, the number of securities
to be included in such registration exceeds the number which can be sold in
such offering, so as to be likely to have a significant adverse effect on
such offering as contemplated by the Company (including the price, timing or
distribution of which the Company proposes to sell such securities), then the
Company will include in such registration (i) first, 100% of the securities
the Company proposes to sell, (ii) second, to the extent of the number of
Registrable Securities requested to be included in such registration which,
in the opinion of such managing underwriter, can be sold without having the
significant adverse effect referred to above, the number of Registrable
Securities which the Holders have requested to be included in such
registration, such amount to be allocated first to the Stockholder and its
Affiliates, and then pro rata among all requesting Holders on the basis of
the relative number of shares of Registrable Securities initially requested
to be included by each such Holder.
4. REGISTRATION PROCEDURES. Whenever a Holder or Holders have requested
that any Registrable Securities be registered pursuant to this Agreement, the
Company will use its best efforts to effect the registration and the sale of
such Registrable Securities in accordance with the intended method of
disposition thereof, and pursuant thereto the Company will as expeditiously
as possible:
(a) prepare and file with the Commission a registration statement with
respect to such Registrable Securities (which shall be effected within 30
days of a request in the case of a registration under Section 2(a)) and use
its best efforts to cause such registration statement to become effective
(provided that before filing a registration statement or prospectus or any
amendments or supplements thereto, the Company will furnish to the counsel
-6-
<PAGE>
selected by the Holders of a majority of the Registrable Securities covered
by such registration statement copies of all such documents proposed to be
filed, which documents shall be subject to review of such counsel;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for such period as is necessary to complete the
disposition of all securities covered by such registration statement during
such period in accordance with the intended methods of disposition by the
seller or sellers thereof set forth in such registration statement;
PROVIDED, HOWEVER, that such period shall not exceed 90 days unless the
registration statement is a Shelf Registration Statement;
(c) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and supplement
thereto, the prospectus included in such registration statement (including
each preliminary prospectus) and such other documents as such seller may
reasonably request in order to facilitate the disposition of the
Registrable Securities owned by such seller;
(d) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such
jurisdictions as any seller reasonably requests and do any and all other
acts and things that may be reasonably necessary or advisable to enable
such seller to consummate the disposition in such jurisdictions of the
Registrable Securities owned by such seller (provided that the Company will
not be required to (i) qualify generally to do business in any jurisdiction
where it would not otherwise be required to qualify but for this
subparagraph, (ii) subject itself to taxation in any such jurisdiction or
(iii) consent to general service of process in any such jurisdiction);
(e) notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act,(i) of the occurrence of any event as a result of which the
prospectus included in such registration statement contains an untrue
statement of a material fact or omits any fact necessary to make the
statements therein, in light of the circumstances under which made, not
misleading, and at the request of any such seller, the Company will prepare
a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
will not contain an untrue statement of a
-7-
<PAGE>
material fact or omit to state any fact necessary to make the statements
therein, in light of the circumstances under which made, not misleading;
or (ii) of the issuance by the Commission of any stop order suspending
the effectiveness of the registration statement or of any order
preventing or suspending the use of any preliminary prospectus, or of
the suspension of the qualification of the registration statement for
offering or sale in any jurisdiction, or of the institution or
threatening of any proceedings for any of such purposes; PROVIDED,
HOWEVER, that the Company shall not be required to notify a seller of
Registrable Securities of the occurrence of any event described in
clause (i) hereof that relates to a prospectus contained in a Shelf
Registration Statement unless within the 30 days prior thereto the
seller has given the Company notice of its intention to offer or sell
Registrable Securities pursuant to Section 5(e) below;
(f) cause all such Registrable Securities to be listed on each
securities exchange on which securities issued by the Company that are of
the same class as the Registrable Securities are then listed;
(g) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration
statement;
(h) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to
such registration statement and any attorney, accountant or other agent
retained by any such seller or underwriter all financial and other records,
pertinent corporate documents and properties of the Company, and cause the
Company's officers, directors, employees and independent certified public
accountants to supply all information reasonably requested by any such
seller, underwriter, attorney, accountant or agent in connection with such
registration statement;
(i) use its best efforts to cause such Registrable Securities covered
by such registration statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary to enable
the sellers thereof to consummate the disposition of such Registrable
Securities;
(j) obtain a "cold comfort" letter from the Company's independent
public accountants in customary form and covering such matters of the type
customarily covered by "cold comfort" letters as the seller or sellers of a
majority of the Registrable Securities being sold reasonably request;
-8-
<PAGE>
(k) if underwriters are engaged by the Company in connection with any
registration referred to in this Agreement (such underwriters shall be
reasonably satisfactory to the Holders of a majority of the Registrable
Securities covered by such registration), the Company shall provide
indemnification, representations, covenants, opinions and other assurance
to the underwriters in form and substance reasonably satisfactory to such
underwriters; and
(l) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the
Holders of a majority of the Registrable Securities being sold or the
underwriters, if any, reasonably request in order to expedite or facilitate
the disposition of such Registrable Securities.
