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** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549**

**FORM10-Q**

 
| **ý** | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF**  |
|------------|-----------------------------------------------------------|
|       | **THE SECURITIES  EXCHANGE ACT OF 1934**                  |
|       |                                                      |
|       | **For the quarterly period ended June 30, 2001**          |
|       |                                                      |
|       | **OR**                                                    |
|       |                                                      |
| **o**      | **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 ofregistrant as specified in its charter)

 
| **DELAWARE**                                                                      | **36-3803405**                          |
|-----------------------------------------------------------------------------------|-----------------------------------------|
| (State or other jurisdiction of                                                   | (I.R.S. Employer Identification Number) |
| incorporation or organization)                                                    |                                    |
|                                                                              |                                    |
| **3100 Woodcreek Drive**                                                          |                                    |
| **Downers Grove, Illinois**                                                       | **60515-5400**                          |
| (Address of principal executive offices)                                          | (Zip Code)                              |
|                                                                              |                                    |
| Registrant’s telephone number, including area code: ** (630) 271-7000** |

 

             Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.Yes ý        No  o  

             Numberof shares of Common Stock, par value $.001 per share, outstanding as of August8, 2001:  10,252,631

 

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**VYSIS, INC.**

**FORM 10-Q**

**FOR THE QUARTERLY PERIOD ENDEDJUNE 30, 2001**

**TABLE OF CONTENTS**

|          |                                                                                        |                                                                                                    |
|---------------|---------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|          | **PART I:  FINANCIAL INFORMATION**                                                     |                                                                                                    |
|          |                                                                                        |                                                                                                    |
| **Item 1:**   | Financial Statements                                                                        |                                                                                                    |
|          |
|          |                                                                                        | Consolidated Balance Sheets  As of June 30, 2001 and December 31, 2000                                  |
|          |                                                                                        | Consolidated  Statements of Operations For the three months ended June 30, 2001 and 2000                |
|          |                                                                                        | Consolidated  Statements of Operations For the six months ended June 30, 2001 and 2000                  |
|          |                                                                                        | Consolidated  Statements of Comprehensive Operations For the three months ended June 30,  2001 and 2000 |
|          |                                                                                        | Consolidated  Statements of Comprehensive Operations For the six months ended June 30, 2001  and 2000   |
|          |                                                                                        | Consolidated  Statements of Cash Flows For the six months ended June 30, 2001 and 2000                  |
|          |                                                                                        | Notes to  Consolidated Financial Statements                                                             |
|          |                                                                                        |                                                                                                    |
| **Item  2:**  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                    |
|          |                                                                                        |                                                                                                    |
| **Item  3:**  | Quantitative  and Qualitative Disclosure About Market Risk                                  |                                                                                                    |
|          |                                                                                        |                                                                                                    |
|          | **PART II:  OTHER INFORMATION**                                                        |                                                                                                    |
|          |                                                                                        |                                                                                                    |
| **Item 1:**   | Legal Proceedings                                                                           |                                                                                                    |
|          |                                                                                        |                                                                                                    |
| **Item  4:**  | Submission  of Matters to a Vote of Security Holders                                        |                                                                                                    |
|          |                                                                                        |                                                                                                    |
| **Item 6:**   | Exhibits and  Reports on Form 8-K                                                           |                                                                                                    |
|          |                                                                                        |                                                                                                    |
| **Signature** |
|               |                                                                                             |                                                                                                         |  |

 

**PART I. FINANCIAL INFORMATION****ITEM 1. FINANCIAL STATEMENTS**

**VYSIS, INC.(An indirect subsidiary of BP p.l.c.)**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except share andper share amounts)(unaudited)**

