<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 26, 1996
REGISTRATION NO. 333-4461
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
VENTANA MEDICAL SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 3841 94-2976937
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
3865 NORTH BUSINESS CENTER DRIVE
TUCSON, ARIZONA 85705
(520) 887-2155
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
R. JAMES DANEHY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
VENTANA MEDICAL SYSTEMS, INC.
3865 NORTH BUSINESS CENTER DRIVE
TUCSON, ARIZONA 85705
(520) 887-2155
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
BARRY E. TAYLOR, ESQ. GARY L. SELLERS, ESQ.
CHRISTOPHER D. MITCHELL, ESQ. SIMPSON THACHER & BARTLETT
TREVOR J. CHAPLICK, ESQ. 425 LEXINGTON AVENUE
WILSON SONSINI GOODRICH & ROSATI NEW YORK, NEW YORK 10017-3954
PROFESSIONAL CORPORATION (212) 455-2000
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
(415) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<S> <C> <C> <C> <C>
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PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
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Common Stock, $0.001 par value..... 2,357,500 $10.00 $23,575,000 $8,130
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</TABLE>
(1) Includes 307,500 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933, as amended.
(3) Entire amount previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
VENTANA MEDICAL SYSTEMS, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN
PROSPECTUS OF PART I ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN FORM S-1
REGISTRATION STATEMENT LOCATION OF CAPTION IN PROSPECTUS
- ------------------------------------------------------- -------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus........... Forepart of Registration Statement;
Outside Front Cover Page; Additional
Information
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Inside Front Cover Page; Outside Back
Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ Prospectus Summary; The Company; Risk
Factors
4. Use of Proceeds.................................. Use of Proceeds
5. Determination of Offering Price.................. Outside Front Cover Page;
Underwriting
6. Dilution......................................... Dilution; Risk Factors
7. Selling Security Holders......................... Principal and Selling Stockholders
8. Plan of Distribution............................. Outside and Inside Front Cover Pages;
Underwriting; Outside Back Cover Page
9. Description of Securities to be Registered....... Prospectus Summary; Dividend Policy;
Capitalization; Description of
Capital Stock; Shares Eligible for
Future Sale
10. Interests of Named Experts and Counsel........... Legal Matters
11. Information with Respect to the Registrant....... Outside and Inside Front Cover Pages;
Prospectus Summary; Risk Factors; Use
of Proceeds; Dividend Policy;
Capitalization; Dilution; Selected
Consolidated Financial and Operating
Data; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Business;
Management; Certain Transactions;
Principal Stockholders; Description
of Capital Stock; Shares Eligible for
Future Sale; Financial Statements;
Outside Back Cover Page
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
2,050,000 SHARES
LOGO
VENTANA MEDICAL SYSTEMS, INC.
COMMON STOCK
------------------------------
Of the 2,050,000 shares (the "Shares") of common stock, par value $.001 per
share (the "Common Stock"), offered hereby (the "Offering"), 1,890,907 Shares
are being sold by Ventana Medical Systems, Inc. ("Ventana" or the "Company") and
159,093 Shares are being sold by certain stockholders of the Company (the
"Selling Stockholders"). See "Principal and Selling Stockholders." The Company
will not receive any of the proceeds from the sale of Shares by the Selling
Stockholders. Prior to the Offering, there has been no public market for the
Common Stock of the Company, and no assurance can be given that an active
trading market for the Common Stock will develop after the Offering. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price.
------------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<S> <C> <C> <C> <C>
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- -------------------------------------------------------------------------------------------------------
Per Share.......................... $10.00 $0.70 $9.30 $9.30
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Total(3)........................... $20,500,000 $1,435,000 $17,585,435 $1,479,565
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</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities arising
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $925,000.
(3) One of the Selling Stockholders and the Company have granted the
Underwriters a 30-day option to purchase up to an additional 307,500 shares
of Common Stock on the same terms as the Common Stock offered hereby solely
to cover over-allotments, if any (the "Over-Allotment Option"). If the
Over-Allotment Option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to
Selling Stockholders will be $23,575,000, $1,650,250, $19,485,025 and
$2,439,725, respectively. See "Underwriting" and "Principal and Selling
Stockholders."
------------------------------
The Shares are being offered by the several Underwriters, subject to prior sale,
when, as and if delivered and accepted by them, subject to certain conditions,
including the approval of certain legal matters by counsel for the Underwriters.
The Underwriters reserve the right to withdraw, cancel or modify such offer and
to reject orders in whole or in part. It is expected that delivery of the Shares
will be made against payment therefor on or about July 31, 1996, at the offices
of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167.
------------------------------
BEAR, STEARNS & CO. INC. DILLON, READ & CO. INC.
JULY 26, 1996
<PAGE> 4
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, all information in this Prospectus (i) assumes no exercise of the
Underwriters' Over-Allotment Option, (ii) reflects a 1-for-2.7059046 reverse
split of the Common Stock effected in July 1996 (iii) reflects the conversion of
all outstanding shares of Convertible Redeemable Preferred Stock ("Preferred
Stock") into Common Stock and cancellation of accrued dividends upon such
conversion, and (iv) assumes the exercise of warrants to purchase 81,530 shares
of Common Stock of the Company upon the closing of this Offering, which warrants
will terminate if not so exercised. See "Description of Capital Stock" and
"Underwriting." The Shares of Common Stock offered hereby are subject to a high
degree of risk. See "Risk Factors." This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, those discussed in "Risk Factors."
THE COMPANY
Ventana develops, manufactures and markets proprietary instrument/reagent
systems that automate immunohistochemistry ("IHC") and in situ hybridization
("ISH") tests for the analysis of cells and tissues on microscope slides. These
tests are important tools used in diagnosing and selecting treatment for cancer.
With a worldwide installed base of 581 instruments as of March 31, 1996, the
Company believes that it is the worldwide leader in the automated IHC testing
market. The Company estimates that its installed base of instruments is
approximately five times as large as the combined installed base of all of the
Company's current competitors. Ventana has placed instruments with 35 of the 42
cancer centers identified as principal cancer research centers by the National
Cancer Institute including the Mayo Clinic, the Dana Farber Cancer Institute,
The Johns Hopkins University and the M.D. Anderson Cancer Center. Each Ventana
proprietary system placed typically provides a recurring revenue stream as
customers consume reagents and supplies sold by the Company with each test
conducted.
Ventana's "patient priority" systems (the Ventana ES and gen II) perform
multiple tests rapidly on a single patient biopsy thereby providing a matrix of
diagnostic data to the pathologist. In February 1996, Ventana acquired BioTek
Solutions, Inc. ("BioTek") for several strategic reasons. The Company believes
the combination of Ventana's "patient priority" systems and BioTek's TechMate
"batch processing" systems, which process high volumes of tests on multiple
patient biopsies, will enable the Company to serve the full range of health care
institutions that perform IHC tests. Ventana increased its installed base of
instruments from 294 to 581 as a result of the acquisition, thereby increasing
the corresponding aggregate recurring reagent revenue stream and enabling the
Company to become the worldwide leader in automated IHC testing. Ventana
believes significant synergies and margin improvements can be realized from the
integration of BioTek into Ventana's business model in which important
value-added activities are performed internally, in contrast to BioTek's
reliance on third parties.
