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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, 1999
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. /X/
The aggregate market value of voting stock held by non-affiliates of
the registrant as of March 14, 2000 was approximately $43.3 million.
Number of shares of Common Stock outstanding as of March 14, 2000:
10,055,927
DOCUMENTS INCORPORATED BY REFERENCE:
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Documents: Definitive Proxy Statement for the 2000 Part of the Form 10-K into
annual meeting of stockholders which incorporated:
Part III
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TABLE OF CONTENTS
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PART I
ITEM 1: Business ..................................................................... 3
General ................................................................. 3
Genomic Disease Management .............................................. 3
Technology Platforms .................................................... 3
Business Segment Information............................................. 5
Products ................................................................ 5
Distributed Laboratory Products ......................................... 11
Food Testing Products ................................................... 11
Sales and Marketing ..................................................... 11
Manufacturing ........................................................... 13
Collaborations .......................................................... 13
Patents, License Rights and Proprietary Information ..................... 14
Ability to Practice Technology .......................................... 15
Competition ............................................................. 17
Government Regulation ................................................... 17
Employees ............................................................... 18
Executive Officers ...................................................... 19
Scientific Advisory Board ............................................... 20
ITEM 2: Properties ................................................................... 21
ITEM 3: Legal Proceedings ............................................................ 21
ITEM 4: Submission of Matters to a Vote of Security Holders .......................... 22
PART II
ITEM 5: Market for the Registrant's Common Equity and Related Stockholder Matters .... 22
ITEM 6: Selected Financial Data ...................................................... 23
ITEM 7: Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................... 25
Overview ................................................................ 25
Results of Operations ................................................... 25
Income Taxes ............................................................ 27
Liquidity and Capital Resources ......................................... 27
Recent Accounting Pronouncements ........................................ 28
Year 2000 Compliance .................................................... 29
ITEM 7A: Quantitative and Qualitative Disclosures About Market Risk ................... 29
ITEM 8: Financial Statements ......................................................... 30
ITEM 9: Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure ................................................................... 30
PART III
ITEM 10: Directors and Executive Officers of the Registrant ........................... 30
ITEM 11: Executive Compensation ....................................................... 30
ITEM 12: Security Ownership of Certain Beneficial Owners and Management ............... 30
ITEM 13: Certain Relationships and Related Transactions ............................... 30
PART IV
ITEM 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K .............. 30
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, which could cause actual results to differ materially from
those expressed or implied by the forward-looking statements, include: the
market acceptance of the Company's clinical products; the extent to which the
clinicians or laboratories performing procedures with the Company's products are
able to obtain third-party reimbursement; the ability of the Company to
successfully market and sell its clinical products, other products and
equipment; competition; compliance by the Company with regulatory requirements
and the timely receipt of necessary governmental approvals; the Company's
ability to manufacture products in sufficient quantities; the Company's ability
to maintain intellectual property protection for its proprietary products, to
defend its existing intellectual property rights from challenges by third
parties, and to avoid infringing intellectual property rights of third parties;
product liability claims; the success of the Company's collaborators and
licensees; and the Company's cost control efforts. In addition, a detailed
discussion of risks and uncertainties may be found in the Company's periodic
filings with the Securities and Exchange Commission. The Company disclaims any
intent or obligation to update these forward-looking statements. Further
information concerning factors that could significantly impact expected results
is included in the following sections of this Form 10-K: Business--Sales and
Marketing; 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") or foreign cleared or
approved clinical ("Clinical") products in addition to distributing over 275
Analyte Specific Reagent ("ASR") and research products ("ASR/Research")
through its direct sales operations in the United States and Europe and a
worldwide distribution network covering 59 countries. The Company's wholly
owned subsidiary, Gene-Trak Systems Industrial Diagnostics Corporation,
manufactures and markets food testing kits based on Deoxyribonucleic Acid
("DNA") probes.
The Company was incorporated in Delaware on April 18, 1991. The
Company's business represents the consolidation of multiple research units and
programs of the former Amoco Corporation. On December 31, 1998, Amoco
Corporation merged with the former British Petroleum Corporation, and as a
result of the merger became a wholly-owned subsidiary of BP Amoco p.l.c. As used
herein, "BP Amoco" refers to BP Amoco p.l.c., or its wholly owned subsidiaries,
Amoco Corporation and Amoco Technology Company ("ATC").
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 "Offering"). The net
proceeds of the Offering after deducting expenses were approximately $32.1
million. Concurrent with the consummation of the Offering, the Company issued
675,000 shares of Common Stock at $12.00 per share to BP Amoco in exchange for a
reduction of $8.1 million in the Company's note payable to BP Amoco. As of March
14, 2000, BP Amoco beneficially owned approximately 66 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.
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 FLUORESCENCE IN SITU HYBRIDIZATION ("FISH") SYSTEM, which detects
chromosomal copy number and rearrangement (large genetic structures), the
GENOSENSOR-TM- SYSTEM,
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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 automated
processing instruments used with the Company's patented direct label FISH DNA
probes.
Vysis is continuing to refine the automated instruments 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 began shipping in 1999 its VP 2000-TM-
Processor, a high throughput instrument that automates the specimen preparation
steps of FISH assays, which is estimated to eliminate 70 percent of the labor
used for sample preparation. In July 1999 the Company sold its Quips-TM-
cytogenetic imaging instrumentation ("Imaging") business, which provides
integrated solutions to enhance and automate the visualization, analysis, and
storage of FISH images, to Applied Imaging Corp. ("AI"). See Note 9 of Notes to
Consolidated Financial Statements for further discussion of the Imaging business
sale.
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 Ribonucleic Acid ("RNA") 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 continuing to develop a ready-to-use array of DNA probes on a
miniaturized chip, the Ampli-Onc-TM- Microarray, 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 consists of individual
Ampli-Onc Microarrays, a high speed camera based reader and specimen processing
reagents. The Company began shipping the first Ampli-Onc Microarray, designed
for research use to detect gene amplification of 58 different genes, in December
1999. The Company currently is manufacturing commercial quantities of the
Ampli-Onc Microarrays with a first generation robotic system and is developing a
higher throughput, next generation robotic manufacturing system.
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 completed a strategic reassessment of its Molecular Lawn
platform in March 1999 and deferred near term research and development of the
Molecular Lawn platform to allow the Company to focus on products for the FISH
and GenoSensor platforms. The Company does not anticipate resuming Molecular
Lawn research in 2000.
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BUSINESS SEGMENT INFORMATION
The Company operates in two business segments: genetic testing and
food testing products. See Note 16 of Notes to Consolidated Financial Statements
for financial information regarding each of the Company's segments.
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 to detect amplification of the HER-2/NEU gene via
fluorescence IN SITU hybridization (FISH) in formalin-fixed,
paraffin-embedded human breast cancer tissue specimens. Results from the
PathVysion Kit are intended for use as an adjunct to existing clinical and
pathologic information currently used as prognostic factors in stage II,
node-positive breast cancer patients. The PathVysion Kit is further
indicated as an aid to predict disease-free and overall survival in patients
with stage II, node-positive breast cancer treated with adjuvant
cyclophosphamide, doxorubicin, and 5-fluorouracil (CAF) chemotherapy. The
PathVysion HER-2 DNA Probe Kit was registered in February 2000 by the French
regulatory committee, the Agence Francaise de Securite Sanitaire des Produits
de Sante ("AFSSAPS") for marketing in France. The Company's lead prenatal
product, the AneuVysion-Registered Trademark- Assay for the detection of
chromosome abnormalities on the X, Y, 13, 18 and 21 chromosomes, was cleared
by the FDA in October 1997 and by the AFSSAPS in March 1998. The Clinical
products represented approximately $4.1 million, or 19.7 percent, of the
Company's $20.9 million of product revenues in 1999, $2.6 million, or 12.2
percent, of the Company's $21.5 million of product revenues in 1998 and
approximately $0.4 million, or 2.5 percent, of the Company's $16.0 million of
product revenues in 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.
CLINICAL PRODUCTS
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PRODUCT TECHNOLOGY PLATFORM APPLICATION INTENDED UTILITY STAGE
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CANCER
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CEP-Registered FISH System Chronic Disease monitoring MARKETING
Trademark- 8 Myelogenous (FDA 510(k)
Leukemia, myeloid cleared November
disorders 1996)
CEP-Registered FISH System Chronic Disease progression and MARKETING
Trademark- 12 Lymphocytic disease monitoring (FDA 510(k)
Leukemia cleared January
1997)
CEP-Registered FISH System Bone marrow Disease monitoring MARKETING
Trademark- X/Y transplantation (FDA 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)
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CLINICAL PRODUCTS (CONTINUED)
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PRODUCT TECHNOLOGY PLATFORM APPLICATION INTENDED UTILITY STAGE
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Breast Panel FISH System Breast cancer Selection of therapy and RESEARCH
prognosis
PathVysion-TM- FISH System Bladder cancer Disease recurrence CLINICAL TRIALS
Bladder monitoring
PathVysion-TM- FISH System Bladder cancer Early detection DEVELOPMENT
Bladder
PathVysion-TM- FISH System Bladder cancer Screening of high-risk DEVELOPMENT
Bladder Panel patients
Lung Panel FISH System Lung cancer Screening of high-risk RESEARCH
patients
Cervical Panel FISH System Cervical cancer Disease diagnosis in Pap RESEARCH
smears
Prostate Panel FISH System Prostate cancer Disease prognosis RESEARCH
PRENATAL
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TriGen-TM- FISH System Trisomy 21 (Down Detection of chromosomal MARKETING
syndrome), sex abnormalities associated (AFSSAPS
chromosome with mental retardation registered in
disorders and other birth defects June 1997; "Export
Only")
AneuVysion FISH System Trisomy 21 (Down Detection of chromosomal MARKETING
syndrome), and abnormalities associated (FDA 510(k)
other chromosomal with mental retardation cleared October
disorders and other birth defects 1997; AFSSAPS
registered in
March 1998)
Aneu-Del-Tel-TM- GenoSensor-TM-System Trisomy 21 (Down Detection of essentially all RESEARCH
Chip syndrome), and chromosomal
other chromosomal abnormalities causing
disorders common mental
retardation and other birth
defects
Fetal Screen FISH System Trisomy 21 (Down Detection of mental RESEARCH
syndrome), and retardation and other birth
other chromosomal defects from fetal cells in
disorders maternal blood circulation
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CANCER PRODUCTS
The Company markets FDA cleared or approved products for leukemia and
breast cancer, and is currently focusing its cancer product development efforts
on breast, bladder, lung, cervical 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. This product is used as an adjunct to standard cytogenetic
analysis for identifying and enumerating chromosome 8 via FISH in interphase
nuclei and in metaphase spreads of cells obtained from bone marrow in
patients with myeloid disorders [chronic myelogenous leukemia (CML), acute
myeloid leukemia (AML), myeloproliferative disorder (MPD), myelodysplastic
syndrome (MDS), and hematological disorders not otherwise specified (HDNOS)].
It is not intended to be used as a stand alone assay for test reporting.
Standard cytogenetics, also called karyotyping, involves the direct
microscopic examination of the chromosomes of cells in a blood or tissue
sample. 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 in conjunction with standard
cytogenetics. It is used as an adjunct to standard cytogenetic analysis for
identifying and enumerating chromosome 12 via FISH in interphase nuclei of
cells obtained from peripheral blood lymphocytes in patients with B-cell
chronic lymphocytic leukemia. It is not intended to be used as a stand
alone assay for test reporting. The CEP 12 assay has not been validated for
purposes other than those described above. The abnormal occurrence of three
copies (trisomy) of chromosome 12 is one of the more common genetic
abnormalities in chronic lymphocytic leukemia. 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 in conjunction with standard
cytogenetics 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.
BREAST CANCER. The Company received FDA approval of a PMA
application in December 1998, for its first breast cancer product, the
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's marketing partner, Fujisawa Pharmaceutical Co., is performing
clinical trials of the PathVysion HER-2 kit for Japan regulatory approval.
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 distinguish
gene amplification from the presence of extra copies of chromosome 17.
BREAST CANCER PANEL. Because cancer is considered a multi-gene event,
the Company believes that appropriate patient management may require
simultaneous testing for multiple genetic abnormalities. The Company is
developing a FISH probe panel for breast cancer that includes HER-2 and another
amplified target gene.
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BLADDER CANCER PANELS. 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 from routine urine
specimens for detection of recurrence of bladder cancer. In 1999 the Company
completed 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. The Company is currently designing two
additional clinical trials to support first, a claim for the early detection of
bladder cancer in symptomatic patients and second, a claim for screening for the
presence of bladder cancer as part of annual physical exams for patients in
high-risk categories for bladder cancer.
