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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 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 __/X/__ No ____
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.____________
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 18, 1999 was approximately $13.7 million.
Number of shares of Common Stock outstanding as of March 18, 1999:
9,792,437
DOCUMENTS INCORPORATED BY REFERENCE:
Documents: Definitive Proxy Statement for the 1999 annual
meeting of stockholders
Part of the Form 10-K into which incorporated:
Part III
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TABLE OF CONTENTS
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PAGE
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PART I
<S> <C> <C>
ITEM 1: Business ...................................................... 3
General..................................................... 3
Genomic Disease Management.................................. 3
Technology Platforms........................................ 4
Products.................................................... 5
Food Testing Products....................................... 14
Sales and Marketing......................................... 14
Manufacturing............................................... 15
Collaborations.............................................. 15
Patents, License Rights and Proprietary Information......... 17
Ability to Practice Technology.............................. 18
Competition................................................. 19
Government Regulation....................................... 20
Employees................................................... 21
Executive Officers.......................................... 21
Scientific Advisory Board................................... 22
ITEM 2: Properties .................................................... 23
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
Readiness for the Year 2000................................. 30
ITEM 7A: Quantitative and Qualitative Disclosures About Market Risk .... 31
ITEM 8: Financial Statements .......................................... 32
ITEM 9: Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure....................................... 32
PART III
ITEM 10: Directors and Executive Officers of the Registrant ............ 32
ITEM 11: Executive Compensation ........................................ 32
ITEM 12: Security Ownership of Certain Beneficial Owners
and Management ................................................ 32
ITEM 13: Certain Relationships and Related Transactions ................ 32
PART IV
ITEM 14: Exhibits, Financial Statement Schedules and Reports
on Form 8-K ................................................... 33
SIGNATURES............................................................... 58
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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:
competition; compliance by the Company with regulatory requirements; the
ability of the Company to successfully market and sell its products and
equipment; delays in the acceptance and adoption rates for the Company's
clinical products; the Company's ability to manufacture products in
sufficient quantities; the Company's ability to maintain intellectual
property protection for its proprietary products, to defend its existing
intellectual property rights from challenges by third parties, and to avoid
infringing intellectual property rights of third parties; and the extent to
which the clinicians or laboratories using the Company's products are able to
obtain third-party reimbursement. 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 six U.S. Food and
Drug Administration ("FDA") cleared or approved clinical products in addition to
distributing over 300 research products through its direct sales operations in
the United States and Europe and a worldwide distribution network covering 51
countries. The Company has an installed base of over 550 proprietary genetic
workstations in 32 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. On December 31, 1998, Amoco Corporation merged
with the former British Petroleum Corporation, and as a result of the merger
became a wholly-owned subsidiary of BP Amoco p.l.c. As used herein, "BP Amoco"
refers to BP Amoco p.l.c., or its wholly owned subsidiaries, Amoco Corporation
and Amoco Technology Company ("ATC"). In 1994, BP Amoco began consolidation of
all of its medical diagnostic businesses and related research under the Company.
In March 1994, BP Amoco contributed to the Company all of its genetic disease
related assets, including the stock of Imagenetics Incorporated (an Illinois
corporation). Also in March 1994, BP Amoco contributed all of its infectious
disease related assets and the stock of Gene-Trak, Inc. to the Company.
Gene-Trak, Inc. had previously acquired certain infectious disease related
assets from Genzyme Corporation and BP Amoco, including all of the interest in
Gene-Trak Systems, a joint venture partnership for infectious disease
diagnostics established by BP Amoco and Integrated Genetics in 1986.
On February 10, 1998, the Company completed the initial public offering
of 3 million shares of its Common Stock, par value $0.001 per share (the "Common
Stock") at a price of $12.00 per share (the "IPO"). The net proceeds of the IPO
after deducting expenses were approximately $32.1 million. Concurrent with the
consummation of the IPO, the Company issued 675,000 shares of Common Stock at
$12.00 per share to BP Amoco in exchange for a reduction of $8.1 million in the
Company's note payable to BP Amoco. As of March 15, 1999, BP Amoco beneficially
owned approximately 69 percent of the Company's outstanding Common Stock.
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.
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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 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. Vysis' three technology platforms
include: the FISH ("FLUORESCENCE IN SITU HYBRIDIZATION") SYSTEM, which detects
chromosomal copy number and rearrangement (large genetic structures), the
GENOSENSOR(TM) 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). The Company is
presently focusing its research and development efforts on the FISH System and
on the GenoSensor System.
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(TM) Genetic
Workstations provide integrated solutions to enhance and automate the
visualization, analysis, and storage of FISH images. The Company is currently
near completion of development of the VP 2000(TM) Processor, a high throughput
instrument that will automate the specimen preparation steps of FISH assays,
which is estimated to eliminate 70 percent of the labor used for sample
preparation.
GENOSENSOR(TM) SYSTEM
The GenoSensor 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 (a "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 GenoSensor System, consisting of individual gCGH
arrays, a high speed camera based reader and specimen processing reagents is
currently at an advanced 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.
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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. This technology platform
enables the detection of small genetic targets associated with disease
predisposition and early detection of disease. The Company has completed a
strategic reassessment of its Molecular Lawn platform. The Company has
decided that near term research and development of the Molecular Lawn
platform will be deferred to allow the Company to focus on products for the
FISH and GenoSensor platforms.
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 lead cancer
product, the PathVysion(TM) HER-2 DNA Probe Kit, was approved by the FDA in
December 1998 for the determination of the HER-2 gene status in stage II,
node positive breast cancer patients and for the prediction of therapeutic
outcome of use of adriamycin chemotherapy in breast cancer patients. The
PathVysion HER-2 DNA Probe Kit has also been submitted to the French Agence
du Medicament (the "ADM") for approval for marketing in France. The
Company's lead prenatal product, the AneuVysion Assay for the detection of
Down Syndrome and other prenatal birth defects, was cleared by the FDA in
October 1997 and by the ADM in March 1998. The clinical products represented
approximately $2.6 million of the Company's $21.5 million of product revenues
in 1998, approximately $0.4 million of the Company's $16.0 million of product
revenues in 1997, and no clinical product revenue before 1997.
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
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CANCER
CEP(R)8 FISH System Chronic Myelogenous Disease monitoring MARKETING (FDA
Leukemia, myeloid 510(k) cleared
disorders November 1996)
CEP(R)12 FISH System Chronic Lymphocytic Disease progression and MARKETING (FDA
Leukemia disease monitoring 510(k) cleared
January 1997)
CEP(R) X/Y FISH System Bone marrow Disease monitoring MARKETING (FDA
transplantation 510(k) cleared
January 1997)
PathVysion(TM) FISH System Breast cancer Selection of therapy and MARKETING
HER-2 prognosis (FDA PMA
approved
December 1998);
additional
clinical trials
underway
PathVysion(TM) FISH System Bladder cancer Disease recurrence CLINICAL TRIALS
Bladder monitoring
Prostate Panel FISH System Prostate cancer Disease prognosis RESEARCH
Breast Panel GenoSensor System Breast cancer Selection of therapy and RESEARCH
prognosis
Prostate Panel GenoSensor System Prostate cancer Disease progression RESEARCH
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CLINICAL PRODUCTS (CONTINUED)
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PRODUCT TECHNOLOGY PLATFORM DISEASE/PROCEDURE INTENDED UTILITY STAGE
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PRENATAL
TriGen(TM) FISH System Down syndrome, sex Detection of mental MARKETING (ADM
chromosome disorders retardation and other registered in
birth defects June 1997)
AneuVysion(TM) FISH System Down syndrome, and Detection of mental MARKETING
other chromosomal retardation and other (FDA 510(k)
disorders birth defects cleared October
1997; ADM
registered in
March 1998)
Aneu-Del-Tel(TM) GenoSensor(TM)System Down syndrome, and Detection of essentially RESEARCH
Chip other chromosomal all chromosomal
disorders abnormalities causing
common mental retardation
and other birth defects
Fetal Screen FISH System Down syndrome, and Detection of mental RESEARCH
other chromosomal retardation and other
disorders birth defects from fetal
cells in maternal blood
circulation
</TABLE>
CANCER PRODUCTS
The Company markets FDA approved or cleared products for leukemia and
breast cancer, and is currently focusing its cancer product development efforts
on breast, bladder and prostate cancers.
LEUKEMIA. The Company markets three clinical products, each based on
the FISH System, for use in management of leukemia. The CEP 8 Probe Kit was
cleared by the FDA in November 1996 by a 510(k) premarket notification and 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 CEP 12 Probe Kit was cleared by the FDA in January 1997 by a
510(k) premarket notification and 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"). 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.
The CEP X/Y Probe Kit was cleared by the FDA in January 1997 by a
510(k) premarket notification and 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. 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
7
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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.
BREAST CANCER. The Company received FDA approval of a PMA application
on December 9, 1998, for its first breast cancer product, PathVysion(TM) HER-2
DNA Probe Kit. Results from the PathVysion HER-2 test are intended to rapidly
assess the amplification of the HER-2/NEU gene for use as a predictive marker
for response to adriamycin-based chemotherapy. The Company is performing
additional clinical trials for the PathVysion HER-2 assay to obtain additional
diagnostic claims for the product relating to prediction of therapeutic outcome
of use of tamoxifen and of use of a combination of Herceptin(R) and taxol in
breast cancer chemotherapy.
The Company's HER-2 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 in tissue cells of the HER-2/NEU
gene and chromosome 17, on which the HER-2/NEU gene resides. The Company's
product includes a second DNA probe specific for chromosome 17, to serve as a
built in control for false positive results due to extra copies of chromosome
17.
BREAST CANCER PANELS. Because cancer is considered a multi-gene event,
the Company believes that appropriate patient management may require
simultaneous testing for multiple genetic abnormalities, for example
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 GenoSensor 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. The Company is
also pursuing leads on a FISH probe panel for breast cancer.
BLADDER CANCER PANEL. The Company is developing the PathVysion(TM)
Bladder DNA Probe Kit, based on the FISH System, which is designed to provide
simultaneous analysis of multiple genetic markers in cells in a routine urine
specimen for detection of recurrence of bladder cancer. The Company is near
completion of a 200 patient preclinical trial of the PathVysion Bladder assay
at the Mayo Clinic. The Company began PathVysion Bladder clinical trials in
March 1999 designed to support a 510(k) application.
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 products for testing of prostate
biopsies that includes a panel of genetic markers designed to provide
information indicating which patients should receive more aggressive therapeutic
intervention. The Company plans to begin development in 1999 of a FISH panel
assay, that was identified in 1998, for prostate cancer prognosis. The Company
is also researching a product based on the GenoSensor System that is intended to
provide the ability to simultaneously detect both gene amplification
abnormalities and gene deletion abnormalities, each of which have been
associated with prostate cancer progression. In conjunction with the Mayo
Clinic, the Company is evaluating several potential leads for its initial
GenoSensor prostate clinical product.
PRENATAL PRODUCTS
The Company's prenatal testing products provide information on genetic
abnormalities involved in mental retardation and other birth defects.
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.
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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 panel 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 France is registered as a stand alone
diagnostic test.
The Company is performing research on a GenoSensor System 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.
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. In collaboration with
the Vrije University in the Netherlands, the Company 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 AND OTHER GENETIC TESTING PRODUCTS
Vysis currently markets over 300 DNA probes and related reagent
products that were marketed under research use only ("RUO") labeling before
November 23, 1998, when new FDA regulations went into effect. The Company has
converted the labeling of most of these products to Analyte Specific Reagents
("ASR's") under the new regulations. ASR products can be used by qualified
testing laboratories for clinical diagnosis, provided that the laboratory
verifies the clinical performance of the assay and uses an FDA mandated
disclaimer when reporting the results. The Company is not permitted to make
marketing claims on clinical performance of any ASR product. See Business
- -Government Regulation. Sales of ASR products are categorized in Research and
other genetic testing products (see Note 10 of Notes to Consolidated
Financial Statements). The Company introduced 40 new RUO products in 1998.
The research reagent product line represented approximately $8.5 million of
the Company's $21.5 million of product revenues in 1998, approximately $4.6
million of the Company's $16.0 million of product revenues in 1997, and
approximately $2.8 million of the Company's $11.0 million of product revenues
in 1996.
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The Company's research product commercialization process involves three
distinct stages prior to marketing which include, in order: research,
development and trials.
RESEARCH AND OTHER GENETIC TESTING PRODUCTS
<TABLE>
<CAPTION>
PRODUCT TECHNOLOGY PLATFORM DISEASE/PROCEDURE POSSIBLE UTILITY STAGE
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<S> <C> <C> <C> <C>
WCP(R) Probes (103 FISH system Prenatal, postnatal Analysis of metaphase MARKETING
products) and cancer chromosomes, additions,
deletions and
translocations
CEP(R) Probes FISH System Prenatal, postnatal Determination of MARKETING
(47 products) and cancer chromosome copy number
LSI(R) Probes FISH System Prenatal, postnatal Determination of gene MARKETING
(38 products) and cancer copy number, 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 and PB genetic testing IN VITRO fertilization
(2 products) implantation and
successful birth
TelVysion(TM) FISH System Mental retardation Detects hidden MARKETING
Telomere Probes analysis chromosomal deletions
(42 products) and/or translocations not
possible with traditional
karyotyping
SpectraVysion(TM) FISH System Cancer and prenatal Detects hidden MARKETING
Assay karyotyping analysis chromosomal
in 24 colors rearrangements not
possible with traditional
karyotyping
Ampli-Onc(TM) I GenoSensor System All cancers Detects substantially all TRIALS
Biochip genes amplified in cancer
Ampli-Onc(TM)II GenoSensor System All cancers Detects genes deleted in RESEARCH
Biochip cancer
</TABLE>
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The Company markets six FISH probe product lines, respectively marketed
as WCP(R), CEP(R), LSI(R) and MultiVysion, TelVysion and SpectraVysion probes
and various reagents. These products are used in a wide range of genetic
research.
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 MultiVysion PGT product,
based on the FISH System, which simultaneously detects abnormalities of
chromosomes 13, 18, 21, X and Y in a single blastomere cell within 4 hours. In
1998, the MultiVysion PB product, also on the FISH System, was introduced for
detection of abnormalities of chromosomes 13, 16, 18, 21 and 22 in polar bodies.
The Company believes that completing a PGT analysis using Vysis' patented
multi-color probes can increase the probability of a successful implantation and
birth at a substantially lower cost for patients undergoing IN VITRO
fertilization.
TELVYSION 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. The Company
markets the TelVysion line of individual locus specific FISH probes for research
in chromosomal causes of mental retardation and cancer.
SPECTRAVYSION ASSAY. 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 SpectraVysion Assay 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 in 1998 began marketing its
spectral karyotyping system comprised of a 24 color probe SpectraVysion reagent
set and a genetic workstation that incorporates proprietary software for image
analysis of the multi-color karyotype provided by the reagent.
AMPLI-ONC I AND II BIOCHIPS. The Company is developing an Ampli-Onc I
Biochip based on its GenoSensor 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 for use with the GenoSensor System reader to
enable simultaneous assessment of a large number of genes in patient specimens
for abnormalities in specific gene counts. The Company is also developing the
Ampli-Onc II Biochip, which adds assessment of various tumor suppressor gene
loci to the amplified genes of the Ampli-Onc I. 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. The Ampli-Onc I Biochip and the GenoSensor System's
reader are nearing completion of development, and the Company expects to begin
product shipments in the third quarter of 1999.
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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 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, karyotype and brightfield
pathology 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 pathology and research centers around the
world. The Company has an installed base of over 550 proprietary genetic
workstations in 32 countries. The Company introduced two new instrument products
in 1998. The instrument product line represented approximately $6.6 million of
the Company's $21.5 million of product revenues in 1998, approximately $7.2
million of the Company's $16.0 million of product revenues in 1997, and
approximately $4.6 million of the Company's $11.0 million of product revenues in
1996.
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INSTRUMENT PRODUCTS
<TABLE>
<CAPTION>
PRODUCT TECHNOLOGY PLATFORM DISEASE/PROCEDURE UTILITY STAGE
- ------- ------------------- ----------------- ------- -----
<S> <C> <C> <C> <C>
Quips Karyotyping Image Analysis Software Cancer and prenatal Clinical and research MARKETING (FDA
Software testing automated classification of 510(k) cleared
chromosomes February 1990)
Quips FISH Software FISH System Cancer and prenatal Clinical and research MARKETING
testing imaging of FISH probes
Quips CGH Software FISH System All cancers Research for chromosomal MARKETING
amplifications and deletions
Quips PathVysion(TM) FISH System All cancers Light and fluorescent MARKETING
Software microscopy imaging for
pathology labs
Lab Manager(TM) Database Software Cancer and prenatal Patient data management MARKETING
Software testing incorporated in
karyotyping, CGH and FISH
software
HYBrite(TM) System FISH System Cancer and prenatal Clinical and research MARKETING
testing semi-automated
hybridization of FISH probes
Quips SpectraVysion FISH System Cancer and prenatal Clinical and research MARKETING
Software testing automated classification
and imaging of chromosomes
in 24 colors
VP 2000 Processor FISH System Cancer and Automates FISH DEVELOPMENT
prenatal testing, pretreatment,
routine slide deparaffinization and
processing routine histology/cytology
slide staining
GenoSensor System GenoSensor System Cancer and prenatal Reads gCGH Arrays TRIALS
Reader testing
</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.
PATHVYSION(TM) Software includes imaging software for light microscopy
analysis of immunohistochemical stains as well as analysis of FISH and mFISH
assays and is designed for use by pathology laboratories.
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SPECTRAVYSION(TM) Software is designed for use with SpectraVysion
reagents and permits a user to image and classify multiple chromosomes stained
with SpectraVysion reagents.
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.
DISTRIBUTED LABORATORY PRODUCTS
The Company's wholly-owned subsidiary, Vysis Sarl, markets a line of
laboratory products on a distributor basis primarily in France. These
products include laboratory ventilation systems, growth media and humidifier
cabinets. Sales of these products were approximately $1.2 million in 1998 and
1997, and approximately $1.1 million in 1996.