Cancer is the second leading cause of death in the United States accounting
for 25% of deaths. Currently, approximately 10 million people in the United
States have a history of invasive cancer. It is estimated that approximately 1.4
million new cases of invasive cancer will be diagnosed each year. The vast
majority of IHC testing associated with cancer diagnosis and treatment in the
United States is conducted in an aggregate of approximately 2,200 clinical
institutions and reference and research laboratories which the Company estimates
creates the opportunity for the placement of as many as 2,500 automated IHC
testing instruments. The Company believes that less than 25% of such
institutions and laboratories currently conduct IHC testing on an automated
basis. The international market for instrument placements is estimated by the
Company to be approximately 1.2 times the size of the United States market, with
Europe accounting for the majority of the international market potential.
As compared to manual IHC testing, Ventana's automated systems provide
improved reliability, reproducibility and consistency of test results. The
systems' economic advantages include reduced cost per test, faster turnaround
time, increased test throughput and a reduced dependence on skilled laboratory
technicians. The Company believes it will play a critical, expanding role in
cancer science as researchers will use Ventana systems to accelerate the
identification and development of new tests and that the Company's installed
base of instruments will speed the commercialization and clinical implementation
of such new tests.
The main element of the Company's strategy to strengthen its leadership
position in automated IHC testing is to maximize instrument placements in order
to create a barrier that competitors, which compete on the basis of product and
price, will need to overcome. To meet this objective, the Company plans to
introduce two lower priced instruments, one for potential patient priority
customers (the Ventana NexES) and one for potential batch processing customers
(the TechMate 250). The Company believes that these lower priced instruments
will enable it to increase its emphasis on instrument placements through reagent
programs ("RPs"). In an RP, the Company provides the customer with the use of an
instrument with no capital investment which creates an opportunity for the
Company to generate reagent revenue. The Company believes that it can accelerate
the rate of expansion of its installed base of instruments by using RPs because
the required capital investment associated with a purchase, a significant sales
hurdle, will be eliminated.
3
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered:
By the Company.......................... 1,890,907 shares
By the Selling Stockholders............. 159,093 shares
Total........................... 2,050,000 shares
Common Stock to be outstanding after the
Offering................................ 10,680,998 shares(1)
Use of proceeds........................... For repayment of approximately $16.2 million of
indebtedness, working capital and general
corporate purposes.
Nasdaq National Market Symbol............. VMSI
</TABLE>
- ---------------
(1) Includes 8,708,561 outstanding shares of Common Stock, 81,530 shares of
Common Stock issuable upon the exercise of outstanding warrants which would
otherwise expire upon the closing of this Offering and the 1,890,907 Shares
of Common Stock offered by the Company hereby. Excludes 887,740 shares of
Common Stock issuable upon exercise of warrants that may remain outstanding
after the completion of this Offering and 840,399 shares of Common Stock
issuable upon the exercise of options outstanding under the Company's stock
option plans.
4
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACTUAL PRO FORMA(1)
------------------------------------------------ ---------------------------
THREE MONTHS THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31, YEAR ENDED ENDED
--------------------------- ------------------ DECEMBER 31, MARCH 31,
1993 1994 1995 1995 1996 1995 1996
------- ------- ------- ------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales:
Instruments................................. $ 1,162 $ 2,588 $ 4,644 $ 1,007 $ 1,594 $ 8,396 $ 1,733
Reagents and other.......................... 1,519 3,339 5,969 1,195 2,552 11,079 3,495
------- ------- ------- ------- ------- ------- -------
Total net sales........................... 2,681 5,927 10,613 2,202 4,146 19,475 5,228
Cost of goods sold............................ 1,722 2,531 4,282 936 1,432 9,096 1,924
------- ------- ------- ------- ------- ------- -------
Gross profit.................................. 959 3,396 6,331 1,266 2,714 10,379 3,304
Operating expenses:
Research and development.................... 2,100 1,926 2,239 556 613 4,407 771
Selling, general and administrative......... 4,067 6,899 7,435 1,594 2,374 10,968 2,799
Nonrecurring expenses....................... -- -- -- -- 9,983 9,983 --
Amortization of intangibles................. -- -- -- -- 46 557 139
------- ------- ------- ------- ------- ------- -------
Loss from operations.......................... (5,208) (5,429) (3,343) (884) (10,302) (15,536) (405)
Interest income (expense)..................... 229 59 74 50 (5) 74 (5)
------- ------- ------- ------- ------- ------- -------
Net loss...................................... $(4,979) $(5,370) $(3,269) $ (834) $(10,307) $(15,462) $ (410)
======= ======= ======= ======= ======= ======= =======
Net loss per share, as adjusted(2)............ $ (0.38) $ (0.10) $ (1.16) $ (1.52) $ (0.04)
======= ======= ======= ======= =======
Shares used in computing net loss per share,
as adjusted(2).............................. 8,664 8,529 8,895 10,167 10,398
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................................. $ 3,436 $ 5,061
Long-term debt............................................................................ 15,035 --
Working capital........................................................................... 419 2,044
Total assets.............................................................................. 21,742 36,719
Accumulated deficit(4).................................................................... (32,436) (32,436)
Total stockholders' equity (deficit)(4)................................................... (1,560) 15,100
</TABLE>
SELECTED OPERATING DATA:
The following table sets forth the Company's pro forma annual instrument
placements and instrument installed base for the periods indicated as if the
acquisition of BioTek had taken place on January 1, 1992:
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------- MARCH 31,
1992 1993 1994 1995 1996
---- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C>
INSTRUMENT PLACEMENTS (UNITS):
Patient priority (Ventana)................................................. 17 56 74 113 33
Batch processing (BioTek).................................................. 4 37 106 128 12
-- --
--- --- ---
Total annual placements.................................................. 21 93 180 241 45
== == === === ===
Total instrument installed base........................................ 22 115 295 536 581
== == === === ===
RPs in installed base.................................................. 6 25 44 66 72
== == === === ===
</TABLE>
- ---------------
(1) Adjusted to reflect the acquisition of BioTek as if it had occurred on
January 1, 1995. BioTek was acquired on February 26, 1996.
(2) See Note 1 to the Consolidated Financial Statements and Note 8 to the
Unaudited Pro Forma Condensed Consolidated Financial Statements for
information concerning the computation of net loss per share.
(3) Adjusted to give effect to the sale of the Shares of Common Stock offered by
the Company hereby and the application of the net proceeds thereof (at the
initial public offering price of $10.00 per share). See "Use of Proceeds,"
"Capitalization" and "Dividend Policy."
(4) Gives effect to the cancellation of accrued Preferred Stock dividends upon
the assumed conversion of the Preferred
Stock into Common Stock. Actual amounts reflect the assumed conversion of
the Preferred Stock but not the exercise of warrants which would otherwise
expire upon the closing of this Offering.