(m) obtain an opinion of outside counsel (or inside counsel if
satisfactory to each underwriter) for the Company covering such matters of
the type customarily covered in opinions of issuer's counsel as the seller
or sellers of a majority of the Registrable Securities being sold
reasonably request;
(n) file the reports required by the Exchange Act for companies
registered under such act and otherwise comply with all applicable rules
and regulations of the Commission;
(o) keep the sellers advised as to the initiation and progress of any
demand or other registration; and
(p) promptly deliver to the Holders copies of all public announcements
made by the Company regarding disposition, acquisitions or other material
transactions involving the Company.
5. HOLDERS' OBLIGATIONS IN REGISTRATION.
(a) Each Holder agrees, that, upon receipt of notice of an event
described in Section 4(e) above, such Holders will immediately discontinue
disposition of the Registrable Securities until such Holder's receipt of
the copies of the supplemented or amended prospectus contemplated by
Section 4(e) or until it is advised in writing by the Company that the use
of the prospectus may be resumed, and has received copies of any additional
or supplemental filings which are incorporated by reference in the
prospectus. If so directed by the Company, such Holder will, or will
request the managing underwriter or agent, if
-9-
<PAGE>
any, to deliver to the Company at the Company's expense all copies
(other than permanent file copies) then in such Holder's possession, of
the prospectus covering such Registrable Securities current at the time
of receipt of such notice.
(b) In respect of a registration pursuant to this Agreement, each
Holder of Registrable Securities covered by a registration statement shall
advise the Company immediately if such Holder knows or becomes aware of any
matter which such Holder believes may result in the inclusion in a
prospectus contained in such registration statement of an untrue statement
of a material fact or the omission of a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
shall promptly notify the Company and assist the Company in preparation and
filing with the Commission of any such amendments or supplements to said
registration statement that may be necessary or appropriate to permit the
prospectus included therein to be used under the Securities Act during the
period during which the prospectus must be delivered in connection with the
offering and sale of the Registrable Securities.
(c) The Company may require each Holder of Registrable Securities as
to which any registration is being effected to furnish to the Company such
information regarding the distribution of such Registrable Securities and
such other information relating to the Holder and its ownership of
Registrable Securities as the Company may from time to time reasonably
request and each Holder agrees to furnish the Company with such information
and to cooperate with the Company as necessary to enable the Company to
comply with the provisions of this Agreement.
(d) In the case of any underwritten public offering by the Company of
any shares of Common Stock or securities convertible into shares of Common
Stock, each Holder of Registrable Securities agrees, if and to the extent
requested in writing by the managing underwriter of such offering, not to
effect any public sale or distribution of the Common Stock of the Company
(except as part of such underwritten offering), during the period ending on
the earlier of (i) 90 days after the effective date of the registration
statement relating to such underwritten public offering and (ii) the date
such sale or distribution is permitted by such managing underwriter.
(e)In the event that a Shelf Registration Statement has been filed and
declared effective with respect to any Registrable Securities, the Holder
of such Registrable
-10-
<PAGE>
Securities agrees to notify the Company of any proposed offer or sale
thereof at least two business days prior to the proposed offer or sale.
Such notice shall include such information relating to the Holder and
the proposed distribution of Registrable Securities by the Holder as
shall be required to be included in the prospectus, to the extent such
information has not already been included therein. If within such two
business day period the Company advises the Holder furnishing such
notice that the Company is in possession of material information that
has not been disclosed to the public and the Company deems it advisable
not to disclose such information in the prospectus, then the Holder
furnishing such notice shall postpone the contemplated offering or sale
until the earlier to occur of (i) the date as of which the Company is no
longer in possession of such undisclosed material information (notice of
which the Company agrees to promptly furnish to the Holder)or (ii) the
date which is 30 days following the receipt by the Company of the notice
of proposed offer or sale. A Holder furnishing a notice of proposed
offer or sale to the Company pursuant to this Section 5(e) shall
promptly notify the Company of the termination of such offering or
completion of such sale.