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(R)
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 $2.6 million in 1998, and approximately $2.5 million in 1997 and
1996.
SALES AND MARKETING
MARKETING STRATEGY
The Company currently markets its products to cytogenetic laboratories,
hospitals, reference laboratories, academic and commercial research institutions
and managed care organizations. The principal customers for its clinical
diagnostic products include cytogeneticists, pathologists, oncologists and other
physicians. The Company focused its 1998 clinical marketing efforts on its
prenatal products and is expanding its focus in 1999 to include the PathVysion
product for breast cancer. The marketing of the PathVysion HER-2 DNA Probe Kit
will be focused on hospital-based pathology laboratories and reference
laboratories.
The Company's sales of instrument products declined approximately 8
percent from 1997 sales levels to $6.6 million, significantly below the
Company's expectations. The Company believes this decline was due to the market
environment resulting from reduced demand for new research equipment from
cytogenetic laboratories and delays in replacing existing equipment by
cytogenetic laboratories. The Company expects the current market environment of
reduced demand for cytogenetic imaging equipment to continue through 1999.
The Company is experiencing slower than expected market adoption rates
for its clinical AneuVysion prenatal testing product. The Company believes the
delay in U.S. adoption is primarily due to low patient and physician awareness
of the benefits of AneuVysion and lack of awareness of reimbursement codes for
FISH assays. The Company believes the adoption in France has been adversely
affected by the French government's 1998 decision to delay action on a
recommendation that it approve reimbursement for FISH prenatal tests. The
Company does not know when or if the French government will approve
reimbursement. Continued delays in the acceptance and adoption rates for the
Company's clinical products could have a material adverse effect on the
Company's business, financial condition and results of operations.
In order to accelerate clinical market acceptance of its Genomic
Disease Management products, the Company is continuing its marketing programs 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
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Company is pursuing 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. The Company in 1998 initiated efforts to obtain third
party payor's approvals for reimbursement for the Company's products, by hiring
a Director of Reimbursement, with responsibility for establishing and
implementing the Company's strategy for obtaining third party payors' approval.
As part of these efforts, the Company recently entered into a license agreement
with the American Medical Association permitting the Company to publish the
AMA's "CPT" codes governing reimbursement for the Company's FISH products. The
Company also has obtained reimbursement approval for its PathVysion HER-2 DNA
Probe Kit in 16 states.
SALES STRATEGY
Sales in the United States are conducted by a direct sales force,
currently consisting of a national sales manager and eleven technical sales
representatives. Eight representatives are dedicated to clinical and research
reagent sales. The remaining three representatives are dedicated to sales of
genetic workstations. European sales are managed by country specific managers
supported by a 26 person direct sales organization with offices in Germany,
France, Italy 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 1999. Fujisawa and the
Company are currently collaborating on development of a Japanese clinical trial
plan for the PathVysion HER-2 Assay for breast cancer.
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.
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 its 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 is focusing its outside collaborations on development of
its GenoSensor platform and on establishing correlations of chromosome
abnormalities to various cancers. The Company's major collaborations include:
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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, with additional principal
investigators Dr. Donna Albertson and Dr. Dan Pinkel, on array CGH and cancer
correlations.
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.
PUBLIC HEALTH RESEARCH INSTITUTE OF NEW YORK
The Company funded in 1998 a research and development collaboration and
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. The
Company ended this research funding in February 1999.
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. The Company believes that the map will be half complete in 1999.
NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY GRANTS
The Company in 1998 completed performance of 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 ran through February 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 ran through July 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 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 is near
completion of production of the TelVysion telomere probe set. The Company in
1998 introduced a RUO FISH probe for detection of a chromosomal translocation in
pediatric leukemia under an
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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. The Company initiated research in 1998 with Vrije University,
the Netherlands, on a fetal cell identifier.
PATENTS, LICENSE RIGHTS AND PROPRIETARY INFORMATION
The Company currently holds or has exclusive licenses to 119 issued
United States patents or allowed United States patent applications, to 64
pending United States patent applications, and to additional foreign patents
and pending patent applications in various areas of genetic and infectious
disease testing. In 1998 the Company's patent portfolio grew by 27 new U.S.
patents and the Oncor patent infringement litigation was settled. The patent
infringement litigation brought by the Company and its exclusive licensor,
the University of California, against Oncor, Inc. was settled in April 1998,
with Oncor entering into a license as part of the settlement agreement. The
litigation was ended with an Order by the U.S. District Court in San
Francisco that the University's U.S. Patent 5,447,841 was valid, enforceable
and infringed by Oncor. Under the settlement agreement, the Company granted
Oncor a non-exclusive, worldwide, royalty-bearing license under the `841
patent and other patents and applications for the sale by Oncor of its
oncology FISH-based products in the field of oncology. The Company and the
University of California shared equally a $500,000 license fee received
pursuant to the settlement and will be entitled to share equally an additional
$1.5 million due on April 9, 2000 to maintain this license in force.
The following describes significant patents of the Company:
FISH TECHNOLOGY
U.S. Patent 5,447,841, "Method for Chromosome-Specific Staining",
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 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. U.S. Patent 5,756,696,
"Compositions for Chromosome Specific Staining", issued May 26, 1998, relates to
unique sequence FISH probe compositions containing blocking DNA.
DIRECT LABELING TECHNOLOGY
U.S. Patent 5,491,224, "Direct Label Transaminated DNA Probe
Compositions for Chromosome Identification and Methods for their Manufacture",
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, "Probe Compositions for Chromosome Identification and
Methods", 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. U.S. Patent 5,776,688, "Methods for
Detection by In Situ Hybridization of Multiple Chromosomes or Regions Thereof",
issued July 7, 1998, relates to use of multiple direct label FISH probes.
GENOSENSOR TECHNOLOGY
The Company is exclusively licensed by the University of California
under U.S. Patent 5,665,549, "Comparative Genomic Hybridization (CGH)", 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 U.S. Patent
5,830,645, "Comparative Fluorescence Hybridization to Nucleic Acid Arrays",
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issued November 2, 1998, relating to gCGH assays carried out using a nucleic
acid array as the hybridization target, and to pending U.S. and foreign patent
applications claiming gCGH assays. The Company has pending U.S. patent
applications relating to its gCGH arrays and the GenoSensor imaging system.
SEQUENCE SPECIFIC TECHNOLOGY
The Company's Sequence Specific Technology underlies the Molecular
Lawn Platform. U.S. Patent 5,851,767, "Detection of Prokaryotic Organism by
DNA Hybridization", issued December 22, 1998, relates to detection of
bacteria using bacteria specific, synthesized oligonucleotide probes. U.S.
Patent 5,750,338, "Target and Background Capture Methods with Amplification
for Affinity Assays," issued May 12, 1998, relates to methods of reducing
background noise in nucleic acid amplification assays. The Company holds
non-exclusive licenses (which were exclusive before January 1999) 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 its sequence specific 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, "Detection of Amplified or Deleted
Chromosome Regions", issued December 5, 1995, 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 and the Mayo Clinic have filed a U.S. patent application
covering the PathVysion Bladder test. The Company is also exclusively licensed
under United States and foreign patent applications from the University of
California, St. Jude Children's Research Hospital, Canji, Inc. and the
California Pacific Medical Center 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, including array
manufacturing, labels for nucleic acid probes, nucleic acid probe compositions,
nucleic acid probe 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
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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, including gCGH applications,
and direct labeling technologies, or to significant elements of the Company's
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.
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. Ventana Medical Systems
acquired the FISH oncology-related assets of Oncor, Inc., formerly a major
competitor in the supply of FISH products to the research market. Ventana has
begun marketing of the former Oncor products, including the clinical Inform
HER-2/NEU FISH product. Dako USA markets an immunohistochemical assay, the
Herceptest(TM), that competes with the PathVysion HER-2 assay. The Company is
aware of other entities that currently market ASR/RUO nucleic acid
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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. Applied Imaging Corp. and
Perceptive Scientific Instruments, Inc. compete with Vysis in the marketing of
genetic imaging workstations.
Other companies are developing and marketing 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
generally 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 is
also permitted to market products that have diagnostic utility under the FDA's
new Analyte Specific Reagent rules, also termed the "ASR" regulations, that went
into effect in November 1998. Under the ASR regulations, the Company's marketing
of products labeled as ASR's must not contain any claims of diagnostic utility.
The ASR regulations restrict sales of ASR reagents to (1) clinical
laboratories certified under the Clinical Laboratories Improvement Act as high
complexity testing laboratories, (2) clinical device manufacturers and (3)
laboratories and other organizations performing tests for purposes other than
human or animal diagnostic information. The ASR regulations further permit
clinical laboratories to offer diagnostic tests based upon use of ASR reagents,
provided that the laboratory establish the clinical validity of the test and
that the laboratory include a disclaimer with the test reports that the FDA has
not reviewed nor approved the test. The Company has converted the labeling of
most of its previous RUO reagents to ASR labeling in compliance with the new ASR
regulations. The FDA has not yet taken any regulatory action under the ASR
regulations, nor issued any guidance documents on the ASR regulations.
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.
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The Food and Drug Administration Modernization Act of 1997 made 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
affect the 510(k) and PMA processes, and also 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 30, 1999, the Company had 173 full-time employees, of whom
29 hold Ph.D. degrees, one holds an M.D. degree and 21 hold other advanced
degrees. Of the Company's total work force, 38 are in research and development,
51 are in sales/marketing, 17 are in regulatory affairs, 41 are in operations,
and 26 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,
1999, and their present positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----- --- ---------
<S> <C> <C>
John L. Bishop................... 54 President, Chief Executive Officer and Director
George R. Kennedy................ 45 Senior Vice President, Sales and Marketing
Russel K. Enns................... 50 Vice President, Regulatory Affairs
James J. Habschmidt.............. 43 Executive Vice President and Chief Financial Officer
James P. Marcella................ 56 Vice President, Operations
William E. Murray................ 45 General Counsel and Secretary
Paul J.J.G. Steuperaert.......... 59 President, European Operations
Steven A. Seelig................. 50 Vice President, Research and Development and Chief Medical Officer
</TABLE>
JOHN L. BISHOP has served as President and as a Director since
November 1993 and became Chief Executive Officer in February 1996. Mr. Bishop
was elected in March 1999 a director on the board of directors of the
American College of Medical Genetics Foundation. 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 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.
GEORGE R. KENNEDY served as Senior Vice President, Sales and
Marketing from September 1997 until March 30, 1999. 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.
21
<PAGE>
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.
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. Mr. Habschmidt resigned his position
effective March 31, 1999.
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 BP 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 BP Amoco's law
department in both attorney and patent attorney positions.
PAUL J.J.G. STEUPERAERT, has served as President, European Operations
since September 1, 1998. He served from 1988 until joining the Company as
president of Pilling Weck Europe, the surgical products division of Teleflex
Inc., where he managed all operations in Europe, the Middle East and Africa.
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.
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
22
<PAGE>
or co-inventor on fundamental patents covering QBR based diagnostic assays,
which are 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.
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 is consolidating its European administrative, technical
services, marketing and product warehousing support temporarily in a leased
facility of 4,100 square feet near Toulouse, France. The Company has acquired 10
acres of land near Toulouse and expects to begin construction of a facility for
its European headquarters in 1999. The Company also leases 3,300 square feet of
space in Stuttgart, Germany under a lease
23
<PAGE>
that expires in October 2000. The Company has granted a sublease to this space
and is moving its German sales offices to a leased facility of 350 square feet
near Cologne, Germany. The Company has leased 3,014 square feet near Paris,
France under a lease that expires in May 2005. The Company leases 400 square
feet near London, England. The Company's food testing business leases 10,237
square feet in Hopkinton, Massachusetts under a lease that expires in January
2000.
ITEM 3. LEGAL PROCEEDINGS
The Company and BP 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 relate to the manufacture, use and sale of
reagents and kits for detecting certain food pathogens currently used in the
Company's food testing business and to certain non-commercial research
activities of the Company. The stay previously entered in this suit 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, has been
lifted following the entry of a final judgment against CNS. The suit is now in
early stages of discovery and the Company is vigorously contesting the suit. As
part of the suit, the Company has brought a counter-claim of patent infringement
of a patent assigned to the Company relating to the plaintiff's manufacture, use
and sale of tests that detect a particular pathogen in foodstuffs.
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 Gen-Probe has appealed. In Japan, the Company's opposition was 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.
BP Amoco is named as a defendant in a suit pending in the U.S.
District Court in San Diego brought by David Kohne in 1998 that alleges the
defendant participated with CNS and the Regents of the University of
California to maliciously prosecute CNS' and the Regents' separate, prior
litigations against Gen-Probe and David Kohne. The case is presently on
remand to California Superior Court in San Diego. Discovery has not yet been
completed and no trial date has been set. BP Amoco is vigorously contesting
the suit. Gen-Probe also brought suit in 1998 against BP Amoco in California
Superior Court in San Diego, California alleging malicious prosecution based
on the CNS and the Regents suits. Discovery in the Gen-Probe suit is near
complete and trial is set for April 19, 1999.
The Company and BP Amoco have entered into a Cooperation Agreement
relating to the establishment of the Company as a stand-alone entity. The
Cooperation Agreement provides that BP Amoco and the Company will cooperate
in the defense of the suits brought by Gen-Probe and Kohne and includes an
allocation of any liability arising from the Gen-Probe suit or the suit
brought by Kohne. Under this allocation, BP Amoco has agreed to indemnify the
Company against any loss or damage based upon allegations by Gen-Probe and
David Kohne of unfair competition and related claims, including David Kohne's
and Gen-Probe's claims of malicious prosecution of the prior suits brought by
the Regents and CNS. The Company has agreed to indemnify BP Amoco against any
loss or damage based upon the patent infringement claims 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
24
<PAGE>
defense of the patent infringement claims. There can be no assurance that the
indemnity of the Company by BP 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
No matters were submitted to a vote of the Company's security
holders during the fourth quarter of 1998.
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 Stock Market, ticker
symbol VYSI.
As of March 18, 1999, there were 9,792,437 shares of Common Stock
outstanding held by approximately 45 shareholders of record.
The following table sets forth the high and low sale prices of the
Common Stock during each of the Company's fiscal quarters since its initial
public offering on February 5, 1998, as quoted on the NASDAQ Stock Market.
<TABLE>
<CAPTION>
QUARTER ENDED ($) HIGH ($) LOW
--------------------------- -------- -------
<S> <C> <C>
March 31 ................... 12.375 10.25
June 30 .................... 11.25 10.00
September 30 ............... 10.25 3.375
December 31 ................ 9.5 3.00
</TABLE>
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.
The Company received net proceeds of $32.1 million from the sale in an
initial public offering of 3,000,000 shares of its Common Stock (see Note 8 of
the Notes to Consolidated Financial Statements for further discussion). From the
closing date of the sale, February 10, 1998, to December 31, 1998, the Company
used such net offering proceeds as follows (in millions):
<TABLE>
<S> <C>
Purchase of short-term investments and cash equivalents..... $18.3
Repayment of note payable-BP Amoco.......................... 2.0
Acceleration of product development, expansion of sales and
marketing capabilities and funding of increased working
capital requirements and ongoing operations............... 11.8
-----
Total....................................................... $32.1
-----
-----
</TABLE>
Each of these amounts is a reasonable estimate of the application of
the net offering proceeds. This use of proceeds does not represent a material
change in the use of proceeds described in the Prospectus for the IPO.
Other than the repayment of a note payable to BP Amoco in the amount of $2
million, none of such amounts (with the exception of salaries and directors'
fees and working capital advances to affiliates incurred in the ordinary course
of business) represented direct or indirect payments to (i) directors or
officers of the Company or their associates, (ii) persons owning 10 percent or
more of any class of equity securities of the Company or (iii) affiliates of the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
25
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data presented below for the year ended
December 31, 1998 and the balance sheet data presented below at December 31,
1998 have been derived from the financial statements of the Company, which have
been audited by Deloitte & Touche LLP, independent auditors. The statement of
operations data for the years ended December 31, 1997, 1996, 1995 and 1994, and
the balance sheet data at December 31, 1997, 1996 and 1995, have been derived
from the financial statements of the Company, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. The balance sheet data at
December 31, 1994 is unaudited but has been prepared on the same basis as the
audited consolidated financial statements and in the opinion of management
includes all adjustments, consisting of normal recurring 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,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Product revenue .............................. $ 21,526 $ 16,021 $ 11,022 $ 6,296 $ 5,373
Grant and other revenue ...................... 1,828 2,212 2,216 921 30
-------- -------- -------- -------- --------
Total revenues ............................... 23,354 18,233 13,238 7,217 5,403
Cost of goods sold ........................... 9,896 8,063 6,127 4,360 3,639
-------- -------- -------- -------- --------
Gross profit ................................. 13,458 10,170 7,111 2,857 1,764
Research and development ..................... 11,488 10,533 9,456 8,871 11,639
Selling, general and administrative .......... 19,683 15,877 15,688 11,687 8,784
-------- -------- -------- -------- --------
Loss from operations ......................... (17,713) (16,240) (18,033) (17,701) (18,659)
Interest income (expense), net ............... 958 (636) (148) -- --
-------- -------- -------- -------- --------
Net loss ..................................... $(16,755) $(16,876) $(18,181) $(17,701) $(18,659)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net loss per basic and diluted
common share (1) ........................ $ (1.91) $ (15.89) $ (17.18) $ (16.72) $ (17.64)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Shares used in computing net
loss per basic and diluted share (1) .... 8,753 1,062 1,058 1,058 1,058
<CAPTION>
DECEMBER 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .................... $ 4,672 $ 669 $ 48 $ 247 $ 10
Short-term investments ....................... 13,667 -- -- -- --
Working capital (deficit) .................... 17,098 (9,138) (6,622) (2,625) 758
Total assets ................................. 35,043 16,940 15,115 19,167 17,574
Note payable--BP Amoco ....................... -- 9,202 5,106 -- --
</TABLE>
(1) Loss per share data presented in 1994 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 1994 through 1996.
26
<PAGE>
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. The Company currently markets clinical products cleared by the U.S.