LUNG CANCER PANEL. The Company is developing a FISH system based panel
for use on testing of sputum samples for the early identification of lung
cancer. The Company believes that, similar to the PathVysion Bladder assay of
urine samples, a FISH probe panel can identify cancerous cells present in sputum
samples before conventional test methods can detect the presence of lung cancer.
The Company is currently researching the probes to be included in the panel in
collaboration with the Mayo Clinic.
CERVICAL CANCER PANEL. The Company is developing a FISH system based
panel for use on testing Pap smear samples classified as "ASCUS" (abnormal
squamous cells of unknown significance). The Company believes that a FISH panel
with probes identifying cancer-related genetic abnormalities in the cells
classified as ASCUS will be of significant medical value. The Company is
currently researching several leads for this panel.
PROSTATE CANCER PANEL. 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 include a panel of genetic markers designed to provide
information indicating which patients should receive more aggressive therapeutic
intervention. The Company is developing a FISH panel assay for prostate cancer
prognosis, but plans to introduce the product as an ASR product while deciding
whether to start clinical trials on the panel.
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 examination of stained
chromosomes. This analysis, which is known as karyotyping, is a standard
cytogenetic method which requires 7 to 10 days for completion at an estimated
patient cost of $400 to $800 per analysis.
The Company's first prenatal diagnostic product, based on the FISH
System, is the TriGen Assay for the direct diagnosis of Down syndrome (trisomy
21, 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 committee, the AFSSAPS,
registered the product in June 1997 as a stand alone diagnostic test. The
product is only available in the European markets and is for export use only.
The Company's AneuVysion product is a FISH panel for the detection of
the trisomy 21 abnormality (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 regulatory committee, the AFSSAPS, 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 approximately 85
percent of the chromosomal abnormalities associated with mental retardation and
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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. A two-year study
involving over 3,000 patients tested with the AneuVysion assay was reported as
having no false positive results and one false negative result.
The Company is conducting research on a GenoSensor System prenatal
microarray product, the Aneu-Del-Tel-TM- microarray, 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. Researchers such as the
National Institutes of Health Fetal Cell Study consortium, funded by the U.S.
National Institutes of Health, have demonstrated the feasibility of genetic
analysis of fetal cells isolated from maternal blood. However, obtaining a
sufficient number of fetal blood cells for analysis has been difficult and
generally not suitable to routine clinical application. The Company is
continuing research on 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.
ASR/RESEARCH PRODUCTS
Vysis currently markets over 275 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 must be manufactured under
the FDA's Quality System Regulations (formerly the Good Manufacturing
Practice rules), and can be used by high complexity testing laboratories, as
certified under the Clinical Laboratories Improvement Act ("CLIA"), for
clinical diagnosis provided that the laboratory validates the analytical
characteristics of the assay and uses an FDA mandated disclaimer when
reporting the results. The Company is not permitted to make marketing claims
on neither the analytical nor the clinical performance of any ASR product.
See Business - Government Regulation. Sales of ASR products are categorized
in ASR/Research products (see Note 16 of Notes to Consolidated Financial
Statements). The Company introduced 19 new ASR/Research products in 1999. The
ASR/Research reagent product line represented approximately $9.5 million, or
45.4 percent, of the Company's $20.9 million of product revenues in 1999,
approximately $8.5 million, or 39.3 percent, of the Company's $21.5 million
of product revenues in 1998 and approximately $4.6 million, or 28.8 percent,
of the Company's $16.0 million of product revenues in 1997.
The Company markets six FISH ASR/Research probe product lines,
respectively marketed as WCP-Registered Trademark-, CEP-Registered Trademark-,
LSI-Registered Trademark- and MultiVysion, TelVysion and SpectraVysion probes
and various reagents. These products are used in a wide range of genetic
research and can be used for clinical diagnostics under the ASR regulations
noted above. The Company also markets Comparative Genomic Hybridization
reagents for ASR/Research use.
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.
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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, 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
is supplying the MultiVysion probes for a marketing trial of their use in PGT
analysis. PGT analysis is performed to increase the probability of a successful
implantation.
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 the
gene-rich chromosome regions near 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 targeted at the
gene-rich regions near the telomeres for research in chromosomal causes of
mental retardation and cancer. In collaboration with the University of
Chicago, the Company is developing a multi-color 41 telomere probe set to
simultaneously assess 41 sub-telomere regions, with the ASR/research product
introduction expected in spring 2000.
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 as an
ASR/research product, 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. The Quips SpectraVysion genetic imaging workstation software was
sold to AI as part of the Imaging business sale. AI markets imaging software
used with the SpectraVysion probes.
AMPLI-ONC I AND II MICROARRAYS. In December 1999, the Company
initiated shipments of its Ampli-Onc I Microarray based on its GenoSensor Array
System that detects 58 genes amplified in cancer. This ready-to-use array of DNA
probes on a miniaturized chip is designed 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 Microarray, 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 eventually provide clinical correlations between
chromosomal abnormalities and disease. Both of these products may enable
researchers to discover new correlations that may yield genomic products for
improved diagnosis, prognosis and predictive outcome.
INSTRUMENT PRODUCTS
Vysis markets instrument products including certain FISH-related
processing instruments and the GenoSensor System reader. The Company began
shipments of its VP 2000 Processor and the GenoSensor Reader in 1999. In July
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1999, the Company sold its Imaging business to Applied Imaging Corp. Under the
sale terms, the Company retained the ownership of and right to use all of the
Quips proprietary software in automated scanning and hybridization instruments.
See Note 9 of Notes to Consolidated Financial Statements for further discussion
of the Imaging business sale. The instrument product line represented
approximately $3.3 million, or 15.6 percent, of the Company's $20.9 million of
product revenues in 1999, approximately $6.6 million, or 30.9 percent, of the
Company's $21.5 million of product revenues in 1998 and approximately $7.2
million, or 45.1 percent, of the Company's $16.0 million of product revenues in
1997.
VP 2000 PROCESSOR. This processing instrument was designed to reduce
up to 70% of the manual steps required in carrying out a FISH assay,
particularly for those assays which involve a tissue pretreatment step. The
Company began shipping the VP 2000 Processor in 1999 and the Company's test
results showed the VP 2000 provided superior test results compared to fully
manual FISH assays for paraffin-embedded breast cancer samples.
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.
GENOSENSOR-TM- Reader. The GenoSensor Reader, which the Company began
shipping in 1999, is a proprietary reader designed to quickly capture
fluorescent image data from the Ampli-Onc MicroArray after assay performance.
The Reader incorporates image processing software that permits analysis and
calculation of gene amplification or deletion in the test sample for each gene
in the microarray.
DISTRIBUTED LABORATORY PRODUCTS
The Company's former wholly-owned subsidiary, Vysis Sarl, marketed
a line of laboratory products on a distributor basis primarily in France.
These products included laboratory ventilation systems, growth media and
humidifier cabinets. Sales of these products were approximately $1.1 million
in 1999 and $1.2 million in 1998 and 1997. The Company sold Vysis Sarl and
the rights to this product line to Applied Genetics Services, Ltd. in
December 1999. See Note 10 of Notes to Consolidated Financial Statements.
FOOD TESTING PRODUCTS
The Company develops, manufactures and commercializes products for the
detection and identification of food-borne pathogens to food processors and
quality control laboratories. These products, marketed under the
Gene-Trak-Registered Trademark- name, include both DNA probe products and
antibody kits for the detection of organisms found to contaminate food such as
Salmonella, E. coli, Listeria and Listeria monocytogenes. The Company's food
testing product revenues were approximately $3.0 million in 1999, approximately
$2.6 million in 1998 and approximately $2.5 million in 1997. Sales and marketing
of the food testing products are conducted by sales and marketing employees in
the United States dedicated solely to the food testing business segment and
through separate international distributors. The food testing products are
manufactured in a separate facility from that used for the Company's genetic
testing products. Compliance with government regulatory requirements for the
food testing products is performed by separate employees.
SALES AND MARKETING
MARKETING STRATEGY
The Company currently markets its products to 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
AneuVysion assay is used in the U.S. by CLIA certified high complexity
testing cytogenetic laboratories offering karyotyping and prenatal diagnostic
services. The marketing of the PathVysion HER-2 DNA Probe Kit is focused on
hospital-based pathology laboratories and reference laboratories.
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The Company has experienced slower than expected market adoption rates
for its Clinical products. Although the Company believes the market adoption
rates for its Clinical products are improving, there can be no assurances that
this improvement trend will continue. The Company believes the adoption in
France of its prenatal Clinical products 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 French government has still
taken no action on this recommendation, and 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 and ASR/Research
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, (iii) provide data demonstrating clinical correlation
of the disease target to disease outcome, progression and predisposition, and
(iv) establish marketing programs through relevant patient advocacy and support
groups.
The Company in 1999 continued efforts to obtain approvals from
third party payors, including Medicare and private approvals, for
reimbursement for the Company's products. As part of these efforts, the
Company entered into a license agreement with the American Medical
Association ("AMA") permitting the Company to publish the AMA's "CPT" codes
governing reimbursement for the Company's FISH products. The Company includes
the CPT codes in its product catalog and web site, along with advice for its
customer base on how to pursue reimbursement. The Company believes
reimbursement is generally available in all states for the AneuVysion assay.
The Company also has obtained reimbursement approval for its PathVysion HER-2
DNA Probe Kit in 33 states with reimbursement decisions pending in 12 states.
One state, South Carolina, has denied coverage for the PathVysion HER-2
assay. The failure of the Company's customers to obtain adequate third party
payor reimbursement for the Company's Genomic Disease Management products
could result in a material adverse impact on the Company's business,
financial condition and results of operations.
SALES STRATEGY
Sales in the United States are conducted by a direct sales force,
currently consisting of a national sales manager and seven technical sales
representatives. The sales representatives each handle Clinical and ASR/Research
reagent sales as well as instrumentation sales. European, Middle Eastern and
African sales, managed by the President of the Company's European operations,
are supported by an 11-person direct sales organization with offices in Germany,
France and the United Kingdom.
Sales and marketing in Japan is conducted through a marketing
partnership with Fujisawa Pharmaceutical Co., Ltd. ("Fujisawa"). The
partnership, entered into in July 1995, provides Fujisawa with a ten-year
exclusive distribution right to market Vysis FISH probes and instruments 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 required Fujisawa to pay the Company
$600,000 per year through 1999. Fujisawa and the Company are currently
collaborating on the performance of a Japanese clinical trial plan and
submission to the Japanese regulatory agency 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 by a U.S.-based
International Distribution Manager. See Note 16 of Notes to Consolidated
Financial Statements for financial information of the Company organized by
geographic area.
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MANUFACTURING
The Company's manufacturing operations encompass the production and
packaging of DNA probes and reagents, the Ampli-Onc I Microarrays and the
GenoSensor Readers. 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 genetic testing product manufacturing processes are readily scaleable to
meet expected growth.
The genetic testing product manufacturing processes are performed
according to the FDA's Quality System Regulation ("QSR"), which replaced the
FDA's Good Manufacturing Practices criteria. The Company trains employees for
compliance with current QSR requirements as specified by the FDA. See
Business-Government Regulation. The Company's genetic testing product
manufacturing and food testing product manufacturing are both 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:
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 on microarray-based CGH and cancer correlations.
THE MAYO CLINIC
The Company funds or collaborates on research performed at the Mayo
Clinic in the area of correlation of chromosomal abnormalities to aggressive
forms of prostate cancer and genes associated with metastatic potential, in the
use of the PathVysion Bladder assay and in the development of a FISH panel for
the early detection of lung cancer, and on new FISH probes for classification of
various leukemias and lymphomas.
NATIONAL HUMAN GENOME RESEARCH INSTITUTE/INSTITUTE OF PATHOLOGY AT THE
UNIVERSITY OF BASEL
In 1999 the Company began a three party cooperative research and
development agreement ("CRADA") collaboration with the National Human Genome
Research Institute and Dr. Guido Sauter of the Institute of Pathology at the
University of Basel in Switzerland, on the use of the Company's FISH and
GenoSensor technologies in combination with "microtumor" arrays. This
collaboration will be testing various microtumor arrays, including bladder,
prostate, breast, ovarian, lung and cervical cancer specimen arrays, with the
Company's FISH probes and Ampli-Onc Microarrays. The Company expects to
develop significant Clinical product leads from this collaboration. Under the
CRADA the Company has an option to obtain an exclusive license to the
technology developed during the collaboration.
EOS BIOTECHNOLOGY
In 1999 the Company began a research collaboration with Eos
Biotechnology, a privately held developer of therapeutic drug candidates, to
identify genes in breast cancer that are both over-expressed and are amplified
at the chromosomal DNA level. Under this collaboration, the Company is
developing FISH probes for genes identified by Eos as over-expressed in breast
cancer. Eos uses a variety of technologies to identify these genes, including
Affymetrix GeneChips and its own proprietary technologies. Under the
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collaboration agreement, the Company will have exclusive rights for diagnostic
use of the developed technology and Eos will have exclusive rights for
therapeutic and therapeutic development use.