5
<PAGE> 8
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the Shares of Common Stock offered hereby. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed in Risk
Factors.
CONTINUING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has incurred cumulative losses of $32.4 million from its
inception in 1985 through March 31, 1996. In February 1996, the Company acquired
BioTek, which had sustained cumulative losses of $18.2 million since its
inception in October 1990. The Company intends to make increased investments in
both product development and sales and marketing and expects to incur operating
losses through at least the first half of 1997. The Company's ability to achieve
profitability is dependent on a variety of factors including the extent to which
its instrument and reagent systems continue to achieve market acceptance, the
Company's ability to sell reagents to its customers, the Company's ability to
compete successfully, the Company's ability to develop, introduce, market and
distribute existing and new diagnostic systems, the Company's ability to expand
manufacturing capacity as required, the successful integration of BioTek's
operations and the receipt of required regulatory approvals for products
developed by the Company. There can be no assurance that the Company will be
successful in these efforts. Moreover, if profitability is achieved, the level
of profitability cannot be accurately predicted and there can be no assurance
that any such profitability will be sustained. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
FUTURE FLUCTUATIONS IN OPERATING RESULTS
The Company derives revenues from the sale of reagents and instruments. The
initial placement of an instrument is subject to a longer, less consistent sales
cycle than the sale of reagents, which begin and are typically recurring once an
instrument is placed. Consequently, the Company's future operating results are
likely to fluctuate substantially from period to period because instrument sales
are likely to remain an important part of revenues in the near future. The
degree of fluctuation will depend on the timing, level and mix of instruments
placed through direct sales and instruments placed through RPs. The Company
anticipates that the percentage of instruments placed through RPs, in particular
RP placements without formal reagent purchase commitments, will increase in the
future which is likely to result in a decrease in instrument sales both in
absolute dollars and as a percentage of total revenues. In addition, average
daily reagent use by customers may fluctuate from period to period, which may
contribute to future fluctuations in revenues. In particular, customers who have
received instruments under RP arrangements that do not provide for specified
reagent purchase commitments are not contractually obligated to purchase
reagents from the Company, and there can be no assurance as to the timing or
volume of reagent purchases by such customers. Furthermore, customers that have
entered into contractual RP agreements may also attempt to cancel all or a
portion of their reagent purchase commitments. Accordingly, there can be no
assurance as to the level of revenues that will be generated by customers
procuring instruments through RP arrangements, particularly from those customers
who obtain instruments without reagent purchase commitments. In the event that
RP customers do not purchase anticipated quantities of reagents, the Company
will have incurred substantial costs in supplying instruments to RP customers
without receipt of an adequate reagent revenue stream and the Company's
business, financial condition and results of operations would be materially and
adversely affected. Sales of instruments may fluctuate from period to period
because sales to the Company's international distributors typically provide such
distributors with several months of instrument inventory, which the distributors
will subsequently seek to place with end users. The Company's instrument
installed base includes instruments shipped to DAKO A/S ("DAKO") and recognized
as sales, over 85% of which the Company believes DAKO has placed with end-users.
Results of operations for the remainder of 1996 are also expected to be affected
by costs associated with the integration of BioTek's operations. These include
costs associated with centralizing reagent manufacturing, expanding reagent
product offerings for batch processing instruments and eliminating operational
redundancies. Other factors that may result in fluctuations in operating results
include the timing of new product announcements and the introduction of new
products and new technologies by the Company
6
<PAGE> 9
and its competitors, market acceptance of the Company's current or new products,
developments with respect to regulatory matters, availability and cost of raw
materials from its suppliers, competitive pricing pressures, increased research
and development expenses, and increased marketing and sales expenses associated
with the implementation of the Company's market expansion strategies for its
instrument and reagent products. Future instrument and reagent sales could also
be adversely affected by the configuration of the Company's patient priority
systems, which require the use of the Company's detection chemistries,
particularly if and to the extent that competitors are successful in developing
and introducing new IHC instruments or if competitors offer reagent supply
arrangements having pricing or other terms more favorable than those offered by
the Company. In connection with future introductions of new products, the
Company may be required to incur reserves or charges for inventory obsolescence
in connection with unsold inventory of older generations of products. To date,
however, the Company has not incurred material charges or expenses associated
with inventory obsolescence in connection with new product introductions. In
addition, a significant portion of the Company's expense levels are based on its
expectation of a higher level of revenues in the future and are relatively fixed
in nature. Therefore, if revenue levels are below expectations, operating
results in a given period are likely to be adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RATE OF MARKET ACCEPTANCE AND TECHNOLOGICAL CHANGE
Use of automated systems to perform diagnostic tests is relatively new.
Historically, the diagnostic tests performed by the Company's systems have been
performed manually by laboratory personnel. The rate of market acceptance of the
Company's products will be largely dependent on the Company's ability to
persuade the medical community of the benefits of automated diagnostic testing
using the Company's products. Market acceptance and sales of the Company's
products may also be affected by the price and quality of the Company's
products. The Company's products could also be rendered obsolete or
noncompetitive by virtue of technological innovations in the fields of cellular
or molecular diagnostics. Failure of the Company's products to achieve market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business."
RISKS ASSOCIATED WITH DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS
The Company's future growth and profitability will be dependent, in large
part, on its ability to develop, introduce and market new instruments and
reagents used in diagnosing and selecting treatment for cancer and additional
disease states. In particular, the Company must successfully and timely
introduce the NexES and TechMate 250. These instruments are smaller capacity,
lower priced instruments than the Company's current instruments and are
necessary to expand the market opportunity at smaller hospitals and reference
laboratories in the United States and Europe. The Company depends in part on the
success of medical research in developing new antibodies, nucleic acid probes
and clinical diagnostic procedures that can be adapted for use in the Company's
systems. In addition, the Company will need to obtain licenses on satisfactory
terms to certain of these technologies, as to which there is no assurance.
Certain of the Company's products are currently under development, initial
testing or preclinical or clinical evaluation by the Company. Other products are
scheduled for future development. Products under development or scheduled for
future development may prove to be unreliable from a diagnostic standpoint, may
be difficult to manufacture in an efficient manner, may fail to receive
necessary regulatory clearances, may not achieve market acceptance or may
encounter other unanticipated difficulties. The failure of the Company to
develop, introduce and market new products on a timely basis or at all could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Research and Development."
COMPETITION
Competition in the diagnostic industry is intense and is expected to
increase. Competition in the diagnostic industry is based on, among other
things, product quality, performance, price and the breadth of a company's
product offerings. The Company's systems compete both with products manufactured
by competitors and with traditional manual diagnostic procedures. The Company's
competitors may succeed in developing products that are more reliable or
effective or less costly than those developed by the Company and may be more
successful than the Company in manufacturing and marketing their products. There
are other
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companies engaged in research and development of diagnostic devices or reagents,
and, notwithstanding the Company's product development efforts, the introduction
of such devices or alternative methods for diagnostic testing could hinder the
Company's ability to compete effectively and could have a material adverse
effect on the Company's business, financial condition and results of operations.