6. REGISTRATION EXPENSES. All expenses incidental to the Company's
performance of or compliance with this Agreement, including, without limitation,
all registration and filing fees, fees and expenses of compliance with
securities or blue sky laws, printing expenses, messenger and delivery expenses,
and fees and disbursements of counsel for the Company and all independent
certified public accountants, underwriters (excluding discounts and commissions)
and other persons retained by the Company, including, without limitation, all
salaries and expenses of the Company's officers and employees performing legal
or accounting duties, the expense of any annual audit or quarterly review, the
expense of any liability insurance and the expenses and fees for listing the
securities to be registered on each securities exchange on which securities
issued by the Company that are of the same class as the Registrable Securities
are then listed will be borne by the Company, except that underwriting discounts
and commissions relating to the sale of Registrable Securities will be the
responsibility of each seller, and each seller shall be responsible for all fees
and disbursements of their own counsel.
7. TERM. This Agreement shall terminate at such time as the shares of
Registrable Securities owned by the Holders of Registrable Securities constitute
less than 5% of the issued and outstanding shares of Common Stock of the
Company.
-11-
<PAGE>
8. INDEMNIFICATION. The provisions of this Section 8 shall be applicable
in respect of each registration pursuant to this Agreement.
(a) The Company shall hold harmless and indemnify each Holder of
Registrable Securities, any underwriter or agent participating in an offering
and their respective Affiliates (including any director, officer, employee,
agent or controlling Person of any of the foregoing), from and against all
losses, claims, damages, liabilities and expenses (including reasonable
attorneys' fees and expenses of investigation) incurred by such indemnified
party pursuant to any actual or threatened third-party action, suit, proceeding
or investigation (including reasonable attorneys' fees and expenses of
investigation) arising out of or based upon any untrue or alleged untrue
statement of material fact contained in any registration statement, any
amendment or supplement thereto, any prospectus or preliminary prospectus or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein (in the case of a
prospectus, in light of the circumstances under which they were made) not
misleading, except insofar as the same arise out of or are based upon any such
untrue statement or omission based upon information with respect to such Holder
furnished in writing to the Company by such Holder expressly for use therein.
(b) In connection with any registration statement in which a Holder of
Registrable Securities is participating, each such Holder will furnish to the
Company in writing such information, as the Company reasonably requests for use
in connection with any such registration statement or prospectus, and shall
severally and not jointly hold harmless and indemnify each other Holder of
Registrable Securities, any underwriter or agent participating in an offering,
the Company and its Affiliates (including any director, officer, employee,
agent, or controlling Person of each of the foregoing) from and against any
losses, claims, damages, liabilities and expenses (including reasonable
attorneys' fees and reasonable expenses of investigation) incurred by such
indemnified party pursuant to any actual or threatened third-party action, suit,
proceeding or investigation (including reasonable attorneys' fees and expenses
of investigation) arising out of or based upon any untrue or alleged untrue
statement of a material fact contained in any registration statement, any
amendment or supplement thereto, any prospectus or preliminary prospectus or any
omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein (in case of a prospectus, in the light
of the circumstances under which they were made) not misleading, to the extent,
but only to the extent, that such untrue statement or omission is contained in
or failed to be contained in any information with respect to such Holder
furnished in writing by
-12-
<PAGE>
such Holder specifically for inclusion in any prospectus or registration
statement; PROVIDED, HOWEVER, that the liability of such indemnifying party
under this Section 8(b) shall be limited to the amount of net proceeds
received by such indemnifying party in the offering giving rise to such
liability.