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. The Company's 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 has resulted in the TelVysion telomere probe set product release in
2000. The Company is supplying its MultiVysion FISH probe panel for a marketing
trial with the Reproductive Genetics Institute directed at establishing the
utility of the Company's FISH probes in pre-implantation genetic testing.
PATENTS, LICENSE RIGHTS AND PROPRIETARY INFORMATION
The Company currently holds or has exclusive licenses to 136 issued
United States patents or allowed United States patent applications, to 65
pending United States patent applications, and to additional foreign patents
and pending patent applications in various areas of genetic and infectious
disease testing. In 1999 the Company's patent portfolio grew by the
acquisition of the entire patent portfolio of Aprogenex, Inc., a developer of
fetal cell assays using FISH. The Company believes the patents include
several patents that may be commercially significant to any fetal cell assay
using mRNA probes as a fetal cell identifier.
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. In January
2000, the Company acquired a royalty-bearing exclusive license from Yale
University under the chromosomal suppression IN SITU hybridization patent rights
invented by David Ward et al., including issued European Patent 0 444 115 and
its pending U.S. application counterparts. This license broadens the Company's
FISH patent portfolio, particularly in Europe, and the Company intends to
include these rights in its sublicensing efforts for FISH.
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.
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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",
issued November 2, 1998, relating to microarray-based CGH assays carried out
using a nucleic acid array as the hybridization target, and to pending U.S. and
foreign patent applications claiming microarray-based CGH assays. The Company
has pending U.S. patent applications relating to its Ampli-Onc and Aneu-Del-Tel
Microarrays 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, the "Collins patent", relates to
methods of reducing background noise in nucleic acid amplification assays. A
royalty-bearing, non-exclusive license under the Collins patent was granted
to Gen-Probe Incorporated ("Gen-Probe") under the August 1999 settlement of
the litigation with Gen-Probe. See Legal Proceedings below. The Company holds
non-exclusive licenses from Columbia University/Salk Institute and from PHRI
on United States and foreign patents and pending patent applications relating
to the use of QBR as an amplification technology to detect nucleic acid
targets. These include U.S. Patent 4,786,600 issued November 22, 1988,
claiming "substrate" molecules having inserted probe sequences which are
replicatable by QBR and U.S. Patent 4,957,858, issued September 18, 1990,
claiming nucleic acid detection assays using QBR. The Company also has a
number of United States and foreign patents and pending patent applications
covering 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 jointly owned U.S. patent
application covering the PathVysion Bladder test. The Company holds an option to
acquire an exclusive license to a patent application filed by the Mayo Clinic
for a FISH assay to identify aggressive prostate cancer. 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., the U.S. National Institutes of Health 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,
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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 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 its microarray-based
CGH 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 microarray-based CGH 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
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condition and 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,
Inc. ("Ventana") 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. Ventana also markets
immunohistochemistry ("IHC") reagents and has filed a PMA application for an IHC
test to detect HER-2 gene overexpression. Dako USA markets an IHC 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 products,
which may have the ability to compete with the Company in the clinical market.
In addition, many reference laboratories and research institutions produce their
own FISH probes for internal use.
Other companies are developing 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. The Company's FISH products also face significant
competition from polymerase chain reaction ("PCR") based nucleic acid
amplification assays. 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.
The food testing product segment is also highly competitive and the
Company's nucleic acid probe food testing products face competition from
antibody product suppliers and from PCR assay products.
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
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 analytical or
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
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clinical laboratories to offer diagnostic tests based upon use of ASR reagents,
provided that the laboratory establish the analytical 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 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.
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 legislation will not impose additional costs or lengthen review
times for the Company's products.
On February 2, 2000 the FDA issued a warning letter to the Company
asserting that its recent press releases in September 1999 and January 2000, and
certain of the Company's web site pages relating to its AneuVysion FDA cleared
prenatal diagnostic kit constituted "off-label" promotion of the AneuVysion kit
for uses outside the FDA cleared Statement of Intended Use. The FDA asserted
that the Company was advertising AneuVysion as a stand-alone test, while the
Statement of Intended Use called for the kit to be used as an adjunct to
standard karyotyping. The Company's policy is to work constructively with the
FDA to remain in full compliance with FDA regulations, and as a result, the
Company expects to resolve the warning letter over AneuVysion satisfactorily
without any material adverse impact on the Company's business, financial
condition and results of operations.
The Company timely responded to the warning letter in February 2000.
In its response, the Company disagreed with the FDA's interpretation of its
press releases and advertising material and pointed out certain statements in
the Statement of Intended Use which the Company believes support its press
releases and advertising. In its response, the Company also advised the FDA of
certain revisions to its web site that were made in response to the warning
letter. These revisions included the withdrawal of the September 1999 and
January 2000 press releases from the site and a revision to more prominently
display the Statement of Intended Use at certain parts of the web site. As of
March 29, 2000, the Company had not received any further response from the FDA
over this warning letter.
EMPLOYEES
As of March 10, 2000, the Company had 138 full-time employees
(including seven open positions), of whom 20 hold Ph.D. degrees, one holds an
M.D. degree and 17 hold other advanced degrees. Of the Company's total work
force, 41 positions are in research and development, 31 are in operations and
66 are in sales, general and administrative positions including sales,
marketing, legal, finance, management information services, 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
18
<PAGE>
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,
2000, and their present positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John L. Bishop................... 55 President, Chief Executive Officer and Director
Alfred H. Ellsworth.............. 40 Vice President, Finance
Russel K. Enns................... 51 Vice President, Regulatory Affairs
Robert J. Koska.................. 42 Vice President, Sales and Marketing
William E. Murray................ 46 Vice President, General Counsel and Secretary
Steven A. Seelig................. 51 Vice President, Research and Development and Chief Medical Officer
Paul J.J.G. Steuperaert.......... 60 President, European Operations
</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 to 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.
ALFRED H. ELLSWORTH became Vice President of Finance in May 1999 and
was previously Controller since joining the Company in November 1997. From
January 1994 until November 1997, Mr. Ellsworth served as Corporate Controller
of Rand McNally & Co., a publisher of maps. Mr. Ellsworth was Corporate
Controller of Silvestri Corporation, a designer and marketer of seasonal and
home decorations, from September 1991 to January 1994, and held various audit
positions at Price Waterhouse from 1981 to 1991.
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.
ROBERT J. KOSKA was appointed Vice President, Sales and Marketing in
January 2000. Mr. Koska was previously Director of Marketing since August 1998
and Marketing Manager since joining the Company in June 1996. Prior to joining
the Company, Mr. Koska held a variety of marketing and sales management
positions and was most recently Eastern Area Sales Manager for Difco
Laboratories Inc., a microbiology and infectious disease diagnostic products
manufacturer, from April 1989 to May 1996. From September 1983 to April 1989 Mr.
Koska held sales positions at Genetic Systems Corporation, a supplier of
diagnostic kits and instruments, and Ortho Diagnostic Systems, Inc. , a supplier
of diagnostic kits and instruments.
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.
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<PAGE>
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.
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.
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.
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
ongoing research programs into the molecular pathology of prostate, breast and
ovarian cancers and gliomas. Dr. Jenkins has published 43 scientific articles on
the use of FISH to assess cancer pathology.
FRED R. KRAMER, PH.D., is Chairman, Department of Molecular Genetics,
Public Health Research Institute, New York, New York. Dr. Kramer is the
co-author of over 30 scientific articles; is the inventor or co-inventor on
fundamental patents covering QBR based diagnostic assays, which are 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 Vice President, Diagnostic
Development, Corixa Corporation, and Medical Director, the Infectious Disease
Research Institute, Seattle, Washington. Dr. Persing was previously 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.
20
<PAGE>
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 and array manufacturing
methods.
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 has consolidated 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 begun
construction of a facility near Toulouse, France. The Company leases 350 square
feet of space near Cologne, Germany under a month-to-month rental agreement. The
Company also leases 400 square feet near London, England under a month-to-month
rental agreement. The Company's food testing business leases 10,237 square feet
in Hopkinton, Massachusetts under a lease that expires in January 2003.
ITEM 3. LEGAL PROCEEDINGS
The Company, BP Amoco and other parties had been named as defendants
in a patent infringement suit brought by Gen-Probe Incorporated ("Gen-Probe") in
the United States District Court in the Southern District of California (San
Diego). During August 1999, the parties to the suit agreed to a settlement which
has been approved by the Court and resulted in dismissal of the action. The
settlement provided for an exchange of certain immunities and patent licenses
among the parties. No material amounts of cash were paid by or received by the
Company upon completion of the settlement. Pursuant to the settlement, Gen-Probe
was granted a royalty-bearing license to the Company's U.S. Patent 5,750,338
(the "`338 patent"). Gen-Probe was also granted an option to acquire a license
for its collaboration partners, BioMerieux Corporation, Bayer Corporation and
Chiron Corporation. Gen-Probe exercised this option in December 1999.
On December 22, 1999, the Company was named as a defendant in a
Complaint For Declaratory Relief filed by Gen-Probe in the United States
District Court in the Southern District of California (San Diego). Gen-Probe
filed a First Amended Complaint For Declaratory Relief And Unfair Competition on
January 25, 2000. Gen-Probe's amended complaint seeks a declaration that the
`338 patent is invalid and not infringed by certain products for detecting the
presence of hepatitis C virus (HCV) and human immunodeficiency virus (HIV) in
blood specimens and an injunction restraining the Company from interfering with
the manufacture, sale, license or use of Gen-Probe's products by Gen-Probe, its
21
<PAGE>
partners and customers among others. The complaint also seeks damages and other
monetary relief for the unfair competition.
The Gen-Probe products identified in the suit use nucleic acid testing
methodology for detecting HCV and HIV in blood specimens. The `338 patent
license applies to Gen-Probe's blood testing products which are marketed by
Chiron Corporation in France and are expected to be marketed in the U.S. and
elsewhere, and other products which the Company understands will be introduced
commercially by Gen-Probe and its partners later in 2000 and thereafter.
Gen-Probe also seeks a declaration from the Court regarding its rights and
obligations under the license.
The Company has not answered the complaint but has instead requested a
stay of the proceedings pending clarification of certain matters concerning the
'338 patent in the U.S. Patent Office. The Company has also requested summary
dismissal of the unfair competition claim. The Company intends to defend the
suit vigorously should its request for a stay be denied or, should the stay be
granted, at such time as the stay is lifted. The Company further believes
Gen-Probe's claim for damages is without merit. A loss of this suit would not
limit the sales or marketing of any of the Company's present or planned
products, but could result in the loss of revenue under the license granted to
Gen-Probe and the loss of other licensing opportunities for the `338 patent.
Although there can be no assurance as to the ultimate disposition of this
matter, it is the opinion of the Company's management, based upon the
information available at this time, that the expected outcome of this matter
will not have a material adverse effect on the Company's business, results of
operations and financial condition.
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 1999.
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 14, 2000, there were 10,055,927 shares of Common Stock
outstanding held by approximately 88 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>
1998
March 31 ....................... 12.375 10.250
June 30 ........................ 11.250 10.000
September 30 ................... 10.250 3.375
December 31 .................... 9.500 3.000
1999
March 31 ....................... 6.813 3.000
June 30 ........................ 4.125 2.625
September 30 ................... 6.000 2.875
December 31 .................... 3.938 2.438
</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
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<PAGE>
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 14 of
the Notes to Consolidated Financial Statements for further discussion). From the
closing date of the sale, February 10, 1998, to December 31, 1999, the Company
used such net offering proceeds as follows (in millions):
<TABLE>
<S> <C>
Purchase of short-term investments and cash equivalents ................. $ 8.4
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 ................................... 21.7
-----
Total ................................................................... $32.1
=====
</TABLE>
Each of these amounts is a reasonable estimate of the application of
the net offering proceeds. This use of proceeds does not represent a material
change in the use of proceeds described in the prospectus for the Offering.
Other than the repayment of a note payable to BP Amoco in the amount of $2.0
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.
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data presented below for the years ended
December 31, 1999 and 1998 and the balance sheet data presented below at
December 31, 1999 and 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 and 1995, 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 data
presented below should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Report.
