** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

## **WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

 

| **ý**                                             |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|
|                                                   |
| **For the  quarterly period ended September 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 of registrant as specified in itscharter)

 

 

| **DELAWARE**                                                    |   | **36-3803405**                          |
|-----------------------------------------------------------------|--------|-----------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |   | (I.R.S. Employer Identification Number) |
|                                                            |   |                                    |
| **3100 Woodcreek Drive**                                        |   |                                    |
| **Downers Grove, Illinois**                                     |   | **60515-5400**                          |
| (Address of principal  executive offices)                       |   | (Zip Code)                              |

 

Registrant’stelephone number, including area code:  **(630) 271-7000**

 

 

                Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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 ý No o

 

                Number of sharesof Common Stock, par value $.001 per share, outstanding as of October 31,2001:  10,308,269

 

 

 

**VYSIS, INC.**

 

**FORM 10-Q**

 

**FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001**

 

**TABLE OFCONTENTS**

** **

**PART I:  FINANCIAL INFORMATION**

 
| **Item 1:**  | Financial  Statements (Unaudited)                                                                            |   |
|--------------|--------------------------------------------------------------------------------------------------------------|--------|
|         | Consolidated  Balance Sheets As of September 30, 2001 and December 31, 2000                                  |   |
|         | Consolidated Statements of  Operations For the three months ended September 30, 2001 and 2000                |   |
|         | Consolidated  Statements of Operations For the nine months ended September 30, 2001 and  2000                |   |
|         | Consolidated Statements of  Comprehensive Operations For the three months ended September 30, 2001 and  2000 |
|         | Consolidated  Statements of Comprehensive Operations For the nine months ended September  30, 2001 and 2000  |
|         | Consolidated  Statements of Cash Flows For the nine months ended September 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 6:**   | Exhibits and Reports on Form  8-K |   |
|          |                              |
| **Signature** |                              |

 

**PART I. FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

 

**VYSIS, INC.**

**(An indirect subsidiary of BPp.l.c.)**

 

**CONSOLIDATEDBALANCE SHEETS**

 

**(in thousands, except share and pershare amounts)**

**(unaudited)**

 
|                                                                                                                                                                            |   | **September  30,****2001** |   | **December  31, 2000** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|--------|------------------------|--------|
| **ASSETS**                                                                                                                                                                      |   |                       |   |                   |   |
| Current assets:                                                                                                                                                                 |   |                       |   |                   |   |
| Cash and cash equivalents                                                                                                                                                       |   | $                          | 9,371  |                   | $      | 715 |   |
| Short-term investments                                                                                                                                                          |   | 6,363                      |   | 10,673                 |   |
| Accounts receivable, net                                                                                                                                                        |   | 4,048                      |   | 3,366                  |   |
| Other receivables                                                                                                                                                               |   | -                          |   | 321                    |   |
| Inventories                                                                                                                                                                     |   | 2,220                      |   | 1,442                  |   |
| Other current assets                                                                                                                                                            |   | 1,055                      |   | 528                    |   |
| Current assets – discontinued operations                                                                                                                                   |   | -                          |   | 572                    |   |
| Total current assets                                                                                                                                                            |   | 23,057                     |   | 17,617                 |   |
| Property and equipment, net                                                                                                                                                     |   | 2,494                      |   | 2,451                  |   |
| Other assets                                                                                                                                                                    |   | 2,450                      |   | 1,370                  |   |
| Long-term assets, net-discontinued operations                                                                                                                                   |   | -                          |   | 52                     |   |
| Total assets                                                                                                                                                                    |   | $                          | 28,001 |                   | $      | 21,490 |   |
|                                                                                                                                                                            |   |                       |   |                   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                  |   |                       |   |                   |   |
| Current liabilities:                                                                                                                                                            |   |                       |   |                   |   |
| Accounts payable and accrued liabilities                                                                                                                                        |   | $                          | 7,849  |                   | $      | 6,975 |   |
| Deferred revenue                                                                                                                                                                |   | 306                        |   | 200                    |   |
| Total current liabilities                                                                                                                                                       |   | 8,155                      |   | 7,175                  |   |
|                                                                                                                                                                            |   |                       |   |                   |   |
| Long-term liabilities:                                                                                                                                                          |   |                       |   |                   |   |
| Deferred revenues                                                                                                                                                               |   | 1,193                      |   | 972                    |   |
| Other long-term liabilities                                                                                                                                                     |   | -                          |   | 100                    |   |
| Total long-term liabilities                                                                                                                                                     |   | 1,193                      |   | 1,072                  |   |
|                                                                                                                                                                            |   |                       |   |                   |   |
| Contingency (Note 16)                                                                                                                                                           |   |                       |   |                   |   |
|                                                                                                                                                                            |   |                       |   |                   |   |
| 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  September 30, 2001 and December 31, 2000                                                                 |   | -                          |   | -                      |   |
| Series B; 553,126 shares designated; none issued and outstanding at  September 30, 2001 and December 31, 2000                                                                   |   | -                          |   | -                      |   |
| Common stock, $0.001 par value; 35,000,000 shares authorized;  10,289,365 issued and outstanding at September 30, 2001; 10,150,992 issued  and outstanding at December 31, 2000 |   | 10                         |   | 10                     |   |
| Additional paid-in capital                                                                                                                                                      |   | 73,268                     |   | 72,625                 |   |
| Accumulated other comprehensive loss:                                                                                                                                           |   |                       |   |                   |   |
| Cumulative translation adjustment                                                                                                                                               |   | (568                       | )      | (464                   | )      |
| Accumulated deficit                                                                                                                                                             |   | (54,057                    | )      | (58,928                | )      |
| Total stockholders’ equity                                                                                                                                                 |   | 18,653                     |   | 13,243                 |   |
| Total liabilities and stockholders’ equity                                                                                                                                 |   | $                          | 28,001 |                   | $      | 21,490 |   |

 

Seenotes to the consolidated financial statements.