In the instrument market, several companies offer instruments that perform
IHC tests and can be used with any supplier's reagents, which may be attractive
to certain customers. In addition, any future growth in the market for automated
IHC instruments may result in additional market entrants and increased
competition, including more aggressive price competition. Many of the companies
selling or developing diagnostic devices and instruments and many potential
entrants in the automated IHC market have financial, manufacturing, marketing
and distribution resources significantly greater than those of Ventana. In
addition, many of these current and potential competitors have long-term
supplier relationships with Ventana's existing and potential customers. These
competitors may be able to leverage existing customer relationships to enhance
their ability to place new IHC instruments. Competition in the market for
automated IHC instruments, including the advent of new market entrants and
increasing price competition, could have a material adverse effect on the
Company's business, financial condition and results of operations.
In the market for reagents, the Company encounters competition from
suppliers of primary antibodies and detection chemistries, which are the two
principal types of reagents used in IHC tests. The Company's patient priority
instruments require the use of the Company's detection chemistries but can be
used with primary antibodies supplied by third parties, and the Company's batch
processing instruments can be used with both detection chemistries and primary
antibodies supplied by third parties. Accordingly, the Company encounters
significant competition in the sale of reagents for use on those of its
instruments that can be used with reagents supplied by third parties. Lower
prices for reagents used in manual IHC tests could also limit the growth of
automation. Certain of the Company's current and potential competitors in the
reagent market have financial, manufacturing, marketing and distribution
resources greater than those of the Company. Competition in the market for
reagents could also increase as a result of new market entrants providing more
favorable reagent supply arrangements than the Company, including lower reagent
prices. In particular, new entrants in the instrument market may seek to enhance
their competitive position through reduced reagent pricing or more favorable
supply arrangements; the Company's current instrument customers may find it
attractive to purchase primary antibodies for patient priority instruments and
primary antibodies and detection chemistries for batch processing instruments
from such competitors. Increased competition in the reagent market could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Competition."
MANUFACTURING RISKS
The Company has only manufactured patient priority instruments and reagents
for commercial sale since late 1991, and manufacturing of the Company's batch
processing instruments is performed by third parties. As the Company continues
to increase production of such instruments and reagents and develops and
introduces new products, it may from time to time experience difficulties in
manufacturing. BioTek currently manufactures reagents in its Santa Barbara,
California facility and Ventana manufactures reagents in its Tucson, Arizona
facilities. The Company expects to complete, in September 1996, the
consolidation of reagent manufacturing in its Tucson facilities. Difficulties or
delays in integrating reagent manufacturing could result in the inability to
achieve anticipated cost reductions and could have a material adverse effect on
the Company's business, financial condition and results of operations. Ventana
must increase production volumes of instruments and reagents in a cost-effective
manner in order to be profitable. To increase production levels, the Company
will need to scale-up its manufacturing facilities, increase its automated
manufacturing capabilities and continue to comply with the current good
manufacturing practices ("GMPs") prescribed by the United States Food and Drug
Administration ("FDA") and other standards prescribed by various federal, state
and local regulatory agencies in the United States and other countries,
including the International Standards Organization ("ISO") 9000 Series
certifications. There can be no assurance that manufacturing and quality
problems will not arise as the Company increases its manufacturing operations or
that such scale-up can be achieved in a timely manner or at a commercially
reasonable cost. Manufacturing or quality
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problems or difficulties or delays in manufacturing scale-up could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Manufacturing."
DEPENDENCE UPON KEY SUPPLIERS
The Company's reagent products are formulated from both chemical and
biological materials utilizing proprietary Ventana technology as well as
standard processing techniques. Certain components and raw materials, primarily
antibodies, used in the manufacturing of the Company's reagent products are
currently provided by single-source vendors. There can be no assurance that the
materials or reagents needed by the Company will be available in commercial
quantities or at acceptable prices. Any supply interruption or yield problems
encountered in the use of materials from these vendors could have a material
adverse effect on the Company's ability to manufacture its products until a new
source of supply is obtained. The use of alternative or additional suppliers
could be time consuming and expensive. In addition, a number of the components
used to manufacture the ES and gen II instruments are fabricated on a custom
basis to the Company's specifications and are currently available from a limited
number of sources. Consequently, in the event the supply of materials or
components from any of these vendors were delayed or interrupted for any reason
or in the event of quality or reliability problems with such components or
suppliers, the Company's ability to supply such instruments could be impaired,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Manufacturing."
DEPENDENCE UPON THIRD-PARTY MANUFACTURERS FOR BATCH PROCESSING INSTRUMENTS
The Company relies on two outside parties to manufacture its batch
processing instruments. Kollsman Manufacturing Company, Inc. ("Kollsman")
currently manufactures the TechMate 500 instrument and the Company has entered
into an agreement with Kollsman for the manufacture of such instrument. The
Company has entered into a contract manufacturing agreement with LJL BioSystems,
Inc. ("LJL") for the manufacture of the TechMate 250 instrument. There can be no
assurance that these manufacturers will be able to meet the Company's product
needs in a satisfactory, cost effective or timely manner. The Company's reliance
on third-party manufacturers involves a number of additional risks, including
the absence of guaranteed capacity, and reduced control over delivery schedules,
quality assurance and costs. The amount and timing of resources to be devoted to
these activities by such manufacturers are not within the control of the
Company, and there can be no assurance that manufacturing problems will not
occur in the future. Any such manufacturing or supply problems could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Manufacturing."
RISKS ASSOCIATED WITH UNITED STATES DISTRIBUTION RELATIONSHIP
The Company's batch processing instruments and reagents are sold under
distribution agreements entered into by BioTek. In the United States, batch
processing instruments and reagents are sold through Curtin Matheson Scientific,
Inc., a subsidiary of Fischer Scientific, Inc. ("CMS"), under an exclusive
agreement that expires in April 1998. United States sales through CMS are
subject to several operating conditions and risks. In particular, it has
historically been necessary for BioTek to support, and the Company anticipates
that it will need to continue to support, the efforts of CMS with direct field
sales and support personnel. As a result, the Company generates lower gross
margins on sales through CMS than it would generate were it to sell directly to
end-users and incurs higher selling expenses than typically associated with
third-party distribution arrangements. As a result of these factors and due to
the presence of the Company's direct sales force in the United States, the
Company does not intend to renew the agreement with CMS upon its expiration in
April 1998. The Company has had discussions regarding possible modifications to
or early termination of the relationship with CMS. However, these discussions
are not currently ongoing. To the extent that CMS does not adequately promote
and market batch processing instruments and reagents or manage customer
relationships or in the event that difficulties arise in the relationship
between the Company and CMS, the Company's sales of batch processing instruments
and reagents in the United States could be adversely affected and the Company
could also experience disruptions in the supply of batch processing instruments
and reagents to customers in the United States. These developments could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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RISKS ASSOCIATED WITH EUROPEAN DISTRIBUTION RELATIONSHIP
In Europe, batch processing instruments are sold through DAKO which also
pays BioTek a fixed dollar royalty for each instrument in service in exchange
for the right to sell its own reagents for use with such systems. The agreement
with DAKO provides DAKO with exclusive distribution rights for batch processing
instruments in Europe and other territories, subject to certain performance
requirements. The agreement expires in December 1999. Accordingly, the Company
is likely to be dependent upon DAKO for international sales of batch processing
instruments through this date.