Food and Drug Administration ("FDA") and the French Agence du Medicament
("ADM"), and a line of research products, imaging workstations and other
instruments for genetic analysis. During March 1998, the Company received
registration from the ADM to market throughout Europe the AneuVysion(TM) EC
Assay for Down Syndrome and other chromosomal disorders associated with mental
retardation and birth defects. The Company has a pending application for
registration with the ADM to market CEP(R) X/Y, CEP(R) 8 and CEP(R) 12 DNA Probe
Kits for use as adjuncts to standard cytogenetic analysis to identify and
enumerate the presence of chromosomes X and Y in bone marrow and chromosomes 8
and 12 in blood specimens, thus aiding in the diagnosis and treatment of
leukemia patients. The Company's PathVysion(TM) HER-2 DNA probe kit was approved
by the FDA in December 1998 for the assessment of the HER-2 gene status in node
positive Stage II breast cancer patients and for the prediction of the
therapeutic outcome of using adriamycin based chemotherapy in breast cancer
patients. Vysis currently markets six FDA cleared clinical products, including
PathVysion(TM) HER-2, the U.S. versions of CEP X/Y, CEP 8 and CEP 12 and
AneuVysion(TM), which received 510(k) clearance by the FDA during 1997, and over
300 research products. The company has direct sales operations in the United
States and Europe, a marketing partnership in Japan with Fujisawa Pharmaceutical
Co., and a worldwide distribution network.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 AND 1997
For the year ended December 31, 1998, total revenues increased to
$23.3 million from $18.2 million for the year ended December 31, 1997, an
increase of $5.1 million, or 28 percent. 1998 product revenues increased $5.5
million, or 34 percent, to $21.5 million from $16.0 million in 1997 while
1998 grant and other revenue decreased $0.4 million, or 17 percent, as
compared to 1997. The product revenue increase in 1998 is primarily
attributable to a $2.2 million, or 544 percent, increase in worldwide
shipments of FDA/ADM approved clinical genetic testing products ("clinical")
and a $3.9 million, or 84 percent, increase in worldwide shipments of
research and other genetic testing products ("research") offset by a $0.6
million, or 8 percent, decrease in United States shipments of genetic
instrument products. The increase in clinical sales was primarily the result
of having a full year of selling the FDA approved AneuVysion(TM) assay. The
increase in research products was partially due to approximately $1.3 million
of sales attributable to receiving Oncor, Inc.'s ("Oncor") non-oncology
fluorescence IN SITU hybridization ("FISH") business as part of a settlement
agreement ending a patent infringement suit brought by the Company, as
exclusive licensee, and its licensor against Oncor, Inc. The decrease in
instrument sales, which consists primarily of cytogenetic imaging equipment
including software, was the result of a general decline in overall market
demand. The Company expects the current market environment of reduced demand
for cytogenetic imaging equipment to continue through 1999. For the year
ended December 31, 1998, grant and other revenue decreased $0.4 million, or
17 percent, primarily due to the completion in 1998 of two United States
Department of Commerce research grants that resulted in a $0.7 million
decrease in 1998 as compared to 1997, offset by $0.4 million of 1998
nonrecurring license and other revenues related to the previously mentioned
settlement agreement with Oncor.
Cost of goods sold increased to $9.9 million for the year ended
December 31, 1998 from $8.1 million for 1997 as a result of the increase in the
volume of products sold. As a percentage of product revenue, 1998 product gross
profit increased to 54.0 percent as compared to 49.7 percent for 1997, primarily
due to a better product mix as the aforementioned significant growth in the
higher margin clinical and research products represented a higher percentage of
the total business versus 1997. Instrument revenues carry significantly lower
margins than the clinical and research products.
27
<PAGE>
Research and development expense increased to $11.5 million for the
year ended December 31, 1998 from $10.5 million in the prior year. The $1.0
million increase is primarily due to an increase in research and development
activities among all three of the Company's technology platforms.
Selling, general and administrative expense increased to $19.7 million
for the year ended December 31, 1998, representing a $3.8 million increase over
1997. This increase was the result of an increase of $3.0 million in selling
expense primarily attributable to the hiring of additional sales personnel,
expenses incurred to launch the Company's fourth quarter FDA approved
PathVysion(TM) product, an increase in bad debt expense associated with
increased product revenues as well as a $0.8 million increase in general and
administrative expenses incurred to manage the overall Company growth and
expansion of operations.
Interest income increased to $1.3 million for the year ended December
31, 1998, representing a $1.3 million increase over the prior year as a result
of investment of the proceeds from the Company's February 10, 1998 initial
public offering. Interest expense decreased to $0.4 million for 1998,
representing a $0.2 million decrease primarily due to the Company no longer
having a balance due to BP Amoco as it did through February 10, 1998 when it
completed its IPO.
YEAR ENDED DECEMBER 31, 1997 AND 1996
Total revenues increased to $18.2 million for the year ended December
31, 1997 from $13.2 million for the year 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 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 year 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 $8.1 million for the year ended
December 31, 1997 from $6.1 million for the year 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 product revenues, gross profit increased from
44.4 percent for the year ended December 31, 1996 to 49.7 percent for the year
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 $10.5 million for the
year ended December 31, 1997 from $9.5 million for the year ended December 31,
1996. The $1.0 million increase is primarily due to additional contract research
with a collaborative partner.
Selling, general and administrative expense increased to $15.9 million
for the year ended December 31, 1997 from $15.7 million for the year ended
December 31, 1996. This increase was due to an increase in selling expense of
$1.5 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 BP Amoco
of $107,000 during the year ended December 31, 1996 as a result of BP Amoco's
investment of the Company's real estate sale proceeds. The Company incurred
interest expense of $636,000 during the year ended December 31, 1997 and
$255,000 during the year ended December 31, 1996 related to the note payable to
BP Amoco.
28
<PAGE>
INCOME TAXES
Prior to the completion of the Company's IPO, the results of operations
were included in the consolidated income tax returns of BP Amoco; accordingly,
the domestic net operating losses through February 10, 1998 have been utilized
by BP Amoco in its consolidated income tax returns and are not available to
offset the Company's future taxable income. Subsequent to the IPO, the Company
will file a separate federal income tax return. As the Company was in a loss
position for the period February 11, 1998 through December 31, 1998, no federal
provision is recorded. For state income taxes, the Company's results of
operations will continue to be included with BP Amoco due to their 69 percent
ownership interest in the Company in those states where required by state tax
law. Under state tax laws in a number of states, including Illinois (the state
in which much of the Company's business is taxed), the Company is required by
law to be included in BP Amoco's unitary state tax returns as long as BP Amoco
owns or controls 50 percent or more of the voting equity. For unitary state
filings, the tax sharing agreement with BP Amoco requires BP Amoco to pay the
Company the incremental tax savings, if any, received by BP Amoco as a result of
including the Company's results of operations in such filings. The agreement
also requires the Company to pay BP Amoco the incremental tax liability, if any,
incurred by BP Amoco as a result of including the Company's results of
operations in such filings. The Company and BP Amoco are currently unable to
estimate the amount of state income tax benefit to be received by the Company as
a result of its operating losses for the period February 11, 1998 through
December 31, 1998 and, accordingly, no state tax benefit is recorded. For state
income taxes in non-unitary states, the Company has not recorded any benefit as
a result of its loss position for the period February 11, 1998 through December
31, 1998.
A full valuation allowance has been provided for all deferred tax
assets (net of liabilities) at December 31, 1998, as management does not
consider realization of such amounts more likely than not.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $14.6 million, $15.2 million
and $17.4 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Cash used in operating activities primarily relates to ongoing
operating losses as previously discussed above.
Net cash used in (provided by) investing activities was $14.7
million, $0.8 million and $(4.7) million for the years ended December 31,
1998, 1997 and 1996, respectively. The 1998 increase in cash used in
investing activities of $13.9 million as compared to 1997 resulted primarily
from the purchase of short-term investments, net of proceeds from maturities,
as a result of investing a portion of the proceeds from the Offering. The
1997 increase in cash used in investing activities of $5.5 million as
compared to 1996 was primarily attributable to the sale of two facilities in
Framingham, Massachusetts during 1996 for $6.7 million partially offset by a
$1.0 million decrease in 1997 other asset expenditures.
Net cash flows provided by financing activities was $33.3 million,
$16.7 million and $12.4 million for the years ended December 31, 1998, 1997 and
1996, respectively. The 1998 increase of $16.6 million primarily resulted from
the receipt of $32.1 million in net proceeds from the Offering and $1.1 million
of long-term debt, net of repayments, partially offset by the reduced borrowings
from BP Amoco. Such borrowings from BP Amoco ceased February 10, 1998, upon the
completion of the Offering at which time the remaining $2.0 million note balance
was repaid. Prior to the Offering, the Company financed its operations primarily
through loans and capital contributions and expenses funded by BP Amoco.
The Company does not have any material commitments for capital
expenditures. 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 13.7
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 $0.3 million to $1.8 million per year
for 1999 through 2002. See Note 7 of Notes to Consolidated Financial Statements.
29
<PAGE>
At December 31, 1998, the Company had cash, cash equivalents and
short-term investments of $18.3 million and an accumulated deficit of $48.6
million. Since its inception, the Company has experienced negative cash flows
from operations. In order to preserve the Company's cash position and to reduce
cash used in operating activities, the Company's Board of Directors approved
during March 1999 a restructuring plan that has resulted in the elimination of
20 positions in the U.S., representing a 12 percent reduction of the U.S.
work force, thereby reducing ongoing annual cash expenditures by an estimated
$1.6 million. The Company expects to record a charge for severance costs of
approximately $0.5 million during the first quarter of 1999.
The Company believes that its current cash and short-term investment
position, and the interest to be earned thereon, will be sufficient to fund
the Company's operations into 2000. The Company's estimate of the time period
for which cash funds will be adequate to fund its operations is a forward
looking estimate subject to risks and uncertainty, and actual results may
differ materially. The Company's requirements for additional capital will
depend on many factors, including growth in product revenues, 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 June 1998, the Financial Accounting Standards Board issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities," effective
for all fiscal quarters of all fiscal years beginning after June 15, 1999. It
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company anticipates that, due to its
current non-use of derivative instruments, the adoption of SFAS No. 133 will not
have a significant effect on the Company's results of operations or its
financial position.
READINESS FOR THE YEAR 2000
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. As the Year 2000
approaches, these code fields will need to accept four digit entries to
distinguish years beginning with "19" from those beginning with "20". As a
result, computer systems and/or software products used by many companies may
need to be upgraded to comply with such Year 2000 requirements.
The Company is in the process of evaluating the Year 2000 readiness of
the software products sold by the Company ("Products"), the information
technology systems used in its operations ("IT Systems"), and its non-IT
Systems, such as manufacturing/facility related equipment and other systems that
could impact the operations of the Company. The Company currently anticipates
that this project will consist of the following phases: (i) identification of
all Products, IT Systems, and non-IT Systems; (ii) assessment of repair or
replacement requirements; (iii) repair or replacement; (iv) testing where
necessary; (v) implementation; and (vi) creation of contingency plans in the
event of Year 2000 failures.
The Company completed the review of all current versions of its
Products and believes that all Products are Year 2000 compliant. With respect to
IT Systems, the Company has developed a plan to make its systems Year
30
<PAGE>
2000 compliant and has begun implementation of the plan during the first quarter
of 1999. The Company's current IT Systems related to manufacturing are already
Year 2000 compliant. To implement the other IT Systems modules for Year 2000
compliance requires an upgrade to a more current version of the existing
software, which was supplied to the Company at no charge. However, the Company
has elected to use this opportunity to upgrade all modules to the most current
version offered by the software vendor. The Company currently expects this
project to be substantially complete by the third quarter of 1999. Once
installed and operational, the Company will assess the need to develop
contingency plans related to these IT Systems. The Company does not expect this
project to have a significant impact on its information technology ("IT") budget
or other non-related IT projects, as discussed below. The Company will continue
to implement IT systems with strategic value and has started to implement a new
European management information system which is expected to also be completed in
1999.
In the area of non-IT Systems, the Company relies, both domestically
and internationally, upon various vendors, government agencies, research
institutions, utility companies, telecommunications service companies,
delivery service companies, and other material and service providers who are
outside of the Company's control. There is no assurance that such parties
will not suffer a Year 2000 business disruption, which could have a material
adverse effect on the Company's financial condition and results of
operations. The Company has initiated formal communications with significant
vendors and customers to determine the extent of which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company is requesting that third party vendors represent their
products and services to be Year 2000 compliant and that they have a program
to test for Year 2000 compliance. However, the response of those third
parties is beyond the Company's control. To the extent that the Company does
not receive adequate responses by early 1999, it is prepared to develop
contingency plans, with completion of these plans scheduled for no later than
mid-1999. At this time, the Company cannot estimate the additional cost, if
any, that might develop from such contingency plans. With respect to the
manufacturing/facility related equipment and other systems, the Company is in
the process of assessing these systems for Year 2000 compliance.
To date, the Company has not incurred any significant expenditures in
connection with identifying or evaluating Year 2000 compliance issues. Most of
its expenses have related to the opportunity cost of time spent by employees of
the Company evaluating its Products, IT Systems, non-IT Systems, and general
Year 2000 compliance matters. Absent a significant Year 2000 compliance
deficiency, the Company currently estimates that the cost to complete its Year
2000 compliance programs, including updating its IT System modules to the most
current version available, will be less than $100,000 of expense and $75,000 of
capitalized costs.
Breakdowns in the Company's IT Systems and non-IT Systems, such as its
manufacturing application software and the computer chips embedded in its plant
equipment, as well as other Year 2000-related problems such as disruptions in
the delivery of materials, power, heat or water to the Company's facilities,
could prevent the Company from being able to manufacture and ship its products.
If the Company were to fail to correct a material Year 2000 problem, its normal
business activities and operations could be interrupted. Such interruptions
could materially and adversely affect the Company's results of operations,
liquidity and financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk associated with changes in
foreign currency exchange rates and interest rates. The Company's exchange
rate risk is limited to its operations in England, Germany, France and Italy.
The exchange rate risk is mitigated through local purchases for the majority
of their expenditures. The Company's primary foreign currency exchange rate
risk results from the foreign operations' intercompany purchases of clinical
and research products as well as certain instrument system components. The
majority of the intercompany purchases are not expected to be repaid in the
foreseeable future as these operations have required more working capital as
a result of their significant growth. Sales throughout the rest of the world
are denoted in U.S. dollars. The Company does not believe that the impact
from foreign currency exchange rate fluctuations will have a material impact
on its financial statements. The net impact of foreign exchange activities on
earnings was immaterial for the years ended December 31, 1998, 1997 and 1996.
The foreign currency translation loss included in shareholders' equity
resulting from the translation of the financial statements of the Company's
international subsidiaries into U.S. dollars decreased by $0.1 million in
1998 due to the weakening of the U.S. dollar against the functional currency
of the Company's international subsidiaries. Interest rate exposure is
primarily limited to the $13.7 million of short-term investments owned by the
Company. Such securities are debt instruments which generate interest income
for the Company on excess cash balances. The Company does not actively manage
the
31
<PAGE>
risk of interest rate fluctuations; however, such risk is mitigated by the
relatively short term, less than 12 months, nature of these investments.
The Company does not consider the present rate of inflation to have a
significant impact on its business.
ITEM 8. FINANCIAL STATEMENTS
The financial statements of the Company on pages 37 to 56 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
On December 31, 1998, the Company dismissed PricewaterhouseCoopers LLP
("PwC") as the Company's independent accountant. On November 20, 1998, PwC
notified the Company that upon final approval of the pending British
Petroleum-Amoco Corporation merger, PwC would no longer be independent with
respect to the Company. The Company was informed that a lack of independence
would result from the business relationship between PwC and the anticipated
merged British Petroleum-Amoco Corporation organization, the Company's majority
shareholder.
PwC's report on the consolidated financial statements of the Company
for the years ended December 31, 1997 and 1996 did not contain an adverse
opinion or a disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles. In connection with the audit
of the Company's consolidated financial statements for the years ended December
31, 1997, 1996 and 1995, and in subsequent interim periods through December 31,
1998, there were no disagreements with PwC on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of PwC,
would have caused it to make reference to the subject matter of the
disagreements in its report. In addition, there has been no reportable events
for the years ending December 31, 1997, 1996 and 1995 and subsequent periods
through December 31, 1998 as described in paragraph (a) (1) (v) of Item 304 of
Regulation S-K, promulgated under the Securities Exchange Act of 1934 (a
"Reportable Event").
Effective December 31, 1998, the Company retained Deloitte & Touche LLP
("D&T") as its independent auditors. The decision to change auditors was
approved by the Audit Committee of the Board of Directors of the Company. Prior
to engaging D&T, the Company had never consulted D&T concerning either the
application of accounting principles to a specified completed or uncompleted
transaction, the type of audit opinion that might be rendered on the Company's
financial statements or any matter that was either the subject of a disagreement
with the Company's former accountant or a Reportable Event. Further, there was
no written report or oral advice provided that D&T concluded that was an
important factor considered by the Company in reaching a decision as to an
accounting, auditing or financial reporting issue.
PART III
Item 10, "Directors and Executive Officers of the Registrant," Item 11,
"Executive Compensation," Item 12, "Security Ownership of Certain Beneficial
Owners and Management," and Item 13, "Certain Relationships and Related
Transactions," have been omitted from this report inasmuch as the Company will
file with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this report a
definitive Proxy Statement for the 1999 Annual Meeting of Stockholders of the
Company, at which meeting the stockholders will vote upon the election of
directors. The information under the captions "Election of Directors,"
"Ownership of Securities," "Executive Compensation and Related Information" and
"Certain Relationships and Transactions" in such definitive Proxy Statement are
incorporated herein by reference.