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 

**(in thousands, except per shareamounts)**

**(unaudited)**

 

 
|                                                               |   | **Three  Months Ended September 30,** |   |
|--------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                               |   | **2001**                              |   | **2000** |   |
| Revenues:                                                          |   |                                  |   |   |   |
| Product revenue                                                    |   | $                                     | 7,087  |   | $ | 4,683 |   |
| License and other revenue                                          |   | 175                                   |   | 114 |   |
| Total revenues                                                     |   | 7,262                                 |   | 4,797 |   |
| Cost of goods sold                                                 |   | 1,543                                 |   | 839 |   |
| Gross profit                                                       |   | 5,719                                 |   | 3,958 |   |
| Operating expenses:                                                |   |                                  |   |   |   |
| Research and development                                           |   | 1,682                                 |   | 1,537 |   |
| Selling, general and administrative                                |   | 2,727                                 |   | 2,766 |   |
| Non-recurring merger-related expenses                              |   | 619                                   |   | - |   |
| Total operating expenses                                           |   | 5,028                                 |   | 4,303 |   |
| Income (loss) from operations                                      |   | 691                                   |   | (345 | ) |
| Gain on sale of investment                                         |   | -                                     |   | 1,190 |   |
| Interest income                                                    |   | 131                                   |   | 144 |   |
| Income from continuing operations before provision for incometaxes |   | 822                                   |   | 989 |   |
| Provision for income taxes                                         |   | -                                     |   | - |   |
| Income from continuing operations                                  |   | 822                                   |   | 989 |   |
| Discontinued operations:                                           |   |                                  |   |   |   |
| Income (loss) from discontinued operations                         |   | 26                                    |   | (39 | ) |
| Gain on sale of Food business, net of income taxes of $125         |   | 1,671                                 |   | - |   |
| Net income                                                         |   | $                                     | 2,519  |   | $ | 950 |   |
|                                                               |   |                                  |   |   |   |
| Income from continuing operations per share:                       |   |                                  |   |   |   |
| Basic                                                              |   | $                                     | .08    |   | $ | .10 |   |
| Diluted                                                            |   | $                                     | .07    |   | $ | .09 |   |
| Net income per share:                                              |   |                                  |   |   |   |
| Basic                                                              |   | $                                     | .25    |   | $ | .09 |   |
| Diluted                                                            |   | $                                     | .21    |   | $ | .09 |   |
|                                                                    |        |                                       |        |  |  |  |  |  |

 

 

Seenotes to the consolidated financial statements.

**CONSOLIDATED STATEMENTS OFOPERATIONS**

 

**(in thousands, except per shareamounts)**

**(unaudited)**

 

 
|                                                                      |   | **Nine  Months Ended September 30,** |   |
|---------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                      |   | **2001**                             |   | **2000** |   |
| Revenues:                                                                 |   |                                 |   |   |   |
| Product revenue                                                           |   | $                                    | 19,779 |   | $ | 13,451 |   |
| License and other revenue                                                 |   | 804                                  |   | 1,859 |   |
| Total revenues                                                            |   | 20,583                               |   | 15,310 |   |
| Cost of goods sold                                                        |   | 4,006                                |   | 2,838 |   |
| Gross profit                                                              |   | 16,577                               |   | 12,472 |   |
| Operating expenses:                                                       |   |                                 |   |   |   |
| Research and development                                                  |   | 4,628                                |   | 4,974 |   |
| Acquired clinical trial data                                              |   | -                                    |   | 1,500 |   |
| Selling, general and administrative                                       |   | 8,813                                |   | 8,805 |   |
| Non-recurring merger-related expenses                                     |   | 619                                  |   | - |   |
| Total operating expenses                                                  |   | 14,060                               |   | 15,279 |   |
| Income (loss) from operations                                             |   | 2,517                                |   | (2,807 | ) |
| Gain on sale of investment                                                |   | -                                    |   | 1,190 |   |
| Interest income                                                           |   | 443                                  |   | 385 |   |
| Income (loss) from continuing operations before provision for incometaxes |   | 2,960                                |   | (1,232 | ) |
| Provision for income taxes                                                |   | -                                    |   | - |   |
| Income (loss) from continuing operations                                  |   | 2,960                                |   | (1,232 | ) |
| Discontinued operations:                                                  |   |                                 |   |   |   |
| Income (loss) from discontinued operations                                |   | 240                                  |   | (132 | ) |
| Gain on sale of Food business, net of income taxes of $125                |   | 1,671                                |   | - |   |
| Net income (loss                                                          |   | $                                    | 4,871  |   | $ | (1,364 | ) |
|                                                                      |   |                                 |   |   |   |
| Income (loss) from continuing operations per share:                       |   |                                 |   |   |   |
| Basic                                                                     |   | $                                    | .29    |   | $ | (.12 | ) |
| Diluted                                                                   |   | $                                    | .26    |   | $ | (.12 | ) |
| Net income (loss) per share:                                              |   |                                 |   |   |   |
| Basic                                                                     |   | $                                    | .48    |   | $ | (.14 | ) |
| Diluted                                                                   |   | $                                    | .42    |   | $ | (.14 | ) |

 

 

Seenotes to the consolidated financial statements.

**CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE OPERATIONS**

 

**(in thousands)**

**(unaudited)**

 

 
|                                                     |   | **Three  Months Ended September 30,** |   |
|----------------------------------------------------------|--------|---------------------------------------|--------|
|                                                     |   | **2001**                              |   | **2000** |   |
|                                                     |   |                                  |   |   |   |
| Net income                                               |   | $                                     | 2,519  |     | $ | 950 |     |
|                                                     |   |                                  |   |   |   |
| Other comprehensive income (loss):                       |   |                                  |   |   |   |
| Cumulative translation adjustment                        |   | 157                                   |   | (179 | ) |
| Unrealized holding loss on investment                    |   | -                                     |   | 600 |   |
| Reclassification adjustment, realized gain on investment |   | -                                     |   | (1,190 | ) |
| Total other comprehensive income (loss)                  |   | 157                                   |   | (769 | ) |
| Comprehensive income                                     |   | $                                     | 2,676  |   | $ | 181 |   |

 

 

Seenotes to the consolidated financial statements.