|                                           |                                                                                                                                                                       | **June  30,  2001** |    | **December  31,  2000** |    |
|------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------|---------|-------------------------|---------|
|                                           |                                                                                                                                                                       | ****                |    | ****                    |    |
| **ASSETS**                                     |                                                                                                                                                                       |                |    |                    |    |
| Current assets:                                |                                                                                                                                                                       |                |    |                    |    |
|                                           | Cash and cash  equivalents                                                                                                                                                 |                | $       | 7,365                   |    | $ | 715 |   |
|                                           | Short-term investments                                                                                                                                                     |                | 5,085   |                    | 10,673  |   |
|                                           | Accounts receivable,  net                                                                                                                                                  |                | 4,220   |                    | 3,366   |   |
|                                           | Other receivables                                                                                                                                                          |                | ---     |                    | 321     |   |
|                                           | Inventories                                                                                                                                                                |                | 2,052   |                    | 1,442   |   |
|                                           | Other current assets                                                                                                                                                       |                | 1,016   |                    | 528     |   |
|                                           | Current assets –  discontinued operations                                                                                                                             |                | 670     |                    | 572     |   |
|                                           |                                                                                                                                                                       |                     |    |                         |    |
|                                           | Total current assets                                                                                                                                                       |                | 20,408  |                    | 17,617  |   |
| Property and  equipment, net                   |                                                                                                                                                                       | 2,295               |    | 2,451                   |    |
| Other assets                                   |                                                                                                                                                                       | 1,529               |    | 1,370                   |    |
| Long-term assets,  net-discontinued operations |                                                                                                                                                                       | 44                  |    | 52                      |    |
|                                           |                                                                                                                                                                       |                     |    |                         |    |
|                                           | Total assets                                                                                                                                                               |                | $       | 24,276                  |    | $ | 21,490 |   |
|                                           |                                                                                                                                                                       |                     |    |                         |    |
|                                           |                                                                                                                                                                       |                |    |                    |    |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY** |                                                                                                                                                                       |                |    |                    |    |
| Current liabilities:                           |                                                                                                                                                                       |                |    |                    |    |
|                                           | Accounts payable and  accrued liabilities                                                                                                                                  |                | $       | 7,073                   |    | $ | 6,975 |   |
|                                           | Deferred revenue                                                                                                                                                           |                | 303     |                    | 200     |   |
|                                           |                                                                                                                                                                       |                     |    |                         |    |
|                                           | Total current  liabilities                                                                                                                                                 |                | 7,376   |                    | 7,175   |   |
|                                           |                                                                                                                                                                       |                     |    |                         |    |
|                                           |                                                                                                                                                                       |                |    |                    |    |
| Long-term liabilities:                         |                                                                                                                                                                       |                |    |                    |    |
|                                           | Deferred revenues                                                                                                                                                          |                | 1,268   |                    | 972     |   |
|                                           | Other long-term  liabilities                                                                                                                                               |                | ---     |                    | 100     |   |
|                                           |                                                                                                                                                                       |                     |    |                         |    |
|                                           | Total long-term  liabilities                                                                                                                                               |                | 1,268   |                    | 1,072   |   |
|                                           |                                                                                                                                                                       |                     |    |                         |    |
|                                           |                                                                                                                                                                       |                |    |                    |    |
| Contingency (Note 13)                          |                                                                                                                                                                       |                |    |                    |    |
|                                           |                                                                                                                                                                       |                |    |                    |    |
| Stockholders’ equity:                     |                                                                                                                                                                       |                |    |                    |    |
|                                           | Convertible preferred  stock, $0.001 par value; 10,000,000 shares authorized:                                                                                              |                |    |                    |    |   |
|                                           | Series A; 6,200,000  shares designated; none issued and outstanding at June 30, 2001 and December  31, 2000                                                                |                | ---     |                    | ---     |   |
|                                           | Series B; 553,126  shares designated; none issued and outstanding at June 30, 2001 and December  31, 2000                                                                  |                | ---     |                    | ---     |   |
|                                           | Common stock, $0.001  par value; 35,000,000 shares authorized; 10,241,438 issued and outstanding at  June 30, 2001; 10,150,992 issued and outstanding at December 31, 2000 |                | 10      |                    | 10      |   |
|                                           | Additional paid-in  capital                                                                                                                                                |                | 72,923  |                    | 72,625  |   |
|                                           | Accumulated other  comprehensive loss:                                                                                                                                     |                |    |                    |    |   |
|                                           | Cumulative translation  adjustment                                                                                                                                         |                | (725    | )                       | (464    | ) |
|                                           | Accumulated deficit                                                                                                                                                        |                | (56,576 | )                       | (58,928 | ) |
|                                           |                                                                                                                                                                       |                     |    |                         |    |
|                                           | Total stockholders’  equity                                                                                                                                           |                | 15,632  |                    | 13,243  |   |
|                                           |                                                                                                                                                                       |                     |    |                         |    |
|                                           | Total liabilities and  stockholders’ equity                                                                                                                           |                | $       | 24,276                  |    | $ | 21,490 |   |
|                                           |                                                                                                                                                                       |                     |    |                         |    |
|                                                |                                                                                                                                                                            |                     |         |                         |         |  |  |  |  |

Seenotes to the consolidated financial statements.
**VYSIS, INC.(An indirect subsidiary of BP p.l.c.)**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(in thousands, except per shareamounts)(unaudited)**
 **Three  Months Ended June 30,**  ****  **2001** **2000**  **** ****      Revenues:     Product revenue$6,401 $4,537  License and other  revenue387 1,564     Total revenues6,788 6,101 Cost of goods sold1,210 1,072    Gross profit5,578 5,029    Operating expenses:     Research and  development1,467 1,671  Acquired clinical  trial data--- 1,500  Selling, general and  administrative3,058 2,872     Total operating  expenses4,525 6,043    Income (loss) from operations1,053 (1,014)Interest income135 132    Income (loss) from  continuing operations before provision for income taxes1,188 (882)Provision for income  taxes--- ---    Income (loss) from  continuing operations1,188 (882)Income (loss) from  discontinued operations79 (113)   Net income (loss)$1,267 $(995)        Income (loss) from  continuing operations per share:     Basic$.12 $(.09)    Diluted$.10 $(.09)   Net income (loss) per  share:     Basic$.12 $(.10)    Diluted$.11 $(.10)   
Seenotes to the consolidated financial statements.

 

**VYSIS, INC.(An indirect subsidiary of BP p.l.c.)**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(inthousands, except per share amounts)****(unaudited)**
 **Six  Months Ended June 30,**  ****  **2001** **2000**  **** ****      Revenues:     Product revenue$12,692 $8,768  License and other  revenue629 1,745     Total revenues13,321 10,513 Cost of goods sold2,463 1,999    Gross profit10,858 8,514 Operating expenses:     Research and  development2,946 3,437  Acquired clinical  trial data--- 1,500  Selling, general and  administrative6,086 6,039     Total operating expenses9,032 10,976    Income (loss) from  operations1,826 (2,462)Interest income312 241    Income (loss) from  continuing operations before provision for income taxes2,138 (2,221)Provision for income  taxes--- ---    Income (loss) from  continuing operations2,138 (2,221)Income (loss) from  discontinued operations214 (93)   Net income (loss)$2,352 $(2,314)        Income (loss) from  continuing operations per share:     Basic$.21 $(.22)    Diluted$.19 $(.22)   Net income (loss) per  share:     Basic$.23 $(.23)    Diluted$.21 $(.23)   
Seenotes to the consolidated financial statements.