In connection with BioTek's agreement with DAKO, DAKO made two loans
secured by a pledge of substantially all of BioTek's assets. DAKO also made
prepayments on future instrument sales and reagent royalties to BioTek. These
loans and prepayments were used to fund TechMate 250 instrument development and
working capital requirements. The aggregate balance of the secured loans and
prepayments was $1.6 million and $0.9 million, respectively, at March 31, 1996.
Of the secured loans, $0.3 million bears interest at 5% per annum and the
remaining $1.3 million does not bear interest. The prepayments do not bear
interest. The secured loans and prepayments are recorded as advances from
distributor in the Company's Consolidated Financial Statements. The amounts
payable under these loans are repaid through discounts on DAKO instrument
purchases from BioTek. Upon termination of the distribution agreement or in the
event of a default by BioTek under the distribution agreement (including a
failure to satisfy development milestones with respect to the TechMate 250
instrument), the secured loans will convert to fixed term loans that will be due
and payable in 12 equal quarterly installments commencing upon such event.
Since the acquisition of BioTek, Ventana and DAKO have been engaged in
discussions regarding various provisions of the distribution agreement. DAKO has
asserted that BioTek has not fulfilled its obligations with respect to
development and commercial introduction of the TechMate 250 instrument. DAKO's
remedies under the agreement include (i) requiring repayment of the secured
loans in 12 equal quarterly installments commencing upon a default by BioTek and
(ii) an irrevocable license to manufacture TechMate instruments for resale
internationally and a related reduction in the fixed dollar royalty rate paid by
DAKO to BioTek for each instrument included in the royalty base. The
negotiations with DAKO could result in an attempt by DAKO to exercise
contractual remedies available to it under the distribution agreement and terms
of the secured loans, an interruption in the distribution of the Company's batch
processing instruments outside the United States or litigation between the
parties with respect to the agreement, which would involve significant costs as
well as diversion of management time. Any of the foregoing could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company would prevail in any
litigation involving the agreement.
There can be no assurance as to the future course or outcome of the
Company's negotiations with DAKO or as to the Company's future relationship with
DAKO. If DAKO were successful in obtaining a manufacturing license for TechMate
instruments, the Company could experience a loss of instrument and royalty
revenue which could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, termination of the
agreement with DAKO could materially adversely affect the Company's business,
financial condition and results of operations.
RISKS ASSOCIATED WITH PAST AND FUTURE ACQUISITIONS
In February 1996 the Company acquired BioTek. Although the Company has no
pending agreements or commitments, the Company may make additional acquisitions
of complementary businesses, products or technologies in the future.
Acquisitions of companies, divisions of companies, or products entail numerous
risks, including (i) the potential inability to successfully integrate acquired
operations and products or to realize anticipated synergies, economies of scale
or other value, (ii) diversion of management's attention, and (iii) loss of key
employees of acquired operations. No assurance can be given that the Company
will not incur problems in integrating the BioTek operations or any future
acquisition and there can be no assurance that the acquisition of BioTek or any
other future acquisition will result in the Company becoming profitable or, if
the Company achieves profitability, that such acquisition will increase the
Company's profitability. Furthermore, there can be no assurance that the Company
will realize value from any such acquisition which equals or exceeds the
consideration paid. Any such problems could have a material adverse effect on
the Company's
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business, financial condition and results of operations. In addition, future
acquisitions by the Company may result in dilutive issuances of equity
securities, the incurrence of additional debt, large one-time write-offs and the
creation of goodwill or other intangible assets that could result in
amortization expense. These factors could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
RISKS RELATING TO PATENTS AND PROPRIETARY RIGHTS
The Company's success depends, in part, on its ability to obtain patents,
maintain trade secret protection and operate without infringing the proprietary
rights of others. There can be no assurance that the Company's patent
applications will result in patents being issued or that any issued patents will
provide protection against competitive technologies or will be held valid if
challenged. Others may independently develop products similar to those of the
Company or design around or otherwise circumvent patents issued to the Company.
In the event that any relevant claims of third-party patents are upheld as valid
and enforceable, the Company could be prevented from practicing the subject
matter claimed in such patents, or would be required to obtain licenses from the
patent owners of each of such patents or to redesign its products or processes
to avoid infringement. There can be no assurance that such licenses would be
available or, if available, would be on terms acceptable to the Company or that
the Company would be successful in any attempt to redesign its products or
processes to avoid infringement. If the Company does not obtain necessary
licenses, it could be subject to litigation and encounter delays in product
introductions while it attempts to design around such patents. Alternatively,
the development, manufacture or sale of such products could be prevented.
Litigation would result in significant cost to the Company as well as diversion
of management time. Adverse determinations in any such proceedings could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Patents and Proprietary Rights."
Ventana also relies upon trade secret protection for its confidential and
proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information or
techniques, gain access to Ventana's trade secrets or disclose such technology,
or that Ventana can effectively protect its trade secrets. Litigation to protect
Ventana's trade secrets would result in significant cost to the Company as well
as diversion of management time. Adverse determinations in any such proceedings
or unauthorized disclosure of Ventana trade secrets could have a material
adverse effect on Ventana's business, financial condition and results of
operations.
BioTek is a party to litigation initiated by BioGenex Laboratories, Inc.
("BioGenex") relating to certain alleged past infringements of patent rights of
BioGenex. The Company believes that the resolution of this matter will not have
a material adverse effect on the Company's business, financial condition and
results of operations. For additional detail regarding this litigation, see
"Business -- Legal Proceedings."
UNCERTAINTY OF FUTURE FUNDING OF CAPITAL REQUIREMENTS
The Company anticipates that its existing capital resources, including the
net proceeds of this Offering and interest earned thereon, and available
borrowing capacity under the Company's revolving credit line will be adequate to
satisfy its capital requirements through at least 1997. The Company's future
capital requirements will depend on many factors, including the extent to which
the Company's products gain market acceptance, the mix of instruments placed
through direct sales or through RPs, progress of the Company's product
development programs, competing technological and market developments, expansion
of the Company's sales and marketing activities, the cost of manufacturing
scale-up activities, possible acquisitions of complementary businesses, products
or technologies, the extent and duration of operating losses and timing of
regulatory approvals. The Company may require additional capital resources and
there is no assurance such capital will be available to the extent required, on
terms acceptable to the Company or at all. Any such future capital requirements
could result in the issuance of equity securities which would be dilutive to
existing stockholders. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the retention of principal members of its
management, scientific, technical, marketing and sales staff and the recruitment
of additional personnel. The Company does not maintain "key person" life
insurance on any of its personnel. The Company competes with other companies,
academic institutions, government entities and other organizations for qualified
personnel in the areas of the Company's activities. The inability to hire or
retain qualified personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management."