**CONSOLIDATEDSTATEMENTS OF COMPREHENSIVEOPERATIONS**

 

**(in thousands)**

**(unaudited)**

 

 
|                                                     |   | **Nine  Months Ended September 30,** |   |
|----------------------------------------------------------|--------|--------------------------------------|--------|
|                                                     |   | **2001**                             |   | **2000** |   |
|                                                     |   |                                 |   |   |   |
| Net income (loss)                                        |   | $                                    | 4,871  |   | $ | (1,364 | ) |
|                                                     |   |                                 |   |   |   |
| Other comprehensive income (loss):                       |   |                                 |   |   |   |
| Cumulative translation adjustment                        |   | (104                                 | )      | (292 | ) |
| Unrealized holding gain on investment                    |   | -                                    |   | 1,097 |   |
| Reclassification adjustment, realized gain on investment |   | -                                    |   | (1,190 | ) |
| Total other comprehensive loss                           |   | (104                                 | )      | (385 | ) |
| Comprehensive income (loss)                              |   | $                                    | 4,767  |   | $ | (1,749 | ) |

 

 

Seenotes to the consolidated financial statements.

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 

**(in thousands)**

**(unaudited)**

 

** **
|                                                                            |   | **Nine  Months Ended September 30,** |   |
|---------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                            |   | **2001**                             |   | **2000** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                           |   |                                 |   |   |   |
| Net income (loss)                                                               |   | $                                    | 4,871  |   | $ | (1,364 | ) |
| Reconciliation of net loss to net cash used in operating activities:            |   |                                 |   |   |   |
| (Income) loss from discontinued operations                                      |   | (240                                 | )      | 132 |   |
| Gain on sale of Food business                                                   |   | (1,671                               | )      | - |   |
| Gain on sale of investment                                                      |   | -                                    |   | (1,190 | ) |
| Depreciation and amortization                                                   |   | 700                                  |   | 1,119 |   |
| Effects of changes in foreign currency                                          |   | 16                                   |   | 69 |   |
| Foreign currency exchange rate losses                                           |   | 2                                    |   | 15 |   |
| Stock compensation                                                              |   | 40                                   |   | 13 |   |
| Changes in assets and liabilities:                                              |   |                                 |   |   |   |
| Accounts receivable                                                             |   | (787                                 | )      | (71 | ) |
| Inventories                                                                     |   | (795                                 | )      | 19 |   |
| Other current assets                                                            |   | (540                                 | )      | (239 | ) |
| Other assets                                                                    |   | (27                                  | )      | 10 |   |
| Accounts payable and accrued liabilities                                        |   | (190                                 | )      | 1,012 |   |
| Deferred revenue                                                                |   | 327                                  |   | (167 | ) |
| Net cash provided by (used in) operating activities                             |   | 1,706                                |   | (642 | ) |
|                                                                            |   |                                 |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                           |   |                                 |   |   |   |
| Proceeds, net of transaction-related expenses, from thesale of Food business    |   | 2,970                                |   | - |   |
| Proceeds, net of cash sold, from French distributor                             |   | 101                                  |   | 994 |   |
| Proceeds, net of transaction-related expenses, from thesale of Imaging business |   | 250                                  |   | 451 |   |
| Proceeds from sale of investment                                                |   | -                                    |   | 1,718 |   |
| Proceeds from maturities of short-term investments                              |   | 15,195                               |   | 10,929 |   |
| Purchases of short-term investments                                             |   | (10,886                              | )      | (16,841 | ) |
| Purchases of property and equipment                                             |   | (633                                 | )      | (492 | ) |
| Proceeds from sale of property and equipment                                    |   | -                                    |   | 21 |   |
| Increase in other assets                                                        |   | (182                                 | )      | (50 | ) |
| Net cash provided by (used in) investing activities                             |   | 6,815                                |   | (3,270 | ) |
|                                                                            |   |                                 |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                           |   |                                 |   |   |   |
| Proceeds from option plan exercises                                             |   | 519                                  |   | 285 |   |
| Expenses funded by BP                                                           |   | -                                    |   | 115 |   |
| Net cash provided by financing activities                                       |   | 519                                  |   | 400 |   |
| Effect of exchange rate changes on cash                                         |   | (19                                  | )      | (78 | ) |
| Cash used in discontinued operations                                            |   | (365                                 | )      | (62 | ) |
| Net increase (decrease) in cash and cash equivalents                            |   | 8,656                                |   | (3,652 | ) |
| Cash and cash equivalents at beginning of period                                |   | 715                                  |   | 4,818 |   |
| Cash and cash equivalents at end of period                                      |   | $                                    | 9,371  |   | $ | 1,166 |   |

 

 

Seenotes to the consolidated financial statements.

# **NOTES** TOCONSOLIDATED FINANCIAL STATEMENTS

**(unaudited)**

 

**NOTE 1—ORGANIZATION AND BUSINESS:**

 

Vysis,Inc. (“Vysis” or the “Company”) is a Genomic Disease Management company thatdevelops, commercializes and markets clinical products that provide informationcritical to the evaluation and management of cancer, prenatal disorders andother genetic diseases.  Vysis currentlymarkets eight 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.

 

                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. On December 31, 1998, Amoco Corporation merged with the former BritishPetroleum Corporation, and as a result of the merger became a wholly-ownedsubsidiary of BP p.l.c.