 

**VYSIS, INC.(An indirect subsidiary of BP p.l.c.)**

**CONSOLIDATED STATEMENTS OFCOMPREHENSIVE OPERATIONS**

**(in thousands)(unaudited)**
 **Three  Months Ended June 30,**  ****  **2001** **2000**  **** ****      Net income (loss)$1,267 $(995)     Other comprehensive  loss:     Cumulative translation  adjustment(83)(4) Unrealized holding  loss on investment--- (280)    Total other  comprehensive loss(83)(284)   Comprehensive income  (loss)$1,184 $(1,279)   
Seenotes to the consolidated financial statements.

 

**VYSIS,INC.(An indirect subsidiary ofBP p.l.c.)**

**CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE OPERATIONS**

**(inthousands)(unaudited)**
 **Six  Months Ended June 30,**  ****  **2001** **2000**  **** ****      Net income (loss)$2,352 $(2,314)     Other comprehensive  income (loss):     Cumulative translation  adjustment(261)(113) Unrealized holding  gain on investment--- 497     Total other  comprehensive income (loss)(261)384    Comprehensive income  (loss)$2,091 $(1,930)   
Seenotes to the consolidated financial statements.

 

**VYSIS, INC.(An indirect subsidiary of BP p.l.c.)**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(in thousands)(unaudited)**
 **Six  Months Ended June 30,**  ****  **2001** **2000**  **** ****      CASH FLOWS FROM  OPERATING ACTIVITIES:     Net income (loss)$2,352 $(2,314) Reconciliation of net  loss to net cash used in operating activities:     (Income) loss from  discontinued operations(214)93  Depreciation and  amortization464 747  Effects of changes in foreign  currency20 62  Stock compensation9 12  Changes in assets and  liabilities:     Accounts receivable(1,046)(352) Inventories(665)48  Other current assets(519)(476) Other assets(73)10  Accounts payable and  accrued liabilities249 515  Deferred revenue399 (121)    Net cash provided by  (used in) operating activities976 (1,776)        CASH FLOWS FROM  INVESTING ACTIVITIES:     Proceeds, net of cash  sold, from French distributor102 843  Proceeds, net of  transaction-related expenses, from the sale of Imaging business250 (17) Proceeds from  maturities of short-term investments12,007 6,388  Purchases of  short-term investments(6,420)(9,474) Purchases of property  and equipment(279)(388) Proceeds from sale of  property and equipment--- 20  Increase in other  assets(172)(50)    Net cash provided by  (used in) investing activities5,488 (2,678)        CASH FLOWS FROM  FINANCING ACTIVITIES:     Proceeds from option  plan exercises289 214  Expenses funded by BP--- 115     Net cash provided by  financing activities289 329 Effect of exchange  rate changes on cash(43)(65)Cash used in  discontinued operations(60)(65)   Net increase  (decrease) in cash and cash equivalents6,650 (4,255)Cash and cash  equivalents at beginning of period715 4,818    Cash and cash  equivalents at end of period$7,365 $563    
Seenotes to the consolidated financial statements.

 

**VYSIS, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS****(unaudited)**

**NOTE 1—ORGANIZATION AND BUSINESS:**

             Vysis, Inc. (“Vysis” or the“Company”) is a Genomic Disease Management company that develops,commercializes and markets clinical products that provide information criticalto the evaluation and management of cancer, prenatal disorders and othergenetic diseases.  Vysis currentlymarkets seven U.S. Food and Drug Administration (“FDA”) or foreign cleared orapproved clinical (“Clinical”) products in addition to distributing over 300Analyte Specific Reagent and research (“ASR/Research”) products through itsdirect sales operations in the United States and Europe and a worldwidedistribution network covering 59 countries. The Company's wholly ownedsubsidiary, Gene-Trak Systems Industrial Diagnostics Corporation, manufacturedand marketed food testing kits based on Deoxyribonucleic Acid (“DNA”)probes.  As further discussed in Note14, the Company sold on August 4, 2001 substantially all of the assets of thefood testing business, while retaining all of the liabilities.  The Company’s financial statements have beenrestated to reflect the food testing business as a discontinued operation forall periods presented.

             TheCompany was incorporated in Delaware on April 18, 1991. The Company'sbusiness represents the consolidation of multiple research units and programsof the former Amoco Corporation. OnDecember 31, 1998, Amoco Corporation merged with the former British PetroleumCorporation, and as a result of the merger became a wholly-owned subsidiary ofBP p.l.c.

             OnFebruary 10, 1998, the Company completed the initial public offering of 3million 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 afterdeducting expenses were approximately $32.1 million.  Concurrent with the consummation of the Offering, the Companyissued 675,000 shares of Common Stock at $12.00 per share to BP in exchange fora reduction of $8.1 million in the Company’s note payable to BP.  As of August 8, 2001, BP beneficially ownedapproximately 65 percent of the Company’s outstanding Common Stock.

**NOTE 2—FINANCIAL INFORMATION:**

             Theunaudited interim consolidated financial statements of the Company have beenprepared pursuant to the rules and regulations of the Securities and ExchangeCommission.  Accordingly, certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted.  These interimconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2000, as filed withthe Securities and Exchange Commission.
             Inthe opinion of management, the interim consolidated financial statementsreflect all adjustments necessary for a fair presentation of the interimperiods.  All such adjustments are of anormal, recurring nature.  Certainamounts in fiscal 2000 have been reclassified to conform to the fiscal 2001presentation.  These changes had noimpact on previously reported results of operations or stockholders’equity.  The results of operations forthe interim periods are not necessarily indicative of the results of operationsto be expected for a full year.