(c) The obligation of the Company under Section 8(a) and of the Holders
of Registrable Securities under Section 8(b) to hold harmless and indemnify
any underwriter or agent who participates in an offering or any of their
respective Affiliates shall be conditioned on the underwriting or agency
agreement containing an agreement by such underwriter or agent to hold
harmless and indemnify each of the Company, the Holders of Registrable
Securities participating in the offering, and their respective Affiliates
(including any director, officer, employee, agent, or controlling Person of
each of the foregoing) from and against any losses, claims, damages,
liabilities and expenses (including reasonable attorneys' fees and expenses
of investigation) incurred by such indemnified parties pursuant to any actual
or threatened third-party action, suit, proceeding or investigation
(including reasonable attorneys' fees and expenses of investigation) arising
out of or based upon any untrue or alleged untrue statement of a material
fact contained in any registration statement, any amendment or supplement
thereof, any prospectus or preliminary prospectus or any omission or alleged
omission of a material fact required to be stated therein or necessary to
make the statements therein (in the case of a prospectus, in light of the
circumstances under which they were made) not misleading, to the extent, but
only to the extent, that such untrue statement or omission is contained or
failed to be contained in any information with respect to such underwriter or
agent furnished in writing by such underwriter or agent specifically for
inclusion in any prospectus or registration statement.
(d) The indemnity provisions in Sections 8(a) and 8(b) above are subject
to the condition that, insofar as they relate to any untrue statement (or
alleged untrue statement) or omission (or alleged omission) made in a
preliminary prospectus or prospectus but eliminated or remedied in any
amended prospectus, such indemnity provisions shall not inure to the benefit
of any indemnified Person, if the Company has previously and in a timely
manner delivered sufficient copies of such amended prospectus to such
indemnified Person and if a copy of such amended prospectus required to be
sent or given in accordance with any applicable law or regulation was not
furnished by such indemnified Person to the person asserting the loss,
liability, claim or damage.
(e) Promptly after receipt by an indemnified party under this Section 8
of any notice of the commencement of any lawsuit or other proceeding or
investigation thereof, such indemnified party will, if a claim in respect
thereof is to be made against
-13-
<PAGE>
the indemnifying parties hereunder, notify in writing the indemnifying
parties of the commencement thereof; but the omission so to notify the
indemnifying parties will not relieve the indemnifying parties from any
liability which they may have to any indemnified party, unless such failure
to notify is materially prejudicial to the indemnifying parties and
materially increases their risk of loss. In case any such lawsuit or other
proceeding or investigation shall be brought against any indemnified party
and such indemnified party shall notify the indemnifying parties of the
commencement thereof, the indemnifying parties shall be entitled to
participate therein and, unless in the opinion of counsel to the indemnified
party a conflict of interest between such indemnified and indemnifying
parties may exist in respect of such claim, to the extent that it shall wish,
to assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying parties in such action). In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel,(ii) the
indemnifying parties shall have failed to assume the defense of such action
or proceeding or shall have failed to employ counsel reasonably satisfactory
to such indemnified party in any action or proceeding; or (iii) the named
parties (including any impleaded parties) to any such action or proceeding
include both such indemnified party and the indemnifying parties, and such
indemnified party shall have been advised by counsel in writing (with a copy
to the indemnifying parties) that there may be one or more defenses available
to such indemnified party or other indemnified parties or other indemnified
parties which are different from or additional to those available to the
indemnifying parties, then, such separate counsel shall be at the expense of
the indemnifying parties and the indemnifying parties shall not have the
right to assume the defense of such action or proceeding on behalf of such
indemnified person. After notice from the indemnifying parties to such
indemnified party of their election so to assume the defense thereof, and
provided that the exception in the foregoing sentence does not apply, the
indemnifying parties shall not be liable to such indemnified party under
these indemnification provisions for any legal expenses of other counsel or
any other expenses, in each case subsequently incurred by such indemnified
party, in connection with the defense thereof other than reasonable costs of
investigation. In any event, unless there exists a conflict among
indemnified parties, the indemnifying parties shall not, in connection with
any one such action or proceeding or separate but substantially similar or
related actions or proceedings in the same jurisdiction arising out of the
same general allegations or
-14-
<PAGE>
circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys at any time for all such indemnified parties. No
indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified
party unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such proceeding. The indemnifying parties shall not be subject to any
liability for any settlement made without their consent.
(f) In order to provide for the just and equitable contribution in
circumstances under which the indemnity provided for in this Section 8 is for
any reason held to be unenforceable by the indemnified parties though
applicable in accordance with its terms, each applicable indemnifying party,
in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of any losses,
claims, damages, liabilities or expenses of a nature contemplated by such
indemnity in such proportion as is appropriate to reflect not only the
relative benefits received by the indemnifying parties and the indemnified
parties, but also to reflect the relative fault of the indemnifying and
indemnified parties in connection with the statements or omissions which
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations; PROVIDED, HOWEVER, that no
Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any
Person who was not guilty of such fraudulent misrepresentation.