 

                On February 10, 1998, theCompany completed the initial public offering of 3 million shares of its CommonStock, 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 wereapproximately $32.1 million.  Concurrentwith the consummation of the Offering, the Company issued 675,000 shares ofCommon Stock at $12.00 per share to BP in exchange for a reduction of $8.1million in the Company’s note payable to BP. As of October 31, 2001, BP beneficially owned approximately 65 percentof the Company’s outstanding Common Stock.

 

OnOctober 24, 2001, the Company and Abbott Laboratories (“Abbott”) entered into adefinitive agreement for Abbott to purchase the outstanding stock of theCompany for a cash price of $30.50 per share, for a total transaction value ofapproximately $355 million.  Thetransaction is subject to regulatory approvals and certain closing conditions.

 

 

## **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, and theCompany’s Quarterly Reports on Form 10-Q for the three months ended March 31,2001 and June 30, 2001, as filed with the Securities and Exchange Commission.

 

                In the opinion ofmanagement, the interim consolidated financial statements reflect alladjustments necessary for a fair presentation of the interim periods.  All such adjustments are of a normal,recurring nature.  Certain amounts infiscal 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 ACCOUNTINGPRONOUNCEMENTS:**

 

                On June 29, 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 implemented SFASNo. 141 on July 1, 2001 and the adoption of SFAS No. 141 did not have anysignificant impact on its financial statements.

 

                OnJune 29, 2001, SFAS No. 142, “Goodwill and Other Intangible Assets”, wasapproved by the FASB.  SFAS No. 142changes the accounting 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 BALANCE SHEET COMPONENT:**

 

                Inventories consisted of the following (inthousands):

 
|                       |   | **September 30,****2001** |   | **December 31,****2000** |   |
|----------------------------|--------|---------------------------|--------|--------------------------|--------|
| Raw materials and supplies |   | $                         | 1,324  |                     | $      | 431 |   |
| Finished goods             |   | 896                       |   | 1,011                    |   |
|                       |   | $                         | 2,220  |                     | $      | 1,442 |   |

 

 

**NOTE 5—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):

 
|                      |   | **September 30, 2001** |   |
|---------------------------|--------|------------------------|--------|
|                      |   | **Amortized Cost**     |   | **Unrealized****Gain (Loss)** |   | **Fair****Value** |   |
| U.S. government agencies  |   | $                      | 995    |   | $ | 2 |   | $ | 997 |   |
| Corporate debt securities |   | 5,368                  |   | (6 | ) | 5,362 |   |
|                      |   | $                      | 6,363  |   | $ | (4 | ) | $ | 6,359 |   |

 

 
|                      |   | **December 31, 2000** |   |
|---------------------------|--------|-----------------------|--------|
|                      |   | **Amortized Cost**    |   | **Unrealized Gain** |   | **Fair****Value** |   |
| U.S. government agencies  |   | $                     | 3,307  |   | $ | 5 |   | $ | 3,312 |   |
| Corporate debt securities |   | 7,366                 |   | 3 |   | 7,369 |   |
|                      |   | $                     | 10,673 |   | $ | 8 |   | $ | 10,681 |   |

 

                A summary of securities classified as held tomaturity at September 30, 2001 are as follows (in thousands):

 

| **Due In**   |   | **Amortized Cost** |   | **Fair****Value** |   |
|--------------|--------|--------------------|--------|-------------------|--------|
| 1-90 Days    |   | $                  | 1,995  |              | $      | 1,983 |   |
| 91-180 Days  |   | 3,430              |   | 3,431             |   |
| 181-365 Days |   | 938                |   | 945               |   |
|         |   | $                  | 6,363  |              | $      | 6,359 |   |

 

**NOTE6—LICENSE AGREEMENT:**

 

**               **During September2001, the Company entered into an exclusive license agreement with RocheDiagnostics Corporation (“Roche”) that will provide access to technology andintellectual property rights for genetic markers developed by Roche which mayallow for the unique identification of fetal cells in a maternal bloodsample.  The Company is required to pay$1.0 million upon transfer of the technology. As a result of the alternative future use of the technology acquired,the Company has recorded the $1.0 million as a long-term intangible other assetthat will be amortized over the life of the intellectual property acquired inthe agreement.

 

 

**NOTE7—NON-RECURRING MERGER-RELATED EXPENSES:**

 

                Duringthe third quarter of 2001, the Company incurred $619,000 of merger-relatedexpenses, primarily attorney, accounting, and investment advisory fees, inconnection with the anticipated sale of the Company.  At September 30, 2001, the Company had costs related to apossible secondary offering aggregating $347,000 recorded as an other currentasset.  Upon the anticipated sale of theCompany, such costs will be expensed. See Note 17 for further discussion regarding the anticipated sale of theCompany.

 

 

**NOTE 8—GAINON SALE OF FOOD BUSINESS:**

 

                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 cash proceeds of approximately $3.5 million, resulting in again of approximately $1.7 million, net of income taxes.  The Company’s financial statements reflectthe food 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****September 30,** |   |
|---------------------------------------------|--------|------------------------------------------|--------|
|                                        |   | **2001**                                 |   | **2000** |   |
|                                        |   |                                     |   |   |   |
| Total revenues                              |   | $                                        | 211    |   | $ | 689 |   |
| Gross profit                                |   | 65                                       |   | 324 |   |
| Income (loss)  from discontinued operations |   | 26                                       |   | (39 | ) |
|                                             |        |                                          |        |  |  |  |  |

 
|                                        |   | **Nine  months ended****September 30,** |   |
|---------------------------------------------|--------|-----------------------------------------|--------|
|                                        |   | **2001**                                |   | **2000** |   |
|                                        |   |                                    |   |   |   |
| Total  revenues                             |   | $                                       | 1,540  |   | $ | 2,132 |   |
| Gross profit                                |   | 676                                     |   | 1,087 |   |
| Income (loss)  from discontinued operations |   | 240                                     |   | (132 | ) |
|                                             |        |                                         |        |  |  |  |  |