23
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Product revenue .................. $ 20,946 $ 21,526 $ 16,021 $ 11,022 $ 6,296
Grant and other revenue .......... 749 1,444 2,212 2,216 921
Legal settlement ................. -- 384 -- -- --
-------- -------- -------- -------- --------
Total revenues ................... 21,695 23,354 18,233 13,238 7,217
Cost of goods sold ............... 8,134 9,896 8,063 6,127 4,360
-------- -------- -------- -------- --------
Gross profit ..................... 13,561 13,458 10,170 7,111 2,857
Research and development ......... 8,526 11,488 10,533 9,456 8,871
Acquired research-related
patents ..................... 536 -- -- -- --
Selling, general and
administrative .............. 16,226 19,683 15,877 15,688 11,687
Restructuring expense ............ 918 -- -- -- --
-------- -------- -------- -------- --------
Loss from operations ............. (12,645) (17,713) (16,240) (18,033) (17,701)
Gain on sale of Imaging
business .................... 1,700 -- -- -- --
Gain on sale of French
distributor ................. 166 -- -- -- --
Gain on sale of investment ....... 357 -- -- -- --
Interest income (expense), net ... 580 958 (636) (148) --
-------- -------- -------- -------- --------
Net loss ......................... $ (9,842) $(16,755) $(16,876) $(18,181) $(17,701)
======== ======== ======== ======== ========
Net loss per basic and diluted
common share (1)............. $ (1.00) $ (1.91) $ (15.89) $ (17.18) $ (16.72)
======== ======== ======== ======== ========
Shares used in computing net
loss per basic and
diluted share (1) ........... 9,859 8,753 1,062 1,058 1,058
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .... $ 4,818 $ 4,517 $ 669 $ 48 $ 247
Short-term investments ....... 3,597 13,822 -- -- --
Marketable securities ........ 622 -- -- -- --
Other receivables ............ 1,963 -- -- -- --
Working capital (deficit) .... 9,064 17,098 (9,138) (6,622) (2,625)
Total assets ................. 21,035 35,043 16,940 15,115 19,167
Note payable--BP Amoco ....... -- -- 9,202 5,106 --
Long-term debt ............... -- 523 -- -- --
</TABLE>
- -----------
(1) Loss per share data presented in 1995 through 1996 assumes that the shares
issued in connection with the 1996 recapitalization (see Note 14 of Notes
to Consolidated Financial Statements for further discussion) were
outstanding throughout the entire period 1995 through 1996.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Vysis, Inc. ("Vysis" or the "Company") is a Genomic Disease Management
company that develops, commercializes and markets clinical products that provide
information critical to the evaluation and management of cancer, prenatal
disorders and other genetic diseases. Vysis currently markets six U.S. Food and
Drug Administration ("FDA") or foreign cleared or approved clinical ("Clinical")
products in addition to distributing over 275 Analyte Specific Reagent and
research ("ASR/Research") products through its direct sales operations in the
United States and Europe and a worldwide distribution network covering 59
countries. The Company's wholly owned subsidiary, Gene-Trak Systems Industrial
Diagnostics Corporation, manufactures and markets food testing kits based on
Deoxyribonucleic Acid ("DNA") probes.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 AND 1998
For the year ended December 31, 1999, total revenues were $21.7
million, a decrease of $1.7 million, or seven percent, from the prior year. 1999
product revenues decreased $0.6 million, or three percent, to $20.9 million,
from $21.5 million in 1998 while grant and other revenue decreased $0.7 million,
or 48 percent, as compared to 1998. In addition, the Company received $0.4
million of nonrecurring revenue during 1998 related to a litigation settlement
agreement. The decrease in 1999 product revenue was attributable to a $3.4
million reduction in instrument product sales as a result of the Company selling
its Quips cytogenetic imaging instrumentation ("Imaging") business during July
1999, which represented nearly all of its genetic instrument business. The $3.4
million decline in instrument revenues was partially offset by a $1.5 million,
or 57 percent, increase in worldwide shipments of Clinical products, and a $1.0
million, or 12 percent, increase in worldwide shipments of ASR/Research
products. The increase in Clinical sales was primarily due to sales in the U.S.
of the Company's PathVysion-TM- HER-2 DNA Probe Kit that was approved by the FDA
in December 1998 as well as a worldwide increase in the adoption rate of the
Company's Clinical prenatal products. The Company believes the increase in
ASR/Research sales was primarily due to a general increase in worldwide market
demand for the products. The decrease in grant and other revenue was primarily
due to the completion of two U.S. Department of Commerce research grants in
February and July 1998.
Cost of goods sold were $8.1 million for the year ended December 31,
1999, a decrease of $1.8 million, or 18 percent, from the prior year primarily
as a result of the decline in the volume of the instrument products sold
following the divestiture of the Imaging business during July 1999. As a
percentage of product revenue, 1999 product gross profit increased to 61.2
percent as compared to 54.0 percent for 1998, primarily due to the Company's
shift in focus to the higher margin Clinical and ASR/Research products. While
1999 product revenue decreased $0.6 million, the resulting product gross profit
increased by $1.2 million, or 10 percent, to $12.8 million as compared to 1998,
primarily due to the revenue growth in the higher margin Clinical and
ASR/Research products.
Research and development expense decreased to $8.5 million for the
year ended December 31, 1999 from $11.5 million in the prior year. The $3.0
million decrease was primarily due to lower expenditures in software
development, contract research and clinical trials as well as savings from the
elimination of certain positions in connection with the Company's 1999
restructuring plans. During 1999 the Company incurred a nonrecurring charge of
$0.5 million for the acquisition of certain research-related patents.
Selling, general and administrative expense decreased to $16.2 million
for the year ended December 31, 1999 from $19.7 million in the prior year. The
$3.5 million decrease was due to a decrease of $1.6 million in selling expense
primarily due to the reduction in the number of sales and marketing employees
and related costs as a result of divesting the Imaging business and due to the
elimination of certain positions as well as a $1.9 million decrease in general
and administrative expense primarily due to lower litigation expense.
25
<PAGE>
During the year ended December 31, 1999, the Company completed
restructuring plans that included the elimination of 25 employees at various
levels throughout the Company, which resulted in a $0.9 million restructuring
charge in 1999 for employee severance costs.
As previously mentioned, the Company sold its Imaging business during
July 1999 for a purchase price of $2.3 million plus additional consideration of
$0.7 million for the purchase of certain Imaging component inventory, resulting
in a gain of $1.7 million. On December 31, 1999, the Company sold its
wholly-owned French distribution subsidiary for a purchase price of $1.3
million, resulting in a gain of $0.2 million. The gain on sale of investment for
the year ended December 31, 1999 was $0.4 million that resulted from the $0.5
million sale of the Company's investment in Incyte Pharmaceuticals, Inc. common
stock.
Interest income decreased to $0.6 million for the year ended December
31, 1999, representing a $0.7 million decrease over the prior year as a result
of the Company utilizing the proceeds from the February 10, 1998 Offering.
Interest expense decreased to $0.1 million for 1999, representing a $0.3 million
decrease from 1998 primarily due to the Company reducing its outstanding debt
during 1999.
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 $0.7 million, or 35 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 Clinical products
and a $3.9 million, or 84 percent, increase in worldwide shipments of
ASR/Research products 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 assay. The increase in ASR/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. The decrease in
instrument sales, which consists primarily of Quips cytogenetic imaging
equipment including software, was the result of a general decline in overall
market demand. For the year ended December 31, 1998, grant and other revenue
decreased $0.7 million, or 35 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. In addition, the Company
received during 1998 $0.4 million of nonrecurring revenue 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 ASR/Research products represented a higher percentage
of the total business versus 1997. Instrument revenues carry significantly lower
margins than the Clinical and ASR/Research products.
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- HER-2 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.
26
<PAGE>
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 Offering.
INCOME TAXES
Prior to the completion of the Company's Offering, the results of
operations were included in the consolidated income tax returns of BP Amoco;
accordingly, the domestic net operating losses through February 10, 1998 have
been utilized by BP Amoco in its consolidated income tax returns and are not
available to offset the Company's future taxable income. Subsequent to the
Offering, the Company has filed a separate federal income tax return. As the
Company was in a loss position for the period February 11, 1998 through December
31, 1998 and for the year ended December 31, 1999, 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 66 percent ownership interest
in the Company in those states where required by state tax law. Under state tax
laws in a number of states, including Illinois (the state in which much of the
Company's business is taxed), the Company is required by law to be included in
BP Amoco's unitary state tax returns as long as BP Amoco owns or controls 50
percent or more of the voting equity. For unitary state filings, the tax sharing
agreement with BP Amoco requires BP Amoco to pay the Company the incremental tax
savings, if any, received by BP Amoco as a result of including the Company's
results of operations in such filings. The agreement also requires the Company
to pay BP Amoco the incremental tax liability, if any, incurred by BP Amoco as a
result of including the Company's results of operations in such filings. As a
result of the Company's 1998 losses being included in BP Amoco's unitary state
filings, the Company received during 1999 a $30,000 state tax benefit payment.
For 1999, the Company has recorded an estimated state benefit of $25,000 from BP
Amoco.
A full valuation allowance has been provided for all deferred tax
assets (net of liabilities) at December 31, 1999, as management does not
consider realization of such amounts more likely than not.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $10.8 million, $14.6 million
and $15.2 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Cash used in operating activities primarily relates to ongoing
operating losses as previously discussed above.
Net cash provided by (used in) investing activities was $11.3 million,
($14.9) million and ($0.8) million for the years ended December 31, 1999, 1998
and 1997, respectively. The 1999 increase in cash provided by investing
activities of $26.2 million resulted primarily from the proceeds from maturities
of short-term investments, net of purchases of short-term investments, as well
as the proceeds from the sale of the Imaging business and sale of investment.
The 1998 increase in cash used in investing activities of $14.1 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.
Net cash flows (used in) provided by financing activities was ($0.1)
million, $33.3 million and $16.7 million for the years ended December 31, 1999,
1998 and 1997, respectively. The 1999 decrease and 1998 increase of $33.4
million and $16.6 million, respectively, in cash provided by financing
activities primarily resulted from the 1998 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.
27
<PAGE>
The Company has a minimum purchase commitment with an instrument
manufacturer, which expires at December 31, 2000 and contains a remaining
commitment of $0.4 million. 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 17.7 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 $1.3 million to
$0.7 million per year for 2000 through 2004. See Note 13 of Notes to
Consolidated Financial Statements.
On December 31, 1999 the Company sold its wholly-owned French
distribution subsidiary to Applied Genetics Services, Ltd. ("AGS") for a
purchase price of $1.3 million. The Company will receive the purchase price
in various cash installments during the period January through September 2000
and expects to eliminate approximately $0.8 million in annual selling
expenses.
At December 31, 1999, the Company had cash, cash equivalents and
short-term investments of $8.4 million and an accumulated deficit of $58.5
million. Since its inception, the Company has experienced negative cash flows
from operations. In order to preserve the Company's cash position and to reduce
cash used in operating activities, the Company implemented during the first
quarter of 1999 a restructuring plan that resulted in the elimination of 20
positions, including open positions, thereby reducing ongoing expenditures by
approximately $1.6 million. In addition, the Company sold its investment in
Incyte common stock for $0.5 million. During the third quarter of 1999 the
Company sold its Imaging business to Applied Imaging Corp. ("AI") for total
consideration of $3.0 million. Of the $3.0 million in total consideration, the
Company has received $1.6 million in cash and 497,368 shares of AI common stock
that was valued upon its receipt at $0.5 million. In addition, AI is obligated
to pay in cash $0.1 million in January 2000, $0.5 million plus interest in July
2000 and $0.3 million plus interest in January 2001. Upon completion of the
Imaging business sale, the Company refocused on its core technologies and during
the fourth quarter eliminated 37 positions, including open positions as well as
certain positions previously associated with the Imaging business, thereby
reducing ongoing annual cash expenditures by approximately $2.7 million. At
December 31, 1999, the Company paid all but $0.4 million of severance costs
related to the 1999 restructuring plans.
The Company believes that its current cash and short-term investment
position, and the interest to be earned thereon, will be sufficient to fund the
Company's operations through the end of year 2001. The Company's estimate of the
time period for which cash funds will be adequate to fund its operations is a
forward looking estimate subject to risks and uncertainty, and actual results
may differ materially. The Company's requirements for additional capital will
depend on many factors, including growth in product revenues, payments received
under potential collaborative agreements; the availability of government
research grant payments; the progress of the Company's collaborative and
independent research and development projects; the costs of preclinical and
clinical trials for the Company's products; the prosecution, defense and
enforcement of patent claims and other intellectual property rights; costs of
product liability claims; and the development of manufacturing, sales and
marketing capabilities. To the extent capital resources, including payments from
existing and possible future collaborative agreements and grants, together with
the net proceeds of the Offering are insufficient to meet future capital
requirements, the Company will have to raise additional funds to continue the
development of its technologies. There can be no assurance that such funds will
be available on favorable terms, or at all. To the extent that additional
capital is raised through the sale of equity or convertible debt securities, the
issuance of such securities could result in dilution to the Company's
shareholders. If adequate funds are not available, the Company may be required
to curtail operations significantly or to obtain funds through entering into
collaborative agreements on unattractive terms. The Company's inability to raise
capital as and when needed would have a material adverse effect on the Company's
business, financial condition and results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 will require the
Company, to the extent it makes use of derivative financial instruments, to
record them on the balance sheet at fair value. Changes of the fair value of
28
<PAGE>
derivatives will be recognized to earnings or other comprehensive income,
depending on whether the derivative is designated as part of a hedge
transaction. In June 1999, FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement 133," which postponed the effective date of SFAS 133 until calendar
year 2001. The Company anticipates that due to its current non-use of derivative
instruments, the adoption of SFAS 133 will not have a significant effect on the
Company's financial position or results of operations.