Notwithstanding anything in this subsection (f) to the contrary, no Holder
shall be required to contribute any amount in excess of the net proceeds
received by such Holder from the offering to which the losses, claims,
damages, liabilities or expenses relate.
The relative fault of such indemnifying and indemnified parties shall be
determined by reference to, among other things, whether any untrue or alleged
untrue statement of a material fact, or omission or alleged omission to state
a material fact, has been made by, or relates to information supplied by,
such indemnifying party or indemnified parties and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or payable by a party as
a result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include any legal or other fees or expenses incurred
by such party in connection with investigating or defending such claim
-15-
<PAGE>
9. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No person may
participate in any registration hereunder that is underwritten unless such
person (a) agrees to sell such person's securities on the basis provided in
any underwriting arrangements approved by the person or persons entitled
hereunder to approve such arrangements and (b) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the terms of such underwriting arrangements.
10. MISCELLANEOUS.
(a) REMEDIES. Any person having rights under any provision of this
Agreement will be entitled to enforce such rights specifically, to recover
damages caused by reason of any breach of any provision of this Agreement and
to exercise all other rights granted by law.
(b) AMENDMENT AND WAIVERS. The provisions of this Agreement may be
amended and the Company may take any action herein prohibited, or omit to
perform any act herein required to be performed by it, only if the Company
has obtained the written consent of the Stockholder and its Affiliates (to
the extent they are holders of Registrable Securities) and of Holders of at
least 50% of the Registrable Securities held by any other Persons.
(c) SUCCESSORS AND ASSIGNS. All covenants and agreements in this
Agreement by or on behalf of any of the parties hereto will bind and inure to
the benefit of the respective successors and permitted assigns of the parties
hereto whether so expressed or not. A Holder shall be permitted to assign
its rights hereunder to any Person to whom it transfers any Registrable
Securities in a transaction not involving any public offering, provided that
(A)(i) the number of Registrable Securities so transferred is not less than
1,000,000 shares (adjusted for any stock split, reverse stock split or
combination of shares) and (ii) the assignee agrees with the Company in
writing to be bound by the provisions of this Agreement or (B) such Person is
an Affiliate of Stockholder.
(d) SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Agreement.
(e) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, any one of which need not contain the signatures
-16-
<PAGE>
of more than one party, but all such counterparts taken together will
constitute one and the same Agreement.
(f) DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
(g) GOVERNING LAW. The General Corporation Law of Delaware will govern
all issues concerning the relative rights of the Company and the Holders of
Registrable Securities. All other questions concerning the construction,
validity and interpretation of this Agreement and the exhibits and schedules
hereto will be governed by the internal law, and not the law of conflicts, of
the State of Delaware.
(h) NOTICES. All notices, demands or other communications to be given
or delivered under or by reason of the provisions of this Agreement will be
in writing and will be deemed to have been given when delivered personally or
two days after deposit in the mail, certified or registered mail, return
receipt requested and postage prepaid, to the recipient. Such notices,
demands and other communication will be sent to the Stockholder initially as
set forth below and to each other Holder of Registrable Securities at such
Holder's address as it appears in the records of the Company (unless
otherwise indicated by any such Holder to the Company in writing) and to the
Company at its principal executive offices.
For ATC: 3100 Woodcreek Drive
Downers Grove, Illinois 60515
Attn: President
with a copy to: Amoco Corporation
200 East Randolph Drive
Chicago, Illinois 60601
Attn: General Attorney --
Corporate Law Department
-17-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
VYSIS, INC.
By: /s/ John L. Bishop
-----------------------
Name: John L. Bishop
----------------
Title: President & CEO
---------------
AMOCO TECHNOLOGY COMPANY
By: /s/ Robert C. Carr
-----------------------
Name: Robert C. Carr
----------------
Title: President
---------------
-18-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-47463) of Vysis, Inc. of our report dated
March 13, 1998 appearing on page 39 of this Annual Report on Form 10-K.
PRICE WATERHOUSE LLP
Chicago, Illinois
March 26, 1998
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