32
<PAGE>
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 ......................................... 34
Independent Auditors' Report ................................. 35
Report of Independent Accountants ............................ 36
Consolidated Balance Sheet--December 31, 1998 and 1997 ....... 37
Consolidated Statement of Operations for the Years Ended
December 31, 1998, 1997 and 1996 ......................... 38
Consolidated Statement of Comprehensive Operations ........... 39
Consolidated Statement of Stockholders' Equity (Deficit) for
the Years Ended December 31, 1998, 1997 and 1996 ......... 40
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 ......................... 41
Notes to Consolidated Financial Statements ................... 42
</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--Valuation and Qualifying Accounts ............... 57
</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
The Company did not file any Form 8-K reports during the fourth quarter
of 1998.
33
<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 1998 consolidated financial statements have
been audited by Deloitte & Touche LLP, independent auditors, whose audit was
made in accordance with generally accepted auditing standards. Management has
made available to Deloitte & Touche 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
Deloitte & Touche LLP during its audit were valid and appropriate. The
Independent Auditors' Report 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, Deloitte
& Touche LLP has full and free access to the Audit Committee to discuss internal
accounting control, auditing and financial reporting matters.
<TABLE>
<S> <C>
JOHN L. BISHOP JAMES J. HABSCHMIDT
President and Chief Executive Vice President and
Executive Officer Chief Financial Officer
</TABLE>
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Vysis, Inc.:
We have audited the consolidated balance sheets of Vysis, Inc. (an
indirect subsidiary of BP Amoco p.l.c.) and its subsidiaries (the "Company"), as
of December 31, 1998, and the related consolidated statements of operations,
comprehensive operations, stockholders' equity (deficit), and cash flows for the
year then ended. Our audit also included the consolidated financial statement
schedule listed in the Index at Item 14(a)(2). These financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audit. The financial
statements and financial statement schedule of the Company for the years ended
December 31, 1997 and 1996 were audited by other auditors whose report, dated
March 13, 1998, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1998 consolidated financial statements present
fairly, in all material respects, the financial position of Vysis, Inc. (an
indirect subsidiary of BP Amoco p.l.c.) and its subsidiaries at December 31,
1998, and the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles. Also, in our
opinion, such 1998 consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 12, 1999
(March 25, 1999 as to Note 15)
35
<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 33 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 the results of their operations and their cash flows for each of the
two 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. We have not
audited the consolidated financial statements for any period subsequent to
December 31, 1997.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
March 13, 1998
36
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 4,672 $ 669
Short-term investments ...................................... 13,667 --
Accounts receivable, net .................................... 6,106 4,629
Current portion of long-term lease receivables, net ......... 378 --
Inventories ................................................. 2,487 2,733
Other current assets ........................................ 782 1,108
-------- --------
Total current assets ...................................... 28,092 9,139
Property and equipment, net ................................... 3,879 4,646
Investment .................................................... 562 677
Long-term lease receivables, net .............................. 626 --
Other assets .................................................. 1,884 2,478
-------- --------
Total assets .............................................. $ 35,043 $ 16,940
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt ........................... $ 553 $ --
Accounts payable and accrued liabilities .................... 9,475 8,538
Note payable--BP Amoco ...................................... -- 9,202
Deferred revenue ............................................ 966 537
-------- --------
Total current liabilities ................................. 10,994 18,277
-------- --------
Long-term debt ................................................ 523 --
-------- --------
Commitments and contingencies (Notes 4, 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;
none issued and outstanding at December 31, 1998; 6,200,000
issued and outstanding at December 31, 1997 ............... -- 6
Series B; 553,126 shares designated; none issued and
outstanding at December 31, 1998; 553,126 issued and
outstanding at December 31, 1997 .......................... -- 1
Common stock, $0.001 par value; 35,000,000 shares authorized;
9,788,401 issued and outstanding at December 31, 1998;
1,071,970 issued and outstanding at December 31, 1997 ..... 10 1
Additional paid-in capital .................................. 71,862 30,396
Deferred compensation ....................................... (81) (206)
Unrealized gain on investment ............................... 462 577
Cumulative translation adjustment ........................... (101) (241)
Accumulated deficit ......................................... (48,626) (31,871)
-------- --------
Total stockholders' equity (deficit) ...................... 23,526 (1,337)
-------- --------
Total liabilities and stockholders' equity (deficit) ...... $ 35,043 $ 16,940
-------- --------
-------- --------
</TABLE>
See notes to the consolidated financial statements.
37
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product revenue .......................... $ 21,526 $ 16,021 $ 11,022
Grant and other revenue .................. 1,828 2,212 2,216
-------- -------- --------
Total revenues ....................... 23,354 18,233 13,238
Cost of goods sold ............................ 9,896 8,063 6,127
-------- -------- --------
Gross profit .................................. 13,458 10,170 7,111
-------- -------- --------
Operating expenses:
Research and development ................. 11,488 10,533 9,456
Selling, general and administrative ...... 19,683 15,877 15,688
-------- -------- --------
Total operating expenses ............. 31,171 26,410 25,144
-------- -------- --------
Loss from operations .......................... (17,713) (16,240) (18,033)
Interest income ............................... 1,337 -- 107
Interest expense .............................. (379) (636) (255)
-------- -------- --------
Net loss ...................................... $(16,755) $(16,876) $(18,181)
-------- -------- --------
-------- -------- --------
Basic and diluted net loss per share .......... $ (1.91) $ (15.89) $ (17.18)
-------- -------- --------
-------- -------- --------
Shares used in computing basic and diluted
net loss per share .......................... 8,753 1,062 1,058
</TABLE>
See notes to the consolidated financial statements.
38
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENT OF COMPREHENSIVE OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net loss ............................................. $(16,755) $(16,876) $(18,181)
Other comprehensive income:
Cumulative translation adjustment ............... 140 (257) 20
Unrealized holding gain (loss) on investment .... (115) 577 --
-------- -------- --------
Total other comprehensive income ............ 25 320 20
-------- -------- --------
Comprehensive loss ................................... $(16,730) $(16,556) $(18,161)
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to the consolidated financial statements.
39
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Convertible preferred stock:
Beginning balance ........................................... $ 7 $ 6 $ --
Recapitalization ............................................ -- -- 6
Issuance of Series B convertible preferred stock ............ -- 1 --
Conversion of Series A and Series B preferred
stock to common stock ..................................... (7) -- --
-------- -------- --------
Ending balance .............................................. -- 7 6
-------- -------- --------
Common stock:
Beginning balance ........................................... 1 1 --
Recapitalization ............................................ -- -- 1
Conversion of Series A and Series B preferred stock ......... 5 -- --
Conversion of note payable--BP Amoco ........................ 1 -- --
Issuance of common stock through initial public offering .... 3 -- --
-------- -------- --------
Ending balance .............................................. 10 1 1
-------- -------- --------
Additional paid-in capital:
Beginning balance ........................................... 30,396 17,555 --
Recapitalization ............................................ -- -- 12,311
Income tax benefit from BP Amoco ............................ 1,126 7,451 5,031
Deferred compensation ....................................... 21 277 213
Conversion of note payable--BP Amoco ........................ 8,099 5,105 --
Exercise of stock options ................................... 81 8 --
Net proceeds from initial public offering ................... 32,139 -- --
-------- -------- --------
Ending balance .............................................. 71,862 30,396 17,555
-------- -------- --------
Capital contribution--BP Amoco:
Beginning balance ........................................... -- -- 13,189
Net loss (pre-recapitalization) ............................. -- -- (3,186)
Advances from BP Amoco ...................................... -- -- 2,315
Recapitalization ............................................ -- -- (12,318)
-------- -------- --------
Ending balance .............................................. -- -- --
-------- -------- --------
Deferred compensation:
Beginning balance ........................................... (206) (90) --
Stock option grants ......................................... (21) (277) (213)
Amortization ................................................ 146 161 123
-------- -------- --------
Ending balance .............................................. (81) (206) (90)
-------- -------- --------
Unrealized gain (loss) on investment:
Beginning balance ........................................... 577 -- --
Current year activity ....................................... (115) 577 --
-------- -------- --------
Ending balance .............................................. 462 577 --
-------- -------- --------
Cumulative translation adjustment:
Beginning balance ........................................... (241) 16 (4)
Current year activity ....................................... 140 (257) 20
-------- -------- --------
Ending balance .............................................. (101) (241) 16
-------- -------- --------
Accumulated deficit:
Beginning balance ........................................... (31,871) (14,995) --
Net loss (post-recapitalization) ............................ (16,755) (16,876) (14,995)
-------- -------- --------
Ending balance .............................................. (48,626) (31,871) (14,995)
-------- -------- --------
Total stockholders' equity (deficit) .......................... $ 23,526 $ (1,337) $ 2,493
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to the consolidated financial statements.
40
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................. $(16,755) $(16,876) $(18,181)
Reconciliation of net loss to net cash used in
operating activities:
Depreciation and amortization .......................... 2,338 2,885 1,805
Write-off of goodwill .................................. 205 -- --
Loss on disposition of assets .......................... -- (30) (246)
Donation of marketable securities ...................... -- -- 515
Stock compensation ..................................... 146 161 123
Changes in assets and liabilities:
Accounts receivable .................................. (1,310) (2,054) (943)
Inventories .......................................... 223 (473) (804)
Other current assets ................................. 368 (336) (467)
Lease receivables .................................... (1,004) -- --
Other assets ......................................... (208) -- --
Accounts payable and accrued liabilities ............. 1,009 1,380 770
Deferred revenue ..................................... 428 129 57
-------- -------- --------
Net cash used in operating activities .................. (14,560) (15,214) (17,371)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of short-term investments ....... 14,465 -- --
Purchases of short-term investments ...................... (28,132) -- --
Purchases of property and equipment ...................... (675) (280) (509)
Acquisition of Techgen ................................... -- -- (295)
Proceeds from sale of property and equipment ............. -- 30 6,778
Proceeds from sale of investment ......................... -- -- 314
Increase in other assets ................................. (368) (557) (1,548)
-------- -------- --------
Net cash (used in) provided by investing activities .... (14,710) (807) 4,740
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................... 32,142 -- --
Capital contributions--BP Amoco, net ..................... -- -- 2,315
Increase in note payable--BP Amoco ....................... 1,665 15,697 9,649
Expenses funded by BP Amoco .............................. 294 956 452
Loan repayment to BP Amoco ............................... (2,000) -- --
Proceeds from long-term borrowings ....................... 1,488 -- --
Principal payments on long-term borrowings ............... (412) -- --
Proceeds from exercise of stock options .................. 81 8 --
-------- -------- --------
Net cash provided by financing activities .............. 33,258 16,661 12,416
Effect of exchange rate changes on cash .................... 15 (19) 16
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ....... 4,003 621 (199)
Cash and cash equivalents at beginning of period ........... 669 48 247
-------- -------- --------
Cash and cash equivalents at end of period ................. $ 4,672 $ 669 $ 48
-------- -------- --------
-------- -------- --------
Interest paid .............................................. $ 248 $ -- $ --
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to the consolidated financial statements.
41
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
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. On December 31, 1998,
Amoco Corporation merged with the former British Petroleum Corporation and, as a
result of the merger, became a wholly owned subsidiary of BP Amoco p.l.c. All
references to BP Amoco shall mean BP Amoco p.l.c. or its wholly owned
subsidiary, Amoco Corporation, and its indirectly wholly owned subsidiary, Amoco
Technology Company. In 1991, ATC acquired from Genzyme its remaining interest in
Gene-Trak Systems, a joint venture focused on infectious disease diagnostics
originally formed by BP 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 BP Amoco were recorded by the
Company at BP Amoco's net book value at the date of transfer.
Vysis is a genomic disease management company focused on developing and
marketing clinical products as well as providing research 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, including the ability to determine the presence, absence,
number and structure of chromosomes and individual genes. The Company also
develops and markets a line of instrument products which includes genetic
imaging workstations and other processing instruments. These workstations
provide an integrated solution to enhance and automate the visualization,
analysis and storage of DNA probe images. In addition, the Company develops,
manufactures and commercializes products for the detection and identification of
food-borne pathogens to food processors and quality control laboratories.
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 - BP 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.
42
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
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. Revenue attributable to technical support and software enhancements
provided with the sale of certain instrument products is deferred and recognized
ratably over the period of time such services are provided, generally one year.
Revenue on equipment maintenance contracts is deferred and recognized ratably
over the period of the contract, generally one year. Grant and license fee
revenue is recognized as earned pursuant to the related agreement. Payments
received under these agreements prior to the completion of the related work are
recorded as deferred revenue.
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. Basic
earnings per share is computed using the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share also
includes the impact of potential common shares during the period. No
reconciliation is presented of basic and diluted net loss per share as potential
common shares are antidilutive. Certain prior period amounts have been restated
in accordance with SFAS No. 128.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
requires that all items recognized under accounting standards as components of
comprehensive earnings be reported in interim and annual financial statements in
the same prominence as other interim and annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
earnings by their nature in interim and annual financial statements. Other
comprehensive earnings includes foreign currency translation adjustments and
unrealized gains and losses on investments classified as available-for-sale.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments, which are
readily convertible into cash and have maturities of three months or less from
the date of acquisition.
SHORT-TERM INVESTMENTS
Short-term investments have maturities of more than three months and
less than one year. These investments are stated at cost plus accrued interest,
as it is the intent of the Company to hold these securities until maturity.
43
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Equipment depreciation is
provided on the straight-line basis over the expected useful lives of three to
seven years. 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.
OTHER ASSETS
Other assets include capitalized license fees and goodwill which are
carried at cost less accumulated amortization. Amortization expense is
calculated on a straight-line basis over the estimated economic useful lives of
the assets, ranging from four to 17 years. The Company periodically reviews the
recoverability of these assets based primarily upon future anticipated use of
the assets and estimated future cash flows.
FINANCIAL INSTRUMENTS
The carrying value of cash equivalents, investments, accounts
receivable, lease receivables, accounts payable and debt approximates their fair
value. Cash equivalents and short-term investments are primarily corporate debt
securities with creditworthy corporations. With respect to accounts and lease
receivables, 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
(deficit). Gains and losses resulting from foreign currency transactions are
included in the results of operations and have not been significant.
44
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK-BASED COMPENSATION
The Company recognizes stock-based compensation costs under the
intrinsic value based method of accounting as prescribed by Accounting
Principles Board Opinion No. 25. The Company has adopted the disclosure
requirements of SFAS No. 123 "Accounting for Stock-Based Compensation."
INCOME TAXES
Deferred income taxes result primarily from temporary differences
between financial and tax reporting. Deferred tax assets and liabilities are
determined based on the difference between the tax bases of assets and
liabilities and their financial reporting amounts using enacted tax rates.
Future tax benefits are recognized to the extent that realization of such
benefits is more likely than not.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities," effective
for all fiscal quarters of all fiscal years beginning after June 15, 1999. It
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company anticipates that, due to its
current non-use of derivative instruments, the adoption of SFAS No. 133 will not
have a significant effect on the Company's results of operations or its
financial position.
RECLASSIFICATIONS
Certain amounts in fiscal 1997 and 1996 have been reclassified to
conform to the fiscal 1998 presentation. These changes had no impact on
previously reported results of operations or stockholders' equity (deficit).
NOTE 2--RELATED PARTY TRANSACTIONS:
The Company has received certain legal services, research and
development support, and administrative support from BP 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,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Research and development .......... $131 $-- $--
Selling, general and administrative -- 182 304
---- ---- ----
$131 $182 $304
---- ---- ----
---- ---- ----
</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 1998 and 1997, BP Amoco paid on behalf of the Company certain expenses
aggregating $32,000 and $138,000, respectively. Prior to an initial public
offering (the "Offering"--see Note 8), the Company also received cash advances
to meet its working capital requirements and other capital assets from BP Amoco.
For 1998 and 1997 such amounts consisted of advances of $1,665,000 and
$15,697,000, respectively, under a note payable to BP Amoco. During 1996, such
amounts consisted of contributed capital of $2,315,000 and advances of
$10,137,000 under a note payable to BP Amoco. The notes payable to BP Amoco
accrued interest at an annual rate of 7.5 percent that resulted in interest
expense of $131,000, $636,000 and $148,000 for the years ended
45
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998, 1997 and 1996, respectively. Concurrent with the consummation
of the Offering (see Note 8), the Company converted $8.1 million of the Note
Payable-BP Amoco into 675,000 shares of common stock and repaid the remaining
note balance of $2.0 million.
The Company entered into a tax sharing agreement with BP 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 prior to the Offering in BP Amoco's consolidated federal
tax return. Under this agreement, $1,126,000, $7,451,000 and $5,031,000 were
recorded as contributed capital and a related reduction of the note payable to
BP Amoco during 1998, 1997 and 1996, respectively. See Note 6 for further
discussion of the tax sharing agreement.