YEAR 2000 COMPLIANCE
The Year 2000 issue was the result of computer programs having been
written using two digits, rather than four, to define the applicable year. As a
result, computer systems and/or software used by many companies in a very wide
variety of applications could experience operating difficulties unless they were
modified or upgraded to adequately process information involving, related to or
dependent upon the four digit field.
The Company evaluated the Year 2000 readiness of the software included
within the 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. This project evaluation consisted 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 of its Products and believes
that all Products are Year 2000 compliant. With respect to IT Systems, the
Company began implementing a plan during the first quarter of 1999 which has now
been completed, and the Company believes its IT Systems are Year 2000 compliant.
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 initiated
formal communications with significant vendors to determine the extent of which
the Company is vulnerable to those third parties' failure to remediate their own
Year 2000 issues. The Company has requested 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. The Company has received and evaluated
all of its responses and implemented appropriate contingency plans where the
Company believed it was necessary. With respect to the manufacturing/facility
related equipment and other systems, the Company has assessed all known
equipment and systems and believes that they are Year 2000 compliant.
The Company has incurred expenditures in connection with Year 2000
compliance issues aggregating approximately $250,000 of expenses and $50,000 of
capitalized costs.
At year end all systems were backed up and verified to be operational
prior to the resumption of business after the new year. No Year 2000 issues were
encountered. The Company has also not experienced any third party supplier
issues. The Company remains alert to potential Year 2000 related issues that may
occur in the future, but believes that there will be no material impact on
operations, liquidity or 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 and France. The exchange
rate risk is mitigated through local expenditures for the majority of their
expenses. The Company's primary foreign currency exchange rate risk results from
the foreign operations' intercompany purchases of inventory. The majority of the
29
<PAGE>
intercompany purchases are expected to be repaid in standard payment terms of
30 days. Sales throughout the rest of the world are denoted in U.S. dollars.
The Company does not believe that the impact from foreign currency exchange
rate fluctuations will have a material impact on its financial statements.
The net impact of foreign exchange activities on earnings was immaterial for
the years ended December 31, 1999, 1998 and 1997. The foreign currency
translation loss included in shareholders' equity resulting from the
translation of the financial statements of the Company's international
subsidiaries into U.S. dollars increased by $0.2 million in 1999 due to the
strengthening of the U.S. dollar against the functional currency of the
Company's international subsidiaries. Interest rate exposure is primarily
limited to the $3.6 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
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 35 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
None.
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 2000 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.
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.
30
<PAGE>
<TABLE>
<CAPTION>
PAGE NUMBERS OF
THIS FORM 10-K
---------------
<S> <C>
Report of Management ........................................................................ 32
Independent Auditors' Report ................................................................ 33
Report of Independent Accountants ........................................................... 34
Consolidated Balance Sheets--December 31, 1999 and 1998 ..................................... 35
Consolidated Statements of Operations for the Years Ended December 31, 1999,
1998 and 1997 ......................................................................... 36
Consolidated Statements of Comprehensive Operations for the Years Ended December 31, 1999,
1998 and 1997 ......................................................................... 37
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1999, 1998 and 1997 ...................................................... 38
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999,
1998 and 1997 ......................................................................... 39
Notes to Consolidated Financial Statements .................................................. 40
</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 1999.
31
<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 1999 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.
JOHN L. BISHOP ALFRED H. ELLSWORTH
President and Chief Executive Officer Vice President, Finance
32
<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, 1999 and 1998, and the related consolidated statements of
operations, comprehensive operations, stockholders' equity (deficit), and cash
flows for the years 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 audits. The
financial statements and financial statement schedule of the Company for the
year ended December 31, 1997 were audited by other auditors whose report, dated
March 13, 1998, expressed an unqualified opinion on those statements.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, such 1999 and 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,
1999 and 1998, and the results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
Also, in our opinion, such 1999 and 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 10, 2000
33
<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 pages 30 and 31
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 the year 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 audit 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 audit provides 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
34
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 4,818 $ 4,517
Short-term investments ..................................................... 3,597 13,822
Marketable securities ...................................................... 622 --
Accounts receivable, net ................................................... 3,093 6,106
Other receivables .......................................................... 1,963 --
Current portion of long-term lease receivables, net ........................ -- 378
Inventories ................................................................ 2,012 2,487
Other current assets ....................................................... 503 782
-------- --------
Total current assets ................................................... 16,608 28,092
Property and equipment, net ..................................................... 2,986 3,879
Investment ...................................................................... -- 562
Long-term lease receivables, net ................................................ -- 626
Other assets .................................................................... 1,441 1,884
-------- --------
Total assets .......................................................... $ 21,035 $ 35,043
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .......................................... $ -- $ 553
Accounts payable and accrued liabilities ................................... 6,153 9,475
Deferred revenue ........................................................... 1,391 966
-------- --------
Total current liabilities ............................................. 7,544 10,994
-------- --------
Long-term debt .................................................................. -- 523
-------- --------
Commitments and contingencies (Notes 13, 17 and 19)
Stockholders' equity:
Convertible preferred stock, $0.001 par value; 10,000,000 shares authorized:
Series A; 6,200,000 shares designated; none issued and outstanding at
December 31, 1999 and 1998 ............................................. -- --
Series B; 553,126 shares designated; none issued and outstanding at
December 31, 1999 and 1998 ............................................. -- --
Common stock, $0.001 par value; 35,000,000 shares authorized; 9,945,346
issued and outstanding at December 31, 1999; 9,788,401 issued and
outstanding at December 31, 1998 ....................................... 10 10
Additional paid-in capital ................................................. 72,192 71,862
Deferred compensation ...................................................... -- (81)
Unrealized gain on investment .............................................. 93 462
Cumulative translation adjustment .......................................... (336) (101)
Accumulated deficit ........................................................ (58,468) (48,626)
-------- --------
Total stockholders' equity ............................................ 13,491 23,526
-------- --------
Total liabilities and stockholders' equity ............................ $ 21,035 $ 35,043
======== ========
</TABLE>
See notes to the consolidated financial statements.
35
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product revenue .......................................... $ 20,946 $ 21,526 $ 16,021
Grant and other revenue .................................. 749 1,444 2,212
Legal settlement ......................................... -- 384 --
-------- -------- --------
Total revenues ....................................... 21,695 23,354 18,233
Cost of goods sold ............................................ 8,134 9,896 8,063
-------- -------- --------
Gross profit .................................................. 13,561 13,458 10,170
-------- -------- --------
Operating expenses:
Research and development ................................. 8,526 11,488 10,533
Acquired research-related patents ........................ 536 -- --
Selling, general and administrative ...................... 16,226 19,683 15,877
Restructuring expense .................................... 918 -- --
-------- -------- --------
Total operating expenses ............................. 26,206 31,171 26,410
-------- -------- --------
Loss from operations .......................................... (12,645) (17,713) (16,240)
Gain on sale of Imaging business .............................. 1,700 -- --
Gain on sale of French distributor ............................ 166 -- --
Gain on sale of investment .................................... 357 -- --
Interest income ............................................... 648 1,337 --
Interest expense .............................................. (68) (379) (636)
-------- -------- --------
Net loss ...................................................... $ (9,842) $(16,755) $(16,876)
======== ======== ========
Basic and diluted net loss per share .......................... $ (1.00) $ (1.91) $ (15.89)
======== ======== ========
Shares used in computing basic and diluted net loss per share . 9,859 8,753 1,062
</TABLE>
See notes to the consolidated financial statements.
36
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net loss ......................................... $ (9,842) $(16,755) $(16,876)
Other comprehensive income (loss):
Cumulative translation adjustment ........... (235) 140 (257)
Unrealized holding gain (loss) on investment (12) (115) 577
Reclassification adjustment,
realized gain on investment ............... (357) -- --
-------- -------- --------
Total other comprehensive income (loss) . (604) 25 320
-------- -------- --------
Comprehensive loss ............................... $(10,446) $(16,730) $(16,556)
======== ======== ========
</TABLE>
See notes to the consolidated financial statements.
37
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Convertible preferred stock:
Beginning balance ........................................ $ -- $ 7 $ 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
-------- -------- --------
Common stock:
Beginning balance ........................................ 10 1 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 10 1
-------- -------- --------
Additional paid-in capital:
Beginning balance ........................................ 71,862 30,396 17,555
Expenses funded by stock issuance ........................ 286 -- --
Income tax benefit from BP Amoco ......................... -- 1,126 7,451
Deferred compensation .................................... (57) 21 277
Conversion of note payable--BP Amoco ..................... -- 8,099 5,105
Exercise of stock options ................................ 101 81 8
Net proceeds from initial public offering ................ -- 32,139 --
-------- -------- --------
Ending balance ........................................... 72,192 71,862 30,396
-------- -------- --------
Deferred compensation:
Beginning balance ........................................ (81) (206) (90)
Stock option grants ...................................... -- (21) (277)
Amortization ............................................. 24 146 161
Adjustments .............................................. 57 -- --
-------- -------- --------
Ending balance ........................................... -- (81) (206)
-------- -------- --------
Unrealized gain (loss) on investment:
Beginning balance ........................................ 462 577 --
Current year activity .................................... (369) (115) 577
-------- -------- --------
Ending balance ........................................... 93 462 577
-------- -------- --------
Cumulative translation adjustment:
Beginning balance ........................................ (101) (241) 16
Current year activity .................................... (235) 140 (257)
-------- -------- --------
Ending balance ........................................... (336) (101) (241)
-------- -------- --------
Accumulated deficit:
Beginning balance ........................................ (48,626) (31,871) (14,995)
Net loss (post-recapitalization) ......................... (9,842) (16,755) (16,876)
-------- -------- --------
Ending balance ........................................... (58,468) (48,626) (31,871)
-------- -------- --------
Total stockholders' equity (deficit) .......................... $ 13,491 $ 23,526 $ (1,337)
======== ======== ========
</TABLE>
See notes to the consolidated financial statements.
38
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................... $ (9,842) $(16,755) $(16,876)
Reconciliation of net loss to net cash used in
operating activities:
Depreciation and amortization ........................... 1,643 2,338 2,885
Gain on sale of Imaging business ........................ (1,700) -- --
Gain on sale of French distributor ...................... (166) -- --
Gain on sale of investment .............................. (357) -- --
Effect of changes in foreign currency ................... 136 -- --
Write-off of goodwill ................................... -- 205 --
Loss (gain) on disposition of assets .................... 10 -- (30)
Stock compensation ...................................... 24 146 161
Changes in assets and liabilities:
Accounts receivable ................................ 1,534 (1,310) (2,054)
Inventories ........................................ (827) 223 (473)
Other current assets ............................... 120 368 (336)
Lease receivables .................................. 344 (1,004) --
Other assets ....................................... 137 (208) --
Accounts payable and accrued liabilities ........... (2,663) 1,009 1,380
Deferred revenue ................................... 839 428 129
-------- -------- --------
Net cash used in operating activities ................... (10,768) (14,560) (15,214)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds, net of transaction-related expenditures, from
sale of Imaging business ................................ 1,388 -- --
Proceeds, net of cash sold, from sale of French distributor . 28 -- --
Proceeds from sale of investment ............................ 457 -- --
Proceeds from maturities of short-term investments .......... 30,671 14,310 --
Purchases of short-term investments ......................... (20,447) (28,132) --
Purchases of property and equipment ......................... (756) (675) (280)
Proceeds from sale of property and equipment ................ 4 -- 30
Increase in other assets .................................... (79) (368) (557)
-------- -------- --------
Net cash provided by (used in) investing activities ..... 11,266 (14,865) (807)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ...................... -- 32,142 --
Increase in note payable--BP Amoco .......................... -- 1,665 15,697
Expenses funded by stock issuance ........................... 286 -- --
Expenses funded by BP Amoco ................................. -- 294 956
Loan repayment to BP Amoco .................................. -- (2,000) --
Proceeds from long-term borrowings .......................... -- 1,488 --
Principal payments on long-term borrowings .................. (496) (412) --
Proceeds from exercise of stock options ..................... 101 81 8
-------- -------- --------
Net cash (used in) provided by financing activities ..... (109) 33,258 16,661
Effect of exchange rate changes on cash .......................... (88) 15 (19)
-------- -------- --------
Net increase in cash and cash equivalents ........................ 301 3,848 621
Cash and cash equivalents at beginning of period ................. 4,517 669 48
-------- -------- --------
Cash and cash equivalents at end of period ....................... $ 4,818 $ 4,517 $ 669
======== ======== ========
Interest paid .................................................... $ 68 $ 248 $ --
======== ======== ========
</TABLE>
See notes to the consolidated financial statements.