 

Assets of the discontinued operations are asfollows (in thousands):

 
|                         |   | **December  31,****2000** |   |
|------------------------------|--------|---------------------------|--------|
| Accounts  receivables        |   | $                         | 362    |   |
| Inventories                  |   | 210                       |   |
| Total current  assets        |   | 572                       |   |
| Property and  equipment, net |   | 52                        |   |
|                              |        |                           |        |  |

 

 

**NOTE 9—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 is taxed),the Company is required by law to be included in BP’s unitary state tax returnsas long as BP owns or controls 50 percent or more of the voting equity. Forunitary state filings, the tax sharing agreement with BP requires BP to pay theCompany 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 nine months ended September 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 full valuation allowance has been provided for alldeferred tax assets (net of liabilities) at September 30, 2001 as managementdoes not consider realization of such amounts more likely than not.

 

**NOTE 10—GAIN ON SALE OF FRENCHDISTRIBUTOR:**

               On December 31, 1999, the Company sold its wholly-owned Frenchdistribution subsidiary to Applied Genetics Services, Ltd. for a purchase pricein French francs that was the equivalent to $1,272,000 in U.S. dollars as ofDecember 31, 1999, resulting in a gain of $166,000.  At September 30, 2001, the Company and its foreign subsidiarieshave received the entire purchase price in French Francs which aggregated theU.S. dollar equivalent of $1,182,000.

 

 

**NOTE 11—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 12—RELATED PARTY TRANSACTION:**

 

               InJune 2000, the Company received certain consulting services provided for andpaid by BP valued at $115,000.  TheCompany has recorded the benefit of these services as a capital contributionwith a corresponding charge to selling, general and administrative expense.

 

 

**NOTE 13****—****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.                The Company’s revenues byproduct line for the three and nine months ended September 30, 2001 and 2000are as follows (in thousands):

 
|                                            |   | **Three Months Ended****September 30,** |   |
|-------------------------------------------------|--------|-----------------------------------------|--------|
|                                            |   | **2001**                                |   | **2000** |   |
| FDA/AFSSAFP approved clinical  testing products |   | $                                       | 2,962  |   | $ | 1,483 |   |
| ASR/Research testing products                   |   | 3,411                                   |   | 2,762 |   |
| Genetic instrument products                     |   | 714                                     |   | 438 |   |
| License and other revenue                       |   | 175                                     |   | 114 |   |
| Total revenues                                  |   | $                                       | 7,262  |   | $ | 4,797 |   |

 
|                                            |   | **Nine Months Ended****September 30,** |   |
|-------------------------------------------------|--------|----------------------------------------|--------|
|                                            |   | **2001**                               |   | **2000** |   |
| FDA/AFSSAFP approved clinical  testing products |   | $                                      | 7,352  |   | $ | 4,095 |   |
| ASR/Research testing products                   |   | 10,449                                 |   | 7,977 |   |
| Genetic instrument products                     |   | 1,978                                  |   | 1,379 |   |
| License and other revenue                       |   | 804                                    |   | 1,859 |   |
| Total revenues                                  |   | $                                      | 20,583 |   | $ | 15,310 |   |

 

The Company’s revenues by geographic area based onlocation of customers for the three and nine months ended September 30, 2001and 2000 are as follows (in thousands):

 
|                           |   | **Three Months Ended****September 30,** |   |
|--------------------------------|--------|-----------------------------------------|--------|
|                           |   | **2001**                                |   | **2000** |   |
| United States                  |   | $                                       | 4,383  |   | $ | 2,244 |   |
| Europe, Middle East and Africa |   | 2,092                                   |   | 1,831 |   |
| Other                          |   | 787                                     |   | 722 |   |
| Total revenues                 |   | $                                       | 7,262  |   | $ | 4,797 |   |

 
|                           |   | **Nine Months Ended****September 30,** |   |
|--------------------------------|--------|----------------------------------------|--------|
|                           |   | **2001**                               |   | **2000** |   |
| United States                  |   | $                                      | 11,780 |   | $ | 7,730 |   |
| Europe, Middle East and Africa |   | 6,523                                  |   | 5,572 |   |
| Other                          |   | 2,280                                  |   | 2,008 |   |
| Total revenues                 |   | $                                      | 20,583 |   | $ | 15,310 |   |

 

 

**NOTE14—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 a period.  In computing diluted income (loss) fromcontinuing operations per share and net income (loss) per share, the averagestock price for the period is used in determining the number of shares assumedto 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 ninemonths ended September 30, 2001 and 2000:

 
|                                                                        |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-----------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                        |   | **2001**                              |   | **2000**                             |   | **2001** |   | **2000** |   |
| Numerator:                                                                  |   |                                  |   |                                 |   |   |   |   |   |
| Income (loss)  from continuing operations                                   |   | $                                     | 822    |                                 | $      | 989 |   | $ | 2,960 |   | $ | (1,232 | ) |
| Net income  (loss)                                                          |   | $                                     | 2,519  |                                 | $      | 950 |   | $ | 4,871 |   | $ | (1,364 | ) |
| Denominator:                                                                |   |                                  |   |                                 |   |   |   |   |   |
| Denominator for  basic net income (loss) per share- weighted-average shares |   | 10,264                                |   | 10,113                               |   | 10,203 |   | 10,067 |   |
| Dilutive  potential common shares-stock options                             |   | 1,555                                 |   | 676                                  |   | 1,379 |   | - |   |
| Denominator for  diluted net income (loss) per share                        |   | 11,819                                |   | 10,789                               |   | 11,582 |   | 10,067 |   |
| Basic income (loss) from continuing operations per  share                   |   | $                                     | .08    |                                 | $      | .10 |   | $ | .29 |   | $ | (.12 | ) |
| Diluted income (loss) from continuing operations per  share                 |   | $                                     | .07    |                                 | $      | .09 |   | $ | .26 |   | $ | (.12 | ) |
| Basic net income (loss) per share                                           |   | $                                     | .25    |                                 | $      | .09 |   | $ | .48 |   | $ | (.14 | ) |
| Diluted net income (loss) per share                                         |   | $                                     | .21    |                                 | $      | .09 |   | $ | .42 |   | $ | (.14 | ) |

 

          Optionsto purchase 275,250 shares of common stock were outstanding at September 30,2001, but were not included in the computation of diluted per share amounts forthe three and nine months ended September 30, 2001 as their effect wasantidilutive.  Options to purchase188,784 shares were outstanding at September 30, 2000, but were not included inthe computation of diluted loss per share for the three or nine months endedSeptember 30, 2000 as their effect was antidilutive.