NOTE 3--COMPOSITION OF BALANCE SHEET COMPONENTS:
Accounts receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
------- -------
<S> <C> <C>
Accounts receivable ....................... $ 7,046 $ 4,826
Less: allowance for doubtful accounts .... (940) (197)
------- -------
$ 6,106 $ 4,629
------- -------
------- -------
</TABLE>
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------ ------
<S> <C> <C>
Raw materials and supplies ................ $ 900 $1,198
Finished goods ............................ 1,587 1,535
------ ------
$2,487 $2,733
------ ------
------ ------
</TABLE>
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Leasehold improvements .................... $ 2,386 $ 2,382
Equipment, furniture and fixtures ......... 9,314 8,713
-------- --------
11,700 11,095
Less: accumulated depreciation ........... (7,821) (6,449)
-------- --------
$ 3,879 $ 4,646
-------- --------
-------- --------
</TABLE>
46
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------ ------
<S> <C> <C>
License fees (net of accumulated amortization of
$397 and $308 in 1998 and 1997, respectively) . $1,211 $1,192
Software development costs (net of accumulated
amortization of $841 and $143 in 1998 and 1997,
respectively) ................................. 549 989
Prepaid expenses ................................ 124 --
Goodwill (net of accumulated amortization of $457
and $160 in 1998 and 1997, respectively) ...... -- 297
------ ------
$1,884 $2,478
------ ------
------ ------
</TABLE>
Accounts payable and accrued liabilities consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------ ------
<S> <C> <C>
Trade accounts payable ....... $3,435 $3,017
Accrued rent ................. 1,020 1,107
Employee related costs ....... 1,169 1,084
Accrued professional fees .... 2,059 1,534
Other taxes payable .......... 807 356
Other ........................ 985 1,440
------ ------
$9,475 $8,538
------ ------
------ ------
</TABLE>
NOTE 4--LEASE RECEIVABLES AND LONG-TERM DEBT:
A wholly-owned foreign subsidiary of the Company has entered into
certain sales-type leasing transactions with customers. In order to comply with
local regulations with respect to such leasing transactions, the subsidiary must
borrow money and has assigned to the lender a security interest in the lease
receivables and related equipment. The debt is payable over a three year period
in monthly or quarterly installments and bears interest at rates ranging from
6.4 percent to 9.5 percent. The aggregate maturities of gross lease receivables
and long-term debt for the years ending December 31, are as follows:
<TABLE>
<CAPTION>
GROSS LONG-TERM
RECEIVABLES DEBT
----------- ---------
<S> <C> <C>
1999 ............................ $ 406 $ 547
2000 ............................ 547 454
2001 ............................ 444 75
------ ------
$1,397 $1,076
------ ------
------ ------
</TABLE>
47
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of net lease receivables are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-----------
<S> <C>
Gross lease receivables ................. $ 1,397
Unearned income ......................... (43)
Allowance for doubtful accounts ......... (350)
-------
$ 1,004
-------
-------
</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 was therefore recorded at cost of $100,000. During 1997, the
restriction expired and, as a result, the investment balances of $562,000 and
$677,000 represent the market value of the available-for-sale Incyte common
stock at December 31, 1998 and 1997, respectively. The unrealized gains of
$462,000 and $577,000 have been included as a component of stockholders' equity
(deficit) at December 31, 1998 and 1997, respectively.
NOTE 6--INCOME TAXES:
Prior to the completion of the Offering (see Note 8), the Company's
results of operations were included in the consolidated income tax returns of BP
Amoco; accordingly, the Company's domestic net operating losses through February
10, 1998 have been utilized by BP Amoco in its consolidated income tax returns
and are not available to offset the Company's future taxable income. Subsequent
to the Offering, the Company will file a separate federal income tax return. As
the Company was in a loss position for the period February 11, 1998 through
December 31, 1998, no federal provision is recorded. For state income taxes, the
Company's results of operations will continue to be included with BP Amoco in
those states where required by state tax law. Under state tax laws in a number
of states, including Illinois (the state in which much of the Company's business
is taxed), the Company is required by law to be included in BP Amoco's unitary
state tax returns as long as BP Amoco owns or controls 50 percent or more of the
voting equity. For unitary state filings, the tax sharing agreement with BP
Amoco requires BP Amoco to pay the Company the incremental tax savings, if any,
received by BP Amoco as a result of including the Company's results of
operations in such filings. The agreement also requires the Company to pay BP
Amoco the incremental tax liability, if any, incurred by BP Amoco as a result of
including the Company's results of operations in such filings. The Company and
BP Amoco are currently unable to estimate the amount of state income tax benefit
to be received by the Company as a result of its operating losses for the period
February 11, 1998 through December 31, 1998 and, accordingly, no state tax
benefit is recorded. For state income taxes in non-unitary states, the Company
has not recorded any benefit as a result of its loss position for the period
February 11, 1998 through December 31, 1998.
The income tax effect of temporary differences comprising the deferred
tax assets and liabilities is as follows (in thousands):
48
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Patents ................................ $ 216 $ 233
Accrued rent ........................... 408 443
Net operating loss carryforwards ....... 4,588 423
Allowance for doubtful accounts ........ 382 78
Accrued professional fees .............. 435 --
Deferred revenue ....................... 233 --
Miscellaneous accruals ................. 500 137
Inventory reserve ...................... 174 122
Deferred compensation .................. 150 65
------- -------
Total deferred tax assets ................ 7,086 1,500
Valuation allowance ...................... (6,576) (817)
------- -------
Net deferred tax assets .................. 510 683
Deferred tax liabilities:
Accumulated depreciation, software
development costs and license fees ... (510) (683)
------- -------
Net deferred tax assets .................. $ -- $ --
------- -------
------- -------
</TABLE>
The Company had net operating loss carryforwards of $11,318,000 at
December 31, 1998, of which approximately $10,488,000 will expire at varying
dates through 2013 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.
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 13.7 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):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1999................................. $1,808
2000................................. 1,800
2001................................. 600
2002................................. 300
------
$4,508
------
------
</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
49
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$0.001 per share, and 1,058,394 shares of its Common Stock, par value $0.001 per
share, to BP Amoco as consideration for the cumulative investment by BP Amoco in
the Company, which was $12,318,000. The investment by BP Amoco in the Company
included assets contributed by BP Amoco which were recorded at BP 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 BP Amoco into 553,126 shares of its Series B Convertible Preferred Stock,
par value $0.001 per share.
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.
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 $32.1 million. In connection with the Offering, 6,200,000 and
553,126 shares of Series A and Series B Convertible Preferred Stock,
respectively, automatically converted into 4,525,547 and 403,741 shares of
Common Stock, respectively. In addition, concurrent with the consummation of the
Offering, the Company converted $8.1 million of the Note Payable-BP Amoco into
675,000 shares of Common Stock and repaid the remaining note balance of $2.0
million. Upon completion of the Offering, the Company had approximately 9.7
million shares of Common Stock issued and outstanding.
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.
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
Granted .................... 53,440 $ 5.81
Exercised .................. 112,143 $ 0.73
Surrendered or terminated .. 46,696 $ 1.40
-------
Balance at December 31, 1998 846,320 $ 1.40
-------
-------
</TABLE>
50
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES AVERAGE PRICE
--------- -------------
<S> <C> <C>
Options exercisable at December 31, 1998 ...... 544,987 $ 0.94
Options available for future grant at
December 31, 1998 ........................... 13,363
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
Weighted-average fair value of options granted
during the year ended December 31, 1998 .. $ 2.92
</TABLE>
During 1997, the Company issued options under the 1996 Plan 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 under the 1996
Plan 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 $146,000, $161,000
and $123,000 as stock compensation expense during the years ended December 31,
1998, 1997 and 1996, respectively.
During July 1998, the shareholders approved the adoption of the 1998
Long Term Incentive Plan ("the 1998 Plan"). A total of 1,500,000 shares of
Common Stock have been authorized for issuance under the 1998 Plan, subject to
anti-dilution and other adjustments. In general, under the 1998 Plan, incentive
or non-qualified stock options may be granted at a price not less than 100
percent of the fair market value of the Common Stock on the date of grant.
Options vest in accordance with the completion of certain performance milestones
for which specific percentages of vesting are associated; however, no vesting
occurs until the Company has achieved two consecutive quarters of positive net
earnings. Regardless of whether milestones or the earnings criteria are
achieved, the options fully vest upon the ninth anniversary of the grant date
and expire within 10 years from the grant date.
Option activity under the 1998 Plan is summarized below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES AVERAGE PRICE
--------- -------------
<S> <C> <C>
Granted ...................................... 1,039,000 $5.62
Exercised .................................... -- --
Surrendered or terminated .................... -- --
---------
Balance at December 31, 1998 ................. 1,039,000 $5.62
---------
---------
Options exercisable at December 31, 1998 .......... -- --
Options available for future grant at
December 31, 1998 ............................... 461,000
Weighted-average fair value of options granted
during the year ended December 31, 1998 ...... $3.42
</TABLE>
51
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On October 1, 1998, a subcommittee of the Compensation Committee of the
Company's Board of Directors approved a repricing of certain stock options
granted under the 1996 Plan, and all stock options granted under the 1998 Plan,
for options granted during 1998 through October 1, 1998. All repriced options
have an exercise price of $5.60 which exceeded the fair market value of the
common stock as of October 1, 1998.
During October 1998, the Company's Board of Directors approved, with
Mr. Bartlett, Dr. Melmon and Mr. Williams abstaining from the vote, a grant
of non-qualified stock options to each of Mr. Bartlett, Dr. Melmon and Mr.
Williams to purchase 5,000 shares of Common Stock at a price of $5.60 per
share, which was not less than 100 percent of the fair market value of the
Common Stock on the date of grant. The Options vest immediately upon grant
and expire the earlier of one year after a Director ceases to be a Director
of Vysis, or 10 years after the grant date.
Option activity under the Director Plan is summarized below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES AVERAGE PRICE
------ -------------
<S> <C> <C>
Granted .................................... 15,000 $ 5.60
Exercised .................................. -- --
Surrendered or terminated .................. -- --
------
Balance at December 31, 1998 ............... 15,000 $ 5.60
------
------
Options exercisable at December 31, 1998 ..... 15,000 $ 5.60
Weighted-average fair value of options granted
during the year ended December 31, 1998 .... $ 2.93
</TABLE>
The following summarizes information about stock options outstanding at
December 31, 1998:
<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>
$0.53 623,097 7.4 $0.53 464,707
1.34 30,186 7.4 1.34 19,305
2.74 110,018 8.9 2.74 41,291
5.60 1,085,240 9.7 5.60 22,787
6.63-10.00 51,779 9.0 6.85 11,897
--------- -------
1,900,320 559,987
--------- -------
--------- -------
</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 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:
52
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected volatility ............. 82.0% 47.5% 50.3%
Risk free interest rate ......... 4.4% 6.4% 6.2%
Expected option life (years) .... 6.9 7.0 7.0
Dividend yield .................. 0 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 $396,000, $100,000 and $57,000, or $0.05, $0.09 and $0.05 per
share basic and diluted, for the years ended December 31, 1998, 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 $204,000, $187,000 and
$164,000 in 1998, 1997 and 1996, respectively.
NOTE 10--SEGMENT AND GEOGRAPHIC INFORMATION:
The Company operates in one reportable business segment: the
development, manufacture and sale of genetic testing products. The Company's
revenues by product line are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
FDA/ADM approved clinical genetic
testing products ................. $ 2,616 $ 406 $ --
Research and other genetic
testing products ................. 8,463 4,611 2,786
Genetic instrument products ........ 6,650 7,232 4,602
Genetic research grants and
license revenue .................. 1,828 2,212 2,216
Distributed laboratory products .... 1,175 1,246 1,113
Food testing products .............. 2,622 2,526 2,521
------- ------- -------
Consolidated total revenues ........ $23,354 $18,233 $13,238
------- ------- -------
------- ------- -------
</TABLE>
The Company's revenues by geographic area based on location of
customers are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
United States ..................... $ 10,809 $ 8,419 $ 7,534
Europe, Middle East and Africa .... 16,628 11,368 6,462
Other ............................. 2,258 1,947 1,291
Eliminations ...................... (6,341) (3,501) (2,049)
-------- -------- --------
Consolidated total revenues ....... $ 23,354 $ 18,233 $ 13,238
-------- -------- --------
-------- -------- --------
</TABLE>
53
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All long-lived assets as of December 31, 1998 are located within the
United States, except for $307,000 of European long-lived assets.
For the years ended December 31, 1998, 1997 and 1996, there were no
revenues to individual customers that exceeded 10 percent of total revenues.
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>
1999................................. $ 856
2000................................. 662
2001................................. 626
2002................................. 696
2003................................. 683
Thereafter........................ 622
------
$4,145
------
------
</TABLE>
Rental expense totaled $932,000, $669,000 and $606,000 in 1998, 1997
and 1996, 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 was being amortized using the straight-line
method over a five year period. During 1998, the Company analyzed the
undiscounted future cash flows from this product line and determined the cash
flows would be less than the carrying value of the goodwill. As a result of the
impairment, the Company wrote off during the year ended December 31, 1998 the
remaining goodwill of $205,000 in selling, general and administrative expense.
The following unaudited pro forma financial information for the year
ended December 31, 1996 presents the combined results of operations of the
Company and TechGen as if the acquisition had occurred at the beginning of the
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>
1996
---------
<S> <C>
Revenues.............................. $ 13,285
Net loss.............................. $ (18,230)
Loss per share........................ $ (17.22)
</TABLE>
54
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13--COMMITMENTS AND CONTINGENCIES:
The Company and BP Amoco are defendants in a law suit pending in the
U.S. District Court in California alleging infringement of certain patents. The
allegedly infringing activities are the manufacture, use and sale of reagents
and kits for detecting certain food and environmental pathogens currently used
in the Company's food testing business. The previous stay in this suit has been
lifted and the litigation is in the early stages of discovery. The Company is
vigorously defending the suit. As part of the suit, the Company has brought a
counter-claim of infringement of a patent assigned to the Company relating to
assays for a particular pathogen due to the plaintiff's manufacture, use and
sale of tests that detect the pathogen in foodstuffs. The Company has
indemnified BP Amoco against damages from the patent infringement claims in the
suit. Although the Company believes that it has meritorious defenses in the
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
statements. At December 31, 1998, the Company has accrued estimated future
minimum legal costs related to this matter of $1.0 million.
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. The Company and the seller have recently
entered into an amended and restated Asset Purchase Agreement with the
seller, that does not change the consideration to be paid by the Company upon
closing of the transaction. The Company expects the closing to occur during
1999.
The Company has a $1.0 million line of credit secured by eligible
accounts receivable. The line of credit is utilized for securing various standby
letters of credit aggregating $164,000 at December 31, 1998.
NOTE 14--SUPPLEMENTAL CASH FLOW INFORMATION:
BP Amoco contributed property and equipment aggregating $36,000 to the
Company in 1996 and did not make any such contributions during 1997 and 1998.
This amount was reflected by the Company as a capital contribution from BP Amoco
and recorded at BP Amoco's net book value. Certain other non-cash transactions
with BP Amoco are described in Note 2.
NOTE 15--SUBSEQUENT EVENT:
On March 17, 1999, the Company's Board of Directors approved a
restructuring plan that will result in the elimination of 20 positions within
the Company. The Company expects to record a charge for severance costs of
approximately $0.5 million during the first quarter of 1999.
55
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1998
Total revenues ...................... $ 5,051 $ 7,066 $ 5,056 $ 6,181
Gross profit ........................ 2,990 4,253 2,815 3,400
Net loss ............................ (4,551) (3,047) (3,722) (5,435)
Basic and diluted loss per share .... (0.79) (0.31) (0.38) (0.56)
1997
Total revenues ...................... $ 3,820 $ 4,247 $ 4,158 $ 6,008
Gross profit ........................ 2,065 2,480 2,329 3,296
Net loss ............................ (3,617) (4,012) (3,833) (5,414)
Basic and diluted loss per share .... (3.42) (3.79) (3.62) (5.05)
</TABLE>
The prior quarter gross profit amounts previously reported have been
reclassified to conform with the fourth quarter 1998 presentation. This change
has no impact on previously reported results of operations.
56
<PAGE>
SCHEDULE II
VYSIS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(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>
1998
Allowance for doubtful accounts ... $ 197 $1,124 $ 31 $1,290
1997
Allowance for doubtful accounts ... 156 82 41 197
1996
Allowance for doubtful accounts ... 220 -- 64 156
</TABLE>
57
<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 31, 1999 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>
President, Chief Executive
/s/ JOHN L. BISHOP Officer and Director March 31, 1999
- ------------------------------------------ (Principal Executive Officer
John L. Bishop and Director)
Executive Vice President of
/s/ JAMES J. HABSCHMIDT Finance and Chief Financial March 31, 1999
- ------------------------------------------ Officer (Principal Financial
James J. Habschmidt and Accounting Officer)
/s/ WILLIAM M. BARTLETT Director March 31, 1999
- ------------------------------------------
William M. Bartlett
/s/ ROBERT C. CARR Director March 31, 1999
- ------------------------------------------
Robert C. Carr
/s/ KENNETH L. MELMON Director March 31, 1999
- ------------------------------------------
Kenneth L. Melmon
/s/ WALTER R. QUANSTROM Director March 31, 1999
- ------------------------------------------
Walter R. Quanstrom
</TABLE>
58
<PAGE>
SIGNATURES -- (CONTINUED)
<TABLE>
<CAPTION>
SIGNATURES TITLE (CAPACITY) DATE
---------- ---------------- ----
<S> <C> <C>
/s/ FRANK J. SROKA Director March 31, 1999
- ------------------------------------------
Frank J. Sroka
/s/ RICHARD C. WILLIAMS Director March 31, 1999
- ------------------------------------------
Richard C. Williams
</TABLE>
59
<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 Amended and Restated 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.
</TABLE>
60
<PAGE>
EXHIBIT INDEX -- (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------------
<S> <C>
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.
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.
(1) 10.17 Amended and Restated Vysis, Inc. 1998 Long Term Incentive Plan
21.1* Subsidiaries of Vysis, Inc.
23.1 Independent Auditors' Consent.
23.2 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.
** Previously filed as Exhibit 10.15 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
(1) Management contract or compensatory plan or arrangement.
(2) Confidential information contained in this Agreement has been omitted.
61
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
VYSIS, INC.
ARTICLE I
OFFICES
Section 1. The registered office of the Corporation shall be in the
City of Wilmington, County of New Castle, State of Delaware. The Corporation
may also have offices at such other places both within and without the State
of Delaware as the Board of Directors may from time to time determine or the
business of the Corporation may require.
ARTICLE II
STOCKHOLDERS
Section 1. TIME AND PLACE OF MEETINGS. All meetings of the
stockholders for the election of directors or for any other purpose shall be
held at such time and place, within or without the State of Delaware, as
shall be designated by the Board of Directors. In the absence of a
designation of a place for any such meeting by the Board of Directors, each
such meeting shall be held at the principal office of the Corporation.
Section 2. ANNUAL MEETINGS. An annual meeting of stockholders shall
be held for the purpose of electing directors and transacting such other
business as may properly be brought before the meeting. The date of the
annual meeting shall be determined by the Board of Directors.
Section 3. SPECIAL MEETINGS. Special meetings of the stockholders,
for any purpose or purposes, unless otherwise prescribed by law or by the
Corporation's Certificate of Incorporation (as the same may be amended from
time to time, the "CERTIFICATE OF INCORPORATION"), may be called by a
Chairman or a Co-Chairman of the Board, the President or by resolution of the
Board of Directors, and shall be called by the Chairman or a Co-Chairman of
the Board, the President or the Secretary at the request in writing of a
majority of the Board of Directors.