39
<PAGE>
VYSIS, INC.
(AN INDIRECT SUBSIDIARY OF BP AMOCO P.L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS AND ORGANIZATION
Vysis, Inc. ("Vysis" or the "Company") is a Genomic Disease
Management company that develops, commercializes and markets clinical
products that provide information critical to the evaluation and management
of cancer, prenatal disorders and other genetic diseases. Vysis currently
markets six U.S. Food and Drug Administration ("FDA") or foreign cleared or
approved clinical ("Clinical") products in addition to distributing over 275
Analyte Specific Reagent and research ("ASR/Research") products through its
direct sales operations in the United States and Europe and a worldwide
distribution network covering 59 countries. The Company's wholly owned
subsidiary, Gene-Trak Systems Industrial Diagnostics Corporation,
manufactures and markets food testing kits based on Deoxyribonucleic Acid
("DNA") probes.
The Company was incorporated in Delaware on April 18, 1991. The
Company's business represents the consolidation of multiple research units and
programs of the former Amoco Corporation. On December 31, 1998, Amoco
Corporation merged with the former British Petroleum Corporation, and as a
result of the merger became a wholly-owned subsidiary of BP Amoco p.l.c. As used
herein, "BP Amoco" refers to BP Amoco p.l.c. and its wholly owned subsidiaries.
On February 10, 1998, the Company completed the initial public
offering of 3 million shares of its Common Stock, par value $0.001 per share, at
a price of $12.00 per share (the "Offering"). The net proceeds of the Offering
after deducting expenses were approximately $32.1 million. Concurrent with the
consummation of the Offering, the Company issued 675,000 shares of Common Stock
at $12.00 per share to BP Amoco in exchange for a reduction of $8.1 million in
the Company's note payable to BP Amoco. As of March 14, 2000, BP Amoco
beneficially owned approximately 66 percent of the Company's outstanding Common
Stock.
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 a February 29, 1996 recapitalization, as described in Note 14,
are not indicative of the Company's future structure.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect 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.
40
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
Product sales revenue is recognized upon shipment of products to
customers. 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.
WARRANTY
Estimated future warranty obligations related to certain products are
provided by charges to cost of goods sold in the period in which the related
revenue is recognized.
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development costs are expensed as incurred and include
certain amounts relating to grant revenues.
LOSS PER SHARE
The Company adopted Statement of Financial Accounting Standards
("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.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS 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, unrealized gains and losses on
investments classified as available-for-sale and realized gains and losses on
investment sales.
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.
41
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARKETABLE SECURITIES
Marketable securities consist of common stock acquired in the sale of
the Imaging business (see Note 9 for further discussion) that are classified as
available-for-sale securities and recorded at current market value, with
adjustments to stockholders' equity, net of income taxes.
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 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 a capitalized license fee 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 and accounts payable and debt approximates their
fair value. Cash equivalents and short-term investments are primarily corporate
debt securities with creditworthy corporations and U.S. government securities.
With respect to accounts receivable 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 statements of operations using the average
exchange rates in effect during the period. Gains or losses from such
translations are accumulated in a separate component of stockholders' equity.
Gains and
42
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
losses resulting from foreign currency transactions are included in the results
of operations and have not been significant.
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, "Accounting for Stock Issued to Employees."
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 (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS 133 will require the Company, to the extent it makes use of derivative
financial instruments, to record them on the balance sheet at fair value.
Changes of the fair value of derivatives will be recognized to earnings or other
comprehensive income, depending on whether the derivative is designated as part
of a hedge transaction. In June 1999, FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement 133," which postponed the effective date of SFAS 133 until
calendar year 2001. The Company anticipates that due to its current non-use of
derivative instruments, the adoption of SFAS 133 will not have a significant
effect on the Company's financial position or results of operations.
RECLASSIFICATIONS
Certain amounts in fiscal 1998 and 1997 have been reclassified to
conform to the fiscal 1999 presentation. These changes had no impact on
previously reported net loss or stockholders' equity.
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 statements of operations were as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Research and development ................. $ -- $131 $ --
Selling, general and administrative ...... -- -- 182
---- ---- ----
$ -- $131 $182
==== ==== ====
</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. In addition, during 1999 BP
Amoco incurred $50,000 for consulting services on behalf of the
43
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company for which the Company has not been charged. Prior to an initial public
offering (the "Offering"--see Note 14), 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. The notes payable
to BP Amoco accrued interest at an annual rate of 7.5 percent that resulted in
interest expense of $131,000 and $636,000 for the years ended December 31, 1998
and 1997, respectively. Concurrent with the consummation of the Offering (see
Note 14), 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 and $7,451,000 were recorded as
contributed capital and a related reduction of the note payable to BP Amoco
during 1998 and 1997, respectively. For state income taxes, the Company's
results of operations will continue to be included with BP Amoco's state
returns, due to its 66 percent ownership interest in the Company, in those
states where required by state tax law. Under state tax laws in a number of
states, including Illinois (the state in which much of the Company's business is
taxed), the Company is required by law to be included in BP Amoco's unitary
state tax returns as long as BP Amoco owns or controls 50 percent or more of the
voting equity. For unitary state filings, the tax sharing agreement with BP
Amoco requires BP Amoco to pay the Company the incremental tax savings, if any,
received by BP Amoco as a result of including the Company's results of
operations in such filings. The agreement also requires the Company to pay BP
Amoco the incremental tax liability, if any, incurred by BP Amoco as a result of
including the Company's results of operations in such filings. As a result of
the Company's 1998 losses being included in BP Amoco's unitary state filings,
the Company received during 1999 a $30,000 state tax benefit payment. For 1999,
the Company has recorded an estimated state tax benefit of $25,000 from BP
Amoco. See Note 12 for further discussion of the income taxes.
NOTE 3--COMPOSITION OF BALANCE SHEET COMPONENTS:
Accounts receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
------- ------
<S> <C> <C>
Accounts receivable ........................... $ 4,324 $7,046
Less: allowance for doubtful accounts ........ (1,231) (940)
------- ------
$ 3,093 $6,106
======= ======
</TABLE>
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
------ ------
<S> <C> <C>
Raw materials and supplies .................... $1,136 $ 900
Finished goods ................................ 876 1,587
------ ------
$2,012 $2,487
====== ======
</TABLE>
Property and equipment consisted of the following (in thousands):
44
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
------- -------
<S> <C> <C>
Construction-in-progress ...................... $ 239 $ --
Leasehold improvements ........................ 2,398 2,386
Equipment, furniture and fixtures ............. 9,081 9,314
------- -------
11,718 11,700
Less: accumulated depreciation ............... (8,732) (7,821)
------- -------
$ 2,986 $ 3,879
======= =======
</TABLE>
Other assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
------ ------
<S> <C> <C>
License fees (net of accumulated amortization of
$485 and $397 in 1999 and 1998, respectively) .... $1,100 $1,211
Long-term receivable ............................... 258 --
Software development costs (net of accumulated
amortization of $6 and $841 in 1999 and 1998,
respectively)..................................... 74 549
Prepaid expenses ................................... 9 124
Goodwill (net of accumulated amortization of $457
in 1998).......................................... -- --
------ ------
$1,441 $1,884
====== ======
</TABLE>
Accounts payable and accrued liabilities consisted of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
------ ------
<S> <C> <C>
Trade accounts payable................ $1,118 $3,435
Employee related costs................ 1,182 1,169
Other taxes payable................... 1,218 807
Accrued rent.......................... 934 1,020
Accrued professional fees............. 783 2,059
Other................................. 918 985
------ ------
$6,153 $9,475
====== ======
</TABLE>
NOTE 4--LEASE RECEIVABLES AND LONG-TERM DEBT:
The Company sold on December 31, 1999 its wholly-owned French
distribution subsidiary, as further described in Note 10. This former subsidiary
previously entered into certain sales-type leasing transactions with customers.
In order to comply with local regulations with respect to such leasing
transactions, the former subsidiary borrowed money and 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. As a result of the
sale of the French subsidiary, which included transferring to the buyer the
lease receivables as well as the long-term debt, there are no lease receivables
and long-term debt as of December 31, 1999. The components of net lease
receivables at December 31, 1998 are as follows (in thousands):
45
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
Gross lease receivables ....................... $1,397
Unearned income ............................... (43)
Allowance for doubtful accounts ............... (350)
------
$1,004
======
</TABLE>
NOTE 5--CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS CLASSIFIED AS HELD TO
MATURITY:
Cash equivalents and short-term investments are classified as held to
maturity, are carried at amortized cost and are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------------
UNREALIZED FAIR
AMORTIZED COST GAIN (LOSS) VALUE
-------------- ----------------- ------
<S> <C> <C> <C>
U.S. government agencies ................ $2,727 $(11) $2,716
Corporate debt securities ............... 2,770 1 2,771
------ ---- ------
$5,497 $(10) $5,487
====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------
UNREALIZED FAIR
AMORTIZED COST LOSS VALUE
-------------- ----------------- --------
<S> <C> <C> <C>
U.S. government agencies ................ $ 3,679 $ (1) $ 3,678
Corporate debt securities ............... 14,002 (14) 13,988
------- ---- -------
$17,681 $(15) $17,666
======= ==== =======
</TABLE>
A summary of securities classified as held to maturity at December 31,
1999 are as follows (in thousands):
<TABLE>
<CAPTION>
DUE IN AMORTIZED COST FAIR VALUE
------ -------------- ----------
<S> <C> <C>
1-90 Days ................ $1,900 $1,901
91-180 Days .............. 3,212 3,211
181-270 Days ............. 385 375
------ ------
$5,497 $5,487
====== ======
</TABLE>
NOTE 6--LEGAL SETTLEMENT:
During 1998, the Company recognized a $384,000 nonrecurring gain with
respect to a settlement agreement which ended a patent infringement suit brought
by the Company, as exclusive licensee, and its licensor.
NOTE 7--ACQUIRED RESEARCH-RELATED PATENTS:
During July 1999, the Company acquired Aprogenex, Inc.'s intellectual
property portfolio for $250,000 plus the issuance of 80,291 shares of the
Company's Common Stock for a total value of $536,000. The intellectual property
portfolio included 12 United States patents which primarily relate to diagnostic
assays using the identification of fetal cells in maternal blood. The Company
has expensed the entire value of the acquired portfolio as the Company's
research has not yet established that the assays utilizing these patents has
sufficient diagnostic capability and the Company is not currently allocating
significant research expenditures to this area.
46
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8--RESTRUCTURING:
During 1999, the Company completed restructuring plans that included
the elimination of 25 employees at various levels throughout the Company, which
resulted in a $918,000 restructuring charge in 1999 for employee severance
costs. At December 31, 1999, the Company had paid all but $360,000 of such
costs.
NOTE 9--GAIN ON SALE OF THE IMAGING BUSINESS:
During July 1999, the Company sold its Quips cytogenetic imaging
instrumentation ("Imaging") business, which represented nearly all of the
Company's current genetic instrument product line, to Applied Imaging Corp.
("AI") for a purchase price of $2,278,000 plus additional consideration of
$749,000 for the purchase of certain Imaging component inventory, resulting in a
gain of $1,700,000. Of the $3,027,000 in total consideration, the Company has
received $1,620,000 in cash and 497,368 shares of AI common stock that was
valued upon its receipt at $529,000. In addition, in accordance with the sale
agreement, AI is obligated to pay in cash $128,000 in January 2000, $500,000
plus interest in July 2000, and $250,000 plus interest in January 2001. As of
December 31, 1999, the marketable securities balance of $622,000 represents the
market value of the common stock, and an unrealized gain of $93,000 has been
included as a component of stockholders' equity.
NOTE 10--GAIN ON SALE OF FRENCH DISTRIBUTOR:
On December 31, 1999, the Company sold its wholly-owned French
distribution subsidiary to Applied Genetics Services, Ltd. for a purchase price
of $1,272,000, resulting in a gain of $166,000. The Company will receive the
purchase price in various cash installment amounts during the period January
through September 2000.