 

 

**NOTE 15—DISTRIBUTION AND SUPPLY AGREEMENT:**

 

                On March 30, 2001,the Company entered into a five-year, renewable distribution and supplyagreement (“the Agreement”) with Abbott. The Agreement provides Abbott with the exclusive distribution rights inNorth America and Europe for the Company’s PathVysionTM breastcancer product and its UroVysion bladder cancer product.  The Agreement also gives Abbott an exclusiveoption for distribution rights in Asia/Pacific (except Japan) and South Americafor both products.  All payments will berecognized by the Company over the periods to which they apply.

 

 

**NOTE 16****—****CONTINGENCY:**

 

As previously reported, theCompany is named as the defendant in a declaratory judgment suit filed in theUnited States District Court in the Southern District of California (San Diego)by Gen-Probe Incorporated.  The suitseeks a declaration that the Company’s U.S. Patent No. 5,750,338 (“the ‘338patent”) is invalid, unenforceable and not infringed by certain products fordetecting the presence of hepatitis C virus and human immunodeficiency virus inblood specimens.  The Companyunderstands that Chiron Corporation is currently marketing the products invarious countries outside the U.S. pursuant to licenses granted by the Companyto Gen-Probe and Chiron.  The suit alsoseeks an injunction 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 Courtruled that Gen-Probe's products for detecting hepatitis C and the humanimmunodeficiency virus do not literally infringe the '338 patent.  On October 16, 2001, Gen-Probe filed amotion for partial summary judgment of non-infringement under the Doctrine ofEquivalents.  The Court has not yetruled on the motion.  The Companycontinues 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 an application to reissue the ‘338 patent with the UnitedStates Patent & Trademark Office seeking clarification of certain mattersconcerning the '338 patent.  The reissueapplication also requests the Patent Office to supplement the claims of the issuedpatent with new claims of intermediate scope. The application 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.

 

 

**NOTE 17—SUBSEQUENT EVENT:**

 

**               **On October 24, 2001, the Company and Abbottentered into a definitive agreement for Abbott to purchase the outstandingstock of the Company for a cash price of $30.50 per share, for a totaltransaction value of approximately $355 million.  The transaction is subject to regulatory approvals and certainclosing conditions.

 

 

** ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**              **The followingdiscussion and analysis provides information which management believes isrelevant to an assessment and understanding of the Company’s results andfinancial condition.  The discussionshould be read in conjunction with the audited consolidated financialstatements of the Company and notes thereto, which were included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2000 aswell 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 the Company’sclinical products; the extent to which the clinicians or laboratoriesperforming procedures with the Company’s products are able to obtainthird-party reimbursement; the ability of the Company to successfully marketand sell its clinical products, other products and equipment; competition;compliance by the Company with regulatory requirements and the timely receiptof necessary governmental approvals; the Company’s ability to manufactureproducts in sufficient quantities; the Company’s ability to maintainintellectual property protection for its proprietary products, to defend itsexisting intellectual property rights from challenges by third parties, and toavoid infringing intellectual property rights of third parties; productliability claims; the success of the Company’s collaborators and licensees; andthe Company’s cost control efforts.   Inaddition, a detailed discussion of risks and uncertainties may be found in theCompany’s periodic filings with the Securities and Exchange Commission.  The Company disclaims any intent orobligation to update these forward-looking statements.

 

 

**OVERVIEW**

 

                Vysis is a Genomic DiseaseManagement company that develops, commercializes and markets clinical productsthat provide information critical to the evaluation and management of cancer,prenatal disorders and other genetic diseases. Vysis currently markets eight Clinical products in addition todistributing over 300 ASR/Research products through its direct sales operationsin the United States and Europe and a worldwide distribution network covering59 countries.

 

On October 24, 2001, the Company and Abbott entered into a definitiveagreement for Abbott to purchase the outstanding stock of the Company for acash price of $30.50 per share, for a total transaction value of approximately$355 million.  The transaction issubject to regulatory approvals and certain closing conditions.

 

 

**RESULTS OF OPERATIONS**

 