Section 4. NOTICE OF MEETINGS. Written notice of each meeting of the
stockholders stating the place, date and time of the meeting shall be given
not less than ten nor more than sixty days before the date of the meeting, to
each stockholder entitled to vote at such meeting. The notice of any special
meeting of stockholders shall state the purpose or purposes for which the
meeting is called. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice. Neither the business
to be transacted at, nor the purpose of, an annual or special meeting of
stockholders need be specified in any written waiver of notice.
<PAGE>
Section 5. QUORUM; ADJOURNMENT. The holders of shares of capital
stock having a majority of the votes which could be cast by the holders of
all shares of capital stock of the Corporation, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business, except as otherwise required by
these Bylaws, the Certificate of Incorporation or the Delaware General
Corporation Law as from time to time in effect (the "DELAWARE LAW"). If a
quorum is not represented, the holders of the stock present in person or
represented by proxy at the meeting and entitled to vote thereat shall have
power, by the affirmative vote of the holders of a majority of such stock, to
adjourn the meeting to another time and/or place, without notice other than
announcement at the meeting, except as hereinafter provided, until a quorum
shall be present or represented. At such adjourned meeting, at which a quorum
shall be present or represented, any business may be transacted which might
have been transacted at the original meeting. If the adjournment is for more
than thirty days, or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting. Withdrawal of
stockholders from any meeting shall not cause the failure of a duly
constituted quorum at such meeting.
Section 6. VOTING. At all meetings of the stockholders, each
stockholder shall be entitled to vote, in person, or by proxy appointed in an
instrument in writing subscribed by the stockholder or otherwise appointed in
accordance with Section 212 of the Delaware Law, each share of voting stock
owned by such stockholder of record on the record date for the meeting. Each
stockholder shall be entitled to one vote for each share of voting stock held
by such stockholder, unless otherwise provided in the Delaware Law or the
Certificate of Incorporation. When a quorum is present at any meeting, the
affirmative vote of the holders of a majority of the stock having voting
power present in person or represented by proxy shall decide any question
brought before such meeting, unless the question is one upon which, by
express provision of law or of the Certificate of Incorporation, a different
vote is required, in which case such express provision shall govern and
control the decision of such question. Any stockholder who is in attendance
at a meeting of stockholders either in person or by proxy, but who abstains
from the vote on any matter, shall not be deemed present or represented at
such meeting for purposes of the preceding sentence with respect to such
vote, but shall be deemed present or represented at such meeting for all
other purposes. The Corporation shall, in advance of any meeting of
stockholders, appoint one or more inspectors to act at the meeting and make a
written report thereof, in accordance with the Delaware Law.
Section 7. INFORMAL ACTION BY STOCKHOLDERS. Any action required to
be taken at a meeting of the stockholders, or any other action which may be
taken at a meeting of the stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting
forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking
of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in
writing.
-2-
<PAGE>
ARTICLE III
DIRECTORS
Section 1. GENERAL POWERS. The business and affairs of the
Corporation shall be managed and controlled by or under the direction of its
Board of Directors, which may exercise all such powers of, and do all such
acts and things as may be done by, the Corporation and do all such lawful
acts and things as are not by law or by the Certificate of Incorporation or
by these Bylaws directed or required to be exercised or done by the
stockholders.
Section 2. NUMBER, QUALIFICATION AND TENURE. The Board of Directors
of the Corporation shall consist of such number of directors as shall be
determined from time to time by resolution of the Board of Directors;
PROVIDED, HOWEVER, that such number shall not be less than three nor more
than nine. The directors shall be elected at the annual meeting of the
stockholders and may be elected at any special meeting of stockholders,
except as otherwise provided herein, and each director elected shall hold
office until his or her successor is elected and qualified or until his or
her earlier death, termination, resignation or removal from office. Directors
need not be stockholders. The Board of Directors may elect a Chairman or
Co-Chairmen from amongst its members. The Chairman or Co-Chairmen of the
Board, when and if elected, shall preside at meetings of the Board of
Directors and shall have such other functions, authority and duties as may be
prescribed by the Board of Directors or as are set forth herein.
Section 3. VACANCIES AND NEWLY-CREATED DIRECTORSHIPS. Vacancies and
newly created directorships resulting from any increase in the number of
directors may be filled by a majority of the directors then in office,
although less than a quorum, or by a sole remaining director, and each
director so chosen shall hold office until his or her successor is elected
and qualified or until his or her earlier death, termination, resignation,
retirement, disqualification or removal from office. If there are no
directors in office, then an election of directors may be held in the manner
provided by law.
Section 4. PLACE OF MEETINGS. The Board of Directors may hold
meetings, both regular and special, either within or without the State of
Delaware.
Section 5. MEETINGS. The Board of Directors shall hold a regular
meeting, to be known as the annual meeting, immediately following each annual
meeting of the stockholders. Other regular meetings of the Board of Directors
shall be held at such time and place as shall from time to time be determined
by the Board. No notice of regular meetings need be given, other than by
announcement at the immediately preceding regular meeting. Special meetings
of the Board may be called by the Chairman of the Board, or the President or
by the Secretary on the written request of a majority of the Board of
Directors. Notice of any special meeting of the Board shall be given at least
twenty-four hours prior thereto, either in writing, or telephonically if
confirmed promptly in writing, to each director at the address shown for such
director on the records of the Corporation.
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Section 6. WAIVER OF NOTICE; BUSINESS AND PURPOSE. Notice of any
meeting of the Board of Directors may be waived in writing signed by the
person or persons entitled to such notice either before or after the time of
the meeting. The attendance of a director at any meeting shall constitute a
waiver of notice of such meeting, except where a director attends a meeting
for the express purpose of objecting to the transaction of any business
because the meeting is not lawfully called or convened and at the beginning
of the meeting records such objection with the person acting as secretary of
the meeting and does not thereafter vote on any action taken at the meeting.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the Board need be specified in the notice or waiver of
notice of such meeting, unless specifically required by the Delaware Law.
Section 7. QUORUM AND MANNER OF ACTING. At all meetings of the Board
of Directors a majority of the total number of directors shall constitute a
quorum for the transaction of business. If a quorum shall not be present at
any meeting of the Board of Directors, the directors present thereat may
adjourn the meeting from time to time, without notice other than announcement
at the meeting, until a quorum shall be present. The act of a majority of the
directors present at any meeting at which there is a quorum shall be the act
of the Board of Directors, except as may be otherwise specifically provided
by the Delaware Law or by the Certificate of Incorporation. Withdrawal of
directors from any meeting shall not cause the failure of a duly constituted
quorum at such meeting. A director who is in attendance at a meeting of the
Board of Directors but who abstains from the vote on any matter shall not be
deemed present at such meeting for purposes of the preceding sentence with
respect to such vote, but shall be deemed present at such meeting for all
other purposes.
Section 8. NOMINATION OF DIRECTORS AND PRESENTATION OF BUSINESS AT
STOCKHOLDER MEETINGS.
(a) Nominations of persons for election to the Board of
Directors and the proposal of business to be considered by the
stockholders may be made at an annual meeting of stockholders (i)
pursuant to the Corporation's notice of meeting, (ii) by or at the
direction of the Board of Directors or (iii) by any stockholder who was
a stockholder of record at the time of the giving of notice provided
for in this Section 8, who is entitled to vote at the meeting and who
complied with the notice procedures set forth in this Section 8.
(b) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (iii) of
paragraph (a) of this Section 8, the stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice shall be delivered to the Secretary at
the principal executive offices of the Corporation not less than 60
days nor more than 90 days prior to the first anniversary of the
preceding year's annual meeting; PROVIDED, HOWEVER, that in the event
that the date of the annual meeting is advanced by more than 30 days
or delayed by more than 60 days from such anniversary date, notice
by the stockholder to be timely must be so delivered not earlier than
the 90th day prior to such
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annual meeting and not later than the close of business or the later
of (i) the 60th day prior to such annual meeting or (ii) the 10th
day following the day on which public announcement of the date of
such meeting is first made. Such stockholder's notice shall set
forth (i) as to each person whom the stockholder proposes to nominate
for election or reelection as a director all information relating to
such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT") (including such person's
written consent to being named in the proxy statement as a nominee and
to serving as a director if elected); (ii) as to any other business
that the stockholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting,
the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made;
(iii) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made (1) the name
and address of such stockholder as they appear on the Corporation's
books, and of such beneficial owner and (2) the class and number of
shares of stock of the Corporation that are owned beneficially and of
record by such stockholder and such beneficial owner. Notwithstanding
anything in the second sentence of this paragraph (b) to the contrary,
in the event that the number of directors to be elected to the Board of
Directors is increased and there is no public announcement naming all
of the nominees for director or specifying the size of the increased
Board of Directors made by the Corporation at least 70 days prior to
the first anniversary of the preceding year's annual meeting, a
stockholder's notice shall also be considered timely, but only with
respect to nominees for any new positions created by such increase, if
it shall be delivered to the Secretary at the principal executive
offices of the Corporation not later than the close of business on the
10th day following the day on which the public announcement is first
made by the Corporation.
(c) Only such business shall be conducted at a special meeting
of stockholders as shall have been brought before the meeting pursuant
to the Corporation's notice of meeting. Nominations of persons for
election to the Board of Directors may be made at a special meeting of
stockholders with regard to which the Board of Directors has determined
that directors are to be elected (i) pursuant to the Corporation's
notice of meeting, (ii) by or at the direction of the Board of
Directors or (ii) by any stockholder who is a stockholder of record at
the time of the giving of notice provided for in this Section 8, who
shall be entitled to vote for the election of directors at the meeting
and who complies with the notice procedures set forth in this
Section 8. In the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the
Board of Directors, any such stockholder may nominate a person or
persons (as the case may be) for election to such position(s) as
specified in the Corporation's notice of meeting, if the stockholder's
notice setting forth the information and complying with the form
described in paragraph (b) of this Section 8 shall be delivered to the
Secretary at the principal executive offices of the Corporation not
earlier than the 90th day prior to such special meeting and not later
than the close of business
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on the later of (i) the 60th day prior to such special meeting or
(ii) the 10th day following the day on which public announcement is
first made of the date of the special meeting and of the nominees
proposed by the Board of Directors to be elected at such meeting.
(d) Only such persons who are nominated in accordance with the
procedures set forth in this Section 8 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in
accordance with the procedures set forth in this Section 8. The
chairman of the meeting of stockholders shall have the power and duty
to determine whether a nomination or any business proposed to be
brought before the meeting was made in accordance with the procedures
set forth in this Section 8 and, if any proposed nomination or business
is not in compliance with this Section 8, to declare that such
defective nominations or proposal shall be disregarded.
(e) For purposes of this Section 8, "PUBLIC ANNOUNCEMENT"
shall mean disclosure in a press release reported by the Dow Jones News
Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and
Exchange Commission pursuant to Sections 13, 14 or 15(d) of the
Exchange Act.
(f) Notwithstanding the foregoing provisions of this Section
8, (i) if any class or series of stock has the right, voting separately
by class or series, to elect directors at an annual or special meeting
of stockholders, such directors shall be nominated and elected pursuant
to the terms of such class or series of stock; and (ii) a stockholder
shall also comply with all applicable requirements of the Exchange Act
and the rules and regulations thereunder with respect to the matters
set forth in this Section 8. Nothing in this Section 8 shall be deemed
to affect any rights of stockholders to request inclusion of proposals
in the Corporation's proxy statement pursuant to Rule 14a-8 under the
Exchange Act.
Section 9. ORGANIZATION. The Chairman of the Board, if elected,
shall act as chairman at all meetings of the Board of Directors. If the
Chairman of the Board is not elected or, if elected, is not present, the
President, or if the President is not present, a director chosen by a
majority of the directors present, shall act as chairman at such meeting of
the Board of Directors.
Section 10. COMMITTEES. The Board of Directors, by resolution adopted
by a majority of the whole Board of Directors, may designate one or more
committees, each such committee to consist of one or more directors. Except as
expressly limited by Delaware Law or the Certificate of Incorporation, any such
committee shall have and may exercise such powers as the Board of Directors may
determine and specify in the resolution designating such committee. The Board of
Directors, by resolution adopted by a majority of the whole Board of Directors,
also may designate one or more additional directors as alternate members of any
such committee to replace any absent or disqualified member at any meeting of
the committee, and at any time
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may change the membership of any committee or amend or rescind the resolution
designating the committee. In the absence or disqualification of a member or
alternate member of a committee, the member or members thereof present at any
meeting and not disqualified from voting, whether or not such member or
members constitute a quorum, may unanimously appoint another director to act
at the meeting in the place of any such absent or disqualified member,
provided that the director so appointed meets any qualifications stated in
the resolution designating the committee. Each committee shall keep a record
of proceedings and report the same to the Board of Directors to such extent
and in such form as the Board of Directors may require. Unless otherwise
provided in the resolution designating a committee, a majority of all of the
members of any such committee may select its Chairman, fix its rules or
procedure, fix the time and place of its meetings and specify what notice of
meetings, if any, shall be given.
Section 11. ACTION WITHOUT MEETING. Unless otherwise specifically
prohibited by the Certificate of Incorporation or these Bylaws, any action
required or permitted to be taken at any meeting of the Board of Directors or
of any committee thereof may be taken without a meeting, if all members of
the Board of Directors or such committee, as the case may be, execute a
consent thereto in writing setting forth the action so taken, and the writing
or writings are filed with the minutes of proceedings of the Board of
Directors or such committee.
Section 12. ATTENDANCE BY TELEPHONE. Members of the Board of
Directors, or any committee thereof, may participate in and act at any
meeting of the Board of Directors, or such committee, as the case may be,
through the use of a conference telephone or other communications equipment
by means of which all persons participating in the meeting can hear each
other. Participation in such meeting shall constitute attendance and presence
in person at the meeting of the person or persons so participating.
Section 13. COMPENSATION. By resolution of the Board of Directors,
irrespective of any personal interest of any of the members, the directors
may be paid their reasonable expenses, if any, of attendance at each meeting
of the Board of Directors and may be paid a fixed sum of attendance at
meetings or a stated salary as directors. These payments shall not preclude
any director from serving the Corporation in any other capacity and receiving
compensation therefor.
ARTICLE IV
OFFICERS
Section 1. ENUMERATION. The officers of the Corporation shall be
elected by the Board of Directors and shall include a President, one or more
Vice Presidents (the number and designation thereof to be determined by the
Board of Directors), a Secretary and a Treasurer. The Board of Directors may
also elect one or more Assistant Secretaries and Assistant Treasurers and
such other officers and agents as it may deem appropriate. Any number of
offices may be held by the same person.
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Section 2. TERM OF OFFICE. The officers of the Corporation shall be
elected at the annual meeting of the Board of Directors and shall hold office
until their successors are elected and qualified, or until their earlier
death, termination, resignation or removal from office. Any officer or agent
of the Corporation may be removed at any time by the Board of Directors, with
or without cause. Any vacancy in any office because of death, resignation,
termination, removal, disqualification or otherwise, may be filled by the
Board of Directors for the unexpired portion of the term.
Section 3. PRESIDENT. The President shall be the chief executive
officer of the Corporation and, as such, shall have general supervision,
direction and control of the business and affairs of the Corporation, subject
to the control of the Board of Directors, shall have such other functions,
authority and duties as customarily appertain to the chief executive officer
of a business corporation and shall perform such duties and have such other
powers as may from time to time be prescribed by the Board of Directors.
Section 4. VICE PRESIDENTS. In the absence of the President or in
the event of the President's inability or refusal to act, the Vice President
(or if there be more than one, first, the Executive Vice Presidents, then the
Senior Vice Presidents, then the Vice Presidents, or in the absence of any
designation, then in the order of their most recent election) shall perform
the duties of the President and when so acting shall have all the powers of
and be subject to all the restrictions upon the President. A Vice President
who is appointed as such with respect to a particular area of responsibility
or function of the Corporation shall, subject to the authority of the
President, perform all duties and have all authority pertaining to the
general and active management of such area or function and shall see that all
orders and resolutions of the Board of Directors pertaining to such area or
function are carried into effect. The Vice Presidents shall perform such
other duties and have such other powers as the Board of Directors or the
President may from time to time prescribe.
Section 5. SECRETARY. The Secretary shall: (a) keep a record of all
proceedings of the stockholders, the Board of Directors and any committees
thereof in one of more books provided for that purpose; (b) give, or cause to
be given, all notices that are required by law or these Bylaws to be given by
the Secretary; (c) be custodian of the corporate records and, if the
Corporation has a corporate seal, of the seal of the Corporation; (d) have
authority to affix the seal of the Corporation to all instruments the
execution of which requires such seal and to attest such affixing of the
seal; (e) keep a register of the post office address of each stockholder
which shall be furnished to the Secretary by such stockholder; (f) sign, with
the President or any Vice President, or any other officer thereunto
authorized by the Board of Directors, any certificates for shares of the
Corporation, or any deeds, mortgages, bonds, contracts or other instruments
which the Board of Directors has authorized to be executed by the signature
of more than one officer; (g) have general charge of the stock transfer books
of the Corporation; (h) have authority to certify as true and correct, copies
of the Bylaws, or resolutions of the stockholders, the Board of Directors and
committees thereof, and of other documents of the Corporation; and (i) in
general, perform the duties incident to the office of secretary and such
other duties as from time to time may be prescribed by the Board of Directors
or the President. The Board of
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Directors may give general authority to any other officer to affix the seal
of the Corporation and to attest such affixing of the seal.
Section 6. ASSISTANT SECRETARY. The Assistant Secretary, or if there
shall be more than one, each Assistant Secretary in the absence of the
Secretary or in the event of the Secretary's inability or refusal to act,
shall have the authority to perform the duties of the Secretary, subject to
such limitations thereon as may be imposed by the Board of Directors, and
such other duties as may from time to time be prescribed by the Board of
Directors, the President or the Secretary.