**NOTE 3—RECENT ACCOUNTING PRONOUNCEMENTS:**

             On June29, 2001, Statement of Financial Accounting Standards (SFAS) No. 141, “BusinessCombinations”, was approved by the Financial Accounting Standards Board(FASB).  SFAS No. 141 requires that thepurchase method of accounting be used for all business combinations initiatedafter June 30, 2001.  Goodwill andcertain intangible assets will remain on the balance sheet and not beamortized.  On an annual basis, and whenthere is reason to suspect that their values have been diminished or impaired,these assets must be tested for impairment, and write-downs may benecessary.  The Company is required toimplement SFAS No. 141 on July 1, 2001 and does not believe that the adoptionof SFAS No. 141 will have a significant impact on its financial statements.

             On June29, 2001, SFAS No. 142, “Goodwill and Other Intangible Assets”, was approved bythe FASB.  SFAS No. 142 changes theaccounting for goodwill from an amortization method to an impairment-onlyapproach.  Amortization of goodwill,including goodwill recorded in past business combinations, will cease uponadoption of this statement.  The Companyis required to implement SFAS No. 142 on January 1, 2002 and does not believethat the adoption of SFAS No. 142 will have a significant impact on itsfinancial statements.
**NOTE 4—COMPOSITION OF BALANCESHEET COMPONENT:**

             Inventoriesconsisted of the following (in thousands):
 **June 30,****2001** **December 31,  2000**  **** **** Raw  materials and supplies$1,310 $431 Finished  goods742 1,011     $2,052 $1,442    
**NOTE5—SHORT-TERM INVESTMENTS CLASSIFIED AS HELD TO MATURITY:**

             Short-terminvestments are classified as held to maturity, are carried at amortized costand are summarized as follows (in thousands):
 **June 30, 2001**  ****  **Amortized  Cost** **Unrealized****Gain** **Fair****Value**  **** **** **** U.S.  government agencies$986 $1 $987 Corporate debt securities4,099 4 4,103      $5,085 $5 $5,090     
 
 **December 31, 2000**  ****  **Amortized  Cost** **Unrealized  Gain** **Fair  Value**  **** **** **** U.S.  government agencies$3,307 $5 $3,312 Corporate debt securities7,366 3 7,369      $10,673 $8 $10,681     
             Asummary of securities classified as held to maturity at June 30, 2001 are asfollows (in thousands):
**Due In** **Amortized  Cost** **Fair****Value****** **** ****1-90 Day $3,239 $3,24391-180 Days 916 917181-365 Days 930 930     $5,085 $5,090   
 

**NOTE 6—INCOME TAXES:**

             Priorto the completion of the Company’s Offering, the results of operations wereincluded in the consolidated income tax returns of BP; accordingly, thedomestic net operating losses through February 10, 1998 have been utilized byBP in its consolidated income tax returns and are not available to offset theCompany's future taxable income. Subsequent to the Offering, the Company has filed separate federalincome tax returns.  For state incometaxes, the Company’s results of operations will continue to be included withBP, due to its 65 percent ownership interest in the Company, in those stateswhere 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 istaxed), the Company is required by law to be included in BP’s unitary state taxreturns as long as BP owns or controls 50 percent or more of the voting equity.For unitary state filings, the tax sharing agreement with BP requires BP to paythe Company the incremental tax savings, if any, received by BP as a result ofincluding the Company’s results of operations in such filings. The agreementalso requires the Company to pay BP the incremental tax liability, if any,incurred by BP as a result of including the Company’s results of operations insuch filings. As a result of BP’s apportionment factors combined with minimalU.S. based taxable income, the Company has not recorded any state income taxexpense for the three and six months ended June 30, 2001.  For federal and state income taxes innon-unitary states, the Company has not recorded any income tax expense due tothe availability of net operating loss carry-forwards.  Ultimate utilization or availability of netoperating losses and certain deferred tax assets may be limited if asignificant change in ownership occurs, as defined by rules enacted with theUnited States Tax Reform Act of 1986.

             A fullvaluation allowance has been provided for all deferred tax assets (net ofliabilities) at June 30, 2001 as management does not consider realization ofsuch amounts more likely than not.

**NOTE 7—GAIN ON SALE OF FRENCH DISTRIBUTOR:**

             OnDecember 31, 1999, the Company sold its wholly-owned French distributionsubsidiary to Applied Genetics Services, Ltd. for a purchase price in Frenchfrancs that was the equivalent to $1,272,000 in U.S. dollars as of December 31,1999, resulting in a gain of $166,000. At June 30, 2001, the Company and its foreign subsidiaries have receivedthe entire purchase price in French Francs which aggregated the U.S. dollarequivalent of $1,182,000.
**NOTE8—GAIN ON SALE OF THE IMAGING BUSINESS:**

             DuringJuly 1999, the Company sold its Quips cytogenetic imaging instrumentation(“Imaging”) business, which represented nearly all of the Company’s currentgenetic instrument product line, to Applied Imaging Corp. (“AI”) for a purchaseprice of $2,278,000 plus additional consideration of $749,000 for the purchaseof certain Imaging component inventory, resulting in a gain of $1,700,000.  Of the $3,027,000 in total consideration,the Company received $2,499,000 in cash and 497,368 shares of AI common stockthat was valued upon its receipt at $528,000. During July 2000, the Company sold the AI common stock for $1,718,000resulting in a realized gain of $1,190,000.

**NOTE 9—RELATED PARTY TRANSACTION:**

             InJune 2000, the Company received certain consulting services provided for andpaid by BP valued at $115,000.  The Companyhas recorded the benefit of these services as a capital contribution with acorresponding charge to selling, general and administrative expense.