               Total revenues for the three andnine months ended September 30, 2001 were $7.3 million and $20.6 million,respectively, an increase of $2.5 million, or 51%, and $5.3 million, or 34%, ascompared to the three and nine months ended September 30, 2000.  Product revenue for the three and ninemonths ended September 30, 2001 was $7.1 million and $19.8 million,respectively, an increase of $2.4 million, or 51%, and $6.3 million, or 47%, incomparison to the respective prior year periods.  The increase in product revenue for the third quarter of 2001 ascompared to the prior year quarter was attributable to a $1.5 million, or 100%,increase in FDA/AFSSAFP approved clinical products (“Clinical”), and a $0.6million, or 24%, increase in ASR/Research testing products (“ASR/Research”),and a $0.3 million, or 63%, increase in Genetic instrument products(“Instrument”).  For the nine monthsended September 30, 2001, the increase in product revenue of $6.3 million, or47%, over the prior year period was due to a $3.3 million, or 80%, increase inClinical product sales, a $2.5 million, or 31%, increase in ASR/Researchproduct sales and a $0.6 million, or 43%, increase in Instrument productsales.  The increase in Clinical productrevenue for the three and nine months ended September 30, 2001 was primarilydue to growth of the United States adoption rate of the Company’s PathVysionTMbreast cancer product and as a result of the Company’s initial sales of itsUroVysion bladder cancer product, which received FDA product clearance inAugust 2001.  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 22 new ASR/Research products introduced within the last yearand a half.  The increase in Instrumentrevenues is primarily due to an increase in United States shipments of theCompany’s VP2000 Processor, a high throughput instrument that automates thespecimen preparation steps of FISH (fluorescent in site hybridization) assaysand an increase in the United States shipments of the Company’s Hybrite system,a semi-automated hybridization instrument. For the three months ended September 30, 2001, license and other revenuewas $0.2 million, an increase of $0.1 million primarily resulting from anincrease in license revenue from Gen-Probe and Chiron.  For the nine months ended September 30,2001, license and other revenue was $0.8 million, a decrease of $1.1 millionover the respective prior year period primarily due to $1.3 million of non-recurring2000 license revenue associated with a patent license agreement and an optionfor a patent license agreement.

 

               Cost of goods sold for thethree and nine months ended September 30, 2001 were $1.5 million and $4.0million, respectively, an increase of $0.7 million, or 84%, and $1.2 million,or 41%, over the respective prior year periods due to the increase in thevolume of the products sold.  As apercentage of product revenue, product gross profit decreased to 78% for thethree months ended September 30, 2001 from 82% in the prior year as a result ofthe higher percentage sales increase (63%) of the lower margin Instrumentproducts in comparison to the sales increase (50%) of the higher marginClinical and ASR/Research products.  Forthe nine months ended September 30, 2001, product gross profit increased to 80%from 79% in the prior year period as a result of the higher margin Clinical andASR/Research products representing a larger percentage of product revenue forthe nine months ended September 30, 2001 as compared to the prior year period.  Product gross profit was $5.5 million and$15.8 million for the three and nine months ended September 30, 2001,respectively, representing an increase of $1.7 million, or 44%, and $5.2million, or 49%, in comparison to the respective prior year periods.

 

               Research and development expensesfor the three and nine months ended September 30, 2001 were $1.7 and $4.6million, respectively, representing an increase of $0.1 million, or 9%, and adecrease of $0.3 million, or 7%, as compared to the respective prior yearperiods.  The third quarter increase isprimarily due to an increase in costs associated with further development ofthe Company’s microarray platform.  Theyear-to-date decrease was primarily due to lower clinical trial costs duringthe first half of 2001 as compared to the prior year.  During 2000, the Company entered into a collaborative agreementwith Genentech, Inc., the developer of the Herceptin® monoclonal antibodytreatment for metastatic breast cancer, to extend the use of the Company’sPathVysionTM  HER-2 breastcancer test kit.  In accordance with theagreement, the Company incurred a nonrecurring charge of $1.5 million during2000 for its right to utilize Genentech’s clinical trial data for the Company’sregulatory submission to the FDA.

 

               Selling, general andadministrative expenses for the three and nine months ended September 30, 2001were $2.7 million and $8.8 million, respectively, which are consistent with therespective prior year periods.  Duringthe third quarter of 2001, the Company has incurred $0.6 million ofmerger-related expenses associated with the anticipated sale of the Company.

 

               Interest income for the three andnine months ended September 30, 2001 was $0.1 million and $0.4 million,respectively, which is consistent with the respective prior year periodsprimarily as a result of the Company’s higher average cash, cash equivalentsand short-term investment balances during 2001 as compared to the prior yearoffset by lower interest rates on investments maturing during 2001.

 

**DISCONTINUED OPERATIONS**

 

               On August 4, 2001, the Companysold substantially all of the assets, while retaining substantially all of theliabilities of its food testing business for cash proceeds of $3.5 million,resulting in a gain on the sale of $1.7 million.  The Company’s financial statements reflect the food testingbusiness as a discontinued operation. Revenues from discontinued operations for the three and nine monthsended September 30, 2001 were $0.2 million and $1.5 million, respectively, adecrease of $0.5 million and $0.6 million as compared to the respective prioryear periods primarily due to the August 4, 2001 sale of the business.  Gross profit from discontinued operationsfor the three and nine months ended September 30, 2001 was $0.1 million and$0.7 million, respectively, representing a decrease of $0.3 million and $0.4million as compared to the respective prior year periods.  The third quarter and year-to-date decreasein gross profit from discontinued operations was primarily due to the August 4,2001 sale of the business and, on a year-to-date basis, partially due to anincrease in product royalty expense during the first quarter of 2001.  Operating expenses from discontinuedoperations for the three and nine months ended September 30, 2001, were $0.0million and $0.4 million, respectively, a decrease of $0.3 million and $0.8million in comparison to the prior year respective periods primarily due tolower sales and use tax expense resulting from the implementation of a salesand use tax compliance program.  As aresult, income from discontinued operations for the three and nine months endedSeptember 30, 2001 was $0.0 million and $0.2 million, respectively, animprovement of $0.1 million and $0.4 million over the respective prior yearperiods.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

               Net cash provided by operatingactivities for the nine months ended September 30, 2001 was $1.7 million, anincrease of $2.3 million over the prior year period, driven primarily by a $5.3million improvement in income from operations, offset by a $3.0 millionincrease in working capital requirements during 2001 as compared to the prioryear.

 

               Net cash provided by investingactivities for the nine months ended September 30, 2001 was $6.8 million,resulting primarily from $4.3 million of maturities of short-term investments,net of purchases and $3.0 million of proceeds, net of transaction-relatedexpenses, from the sale of the food business. During the prior year, the $3.3 million of net cash used in investingactivities resulted primarily from the $5.9 million purchase of short-terminvestments, net of proceeds offset by the $1.7 million proceeds from the saleof an investment and $1.0 million of net proceeds from the sale of the Frenchdistributor.