Section 7. TREASURER. The Treasurer shall be the principal
accounting and financial officer of the Corporation. The Treasurer shall: (a)
have charge of and be responsible for the maintenance of adequate books of
account for the Corporation; (b) have charge and custody of all funds and
securities of the Corporation, and be responsible therefor and for the
receipt and disbursement thereof; and (c) perform the duties incident to the
office of treasurer and such other duties as may from time to time be
prescribed by the Board of Directors or the President. The Treasurer may sign
with the President or any Vice President, or any other officer thereunto
authorized by the Board of Directors, certificates for shares of the
Corporation. If required by the Board of Directors, the Treasurer shall give
a bond for the faithful discharge of his or her duties in such sum and with
such surety or sureties as the Board of Directors may determine.
Section 8. ASSISTANT TREASURER. The Assistant Treasurer, or if there
shall be more than one, each Assistant Treasurer, in the absence of the
Treasurer or in the event of the Treasurer's inability or refusal to act,
shall have the authority to perform the duties of the Treasurer, subject to
such limitations thereon as may be imposed by the Board of Directors, and
such other duties as may from time to time be prescribed by the Board of
Directors, the President or the Treasurer.
Section 9. GENERAL COUNSEL. The General Counsel shall be the chief
legal adviser of the Corporation as to all matters affecting the Corporation
or its business. In general, he shall perform all the duties incident to the
office of General Counsel and have such other duties as the Board of
Directors or the President may from time to time prescribe.
Section 10. OTHER OFFICERS AND AGENTS. Any officer or agent who is
elected or appointed from time to time by the Board of Directors and whose
duties are not specified in these Bylaws shall perform such duties and have
such powers as may from time to time be prescribed by the Board of Directors
or the President.
ARTICLE V
CERTIFICATES OF STOCK
Section 1. FORM. The shares of the Corporation shall be represented
by certificates; PROVIDED, HOWEVER, the Board of Directors may provide by
resolution or resolutions that some or all of any or all classes or series of
the Corporation's stock shall be uncertificated shares.
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Each certificate for shares shall be consecutively numbered or otherwise
identified. Certificates of stock in the Corporation, shall be signed by or
in the name of the Corporation by the President or a Vice President and by
the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary of the Corporation. Where a certificate is countersigned by a
transfer agent, other than the Corporation or an employee of the Corporation,
or by a registrar, the signatures of one or more officers of the Corporation
may be facsimiles. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, the certificate may be issued by the Corporation with
the same effect as if such officer, transfer agent or registrar were such
officer, transfer agent or registrar at the date of its issue.
Section 2. TRANSFER. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation, subject to any restriction
imposed by law or by contract, to issue a new certificate of stock or
uncertificated shares in place of any certificate therefor issued by the
Corporation to the person entitled thereto, cancel the old certificate and
record the transaction in its stock transfer books.
Section 3. REPLACEMENT. In case of the loss, destruction, mutilation
or theft of a certificate for any stock of the Corporation, a new certificate
of stock or uncertificated shares in place of any certificate theretofore
issued by the Corporation may be issued upon the surrender of the mutilated
certificate or, in the case of loss, destruction or theft of a certificate,
upon satisfactory proof of such loss, destruction or theft and upon such
terms as the Board of Directors may prescribe. The Board of Directors may in
its discretion require the owner of the lost, destroyed or stolen
certificate, or his legal representative, to give the Corporation a bond, in
such sum and in such form and with such surety or sureties as it may direct,
to indemnify the Corporation against any claim that may be made against it
with respect to the certificate alleged to have been lost, destroyed or
stolen.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS
Section 1. THIRD PARTY ACTIONS. The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit or proceeding, whether civil,
criminal, administrative, or investigative, including all appeals (other than
an action, suit or proceeding by or in the right of the Corporation) by
reason of the fact that he is or was a director or officer, of the
Corporation (and the Corporation, in the discretion of the Board of
Directors, may so indemnify a person by reason of the fact that he is or was
an employee or agent of the Corporation or is or was serving at the request
of the Corporation in any other capacity for or on behalf of the
Corporation), against expenses (including attorneys' fees), judgments,
decrees, fines, penalties, and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding
if he acted in good faith and in a manner which he reasonably believed to be
in or not opposed to the best interests of the Corporation and, with respect
to any criminal action or proceeding, had no
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reasonable cause to believe his conduct was unlawful; PROVIDED, HOWEVER, the
Corporation shall be required to indemnify an officer or director in
connection with an action, suit or proceeding initiated by such person only
if such action, suit or proceeding was authorized by the Board of Directors.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in
good faith or in a manner which he reasonably believed to be in or not
opposed to the best interests of the Corporation and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful.
Section 2. ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The
Corporation shall indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending, or completed action or suit,
including all appeals, by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was a director or
officer of the Corporation (and the Corporation, in the discretion of the
Board of Directors, may so indemnify a person by reason of the fact that he
is or was an employee or agent of the Corporation or is or was serving at the
request of the Corporation in any other capacity for or on behalf of the
Corporation), against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Corporation,
except that no indemnification shall be made in respect of any claim, issue
or matter as to which such person shall have been finally adjudged to be
liable for negligence or misconduct in the performance of his duty to the
Corporation unless and only to the extent that the court in which such action
or suit was brought, or any other court of competent jurisdiction, shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses as such court shall deem
proper. Notwithstanding the foregoing, the Corporation shall be required to
indemnify an officer or director in connection with an action, suit or
proceeding initiated by such person only if such action, suit or proceeding
was authorized by the Board of Directors.
Section 3. INDEMNITY IF SUCCESSFUL. To the extent that a director,
officer, employee or agent of the Corporation has been successful on the
merits or otherwise in defense of any action, suit or proceeding referred to
in Section 1 or 2 of this Article, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
Section 4. STANDARD OF CONDUCT. Except in a situation governed by
Section 3 of this Article, any indemnification under Section 1 or 2 of this
Article (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of
the director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in Section 1
or 2, as applicable, of this Article. Such determination shall be made (i) by
a majority vote of directors acting at a meeting at which a quorum consisting
of directors who were not parties to such action, suit or proceeding is
present, or (ii) if such a quorum is not obtainable, or even if obtainable, a
quorum of
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disinterested directors so directs, by independent legal counsel in a written
opinion, or (iii) by the stockholders. The determination required by clauses
(i) and (ii) of this Section 4 may in either event be made by written consent
of the majority required by each clause.
Section 5. EXPENSES. Expenses (including attorneys' fees) of each
officer and director hereunder indemnified actually and reasonably incurred
in defending any civil, criminal, administrative or investigative action,
suit or proceeding or threat thereof shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such person to repay such amount
if it shall ultimately be determined that he is not entitled to be
indemnified by the Corporation as authorized in this Article. Such expenses
(including attorneys' fees) incurred by employees and agents may be so paid
upon the receipt of the aforesaid undertaking and such terms and conditions,
if any, as the Board of Directors deems appropriate.
Section 6. NONEXCLUSIVITY. The indemnification and advancement of
expenses provided by, or granted pursuant to, other Sections of this Article
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may now or hereafter be entitled
under any law, bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office.
Section 7. INSURANCE. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another Corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out
of his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of the Delaware Law.
Section 8. DEFINITIONS. For purposes of this Article, references to
"the Corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had the power and authority to indemnify any or all of its directors,
officers, employees and agents, so that any person who was a director, officer,
employee or agent of such constituent corporation, or was serving at the request
of such constituent corporation in any other capacity, shall stand in the same
position under the provisions of this Article with respect to the resulting or
surviving corporation as such person would have had with respect to such
constituent corporation if its separate existence had continued as such
corporation was constituted immediately prior to such merger.
For purposes of this Article, references to "other capacities" shall
include serving as a trustee or agent for any employee benefit plan; references
to "fines" shall include any excise taxes assessed on a person with respect to
an employee benefit plan; and references to "serving at the request of the
Corporation" shall include any service as a director, officer, employee or
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agent of the Corporation which imposes duties on, or involves services by
such director, officer, employee, or agent with respect to an employee
benefit plan, its participants, or beneficiaries. A person who acted in good
faith and in a manner he or she reasonably believed to be in the best
interests of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests
of the Corporation" as referred to in this Article.
Section 9. SEVERABILITY. If any provision hereof is invalid or
unenforceable in any jurisdiction, the other provisions hereof shall remain
in full force and effect in such jurisdiction, and the remaining provisions
hereof shall be liberally construed to effectuate the provisions hereof, and
the invalidity of any provision hereof in any jurisdiction shall not affect
the validity or enforceability of such provision in any other jurisdiction.
Section 10. AMENDMENT. The right to indemnification conferred by
this Article shall be deemed to be a contract between the Corporation and
each person referred to herein until amended or repealed, but no amendment to
or repeal of these provisions shall apply to or have any effect on the right
to indemnification of any person with respect to any liability or alleged
liability of such person for or with respect to any act or omission of such
person occurring prior to such amendment or repeal.
ARTICLE VII
GENERAL PROVISIONS
Section 1. FISCAL YEAR. The fiscal year of the Corporation shall end
on December 31 of each year unless otherwise fixed from time to time by
resolution of the Board of Directors.
Section 2. CORPORATION SEAL. The corporate seal of the Corporation
shall be inscribed with the name of the Corporation and the words "Corporate
Seal" and "Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or in any other manner reproduced.
Section 3. NOTICES AND MAILING. Except as otherwise provided by
Delaware Law, the Certificate of Incorporation or these Bylaws, all notices
required to be given by any provision of these Bylaws shall be deemed to have
been given (i) when received, if given in person, (ii) on the date of
acknowledgment of receipt, if sent by telex, facsimile or other wire
transmission, (iii) one day after delivery, properly addressed, to a
reputable courier for same day or overnight delivery, or (iv) three days
after being deposited, properly addressed, in the U.S. mail, certified or
registered mail, postage prepaid.
Section 4. WAIVER OF NOTICE. Whenever any notice is required to be
given under the Delaware Law or the provisions of the Certificate of
Incorporation or these Bylaws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent to notice.
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Section 5. INTERPRETATION. In these Bylaws, unless a clear contrary
intention appears, the singular number includes the plural number and VICE
VERSA, and reference to either gender includes the other gender.
ARTICLE VIII
AMENDMENTS
These Bylaws may be altered, amended or repealed or new Bylaws may
be adopted by the Board of Directors. The fact that the power to amend,
alter, repeal or adopt the Bylaws has been conferred upon the Board of
Directors shall not divest the stockholders of the same powers.
-14-
<PAGE>
VYSIS, INC.
1998 LONG TERM INCENTIVE PLAN
<PAGE>
VYSIS, INC.
Certificate
I, _____________ , _____________ of Vysis, Inc. having in my custody
and possession the corporate records of said corporation, do hereby certify
that attached hereto is a true and correct copy of the Vysis, Inc. 1998 Long
Term Incentive Plan as in effect as of October 1, 1998.
WITNESS my hand this ___ day of ________________, 1999.
As Aforesaid
<PAGE>
VYSIS, INC.
1998 LONG TERM INCENTIVE PLAN
1. PURPOSE. The purpose of this Vysis, Inc. 1998 Long Term Incentive
Plan (the "Plan") is to increase stockholder value and to advance the
interests of Vysis, Inc. ("Vysis") and its subsidiaries (collectively, the
"Company") by awarding equity and performance based incentives designed to
attract, retain and motivate employees. As used in the Plan, the term
"subsidiary" means any business, whether or not incorporated, in which Vysis
has an ownership interest.
2. ADMINISTRATION.
2.1. ADMINISTRATION BY COMMITTEE. The Plan shall be
administered by the Compensation Committee of the Board of Directors of Vysis
or a subcommittee thereof (the "Committee"), which Committee shall consist of
two or more persons who constitute "non-employee directors" within the
meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") and "outside directors" within the meaning of
Treas. Reg. Section 1.162-27(e)(3).
2.2. AUTHORITY. Subject to the provisions of the Plan, the
Committee shall have the authority to (a) manage and control the operation of
the Plan, (b) interpret and construe the provisions of the Plan, and
prescribe, amend and rescind rules and regulations relating to the Plan, (c)
make Awards under the Plan, in such forms and amounts and subject to such
restrictions, limitations and conditions as it deems appropriate, including,
without limitation, Awards which are made in combination with or in tandem
with other Awards (whether or not contemporaneously granted) or compensation
or in lieu of current or deferred compensation, (d) modify the terms of,
cancel and reissue, or repurchase outstanding Awards (including, but not
limited to, repurchasing or settling any Option (as defined in subsection
6.1) in cash upon a Change in Control (as defined in subsection 12.2)), (e)
prescribe the form of agreement, certificate or other instrument evidencing
any Award under the Plan, (f) correct any defect or omission and reconcile
any inconsistency in the Plan or in any Award hereunder, (g) extend the
exercise or vesting date of any Award under the Plan, (h) accelerate the
vesting or exercise date of any Award under the plan, and (i) make all other
determinations and take all other actions as it deems necessary or desirable
for the implementation and administration of the Plan; provided, however,
that in no event shall the Committee cancel or modify any Option granted on
or after October 1, 1998 for the purpose of reissuing an additional option to
the option holder at a lower exercise price. The determination of the
Committee on matters within its authority shall be conclusive and binding on
the Company and all other persons.
3. PARTICIPATION. Subject to the terms and conditions of the Plan,
the Committee shall determine and designate, from time to time, from among
the employees of the Company who are key executives or managerial employees
and consultants who provide services to the Company those persons who will be
granted one or more Awards under the Plan, and thereby become "Participants"
in the Plan. In the discretion of the Committee, and subject to the terms of
the
<PAGE>
Plan, a Participant may be granted any Award permitted under the provisions
of the Plan, and more than one Award may be granted to a Participant;
provided, however, that only employees of the Company may be awarded
Incentive Stock Options (as defined in subsection 6.1) under the Plan. Except
as otherwise agreed by the Committee and the Participant, or except as
otherwise provided in the Plan, an Award under the Plan shall not affect any
previous Award under the Plan or an award under any other plan maintained by
the Company. For purposes of the Plan, the term "Award" shall mean any award
or benefit granted to any Participant under the Plan.
4. DEFINITION OF FAIR MARKET VALUE. For purposes of the Plan, the
"Fair Market Value" of a share of common stock of Vysis ("Stock") as of any
date shall be the closing market composite price for such Stock as reported
on NASDAQ on that date or, if Stock is not traded on that date, on the
immediately preceding date on which Stock was traded.
5. SHARES SUBJECT TO THE PLAN.
5.1. NUMBER OF SHARES RESERVED. The shares of Stock with respect to
which Awards may be made under the Plan shall be shares currently authorized
but unissued or currently held or subsequently acquired by Vysis as treasury
shares, including shares purchased in the open market or in private
transactions. Subject to the provisions of subsection 5.4, the number of
shares of Stock which may be issued with respect to Awards under the Plan
shall not exceed 1.5 million shares.
5.2. INDIVIDUAL LIMITS ON AWARDS. Notwithstanding any other
provision of the Plan to the contrary, the maximum aggregate number of shares
of Stock that may be granted or awarded to any Participant under the Plan for
any calendar year shall be 250,000 and the maximum aggregate cash payout with
respect to grants or awards under the Plan in any calendar year to any
Covered Employee (within the meaning of section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code")), shall be $25,000,000. The
determination made under the foregoing provisions of this subsection 5.2
shall be based on the shares subject to the Awards at the time of grant,
regardless of when the Awards become exercisable.
5.3. REUSAGE OF SHARES.
(a) In the event of the exercise or termination (by reason of
forfeiture, expiration, cancellation, surrender or otherwise)
of any Award under the Plan, that number of shares of Stock
that was subject to the Award but not delivered shall again be
available for Awards under the Plan.
(b) In the event that shares of Stock are delivered under the Plan
as a Stock Award (as defined in Section 8) and are thereafter
forfeited or reacquired by the Company pursuant to rights
reserved upon the award thereof, such forfeited or reacquired
shares shall again be available for Awards under the Plan.
-2-
<PAGE>
(c) Notwithstanding the provisions of paragraphs (a) or (b), the
following shares shall not be available for reissuance under
the Plan: (i) shares with respect to which the Participant has
received the benefits of ownership (other than voting rights),
either in the form of dividends or otherwise; (ii) shares
which are withheld from any award or payment under the Plan to
satisfy tax withholding obligations (as described in
subsection 11.4); (iii) shares which are surrendered to
fulfill tax obligations (as described in subsection 11.4);
and (iv) shares which are surrendered in payment of the
Option Price (as defined in subsection 6.3) upon the exercise
of an Option.
5.4. ADJUSTMENTS TO SHARES RESERVED. In the event of any merger,
consolidation, reorganization, recapitalization, spinoff, stock dividend,
stock split, reverse stock split, exchange or other distribution with respect
to shares of Stock or other change in the corporate structure or
capitalization affecting the Stock, the type and number of shares of Stock
which are or may be subject to awards under the Plan and the terms of any
outstanding awards (including the price at which shares of Stock may be
issued pursuant to an outstanding award) shall be equitably adjusted by the
Committee, in its sole discretion, to preserve the value of benefits awarded
or to be awarded to Participants under the Plan.
6. OPTIONS.
6.1. DEFINITIONS. The grant of an "Option" under this Section 6
entitles the Participant to purchase shares of Stock at the Option Price
(determined under subsection 6.3), subject to the terms of this Section 6.
Options granted under this Section 6 may be either Incentive Stock Options or
Non-Qualified Stock Options, as determined in the discretion of the
Committee. An "Incentive Stock Option" is an Option that is intended to
satisfy the requirements applicable to an "incentive stock option" described
in section 422(b) of the Code. A "Non-Qualified Stock Option" is an Option
that is not intended to be an "incentive stock option" as that term is
described in section 422(b) of the Code.
6.2. RESTRICTIONS RELATING TO INCENTIVE STOCK OPTIONS. To the extent
that the aggregate fair market value of Stock with respect to which Incentive
Stock Options are exercisable for the first time by any individual during any
calendar year (under all plans of the Company) exceeds $100,000, such options
shall be treated as Non-Qualified Stock Options, to the extent required by
section 422 of the Code.