**NOTE 10****—SEGMENT AND GEOGRAPHIC INFORMATION:**

             TheCompany operates in one reportable business segment:  genetic testing products. The genetics business develops, commercializes, manufactures and marketsproducts that use nucleic acid probes for the evaluation and management ofcancer, prenatal disorders and other genetic diseases.

             TheCompany’s revenues by product line for the three and six months ended June 30,2001 and 2000 are as follows (in thousands):
 **Three Months Ended June 30,**  ****  **2001** **2000**  **** **** FDA/AFSSAFP approved clinical testing products$2,377 $1,315 ASR/Research testing products3,502 2,573 Genetic instrument products522 649 License and other revenue387 1,564    Total revenues$6,788 $6,101    
 
 **Six Months Ended June 30,**  ****  **2001** **2000**  **** **** FDA/AFSSAFP approved clinical testing products$4,390 $2,612 ASR/Research testing products7,038 5,215 Genetic instrument products1,264 941 License and other revenue629 1,745    Total revenues$13,321 $10,513    
             TheCompany’s revenues by geographic area based on location of customers for thethree and six months ended June 30, 2001 and 2000 are as follows (inthousands):
 **Three Months Ended June 30,**  ****  **2001** **2000**  **** **** United  States$4,105 $3,539 Europe,  Middle East and Africa2,084 1,903 Other599 659    Total  revenues$6,788 $6,101          **Six Months Ended June 30,**** ** ****  **2001**** ****2000**** ** **** **** United  States$7,397 $5,486 Europe,  Middle East and Africa4,431 3,741 Other1,493 1,286    Total  revenues$13,321 $10,513    
**NOTE 11—INCOME (LOSS) PER SHARE:**

             Basicincome (loss) from continuing operations per share and net income (loss) pershare are computed by dividing income (loss) from continuing operations and netincome (loss) (numerators) by the weighted average number of common sharesoutstanding (denominators) during the period and excludes the dilutive effectof stock options.  Diluted income (loss)from continuing operations per share and net income (loss) per share giveseffect to all dilutive potential common shares outstanding during aperiod.  In computing diluted income(loss) from continuing operations per share and net income (loss) per share,the average stock price for the period is used in determining the number ofshares assumed to be purchased from exercise of stock options.

             Thefollowing is a reconciliation of the numerators and denominators of the basicand diluted income (loss) from continuing operations and net income (loss)computations (in thousands, except per share amounts) for the three and sixmonths ended June 30, 2001 and 2000: **Three Months Ended****June  30,** **Six Months Ended  June 30,**  **** ****  **2001** **2000** **2001** **2000** Numerator:         Income (loss) from  continuing operations$1,188 $(882)$2,138 $(2,221)       Net income (loss)$1,267 $(995)$2,352 $(2,314)     Denominator:         Denominator for basic net income (loss) per share-  weighted-average shares10,189 10,079 10,172 10,043  Dilutive potential common shares-stock options1,442 --- 1,268 ---        Denominator for diluted net income (loss) per  share11,631 10,079 11,440 10,043       Basic  income (loss) from continuing operations per share$.12 $(.09)$.21 $(.22)     Diluted  income (loss) from continuing operations  per share$.10 $(.09)$.19 $(.22)     Basic net income  (loss) per share$.12 $(.10)$.23 $(.23)     Diluted net income  (loss) per share$.11 $(.10)$.21 $(.23)     
             Forthe three months ended June 30, 2001, all options were included in thecomputation of diluted per share amounts. Options to purchase 12,788 shares of common stock were outstanding atJune 30, 2001, but were not included in the computation of diluted per shareamounts for the six months ended June 30, 2001 as their effect wasantidilutive.  Options to purchase2,160,088 shares were outstanding at June 30, 2000, but were not included inthe computation of diluted loss per share for the three or six months endedJune 30, 2000 as their effect was antidilutive.

**NOTE 12—DISTRIBUTION AND SUPPLY AGREEMENT:**

             OnMarch 30, 2001, the Company entered into a five-year, renewable distributionand supply agreement (“the Agreement”) with Abbott Laboratories(“Abbott”).  The Agreement providesAbbott with the exclusive distribution rights in North America and Europe forthe Company’s PathVysionTM breast cancer product and its UroVysionbladder cancer product.  The Agreementalso gives Abbott an exclusive option for distribution rights in Asia/Pacific(except Japan) and South America for both products.  All payments will be recognized by the Company over the periodsto which they apply.

**NOTE 13****—CONTINGENCY:**

             As previously reported, the Company is named as thedefendant in a declaratory judgment suit filed in the United States DistrictCourt in the Southern District of California (San Diego) by Gen-ProbeIncorporated.  The suit seeks adeclaration that the Company’s U.S. Patent No. 5,750,338 (“the ‘338 patent”) isinvalid, unenforceable and not infringed by certain products for detecting thepresence of hepatitis C virus and human immunodeficiency virus in bloodspecimens.  The Company understands thatChiron Corporation is currently marketing the products in various countriesoutside the U.S. pursuant to licenses granted by the Company to Gen-Probe andChiron.  The suit also seeks aninjunction restraining the Company from interfering with activities byGen-Probe and its partners regarding these and other products in development;damages and other relief for unfair competition; and a declaration ofGen-Probe’s rights and obligations under its license to the ‘338 patent.  The parties are continuing to takediscovery.
             In June 2001, the Court ruled that Gen-Probe's productsfor detecting hepatitis C and the human immunodeficiency virus do not literallyinfringe the '338 patent.  The Companydisagrees with the Court's ruling and sought certification of the issue for anearly appeal.  However, the Company'srequest for certification and early appeal was denied.  The Company intends to preserve its right toappeal the ruling at a later time.  TheCompany continues to believe that Gen-Probe’s claims are without merit and iscontinuing to defend its rights vigorously. A trial on the remaining issues is projected to occur in about February2002.