 

               Net cash provided by financingactivities for the nine months ended September 30, 2001 was $0.5 million, anincrease of $0.1 million over the prior year as a result of a $0.2 millionincrease in proceeds from stock option exercises offset by a $0.1 nonrecurring contributionof services by BP during the prior year.

 

                At September 30,2001, the Company had cash, cash equivalents and short-term investments of$15.7 million and an accumulated deficit of $54.1 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 fromoperations amounting to $0.3 million. For the nine months ended September 30, 2001, the Company has generatednet cash flows from operations of $1.7 million, an improvement of $2.3 millionover the prior year period.  Theincrease in cash provided by operations is attributable to the $4.2 millionimprovement in income from continuing operations, partially offset for theCompany’s investment in working capital required to provide for the significantgrowth in the business.

 

                The Company believes that its current cash and short-terminvestment position, and the interest to be earned thereon, will be sufficientto fund the Company's operations through the end of year 2002. The Company'sestimate of the time period for which cash funds will be adequate to fund itsoperations is a forward looking estimate subject to risks and uncertainty, andactual results may differ materially. The Company's requirements for additional capital will depend on manyfactors, including growth in product revenues, payments received underpotential collaborative agreements; the progress of the Company's collaborativeand independent research and development projects; the costs of preclinical andclinical trials for the Company's products; the prosecution, defense andenforcement of patent claims and other intellectual property rights; costs ofproduct liability claims; and the development of manufacturing, sales andmarketing capabilities. To the extent capital resources together with cash flowfrom operations are not sufficient to meet future capital requirements, theCompany will have to raise additional funds to continue the development of itstechnologies. There can be no assurance that such funds will be available onfavorable terms, or at all. To the extent that additional capital is raisedthrough the sale of equity or convertible debt securities, the issuance of suchsecurities could result in dilution to the Company's shareholders. If adequatefunds are not available, the Company may be required to curtail operationssignificantly or to obtain funds through entering into collaborative agreementson unattractive terms. The Company's inability to raise capital as and whenneeded would have a material adverse effect on the Company's business,financial condition and results of operations.

 

# **ITEM 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES**

# **ABOUT 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.  Forboth the three and nine months ended September 30, 2001, the foreign exchangerates utilized to translate the Company’s international subsidiaries’ local currencyfinancial results into U.S. dollars declined 5% as compared to the respectiveprior year periods due to the strengthening of the U.S. dollar against thelocal currency of these subsidiaries which resulted in a $0.2 million and $0.3million reduction in income from continuing operations in comparison to therespective prior year periods.  Theforeign currency translation loss included in shareholders’ equity resultingfrom the translation of the financial statements of the Company’s internationalsubsidiaries into U.S. dollars decreased by $0.2 million for the third quarterand increased by $0.1 million for the nine months ended September 30,2001.   Interest rate exposure isprimarily limited to the $6.4 million of short-term investments owned by theCompany.  Such securities are debt instrumentswhich generate interest income for the company on excess cash balances.  The Company does not actively manage therisk of interest rate fluctuations; however, such risk is mitigated by therelatively 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.

 

 

 

**PARTII.  OTHER INFORMATION**

** **

**ITEM1.  LEGALPROCEEDINGS**

 

See Note 16 to theConsolidated Financial Statements, which is incorporated herein by reference.

 

**ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K**

 

 
| a.     | Exhibits filed herewith:                                                                                                                                                                                                                                                                                                                                                                         |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 3.1                                                                                                                                                                                                                                                                                                                                                                                              | Secretary’s Certificate re Amendment of Bylaws |
|   | 10.1                                                                                                                                                                                                                                                                                                                                                                                             | 2001 Severance Program |
|   | 10.2                                                                                                                                                                                                                                                                                                                                                                                             | Retention Agreement with John Bishop |
|   | 10.3                                                                                                                                                                                                                                                                                                                                                                                             | Retention Agreement with Russel Enns |
|   | 10.4                                                                                                                                                                                                                                                                                                                                                                                             | Retention Agreement with Robert Koska |
|   | 10.5                                                                                                                                                                                                                                                                                                                                                                                             | Retention Agreement with William Murray |
|   | 10.6                                                                                                                                                                                                                                                                                                                                                                                             | Retention Agreement with Steven Seelig |
|   | 10.7                                                                                                                                                                                                                                                                                                                                                                                             | Retention Agreement with John Sluis |
|   | 10.8                                                                                                                                                                                                                                                                                                                                                                                             | Retention Agreement with Paul Steuperaert |
|   | 10.9                                                                                                                                                                                                                                                                                                                                                                                             | Retention Agreement with Al Ellsworth |
|   | 10.10                                                                                                                                                                                                                                                                                                                                                                                            | Director’s Agreement with Walter R. Quanstrom |
|   |                                                                                                                                                                                                                                                                                                                                                                                             |   |
| b.     | Form 8-K reports filed  during the quarter:  On August 17,  2001, the Company filed a Form 8K with respect to the Company’s sale of  substantially all of the assets, while retaining substantially all of the  liabilities, of its food testing business to Neogen Corporation for  approximately $3.5 million.  There  were no other Form 8-K reports filed during the quarter. |
|        |                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |

 

 

 

 

**SIGNATURE**

 

               Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

VYSIS, INC.

 

 
| Date:  November 13, 2001 | By:    |   | /s/  JOHN R. SLUIS |                                               |
|-------------------------------|--------|--------|--------------------|----------------------------------------------------|
|                          |   |   | Name:              | John R. Sluis                                      |
|                          |   |   | *Title:*           | *Senior Vice President and Chief Financial Office* |
|                          |   |   |               |
|                               |        |        |                    |                                                    |  |