6.3. OPTION PRICE. The price at which shares of Stock may be
purchased upon the exercise of an Option (the "Option Price") shall be
established by the Committee or shall be determined by a method established
by the Committee at the time the Option is granted; provided, however, that
in no event shall such price be less than the greater of: (i) 100% of the
Fair Market Value (as defined in Section 4) of a share of Stock as of the
date on which the Option is granted; or (ii) the par value of a share of
Stock on such date.
-3-
<PAGE>
6.4. EXERCISE. Except as otherwise expressly provided in the Plan,
an Option may be exercised, in whole or in part, in accordance with terms and
conditions established by the Committee at the time of grant; provided,
however, that no Option shall be exercisable after the Expiration Date (as
defined in Section 10) applicable to that Option. The full Option Price of
each share of Stock purchased upon the exercise of any Option shall be paid
at the time of such exercise (except that, in the case of a cashless exercise
arrangement approved by the Committee, payment may be made as soon as
practicable after the exercise) and, as soon as practicable thereafter, a
certificate representing the shares so purchased shall be delivered to the
person entitled thereto. The Option Price shall be payable in cash or in
shares of Stock (valued at Fair Market Value as of the day of exercise), or
in any combination thereof, as determined by the Committee and, to the extent
provided by the Committee, a Participant may elect to pay the Option Price
upon the exercise of an Option through a cashless exercise arrangement. The
exercise of an Option will result in the surrender of the corresponding
rights under a tandem Stock Appreciation Right, if any.
6.5. POST-EXERCISE LIMITATIONS. The Committee, in its discretion,
may impose such restrictions on shares of Stock acquired pursuant to the
exercise of an Option (including stock acquired pursuant to the exercise of a
tandem Stock Appreciation Right) as it determines to be desirable, including,
without limitation, restrictions relating to disposition of the shares and
forfeiture restrictions based on service, performance, Stock ownership by the
Participant, and such other factors as the Committee determines to be
appropriate.
7. STOCK APPRECIATION RIGHTS
7.1. DEFINITION. Subject to the terms of this Section 7, a "Stock
Appreciation Right" granted under the Plan entitles the Participant to
receive, in cash or Stock, value equal to all or a portion of the excess of:
(a) the Fair Market Value of a specified number of shares of Stock at the
time of exercise; over (b) a specified price which shall not be less than
100% of the Fair Market Value of the Stock at the time the Stock Appreciation
Right is granted, or, if granted in tandem with an Option, the exercise price
with respect to shares under the tandem Option.
7.2. EXERCISE. If a Stock Appreciation Right is not in tandem with
an Option, then the Stock Appreciation Right shall be exercisable in
accordance with the terms established by the Committee in connection with
such rights after the Expiration Date applicable to that Stock Appreciation
Right. If a Stock Appreciation Right is in tandem with an Option, then the
Stock Appreciation Right shall be exercisable at the time the tandem Option
is exercisable. The exercise of a Stock Appreciation Right will result in the
surrender of the corresponding rights under the tandem Option.
7.3. SETTLEMENT OF AWARD. Upon the exercise of a Stock Appreciation
Right, the value to be distributed to the Participant, in accordance with
subsection 7.1, shall be distributed in shares of Stock (valued at their Fair
Market Value at the time of exercise), in cash, or in a combination thereof,
in the discretion of the Committee.
-4-
<PAGE>
7.4. POST-EXERCISE LIMITATIONS. The Committee, in its discretion,
may impose such restrictions on shares of Stock acquired pursuant to the
exercise of a Stock Appreciation Right as it determines to be desirable,
including, without limitation, restrictions relating to disposition of the
shares and forfeiture restrictions based on service, performance, ownership
of Stock by the Participant, and such other factors as the Committee
determines to be appropriate.
8. STOCK AWARDS.
8.1. DEFINITION. Subject to the terms of this Section 8, a "Stock
Award" under the Plan is a grant of shares of Stock to a Participant, the
earning, vesting or distribution of which is subject to one or more
conditions established by the Committee. Such conditions may relate to events
(such as performance or continued employment) occurring before or after the
date the Stock Award is granted, or the date the Stock is earned by, vested
in or delivered to the Participant. If the vesting of Stock Awards is subject
to conditions occurring after the date of grant, the period beginning on the
date of grant of a Stock Award and ending on the vesting or forfeiture of
such Stock (as applicable) is referred to as the "Restricted Period". Stock
Awards may provide for delivery of the shares of Stock at the time of grant,
or may provide for a deferred delivery date.
8.2. TERMS AND CONDITIONS OF AWARDS. Beginning on the date of grant
(or, if later, the date of distribution) of shares of Stock comprising a
Stock Award, and including any applicable Restricted Period, the Participant,
as owner of such shares, shall have the right to vote such shares; provided,
however, that payment of dividends with respect to Stock Awards shall be
subject to the following:
(a) On and after date that a Participant has a fully earned and
vested right to the shares comprising a Stock Award, and the
shares have been distributed to the Participant, the
Participant shall have all dividend rights (and other rights)
of a stockholder with respect to such shares.
(b) Prior to the date that a Participant has a fully earned and
vested right to the shares comprising a Stock Award, the
Committee, in its sole discretion, may award Dividend Rights
(as defined below) with respect to such shares.
(c) On and after the date that a Participant has a fully earned
and vested right to the shares comprising a Stock Award, but
before the shares have been distributed to the Participant,
the Participant shall be entitled to Dividend Rights with
respect to such shares, at the time and in the form determined
by the Committee.
A "Dividend Right" with respect to shares comprising a Stock Award shall
entitle the Participant, as of each dividend payment date, to an amount equal
to the dividends payable with respect to a share of Stock multiplied by the
number of such shares. Dividend Rights shall be settled in cash or in shares
of Stock, as determined by the Committee, shall be payable at the time and in
the form determined by the Committee, and shall be subject to such other
terms and conditions as the Committee may determine.
-5-
<PAGE>
9. PERFORMANCE UNITS.
9.1. DEFINITION. Subject to the terms of this Section 9, the Award
of "Performance Units" under the Plan entitles the Participant to receive
value for the units at the end of a Performance Period to the extent provided
under the Award. The number of units earned, and the value received for them,
will be contingent on the degree to which the performance measures
established at the time of grant of the Award are met. For purposes of the
Plan, the "Performance Period" with respect to the award of any Performance
Units shall be the period over which the applicable performance is to be
measured.
9.2. TERMS AND CONDITIONS OF AWARDS. For each Participant, the
Committee will determine the value of units, which may be stated either in
cash or in units representing shares of Stock; the performance measures used
for determining whether the Performance Units are earned; the Performance
Period during which the performance measures will apply; the relationship
between the level of achievement of the performance measures and the degree
to which Performance Units are earned; whether, during or after the
Performance Period, any revision to the performance measures or Performance
Period should be made to reflect significant events or changes that occur
during the Performance Period; and the number of earned Performance Units
that will be paid in cash and the number of earned Performance Units to be
paid in shares of Stock.
9.3. SETTLEMENT. Settlement of Performance Units shall be subject
to the following:
(a) the Committee will compare the actual performance to the
performance measures established for the Performance Period
and determine the number of units as to which settlement is to
be made, and the value of such units.
(b) Settlement of units earned shall be wholly in cash, wholly in
Stock or in a combination of the two, to be distributed in a
lump sum or installments, as determined by the Committee.
(i) For Performance Units stated in units representing
shares of Stock when granted, one share of Stock will
be distributed for each unit earned, or cash will be
distributed for each unit earned equal to either (A)
the Fair Market Value of a share of Stock at the end
of the Performance Period or (B) the average Stock
value over a period determined by the Committee.
(ii) For Performance Units stated in cash when granted,
the value of each unit earned will be distributed in
its initial cash value, or shares of Stock will be
distributed based on the cash value of the units
earned divided by (A) the Fair Market Value of a
share of Stock at the end of the Performance Period
or (B) the average Stock value over a period
determined by the Committee.
-6-
<PAGE>
(c) Shares of Stock distributed in settlement of the units shall
be subject to such vesting requirements and other conditions,
if any, as the Committee shall determine.
9.4. TERMINATION DURING PERFORMANCE PERIOD. If a Participant's
termination of employment with the Company occurs during a Performance Period
with respect to any Performance Units granted to him, the Committee may
determine that the Participant will be entitled to settlement of all or any
portion of the Performance Units as to which he would otherwise be eligible,
and may accelerate the determination of the value and settlement of such
Performance Units or make such other adjustments as the Committee, in its
sole discretion, deems desirable.
10. EXPIRATION OF AWARDS. The "Expiration Date" with respect to an
Award under the Plan means the date established as the Expiration Date by the
Committee at the time of the grant; provided, however, that the Expiration
Date with respect to any Award shall not be later than the earliest to occur
of:
(a) the ten-year anniversary of the date on which the Award is
granted;
(b) if the Participant's termination of employment with the
Company occurs on account of disability, the one-year
anniversary of such termination of employment;
(c) if the Participant's termination of employment with the
Company occurs by reason of retirement, the three-year
anniversary of such termination of employment;
(d) the three-month anniversary of the Participant's death,
either while employed or thereafter; or
(e) if the Participant's termination of employment with the
Company occurs for reasons other than retirement or
disability, the three-month anniversary of such termination of
employment.
If a Stock Appreciation Right is in tandem with an Option, then the
"Expiration Date" for the Stock Appreciation Right shall be the Expiration
Date for the related Option.
11. MISCELLANEOUS.
11.1. EFFECTIVE DATE. The Plan shall be effective upon its adoption
by the Board of Directors of Vysis (the "Board"). The Plan shall be unlimited
in duration and, in the event of Plan termination, shall remain in effect as
long as any Awards under it are outstanding; provided, however, that no
Incentive Stock Options may be granted under the Plan on a date that is more
than ten years from the date the Plan is adopted.
-7-
<PAGE>
11.2. LIMIT ON DISTRIBUTION. Distribution of shares of Stock or
other amounts under the Plan shall be subject to the following:
(a) Notwithstanding any other provision of the Plan, Vysis shall
have no liability to deliver any shares of Stock under the
Plan or make any other distribution of benefits under the Plan
unless such delivery or distribution would comply with all
applicable laws and the applicable requirements of any
securities exchange or similar entity.
(b) In the case of a Participant who is subject to Section 16(a)
and 16(b) of the Exchange Act, the Committee may, at any time,
add such conditions and limitations to any Award to such
Participant, or any feature of any such Award, as the
Committee, in its sole discretion, deems necessary or
desirable to comply with Section 16(a) or 16(b) and the rules
and regulations thereunder or to obtain any exemption
therefrom.
(c) To the extent that the Plan provides for issuance of
certificates to reflect the transfer of shares of Stock, the
transfer of such shares may be effected on a non-certificated
basis, to the extent not prohibited by applicable law or the
rules of any stock exchange.
11.3. PERFORMANCE-BASED COMPENSATION. To the extent that the
Committee determines that it is necessary or desirable to conform any Awards
under the Plan with the requirements applicable to "Performance-Based
Compensation", as that term is used in section 162(m)(4)(C) of the Code, it
may, at or prior to the time an Award is granted, take such steps and impose
such restrictions with respect to such Award as it determines to be necessary
or desirable.
11.4. WITHHOLDING. All Awards and other payments under the Plan are
subject to withholding of all applicable taxes, which withholding obligations
may be satisfied, with the consent of the Committee, through the surrender of
shares of Stock which the Participant already owns, or to which a Participant
is otherwise entitled under the Plan.
11.5. TRANSFERABILITY. Awards under the Plan are not transferable
except as designated by a Participant by will or by the laws of descent and
distribution. To the extent that the Participant who receives an Award under
the Plan has the right to exercise such Award, the Award may be exercised
during the lifetime of the Participant only by the Participant.
11.6. NOTICES. Any notice or document required to be filed with the
Committee under the Plan will be properly filed if delivered or mailed by
registered mail, postage prepaid, to the Committee, in care of Vysis, at its
principal executive offices. The Committee may, by advance written notice to
affected persons, revise such notice procedure from time to time. Any notice
required under the Plan (other than a notice of election) may be waived by
the person entitled to notice.
-8-
<PAGE>
11.7. FORM AND TIME OF ELECTIONS. Unless otherwise specified herein,
each election required or permitted to be made by any Participant or other
person entitled to benefits under the Plan, and any permitted modification or
revocation thereof, shall be in writing filed with the Committee at such
times, in such form, and subject to such restrictions and limitations, not
inconsistent with the terms of the Plan, as the Committee shall require.
11.8. AGREEMENT WITH VYSIS. At the time of an Award to a Participant
under the Plan, the Committee may require a Participant to enter into an
agreement with Vysis (the "Agreement") in a form specified by the Committee,
agreeing to the terms and conditions of the Plan and to such additional terms
and conditions, not inconsistent with the Plan, as the Committee may, in its
sole discretion, prescribe.
11.9. LIMITATION OF IMPLIED RIGHTS.
(a) Neither a Participant nor any other person shall, by reason
of the Plan, acquire any right in or title to any assets,
funds or property of the Company whatsoever, including,
without limitation, any specific funds, assets, or other
property which the Company, in its sole discretion, may set
aside in anticipation of a liability under the Plan. A
Participant shall have only a contractual right to benefits
or amounts, if any, payable under the Plan, unsecured by any
assets of the Company. Nothing contained in the Plan shall
constitute a guarantee by the Company that the assets of
the Company shall be sufficient to pay any amounts or
benefits to any person.
(b) The Plan does not constitute a contract of employment, and
selection as a Participant will not give any employee the
right to be retained in the employ of the Company, nor any
right or claim to any benefit or payment under the Plan,
unless such right or claim has specifically accrued under
the terms of the Plan. Except as otherwise provided in the
Plan, no Award under the Plan shall confer upon the holder
thereof any right as a shareholder of Vysis prior to the date
on which he fulfills all service requirements and other
conditions for receipt of such rights.
11.10. EVIDENCE. Evidence required of anyone under the Plan may be
by certificate, affidavit, document or other information which the person
acting on it considers pertinent and reliable, and signed, made or presented
by the proper party or parties.
11.11. GENDER AND NUMBER. Where the context admits, words in one
gender shall include the other gender, words in the singular shall include
the plural and the plural shall include the singular.
-9-
<PAGE>
12. CHANGE IN CONTROL.
12.1. ACCELERATION. Except as otherwise provided in the Plan or the
Agreement reflecting the applicable Award, upon the occurrence of a Change in
Control:
(a) All outstanding Options (regardless of whether in tandem with
Stock Appreciation Rights) and Stock Appreciation Rights
(regardless of whether in tandem with Options) shall become
fully exercisable.
(b) All Stock Awards shall become fully vested.
(c) Performance Units may be paid out in such manner and amounts
as determined by the Committee.
12.2. DEFINITION OF CHANGE IN CONTROL. For purposes of the Plan, the
term "Change in Control" means a change in the beneficial ownership of the
Company's voting stock or a change in the composition of the Board which
occurs as follows:
(a) any "Person" (as such term is used in Section 13(d) and
14(d)(2) of the Exchange Act), other than Vysis, any
entity owned, directly or indirectly, by the stockholders
of Vysis in substantially the same proportions as their
ownership of stock of Vysis, and any trustee or other
fiduciary holding securities under an employee benefit
plan of Vysis or its subsidiaries or such proportionately
owned corporation) becomes through acquisitions of
securities of Vysis after the Effective Date of the Plan,
the "beneficial owner" (as defined in Rule 13d-3 promulgated
under the Exchange Act), directly or indirectly, of
securities of Vysis representing 40% or more of the
combined voting power of Vysis' then outstanding securities
having the right to vote for the election of directors;
(b) the stockholders of Vysis approve a merger or consolidation
of Vysis with any other corporation, other than (A) a
merger or consolidation which would result in the voting
securities of Vysis outstanding immediately prior thereto
continuing to represent (either by remaining outstanding
or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting
power of the voting securities of Vysis or such surviving
entity outstanding immediately after such merger or
consolidation, or (B) a merger or consolidation effected to
implement a recapitalization of Vysis (or similar transaction)
in which no Person acquires more than 15% of Vysis' then
outstanding securities having the right to vote for the
election of directors;
(c) the stockholders of Vysis approve a plan of complete
liquidation of Vysis or an agreement for the sale or
disposition by Vysis of all or substantially all of Vysis'
assets (or any transaction having a similar effect); or
-10-
<PAGE>
(d) during any 24 month period, individuals who at the
beginning of such period constitute the board of directors
of Vysis, and any new director (other than a director
designated by a Person who has entered into an agreement
with Vysis to effect a transaction described in paragraph (a),
(b) or (c) of this subsection 12.2) whose election by the
board or nomination for election by Vysis' stockholders
was approved by a vote of at least two-thirds of the
directors then still in office who either were directors
at the beginning of the period or whose election or
nomination for election was previously so approved,
cease for any reason to constitute at least a majority
thereof.
13. AMENDMENT AND TERMINATION.
The Board may, at any time, amend or terminate the Plan, provided
that, subject to subsection 5.4 (relating to certain adjustments to shares),
no amendment or termination may materially adversely affect the rights of any
Participant or beneficiary under any Award made under the Plan prior to the
date such amendment is adopted by the Board. Notwithstanding the foregoing or
any other provision of the Plan or any Award agreement, the Board or the
Committee may amend the Plan or the terms of any Award to the extent it deems
necessary to preserve pooling-of-interest accounting treatment for any
transaction which is intended to be accounted for through such accounting
method.
-11-
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 333-47463 of Vysis, Inc. on Form S-8 of our report dated March 12, 1999
(March 25, 1999 as to Note 15), appearing in the Annual Report on Form 10-K of
Vysis, Inc. for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 30, 1999
<PAGE>
EXHIBIT 23.2
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 36 of this Annual Report on
Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
March 29, 1999
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<PAGE>
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<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,672
<SECURITIES> 13,667
<RECEIVABLES> 8,400
<ALLOWANCES> (1,290)
<INVENTORY> 2,487
<CURRENT-ASSETS> 28,092
<PP&E> 11,700
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0
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</TABLE>