NOTE 11--INVESTMENT:
At December 31, 1998, the investment balance of $562,000 represented
the market value of available-for-sale Incyte Pharmaceuticals, Inc. common stock
with an unrealized gain of $462,000 included as a component of stockholders'
equity. During 1999, the Company sold this investment for $457,000, resulting in
a $357,000 realized gain on the sale.
NOTE 12--INCOME TAXES:
Prior to the completion of the Offering (see Note 14), 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 has filed a separate federal income tax return. As
the Company was in a loss position for the period February 11, 1998 through
December 31, 1998 and for the year ended December 31, 1999, no federal provision
is recorded. See Note 2 for discussion of state taxes and the tax sharing
agreement with BP Amoco.
The income tax effect of temporary differences comprising the deferred
tax assets and liabilities is as follows (in thousands):
47
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Patents ....................................... $ -- $ 216
Accrued rent .................................. 374 408
Net operating loss carryforwards .............. 6,326 4,588
Allowance for doubtful accounts ............... 286 382
Inventory reserve ............................. 133 174
Accrued professional fees ..................... 227 435
Accrued severance ............................. 185 --
Accrued employee benefits ..................... 141 147
Deferred revenue .............................. 553 233
Miscellaneous accruals ........................ 621 353
Deferred compensation ......................... -- 150
------- -------
Total deferred tax assets .......................... 8,846 7,086
Valuation allowance ................................ (8,513) (6,576)
------- -------
Net deferred tax assets ............................ 333 510
Deferred tax liabilities:
Accumulated depreciation, unrealized gain on
investment and software development costs ... (333) (510)
------- -------
Net deferred tax assets ............................ $ -- $ --
======= =======
</TABLE>
The Company had net operating loss carryforwards of $17,960,000 at
December 31, 1999, of which approximately $16,792,000 will expire at varying
dates through 2014 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 13--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 17.7 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>
2000........................... $1,267
2001........................... 1,314
2002........................... 1,014
2003........................... 706
2004........................... 732
------
$5,033
======
</TABLE>
48
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14--CAPITALIZATION:
On February 29, 1996, pursuant to a recapitalization, the Company
issued 6,200,000 shares of its Series A Convertible Preferred Stock, par value
$0.001 per share, and 1,058,394 shares of its Common Stock, par value $0.001 per
share, to 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 15--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:
49
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES AVERAGE PRICE
--------- -------------
<S> <C> <C>
Options outstanding 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
-------
Options outstanding 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
-------
Options outstanding at December 31, 1998 ................. 846,320 $1.40
Granted .................................................. 50,158 $4.03
Exercised ................................................ 76,654 $1.32
Surrendered or terminated ................................ 80,212 $3.19
-------
Options outstanding at December 31, 1999 ................. 739,612 $1.40
=======
Options exercisable at December 31, 1999 ................. 649,097 $1.00
Options available for future grant at December 31,
1999 ................................................. 43,417
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
Weighted-average fair value of options granted
during the year ended December 31, 1999 .............. $3.47
</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 1999 the employees originally granted these
options left the Company and, as a result, deferred compensation was reduced by
$57,000. 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 $24,000, $146,000,
and $161,000 as stock compensation expense during the years ended December 31,
1999, 1998 and 1997, 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. As
implemented by the Company, options granted under the 1998 Plan vest either in
accordance with the completion of certain performance milestones for which
specific percentages of vesting are associated, or over four years with 50
percent vesting in the first year and the remaining 50 percent vesting ratably
over the following three years; however, no vesting occurs until the Company has
achieved two consecutive quarters of positive net earnings. Regardless of
50
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
whether milestones or the profitability criteria are achieved for those options
granted with milestones or the profitability criteria, 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 ................................ -- --
---------
Options outstanding at December 31, 1998 ................. 1,039,000 $5.62
Granted .................................................. 674,900 $3.91
Exercised ................................................ -- --
Surrendered or terminated ................................ 341,000 $5.59
---------
Options outstanding at December 31, 1999 ................. 1,372,900 $4.78
=========
Options exercisable at December 31, 1999 ................. 1,500 $3.75
Options available for future grant at December 31,
1999 ................................................. 127,100
Weighted-average fair value of options granted
during the year ended December 31, 1998 .............. $3.42
Weighted-average fair value of options granted
during the year ended December 31, 1999 .............. $2.77
</TABLE>
During January 2000, the Board of Directors approved the immediate
vesting of 242 and 1,500 unvested options as of December 31, 1999 under the 1996
and 1998 Plans, respectively, for former employees of the French distribution
subsidiary that was sold on December 31, 1999 (see Note 10).
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 the Company, or
10 years after the grant date.
During June 1999, the shareholders approved the adoption of the 1999
Outside Directors Stock Option Plan ("Directors Plan"). A total of 100,000
shares of Common Stock has been authorized for issuance under the Directors
Plan, subject to anti-dilution and other adjustments. The Directors Plan
provides that, on the date of an Outside Director's initial election to the
Board of Directors, the Outside Director will receive an option to purchase
10,000 shares of Common Stock. In addition, the Directors Plan provides that
each person who is an Outside Director at the close of the regular annual
meeting of the Company's stockholders will receive an option to purchase 5,000
shares of Common Stock. Under the Directors Plan, options will be granted at a
price equal to the fair market value of the Common Stock on the date of the
grant. The options vest immediately upon grant and expire the earlier of one
year after a Director ceases to be a Director of the Company, or 10 years after
the grant date.
51
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option activity for the above grants and the Directors Plan is
summarized below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES AVERAGE PRICE
--------- -------------
<S> <C> <C>
Granted ......................................... 15,000 $5.60
Exercised ....................................... -- --
------
Options outstanding at December 31, 1998 ........ 15,000 $5.60
Granted ......................................... 15,000 $3.75
Exercised ....................................... -- --
------
Options outstanding at December 31, 1999 ........ 30,000 $4.68
======
Options exercisable at December 31, 1999 ........ 30,000 $4.68
Weighted-average fair value of options granted
during the year ended December 31, 1998 ..... $2.93
Weighted-average fair value of options granted
during the year ended December 31, 1999 ..... $3.54
</TABLE>
The following summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- ------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE
--------------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C>
$0.53-$1.34 593,412 5.1 $0.56 582,194
$2.74-$2.94 222,395 8.5 $2.74 28,653
$3.06-$3.75 316,750 8.9 $3.75 16,500
$5.38-$5.60 961,976 7.7 $5.60 31,854
$6.63-$10.00 47,979 4.2 $7.01 21,396
--------- -------
2,142,512 680,597
========= =======
</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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected volatility .......... 94.2% 82.0% 47.5%
Risk free interest rate ...... 6.0% 4.4% 6.4%
Expected option life (years) . 6.7 6.9 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
52
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
increased by approximately $950,000, $396,000 and $100,000, or $0.10, $0.05 and
$0.09 per share basic and diluted, for the years ended December 31, 1999, 1998
and 1997, 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 $203,000, $204,000 and
$187,000 in 1999, 1998 and 1997, respectively.
NOTE 16--SEGMENT AND GEOGRAPHIC INFORMATION:
The Company operates in two reportable business segments: genetic and
food testing products. The genetics business develops, commercializes,
manufactures and markets products that use nucleic acid probes for the
evaluation and management of cancer, prenatal disorders and other genetic
diseases. The food business manufactures and markets food testing kits based on
DNA probes.
The tables below present information (in thousands) about reported
segments for the three years ended December 31, 1999:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------
GENETICS FOOD TOTAL
-------- ------ --------
<S> <C> <C> <C>
Revenues from external
customers .................... $ 18,718 $2,977 $ 21,695
Interest income ................. 648 -- 648
Interest expense ................ 68 -- 68
Unusual income items, net* ...... 769 -- 769
Depreciation and amortization ... 1,622 21 1,643
Other non-cash items ............ (1,767) -- (1,767)
Segment loss .................... 9,702 140 9,842
Segment assets .................. 20,374 661 21,035
Additions to long-lived assets .. 778 57 835
</TABLE>
* Includes gain on sales of Imaging business, French distributor
and investment, net of acquired research-related patents and
restructuring expense.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------
GENETICS FOOD TOTAL
-------- ------ --------
<S> <C> <C> <C>
Revenues from external
customers .................... $20,348 $2,622 $22,970
Legal settlement ................ 384 -- 384
Interest income ................. 1,337 -- 1,337
Interest expense ................ 379 -- 379
Depreciation and amortization ... 2,320 18 2,338
Other non-cash items ............ 351 -- 351
Segment loss .................... 16,329 426 16,755
Segment assets .................. 34,380 663 35,043
Additions to long-lived assets .. 1,032 11 1,043
</TABLE>
53
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------
GENETICS FOOD TOTAL
-------- ------ --------
<S> <C> <C> <C>
Revenues from external
customers .................... $ 15,707 $2,526 $ 18,233
Interest expense ................ 636 -- 636
Depreciation and amortization ... 2,817 68 2,885
Other non-cash items ............ 131 -- 131
Segment income (loss) ........... (16,921) 45 (16,876)
Segment assets .................. 16,129 811 16,940
Additions to long-lived assets .. 830 7 837
</TABLE>
The Company's revenues by product line are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
-------- ------- --------
<S> <C> <C> <C>
FDA/AFSSAPS approved clinical
genetic testing products........ $ 4,116 $ 2,616 $ 406
ASR/Research products.............. 9,506 8,463 4,611
Genetic instrument products........ 3,268 6,650 7,232
Genetic research grants and
license revenue................. 749 1,444 2,212
Distributed laboratory products.... 1,079 1,175 1,246
Food testing products.............. 2,977 2,622 2,526
Legal settlement................... -- 384 --
-------- ------- --------
Consolidated total revenues $ 21,695 $23,354 $ 18,233
======== ======= ========
</TABLE>
The Company's revenues from external customers by geographic area
based on the customer's location are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
-------- ------- --------
<S> <C> <C> <C>
United States.................... $10,423 $ 9,884 $ 8,419
Europe, Middle East and Africa... 8,766 11,212 7,867
Other............................ 2,506 2,258 1,947
------- ------ -------
Consolidated total revenues...... $21,695 $23,354 $18,233
======= ======= =======
</TABLE>
All long-lived assets as of December 31, 1999 and 1998 are located
within the United States, except for $284,000 and $307,000 of European
long-lived assets, respectively.
For the years ended December 31, 1999, 1998 and 1997, there were no
revenues to individual customers that exceeded 10 percent of total revenues.
54
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17--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>
2000.................................. $ 879
2001.................................. 807
2002.................................. 878
2003.................................. 691
2004.................................. 623
------
$3,878
======
</TABLE>
Rental expense totaled $1,055,000, $932,000 and $669,000 in 1999, 1998
and 1997, respectively.
NOTE 18--GOODWILL WRITE-OFF:
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, which was subsequently sold in December 1999 (see Note 10).
The acquisition was 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.
NOTE 19--COMMITMENTS AND CONTINGENCIES:
In August 1999 the Company settled a patent infringement claim brought
by Gen-Probe, Incorporated ("Gen-Probe") against the Company and Amoco
Corporation alleging infringement of certain patents owned by Gen-Probe and a
claim of malicious prosecution brought by Gen-Probe against the Company and
Amoco Corporation. The litigation settlement included an exchange of various
patent licenses and immunities from suit between the parties. No material
amounts of cash were paid or received by the Company upon completion of the
settlement. At December 31, 1998, the Company had accrued estimated future legal
costs related to that matter of $1.0 million. During 1999, the Company incurred
legal costs of $744,000 related to that matter and, as a result, credited the
remaining $256,000 to selling, general and administrative expenses.
The Company is the defendant in a suit filed in U.S. District Court in
San Diego, California, seeking a declaratory judgment of patent invalidity and
damages for unfair competition brought by Gen-Probe. The complaint seeks a
declaration that the Company's U.S. Patent No. 5,750,338 (the '338 patent) is
invalid and not infringed by certain products for detecting the presence of
hepatitis C virus (HCV) and human immunodeficiency virus (HIV) in blood
specimens and an injunction restraining the Company from interfering with the
manufacture, sale, license or use of Gen-Probe's products by Gen-Probe, its
partners and customers among others. The Company granted Gen-Probe a royalty
55
<PAGE>
VYSIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
bearing license under the '338 patent as part of the August 1999 litigation
settlement. The Company has not answered the complaint but has instead
requested a stay of the proceedings pending clarification of certain matters
concerning the '338 patent in the U.S. Patent Office. The Company has also
requested summary dismissal of the unfair competition claim. The Company
intends to defend the suit vigorously should its request for a stay be denied
or, should the stay be granted, at such time as the stay is lifted. The
Company further believes Gen-Probe's claim for damages is without merit. A
loss of this suit would not limit the sales or marketing of any of the
Company's present or planned products, but could result in the loss of
revenue under the license granted to Gen-Probe and the loss of other
licensing opportunities for the '338 patent. Although there can be no
assurance as to the ultimate disposition of this matter, it is the opinion of
the Company's management, based upon the information available at this time,
that the expected outcome of this matter will not have a material adverse
effect on the Company's business, results of operations and financial
condition.