             As also reported previously, the Company has filed anapplication to reissue the ‘338 patent with the United States Patent &Trademark Office seeking clarification of certain matters concerning the '338patent.  The reissue application alsorequests the Patent Office to supplement the claims of the issued patent withnew claims of intermediate scope.  Theapplication remains pending.

             Neitherloss of the suit filed by Gen-Probe nor an adverse ruling by the Patent Officeto the reissue application would limit the sales or marketing of any of theCompany’s present or planned products, but either result could result in theloss of revenue resulting from the licenses granted to Gen-Probe and itspartners and other potential licenses granted under the ‘338 patent.  Although there can be no assurance as to theultimate outcome of the suit, based upon the information available at this timeit is the opinion of the Company’s management that the outcome of this suitwill not have a material adverse effect on the Company’s business, results ofoperations and financial condition.****NOTE14—SUBSEQUENT EVENT:**

             TheCompany sold on August 4, 2001 substantially all of the assets, while retainingsubstantially all of the liabilities of its food testing business to NeogenCorporation for a purchase price of approximately $3.5 million, resulting in anestimated gain of approximately $1.5 million. The Company’s financial statements have been restated to reflect thefood testing business as a discontinued operation for all periodspresented.  Operating results of thediscontinued food testing business are summarized as follows (in thousands):
 **Three  months ended June 30,** **** **2001** **2000**  **** ****     Total revenues$643 $724 Gross profit316 331 Income (loss) from  discontinued operations79 (113)      **Six  months ended June 30,** **** **2001** **2000**** ** **** ****     Total revenues$1,329 $1,443 Gross profit610 763 Income (loss) from  discontinued operations214 (93)
Assets of the discontinued operations areas follows (in thousands):
 **June  30,****2001** **December  31,  2000** **** ****Accounts receivables$319 $362 Inventories340 210 Other current assets11 ---   Total current assets$670 $572   Property and  equipment, net$44 $52   
 

**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

             Thefollowing discussion and analysis provides information which managementbelieves is relevant to an assessment and understanding of the Company’sresults and financial condition.  Thediscussion should be read in conjunction with the audited consolidatedfinancial statements of the Company and notes thereto, which were included inthe Company’s Annual Report on Form 10-K for the year ended December 31, 2000as well as the financial statements of the Company and notes thereto.  This Quarterly Report on Form 10-Q containscertain statements which describe the Company’s beliefs concerning futurebusiness conditions and the outlook for the Company based on currentlyavailable information.  Wheneverpossible, the Company has identified these “forward-looking” statements (asdefined 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 whichcould cause the Company’s actual results, performance and achievements todiffer materially from those expressed in or implied by these statements. Theserisks and uncertainties, which could cause actual results to differ materiallyfrom those expressed or implied by the forward-looking statements,include:  the market acceptance of theCompany’s clinical products; the extent to which the clinicians or laboratoriesperforming procedures with the Company’s products are able to obtain third-partyreimbursement; the ability of the Company to successfully market and sell itsclinical products, other products and equipment; competition; compliance by theCompany with regulatory requirements and the timely receipt of necessarygovernmental approvals; the Company’s ability to manufacture products insufficient quantities; the Company’s ability to maintain intellectual propertyprotection for its proprietary products, to defend its existing intellectualproperty rights from challenges by third parties, and to avoid infringingintellectual property rights of third parties; product liability claims; thesuccess of the Company’s collaborators and licensees; and the Company’s costcontrol efforts.   In addition, adetailed discussion of risks and uncertainties may be found in the Company’speriodic filings with the Securities and Exchange Commission.  The Company disclaims any intent orobligation to update these forward-looking statements.
**OVERVIEW**

             Vysisis a Genomic Disease Management company that develops, commercializes andmarkets clinical products that provide information critical to the evaluationand management of cancer, prenatal disorders and other genetic diseases.  Vysis currently markets seven Clinicalproducts in addition to distributing over 300 ASR/Research products through itsdirect sales operations in the United States and Europe and a worldwidedistribution network covering 59 countries. The Company's wholly ownedsubsidiary, Gene–Trak Systems Industrial Diagnostics Corporation,manufactured and marketed food testing kits based on DNA probes.  TheCompany sold on August 4, 2001 substantially all of the assets, while retainingsubstantially all of the liabilities, of its food testing business to NeogenCorporation for a purchase price of approximately $3.5 million, resulting in anestimated  gain of approximately $1.5million.