UNCERTAINTIES RELATED TO GOVERNMENT FUNDING
A portion of the Company's products are sold to universities, research
laboratories, private foundations and other institutions where funding is
dependent upon grants from government agencies, such as the National Institutes
of Health. Research funding by the government, however, may be significantly
reduced under several budget proposals being discussed by the United States
Congress or for other reasons. Any such reduction may materially affect the
ability of the Company's research customers to purchase the Company's products.
FDA AND OTHER GOVERNMENT REGULATION
The manufacturing, marketing and sale of the Company's products are subject
to extensive and rigorous government regulation in the United States and in
other countries. In the United States and certain other countries, the process
of obtaining and maintaining required regulatory approvals is lengthy, expensive
and uncertain. In the United States, the FDA regulates, as medical devices,
clinical diagnostic tests and reagents, as well as instruments used in the
diagnosis of adverse conditions. The Federal Food, Drug, and Cosmetic Act
governs the design, testing, manufacture, safety, efficacy, labeling, storage,
record keeping, approval, advertising and promotion of the Company's products.
There are two principal FDA regulatory review paths for medical devices: the
510(k) pre-market notification ("510(k)") process and the pre-market approval
("PMA") process. The PMA process typically requires the submission of more
extensive clinical data and is costlier and more time-consuming to complete than
the 510(k) process. For a detailed description of this regulatory framework, see
"Business -- Government Regulation."
The FDA regulates, as medical devices, instruments, diagnostic tests and
reagents that are traditionally manufactured and commercially marketed as
finished test kits or equipment. Some clinical laboratories, however, choose to
purchase individual reagents intended for specific analyses and develop and
prepare their own finished diagnostic tests. Although neither the individual
reagents nor the finished tests prepared from them by the clinical laboratories
have traditionally been regulated by the FDA, the FDA has recently proposed a
rule that, if adopted, would regulate the reagents sold to clinical laboratories
as medical devices. The proposed rule would also restrict sales of these
reagents to clinical laboratories certified under the Clinical Laboratory
Improvement Amendments of 1988 ("CLIA") as high complexity testing laboratories.
The Company intends to market some diagnostic products as finished test kits or
equipment and others as individual reagents; consequently, some or all of these
products may be regulated as medical devices.
Medical devices generally require FDA approval or clearance prior to being
marketed in the United States. The process of obtaining FDA clearances or
approvals necessary to market medical devices can be time-consuming, expensive
and uncertain, and there can be no assurance that any clearance or approval
sought by the Company will be granted or that FDA review will not involve delays
adversely affecting the marketing and sale of the Company's products. Further,
clearances or approvals may place substantial restrictions on the indications
for which the product may be marketed or to whom it may be marketed.
Additionally, there can be no assurance that the FDA will not require additional
data, require that the Company conduct further clinical studies or obtain a PMA
causing the Company to incur further cost and delay.
The Company's instruments, with respect to automated IHC testing functions,
have been categorized by the FDA as automated cell staining devices and have
been exempted from the 510(k) notification process. To date, ISH tests have not
received FDA approval and, therefore, use of the gen II for ISH tests will be
restricted to research applications. New instrument products that the Company
may introduce could require
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future 510(k) notifications. Certain antibodies that the Company may wish to
market with labeling indicating that they can be used in the diagnosis of
particular diseases may require PMA approval. In addition, the FDA has proposed
that some of the antibody products that Ventana may wish to market be subjected
to a pre-filing certification process. Certain of the Company's products are
currently sold for research use and are labeled as such.
Failure to comply with applicable regulatory requirements can, among other
consequences, result in fines, injunctions, civil penalties, suspensions or loss
of regulatory approvals, recalls or seizures of products, operating restrictions
and criminal prosecutions. In particular, the FDA enforces regulations
prohibiting the marketing of products for nonindicated uses. In addition,
governmental regulations may be established that could prevent or delay
regulatory approval of the Company's products. Delays in or failure to receive
approval of products the Company plans to introduce, loss of or additional
restrictions or limitations relating to previously received approvals, other
regulatory action against the Company or changes in the applicable regulatory
climate could individually or in the aggregate have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company is also required to register as a medical device manufacturer
with the FDA and is inspected on a routine basis by the FDA for compliance with
the FDA GMP regulations. The Company's clinical laboratory customers are subject
to CLIA, which is intended to ensure the quality and reliability of medical
testing.
In addition to these regulations, the Company is subject to numerous
federal, state and local laws and regulations relating to such matters as safe
working conditions and environmental matters. There can be no assurance that
such laws or regulations will not in the future have a material adverse effect
on the Company's business, financial condition and results of operations. See
"-- Environmental Matters" and "Business -- Government Regulation."
RISKS RELATING TO AVAILABILITY OF THIRD-PARTY REIMBURSEMENT AND POTENTIAL
ADVERSE EFFECTS OF HEALTH CARE REFORM
The Company's ability to achieve revenue growth and profitability may
depend on the ability of the Company's customers to obtain adequate levels of
third-party reimbursement for use of certain diagnostic tests in the United
States, Europe and other countries. Currently, availability of third-party
reimbursement is limited and uncertain for some IHC tests.
In the United States, the Company's products are purchased primarily by
medical institutions and laboratories which bill various third-party payors,
such as Medicare, Medicaid, other government programs and private insurance
plans, for the health care services provided to their patients. Third-party
payors may deny reimbursement to the Company's customers if they determine that
a prescribed device or diagnostic test has not received appropriate FDA or other
governmental regulatory clearances or approvals, is not used in accordance with
cost-effective treatment methods as determined by the payor, or is experimental,
unnecessary or inappropriate. The success of the Company's products may depend
on the extent to which appropriate reimbursement levels for the costs of such
products and related treatment are obtained by the Company's customers from
government authorities, private health insurers and other organizations, such as
health maintenance organizations ("HMOs"). Third-party payors are increasingly
challenging the prices charged for medical products and services. The trend
towards managed health care in the United States and the concurrent growth of
organizations such as HMOs could significantly influence the purchase of health
care services and products. In addition, the federal government and certain
members of Congress have proposed, and various state governments have adopted or
are considering, programs to reform the health care system. These proposals are
focused, in large part, on controlling the escalation of health care
expenditures. The cost containment measures that health care payors are
instituting and the impact of any health care reform could have a material
adverse effect on the levels of reimbursement the Company's customers receive
from third-party payors and the Company's ability to market and sell its
products and consequently could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Third-Party Reimbursement."
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PRODUCT LIABILITY AND RECALLS; PRODUCT LIABILITY INSURANCE
The marketing and sale of the Company's diagnostic instruments and reagents
entails risk of product liability claims. The Company has product liability
insurance coverage with a per occurrence maximum of $2.0 million and an
aggregate annual maximum of $5.0 million. There can be no assurance that this
level of insurance coverage will be adequate or that insurance coverage will
continue to be available on acceptable terms or at all. A product liability
claim or recall could have a material adverse effect on the Company's business,
reputation, financial condition and results of operations.