The Company has a minimum purchase commitment with an instrument
manufacturer. The agreement expires at December 31, 2000 and contains a
remaining commitment of $412,000.
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, 1999.
NOTE 20--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>
1999
Total revenues.............................. $ 5,444 $ 6,472 $ 4,039 $ 5,740
Gross profit................................ 3,397 3,833 2,742 3,589
Net loss.................................... (3,498) (2,798) (1,989) (1,557)
Basic and diluted loss per share............ (0.36) (0.29) (0.20) (0.16)
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)
</TABLE>
56
<PAGE>
SCHEDULE II
VYSIS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEDUCTIONS
BALANCE AT DEDUCTIONS DUE TO SALE BALANCE AT
DESCRIPTION OF BEGINNING DUE TO OF FRENCH END OF
ALLOWANCE AND RESERVES OF PERIOD ADDITIONS WRITE-OFFS SUBSIDIARY PERIOD
- ------------------------------------- -------------- ------------ ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
1999
Allowance for doubtful accounts $1,290 $ 653 $244 $468 $1,231
1998
Allowance for doubtful accounts 197 1,124 31 -- 1,290
1997
Allowance for doubtful accounts 156 82 41 -- 197
</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 30, 2000 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 30, 2000
- ---------------------------------- (Principal Executive Officer
John L. Bishop and Director)
Vice President of Finance
/s/ ALFRED H. ELLSWORTH (Principal Financial Officer March 30, 2000
- ---------------------------------- and Principal Accounting
Alfred H. Ellsworth Officer)
/s/ EILEEN A. KAMERICK Director March 30, 2000
- ----------------------------------
Eileen A. Kamerick
/s/ KENNETH L. MELMON Director March 30, 2000
- ----------------------------------
Kenneth L. Melmon
/s/ ANTHONY J. NOCCHIERO Director March 30, 2000
- ----------------------------------
Anthony J. Nocchiero
/s/ WALTER R. QUANSTROM Director March 30, 2000
- ----------------------------------
Walter R. Quanstrom
/s/ FRANK J. SROKA Director March 30, 2000
- ----------------------------------
Frank J. Sroka
</TABLE>
58
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------------- -----------------------------------------------------------------------------------------------
<S> <C>
** 2.1 (5) Asset Purchase, License, and Distribution Agreement Between Vysis, Inc. and Applied Imaging
Corp. dated July 16, 1999.
3.1.1 (1) Certificate of Incorporation of Vysis, Inc. (formerly Framingham Development Company) filed
April 18, 1991.
3.1.2 (1) Certificate of Amendment of Certificate of Incorporation filed March 30, 1994.
3.1.3 (1) Certificate of Merger filed February 1, 1996.
3.1.4 (1) Certificate of Amendment of Certificate of Incorporation filed February 29, 1996.
3.1.5 (1) Certificate of Correction of Certificate of Amendment filed July 22, 1996.
3.1.6 (1) Certificate of Amendment of Certificate of Incorporation filed September 16, 1997.
3.1.7 (1) Certificate of Designations of Series B Preferred Stock, filed September 17, 1997.
3.1.8 (1) Certificate of Amendment of Certificate of Incorporation filed November 21, 1997.
3.2 (3) Amended and Restated Bylaws of Vysis, Inc.
4.1 (1) Form of Common Stock Certificate.
* 10.1 (1) Vysis, Inc. 1996 Stock Incentive Plan.
10.2 (1) Industrial Building Lease between American National Bank and Trust Company of Chicago and
Vysis, Inc. dated November 29, 1994.
10.3 (1) 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 (1) 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 (1) 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 (1) Exclusive Option Agreement between Vysis and the University of California for the Glass
Chromosome.
10.7 (1) Exclusive License Agreement between the Regents of the University of California and Vysis,
Inc. for Molecular Cytogenetics Software dated June 1, 1995.
</TABLE>
59
<PAGE>
EXHIBIT INDEX -- (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------------- -----------------------------------------------------------------------------------------------
<S> <C>
10.8 (1) Exclusive License Agreement between the Regents of The University of California and ATC dated
July 30, 1992, as amended, December 7, 1994.
10.9 (1) 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 (1) 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 (1) Exclusive Distributor Agreement between Vysis, Inc. and Fujisawa Pharmaceutical Co., Ltd.
dated July 31, 1995.
** 10.12 (1) Sublicense Agreement between Ciba Corning Diagnostics Corp. and Vysis, Inc. dated May 24,
1996.
10.13 Intentionally omitted.
10.14 (1) Cooperation Agreement between the Company and Amoco Technology Company.
10.15 (2) Registration Rights Agreement between the Company and Amoco Technology Company.
10.16 (1) Amended and Restated Tax Allocation Agreement between the Company and Amoco Technology
Company.
* 10.17 Amended and Restated Vysis, Inc. 1998 Long Term Incentive Plan
* 10.18 (4) 1999 Outside Directors Stock Option Plan
* 10.19 1998 Stock Option Agreement with Dr. Kenneth Melmon
21.1 Subsidiaries of Vysis, Inc.
23.1 Independent Auditors' Consent.
23.2 Consent of Independent Accountants.
27.1 Financial Data Schedule.
</TABLE>
- -----------
(1) Previously filed under the corresponding exhibit number in the Company's
S-1 Registration Statement No. 333-38109 and incorporated herein by
reference.
(2) Previously filed as Exhibit 10.15 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997 and incorporated herein by
reference.
60
<PAGE>
EXHIBIT INDEX -- (CONTINUED)
(3) Previously filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated herein by reference.
(4) Previously filed as Exhibit A to the Company's Definitive Proxy Statement
for the 1999 Annual Meeting of Stockholders and incorporated herein by
reference.
(5) Previously filed as Exhibit 2.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999 and incorporated herein by
reference.
* Management contract or compensatory plan or arrangement.
** Confidential information contained in this Agreement has been omitted.
61
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Exhibit 10.17
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 (a) the Board of Directors of Vysis, or (b) 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);
provided, however, that if at any time when the Compensation Committee of the
Board of Directors does not have at least two members meeting the foregoing
requirements, the Plan shall be administered by the full Board of Directors
and references herein to "Committee" shall mean the full Board of Directors.
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
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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 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
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Company pursuant to rights reserved upon the award thereof, such
forfeited or reacquired shares shall again be available for Awards
under the Plan.
(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
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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.
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
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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.
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
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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.
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)
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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.
(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.
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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.
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.
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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.
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.
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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.
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;
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(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
(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.
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EXHIBIT 10.19
VYSIS, INC.
OUTSIDE DIRECTOR
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, made and entered into as of October 1, 1998 (the "Grant
Date") by and between Vysis, Inc. ("Vysis") and Kenneth L. Melmon, M.D. (the
"Director");
WITNESSETH THAT:
WHEREAS, the Board of Directors of Vysis (the "Board") has determined that
each director of Vysis who is not an officer or employee of Vysis, its
subsidiaries or its affiliates (an "Outside Director") should receive an annual
grant of an option to purchase 5,000 shares of common stock, par value $.001 per
share ("Common Stock") of Vysis;
NOW, THEREFORE, Vysis and the Director hereby agree as follows:
1. GRANT; OPTION PRICE. This Agreement evidences the grant to the
Director of an option (the "Option") to purchase a total of 5,000 shares of
Common Stock. The option price of each share subject to the Option shall be
$5.60 (the "Option Price"). The award is not intended to be, and will not be
treated as, an incentive stock option as that term is described in section
422(b) of the Internal Revenue Code of 1986, as amended.
2. VESTING AND EXPIRATION OF OPTION. The Option shall be immediately
exercisable upon the Grant Date. Notwithstanding any other provision of this
Agreement, all rights with respect to the Option shall automatically terminate
on the "Expiration Date" which shall be the earliest of (a) the date which is 10
years after the Grant Date, (b) the date which is one year after the date on
which the Director ceases to be a Director of Vysis.
3. EXERCISE. After the Option becomes exercisable pursuant to paragraph 2
and prior to the Expiration Date, the Option may be exercised in whole or in
part by filing a written notice with the General Counsel of Vysis at its
corporate headquarters. The exercise notice must be filed prior to the
Expiration Date, must specify the number of shares of Common Stock which the
Director elects to purchase and must be accompanied by payment of the Option
Price including any applicable withholding taxes for such shares of Common Stock
indicated by the Director's election (which requirement will be considered
satisfied only if payment is received by Vysis on, or within 7 days after, the
date the Director's election is received by Vysis). Payment of the Option Price
(and any applicable withholding taxes) shall be by cash or check payable to
Vysis, by delivery of shares of Common Stock having an aggregate Fair Market
Value (valued as of the date of exercise) that is equal to the Option Price for
the shares of Common Stock, or any combination thereof. For purposes of this
Agreement, the "Fair Market Value" of a share of Common Stock as of any date
shall be the closing market composite price for such Common Stock as reported on
NASDAQ on that date or, if Common Stock is not traded on that date, on the
immediately preceding date on which Common Stock was traded.
4. NONTRANSFERABILITY. The Option shall not be transferable except by
will or the laws of descent and distribution and shall be exercisable during the
Director's lifetime only by him.
1
<PAGE>
5. ADMINISTRATION. The authority to manage and control the operation and
administration of this Agreement shall be vested in the Board. Any
interpretation of this Agreement by the Board and any decision made by it with
respect to this Agreement is final and binding on all persons.
6. SUCCESSORS. This Agreement shall be binding upon and shall inure to
the benefit of any assignee or successor in the interest of the Company, and
shall be binding upon and inure to the benefits of any estate, legal
representative, beneficiary or heir of the Director.
7. STOCKHOLDER STATUS. This Agreement does not confer upon the Director
or any holder thereof any right as a stockholder of Vysis prior to the issuance
of Common Stock pursuant to the exercise of the Option.
8. AMENDMENT. This Agreement may be amended by written agreement of the
Director and Vysis, subject to the consent of the Board, without the consent of
any other person.
9. ADJUSTMENT OF OPTION PRICE. In the event of any merger, consolidation,
reorganization, recapitalization, spin-off, stock dividend, stock split, reverse
stock split, exchange or other distribution with respect to shares of Common
Stock or other change in the corporate structure or capitalization of Vysis
affecting the Common Stock, the type and number of shares of Common Stock which
may be purchased under this Agreement and the Option Price shall be equitably
adjusted by the Board, in its sole discretion, to prevent dilution or
enlargement of benefits to the Director under this Agreement.
IN WITNESS WHEREOF, the Director has hereunto set his or her hand and Vysis
has caused these presents to be executed in its name and on its behalf, all as
of the date first above written.
VYSIS, INC. DIRECTOR
/s/ JAMES J. HABSCHMIDT /s/ KENNETH L. MELMON
- ---------------------------- ------------------------------
James J. Habschmidt Kenneth L. Melmon, M.D.
Executive Vice President
Chief Financial Officer
October 19, 1998 October 20, 1998
- ---------------------------- ------------------------------
Date Date
2
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION PERCENTAGE OWNERSHIP
- ---- ----------------------------- --------------------
<S> <C> <C>
GGFS, Inc. Illinois 100%
Vysis SA France 100%
Vysis GmbH Germany 100%
Vysis (UK) Ltd. United Kingdom 100%
Gene-Trak, Inc. Delaware 100%
Gene-Trak Systems Industrial Delaware 100%
Diagnostics Corporation
</TABLE>
<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 10, 2000,
appearing in this Annual Report on Form 10-K of Vysis, Inc. for the year ended
December 31, 1999.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 29, 2000
<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 34 of this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,818
<SECURITIES> 4,219
<RECEIVABLES> 6,287
<ALLOWANCES> (1,231)
<INVENTORY> 2,012
<CURRENT-ASSETS> 16,608
<PP&E> 11,718
<DEPRECIATION> (8,732)
<TOTAL-ASSETS> 21,035
<CURRENT-LIABILITIES> 7,544
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 13,481
<TOTAL-LIABILITY-AND-EQUITY> 21,035
<SALES> 20,946
<TOTAL-REVENUES> 21,695
<CGS> 8,134
<TOTAL-COSTS> 32,886
<OTHER-EXPENSES> 1,454
<LOSS-PROVISION> 653
<INTEREST-EXPENSE> 68
<INCOME-PRETAX> (12,645)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,645)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,842)
<EPS-BASIC> (1.00)
<EPS-DILUTED> (1.00)
</TABLE>