**RESULTS OF OPERATIONS**

             Totalrevenues for the three and six months ended June 30, 2001 were $6.8 million and$13.3 million, respectively, an increase of $0.7 million, or 11%, and $2.8million, or 27%, as compared to the three and six months ended June 30,2000.  Product revenue for the three andsix months ended June 30, 2001 was $6.4 million and $12.7 million,respectively, an increase of $1.9 million, or 41%, and $3.9 million, or 45%, incomparison to the respective prior year periods.  The increase in product revenue for the second quarter of 2001 ascompared to the prior year quarter was attributable to a $1.1 million, or 81%,increase in FDA/AFSSAFP approved clinical products (“Clinical”), and a $0.9million, or 36%, increase in ASR/Research testing product (“ASR/Research”),offset by a $0.1 million, or 20%, decrease in Genetic instrument products(“Instrument”).  For the six monthsended June 30, 2001, the increase in product revenue of $3.9 million, or 45%,over the prior year period was due to a $1.8 million, or 68%, increase inClinical product sales, a $1.8 million, or 35%, increase in ASR/Researchproduct sales and a $0.3 million, or 34%, increase in Instrument product sales.  The increase in Clinical product revenue forthe three and six months ended June 30, 2001 was primarily due to growth of theUnited States adoption rate of the Company’s PathVysionTM breastcancer product.  The increase inASR/Research sales was primarily attributable to the worldwide increase inshipments of previously developed ASR/Research products, as well as theworldwide sales of 21 new ASR/Research products introduced within the last yearand a half.  The second quarter 2001decline in Instrument sales was due to the lack of GenoSensorTMReader (“Reader”) shipments, as potential customers anticipate the Company’sintroduction of its second generation microarray, which is analyzed using theproprietary Reader.  The increase inInstrument revenues during the first half of 2001 is primarily due to anincrease in United States shipments of the Company’s VP2000 Processor, a highthroughput instrument that automates the specimen preparation steps of FISH(fluorescent in site hybridization) assays. For the three and six months ended June 30, 2001, license and otherrevenue was $0.4 million and $0.6 million, respectively, a decrease of $1.2million and $1.1 million over the respective prior year periods primarily dueto $1.3 million of second quarter 2000 license revenue associated with a patentlicense agreement and an option for a patent license agreement.
             Costof goods sold for the three and six months ended June 30, 2001 were $1.2million and $2.5 million, respectively, an increase of $0.1 million, or 13%,and $0.5 million, or 23%, over the respective prior year periods due to theincrease in the volume of the products sold. As a percentage of product revenue, product gross profit increased to81% for the three and six months ended June 30, 2001, from 76% and 77% in therespective prior year periods primarily as a result of the higher marginClinical and ASR/Research products representing a larger percentage of productrevenue for the three and six months ended June 30, 2001 as compared to theprior year periods.  As a result, productgross profit was $5.2 million and $10.2 million for the three and six monthsended June 30, 2001, respectively, representing an increase of $1.7 million, or50%, and $3.5 million, or 51%, in comparison to the prior year periods.

             Researchand development expenses for the three and six months ended June 30, 2001 were$1.5 and $2.9 million, respectively, a decrease of $0.2 million, or 12%, and$0.5 million, or 14%, as compared to the prior year periods.  The decreases were primarily due to lowerclinical trial costs during the first half of 2001 as compared to the prioryear.  During the second quarter of2000, the Company entered into a collaborative agreement with Genentech, Inc.,the developer of the Herceptin® monoclonal antibody treatment for metastaticbreast cancer, to extend the use of the Company’s PathVysionTM  HER-2 breast cancer test kit.  In accordance with the agreement, theCompany incurred a nonrecurring charge of $1.5 million during the secondquarter 2000 for its right to utilize Genentech’s clinical trial data for theCompany’s regulatory submission to the FDA.

             Selling,general and administrative expenses for the three and six months ended June 30,2001 were $3.1 million and $6.1 million, respectively, an increase of $0.2million, or 6%, and relatively flat in comparison to the respective prior yearperiods.  The second quarter increasewas due to a $0.2 million increase in general and administrative expensesprimarily attributable to higher litigation expenses.

             Interestincome for the three and six months ended June 30, 2001 was $0.1 million and$0.3 million, respectively, as compared to $0.1 million and $0.2 million forthe three and six months ended June 30, 2000. The year-to-date increase was primarily as a result of the Company’s higheraverage cash, cash equivalents and short-term investment balances during thefirst half of 2001 as compared to the prior year offset by lower interest rateson investments maturing during the second quarter of 2001.

**DISCONTINUED OPERATIONS**

             Revenuesfrom discontinued operations for the three and six months ended June 30, 2001were $0.6 million and $1.3 million, respectively, a decrease of $0.1 million ascompared to the respective prior year periods primarily due to lowerdistributed products resulting from the June 30, 2000 discontinuance of one ofthe food testing distributed product lines. Gross profit from discontinued operations for the three and six monthsended June 30, 2001 was $0.3 million and $0.6 million, respectively,representing a slight decline and a decrease of $0.1 million as compared to therespective prior year periods.  The 2001decrease in year-to-date gross profit from discontinued operations was due tohigher cost of goods sold primarily due to an increase in product royaltyexpense during the first quarter of 2001. Operating expenses from discontinued operations for the three and sixmonths ended June 30, 2001, were $0.2 million and $0.4 million, respectively, adecrease of $0.2 million and $0.4 million in comparison to the prior yearrespective periods primarily due to lower sales and use tax expense resultingfrom the implementation of a sales and use tax compliance program.  As a result, income from discontinuedoperations for the three and six months ended June 30, 2001 was $0.1 millionand $0.2 million, respectively, an improvement of $0.2 million and $0.3 millionover the respective prior year periods.
**LIQUIDITY AND CAPITAL RESOURCES**

             Netcash provided by operating activities for the six months ended June 30, 2001was $1.0 million, an increase of $2.8 million over the prior year period,driven primarily by a $4.4 million improvement in income from continuingoperations, offset by a $1.7 million increase in working capital requirementsduring the first half of 2001 as compared to the prior year.

             Netcash provided by investing activities for the six months ended June 30, 2001was $5.5 million, resulting primarily from maturities of short-terminvestments, net of purchases.  Duringthe prior year, the $2.7 million of net cash used in investing activitiesresulted primarily from the purchase of short-term investments, net ofproceeds.

             Netcash provided by financing activities for the six months ended June 30, 2001was $0.3 million, which is consistent with the prior year as a result of a $0.1million increase in proceeds from stock option exercises offset by BP’snonrecurring contribution of services during the prior year.