ENVIRONMENTAL MATTERS
Certain of the Company's manufacturing processes, primarily processes
involved in manufacturing certain of the Company's reagent products, require the
use of potentially hazardous and carcinogenic chemicals. The Company is required
to comply with applicable federal, state and local laws regarding the use,
storage and disposal of such materials. The Company currently uses third-party
disposal services to remove and dispose of the hazardous materials used in its
processes. The Company could in the future encounter claims from individuals,
governmental authorities or other persons or entities in connection with
exposure to or disposal or handling of such hazardous materials or violations of
environmental laws by the Company or its contractors and could also be required
to incur additional expenditures for hazardous materials management or
environmental compliance. Costs associated with environmental claims, violations
of environmental laws or regulations, hazardous materials management and
compliance with environmental laws could have a material adverse effect on the
business, financial condition and results of operations of the Company. See
"Business -- Government Regulation."
BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS
The Company intends to use $16.2 million of the estimated net proceeds from
the Offering to repay certain indebtedness. The Company anticipates that the
remaining estimated net proceeds of this Offering will be used for working
capital and general corporate purposes. The amounts identified for such uses
under "Use of Proceeds" are estimates and the amounts actually expended for each
such purpose and the timing of such expenditures may vary depending upon
numerous factors. The Company's management will have broad discretion in
determining the amount and timing of expenditures, particularly with respect to
that portion of the net proceeds available for use for working capital and
general corporate purposes. See "Use of Proceeds."
CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER PROVISIONS
After this Offering, the Company's officers, directors and principal
stockholders will beneficially own approximately 59% of the Company's
outstanding Common Stock. These stockholders will be able to elect all members
of the Company's Board of Directors and will have the ability to control
corporate actions requiring stockholder approval. Such concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company. In addition, the Board of Directors has the authority, without
action by the stockholders, to fix the rights and preferences of, and issue
shares of, one or more series of preferred stock, which may have the effect of
delaying or preventing a change in control of the Company, and to issue
additional Common Stock which would be dilutive to existing stockholders. In
addition, provisions in the Company's Certificate of Incorporation and Bylaws
(i) prohibit the stockholders from acting by written consent without a meeting
or calling a special meeting of stockholders, (ii) require advance notice of
business proposed to be brought before an annual or special meeting of
stockholders and (iii) provide for a classified board of directors. The
amendment or modification of these provisions will require the affirmative vote
of the holders of 66 2/3% of the outstanding shares of Common Stock. See
"Principal and Selling Stockholders," "Management" and "Description of Capital
Stock."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Company's
Common Stock. There can be no assurance that an active trading market for the
Common Stock will develop or, if developed, will be
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sustained. The public offering price will be established by negotiations between
the Company and the Representatives of the Underwriters and may bear no
relationship to the price at which the Company's Common Stock trades after the
Offering. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. In addition, the market price of
the Company's Common Stock, similar to the securities of other medical device
and life sciences companies, is likely to be highly volatile. Factors such as
fluctuations in the Company's operating results, announcements of technological
innovations or new products by the Company or its competitors, FDA and other
government regulation, developments with respect to patents or proprietary
rights, public concern as to the safety of products developed by the Company or
others, changes in financial analysts' estimates or recommendations regarding
the Company and general market conditions may have a material adverse effect on
the market price of the Company's Common Stock. The Company's results of
operations may, in future periods, fall below the expectations of public market
analysts and investors and, in such event, the market price of the Company's
Common Stock could be materially adversely affected.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of Common Stock (including shares issued upon the exercise of
outstanding options) in the public market after this Offering could impair the
Company's ability to raise capital through an offering of securities and could
materially adversely affect the market price of the Common Stock. Such sales
also might make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company
deems appropriate or at all. Upon consummation of this Offering, the Company
will have 10,680,998 shares of Common Stock outstanding, of which the 2,050,000
Shares offered hereby will be freely tradable (unless held by affiliates of the
Company) and the remaining 8,630,998 shares will be restricted securities within
the meaning of the Securities Act of 1933, as amended (the "Securities Act").
Approximately 39,703 of such shares will be available for immediate public
resale on the date of this Offering. An additional 2,023 shares of Common Stock
will be saleable at 90 days after the Offering. An additional 8,786 shares of
Common Stock will be saleable between 90 and 180 days after this Offering. The
Company's directors, executive officers and certain stockholders, who in the
aggregate hold 8,618,402 shares of Common Stock of the Company outstanding
immediately prior to the completion of this Offering, have entered into or are
subject to lock-up agreements under which they have agreed not to sell, directly
or indirectly, any shares owned by them for a period of 180 days after the date
of this Prospectus without the prior written consent of Bear, Stearns & Co. Inc.
Holders of outstanding options to purchase Common Stock have entered into or are
subject to similar agreements. Upon expiration of the 180-day lock-up
agreements, approximately 8,534,200 shares of Common Stock (including
approximately 349,201 shares subject to outstanding vested options) will become
eligible for immediate public resale, subject in some cases to vesting
provisions and volume limitations pursuant to Rule 144. The remaining
approximately 319,084 shares held by existing stockholders will become eligible
for public resale at various times over a period of less than two years
following the completion of this Offering, subject in some cases to vesting
provisions and volume limitations. 7,013,259 of the shares outstanding
immediately following the completion of this Offering will be entitled to
registration rights with respect to such shares upon termination of lock-up
agreements. The number of shares sold in the public market could increase if
registration rights are exercised. See "Description of Capital
Stock -- Registration Rights" and "Shares Eligible for Future Sale."
DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of Common Stock. Investors purchasing shares of
Common Stock in this Offering will therefore incur immediate and substantial
dilution. See "Dilution."
ABSENCE OF DIVIDENDS
The Company has not declared or paid any cash dividends since its inception
and does not anticipate paying any dividends in the foreseeable future. In
addition, the Company's bank credit agreement currently prohibits the Company
from paying cash dividends. See "Dividend Policy."
15
<PAGE> 18
THE COMPANY
Ventana was incorporated in California in June 1985 and was reincorporated
in Delaware in December 1993. As used in this Prospectus, the terms "Ventana"
and the "Company" refer to Ventana Medical Systems, Inc. and its subsidiaries,
Ventana Medical Systems, S.A., Ventana Medical Systems GmbH and BioTek
Solutions, Inc. unless the context otherwise requires. The Company's principal
executive offices are located at 3865 North Business Center Drive, Tucson,
Arizona 85705. Its telephone number is (520) 887-2155.
Ventana(TM), the Ventana logo(TM), ES(TM), gen II, TechMate(TM), Liquid
Coverslip(TM) and CheMate(TM) are trademarks of the Company. Trademarks of
others are also referred to in this Prospectus.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares of Common Stock
offered hereby are estimated to be approximately $16.7 million ($18.6 million if
the Underwriters' Over-Allotment Option is exercised in full) after deducting
the estimated underwriting discounts and commissions and expenses of the
Offering.