             AtJune 30, 2001, the Company had cash, cash equivalents and short-terminvestments of $12.5 million and an accumulated deficit of $56.6 million.  The Company has experienced negative cashflows from operations from its inception through 1999.  For the year ended December 31, 2000, theCompany, for the first time in its history, generated net cash flows from operationsamounting to $0.3 million.  For the sixmonths ended June 30, 2001, the Company has generated net cash flows fromoperations of $1.0 million, an improvement of $2.8 million over the prior yearperiod.  The increase in cash providedby operations is attributable to the $4.4 million improvement in income fromcontinuing operations, partially offset for the Company’s investment in workingcapital required to provide for the significant growth in the business.  In addition, the Company sold on August 4, 2001,substantially all of the assets, while retaining substantially all of theliabilities of its food testing business to Neogen Corporation forapproximately $3.5 million, resulting in an estimated gain of approximately$1.5 million.
             TheCompany believes that its current cash and short-term investment position, andthe interest to be earned thereon, will be sufficient to fund the Company'soperations through the end of year 2002. The Company's estimate of the timeperiod for which cash funds will be adequate to fund its operations is aforward looking estimate subject to risks and uncertainty, and actual resultsmay differ materially.  The Company'srequirements for additional capital will depend on many factors, includinggrowth in product revenues, payments received under potential collaborativeagreements; the progress of the Company's collaborative and independentresearch and development projects; the costs of preclinical and clinical trialsfor the Company's products; the prosecution, defense and enforcement of patentclaims and other intellectual property rights; costs of product liabilityclaims; and the development of manufacturing, sales and marketing capabilities.To the extent capital resources together with cash flow from operations are notsufficient to meet future capital requirements, the Company will have to raiseadditional funds to continue the development of its technologies. There can beno 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 orconvertible debt securities, the issuance of such securities could result indilution to the Company's shareholders. If adequate funds are not available,the Company may be required to curtail operations significantly or to obtainfunds through entering into collaborative agreements on unattractive terms. TheCompany's inability to raise capital as and when needed would have a materialadverse effect on the Company's business, financial condition and results ofoperations.
**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

             TheCompany is subject to market risk associated with changes in foreign currencyexchange rates and interest rate.  TheCompany’s exchange rate risk is limited to its European operations.  The Company’s foreign currency exchange raterisk results primarily from the foreign currency translation of its foreignoperations’ financial results and from the foreign operations’ intercompanypurchases of inventory.  The majority ofthe intercompany purchases are paid for within standard payment terms of 30days.  Sales throughout the rest of theworld are denoted in U.S. dollars.  Forthe three and six months ended June 30, 2001, the foreign exchange ratesutilized to translate the Company’s international subsidiaries’ local currencyfinancial results into U.S. dollars declined 8% and 6%, respectively, ascompared to the respective prior year periods due to the strengthening of theU.S. dollar against the local currency of these subsidiaries which resulted ina $0.1 million and $0.2 million reduction in income from continuing operationsin comparison to the respective prior year periods.  The foreign currency translation loss included in shareholders’equity resulting from the translation of the financial statements of theCompany’s international subsidiaries into U.S. dollars increased by $0.1million and $0.3 million for the three and six months ended June 30, 2001,respectively.  Interest rate exposure isprimarily limited to the $5.1 million of short-term investments owned by theCompany.  Such securities are debtinstruments which generate interest income for the company on excess cashbalances.  The Company does not activelymanage the risk of interest rate fluctuations; however, such risk is mitigatedby the relatively short term, less than 12 months, nature of these investments.

             TheCompany does not consider the present rate of inflation to have a significantimpact on its business.
**PART II.  OTHERINFORMATION**

**ITEM 1.  LEGAL PROCEEDINGS**

             See Note 13 to the Consolidated Financial Statements,which is incorporated herein by reference.

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

             At the 2001 Annual StockholdersMeeting of the Company held on May 8, 2001, the stockholders of the Company:

             (1) Elected the followingindividuals as Directors on the Company’s Board of Directors to serve until thenext Annual Stockholders Meeting of the Company and until their successors havebeen elected and qualified according to the following vote:
**Nominee** **For** **Withheld****** **** ****     W.  Murray Air 9,159,982 399,850John  L. Bishop 9,199,291 396,541Thomas  E. Dewey, Jr. 9,199,182 396,650Keith  E. Holmberg 9,196,367 399,465Richard  A. Lerner 9,200,982 394,850Kenneth  L. Melmon 9,199,982 395,850Anthony  J. Nocchiero 9,027,753 568,079Walter  R. Quanstrom 9,198,841 396,991Mark  A. Roberts 9,196,532 399,300Ian  Springett 9,196,317 399,515Frank  J. Sroka 9,057,818 538,014
             (2) Adopted the 2001 Long-TermIncentive Plan as set out and described in the 2001 Proxy Statement  according to the following vote:
For Against Abstain Non-Vote          7,317,503 628,809 13,940 1,635,580;  and
             (3) Adopted an Amendment of theCompany’s 1999 Outside Directors Stock Option Plan, as set out and described inthe 2001 Proxy Statement, according to the following vote:
For Against Abstain Non-Vote          7,395,268 540,644 24,340 1,635,580.
 

**ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K**
a.Exhibits  filed herewith:  10.1  Employment Agreement with Paul  Steuperaert.b.Form  8-K reports filed during the quarter:   None
 

 

**SIGNATURE**

             Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

VYSIS,INC.

 
Date:  August 14, 2001  By/s/ JOHN R. SLUIS        Name:  John R. Sluis    *Title:  Senior Vice President and Chief*    *Financial  Officer*
 **