The Company intends to use $16.2 million of the estimated net proceeds from
the Offering to repay (i) $14.2 million of debt incurred in connection with the
acquisition of BioTek and financing of related working capital requirements (the
"Acquisition Debt") and (ii) a $2.0 million bank term loan (the "Term Loan").
The Acquisition Debt bears interest at 7% per annum and matures in February
1998; however, accrued interest will be forgiven if the principal is repaid
prior to December 31, 1996. The Term Loan bears interest at a rate of 2% over
the bank's prime rate, is secured by a pledge of the Company's assets and
matures in March 1999. The Company anticipates that the estimated remaining net
proceeds of $0.5 million will be used for working capital and general corporate
purposes. Although the Company may use a portion of the net proceeds for the
acquisition of complementary businesses, products or technologies, the Company
currently has no agreements or commitments in this regard. Pending such uses,
the Company intends to invest the net proceeds of the Offering in short-term,
interest-bearing, investment-grade securities.
The Company will not receive any proceeds from the sale of Shares by the
Selling Stockholders.
DIVIDEND POLICY
The Company has not declared or paid any dividends since its inception and
does not intend to pay any dividends in the foreseeable future. In addition, the
Company's bank credit agreement currently prohibits the Company from paying cash
dividends.
16
<PAGE> 19
DILUTION
The net tangible book value of the Company at March 31, 1996 was $(11.2)
million or $(1.38) per share after giving effect to the conversion of the
Preferred Stock into Common Stock and the issuance of 81,530 shares of Common
Stock upon the assumed exercise of outstanding warrants which would otherwise
expire upon the closing of this Offering. The net tangible book value per share
represents the Company's total tangible assets less total liabilities, divided
by the number of shares of Common Stock outstanding (assuming conversion of the
Preferred Stock). Dilution per share represents the difference between the
amount per share paid by investors in this Offering and the net tangible book
value per share after the Offering. After giving effect to (i) the sale of
Shares in this Offering at an initial public offering price of $10.00 per share
and (ii) the issuance of 81,530 shares of Common Stock upon the assumed exercise
of outstanding warrants which would otherwise expire upon the closing of this
Offering, the estimated net proceeds to the Company would be approximately $16.7
million and the net tangible book value of the Company at March 31, 1996 would
be $5.5 million or $0.55 per share. This represents an immediate increase in net
tangible book value of $1.93 per share to existing stockholders and an immediate
dilution in net tangible book value of $9.45 per share to new investors
purchasing Shares at the assumed initial public offering price. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......................... $10.00
Net tangible book value per share before the Offering.................. $(1.38)
Increase per share attributable to new investors....................... 1.93
------
Net tangible book value per share after the Offering..................... 0.55
------
Immediate dilution per share to new investors............................ $ 9.49
======
</TABLE>
The following table summarizes, as of March 31, 1996, the difference
between the existing stockholders and new investors purchasing Shares in this
Offering with respect to the number of Shares of Common Stock purchased, the
total consideration paid and the average price per share paid (at an initial
public offering price of $10.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 8,113,424 81% $31,016,000 62% $ 3.82
New investors...................... 1,890,907 19% 18,909,000 38% 10.00
------- --- ------- ---
Total.................... 10,004,331 100% $49,925,000 100% $ 4.99
======= === ======= ===
</TABLE>
The computations in the above table (i) are determined before deducting the
underwriting discounts and commissions and estimated expenses of the Offering
payable by the Company, (ii) assume no exercise of outstanding stock options or
warrants, other than the issuance of 81,530 shares of Common Stock upon the
assumed exercise of outstanding warrants which would otherwise expire upon the
closing of this Offering and (iii) do not give effect to stock issuance activity
subsequent to March 31, 1996, which consists of 646,664 shares issued upon the
exercise of stock purchase rights and 30,003 shares issued upon the exercise of
options and warrants through May 15, 1996. At May 15, 1996, there were options
outstanding to purchase 840,399 shares of Common Stock at a weighted average
exercise price of $2.48 per share. In addition, warrants to purchase 887,740
shares of Common Stock at an exercise price of $5.82 per share may remain
outstanding upon the completion of this Offering. To the extent outstanding
options and warrants are exercised, there will be further dilution to new
investors. See "Management -- Incentive Stock Plans," "Description of Capital
Stock" and Notes 7 and 10 to the Consolidated Financial Statements.
17
<PAGE> 20
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996, after giving effect to the conversion of the Preferred Stock
into Common Stock upon the closing of the Offering, the restatement of the
Company's Certificate of Incorporation to provide for authorized capital stock
consisting of 50,000,000 shares of Common Stock and 5,000,000 shares of
undesignated preferred stock, and adjusted for the receipt of the estimated net
proceeds from the sale of Common Stock offered hereby and the application
thereof:
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
AS
ACTUAL ADJUSTED(1)
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt(2)..................................................... $ 15,035 $ --
Stockholders' equity:
Preferred Stock: $.001 par value, 5,000,000 shares authorized; none
outstanding...................................................... -- --
Common Stock: $.001 par value, 50,000,000 shares authorized;
8,031,894 shares issued and outstanding and; 10,004,331 shares
issued and outstanding, as adjusted-amount paid in(3)(4)(5)...... 31,016 47,676
Accumulated deficit(6)................................................ (32,436) (32,436)
Cumulative foreign currency translation adjustment.................... (140) (140)
-------- --------
Total stockholders' equity (deficit)(4)(5).......................... (1,560) 15,100
-------- --------
Total capitalization........................................ $ 13,475 $ 15,100
======== ========
</TABLE>
- ---------------
(1) As adjusted shares outstanding includes the issuance of 81,530 shares of
Common Stock upon the assumed exercise of outstanding warrants which would
otherwise expire upon the closing of this Offering. As adjusted shares
outstanding excludes 840,399 shares issuable upon exercise of stock options
outstanding under the Company's 1988 Incentive Stock Option Plan as of May
15, 1996 and warrants to purchase 887,740 shares of Common Stock which may
remain outstanding upon completion of this Offering. As adjusted shares
outstanding does not give effect to stock issuance activity after March 31,
1996, which consists of 646,664 shares issued upon exercise of stock
purchase rights and 30,003 shares issued upon the exercise of options and
warrants through May 15, 1996. See "Management -- Incentive Stock Plans,"
"Description of Capital Stock" and Notes 7 and 10 to the Consolidated
Financial Statements.
(2) As of March 31, 1996, the Company had outstanding borrowings of $1.0 million
under the bank credit agreement. Subsequent to March 31, 1996, the Company
borrowed an additional $1.0 million, all of which was converted into a $2.0
million term loan. The Company also raised $0.5 million through the private
placement of subordinated notes subsequent to March 31, 1996 in connection
with the acquisition of BioTek. The Company intends to repay $16.2 million
of such debt with the proceeds of this Offering. See "Use of Proceeds."
(3) Assumes net proceeds of $16.7 million from this Offering based on an initial
public offering price of $10.00 per share.
(4) See Notes 6 and 7 to the Consolidated Financial Statements.
(5) Actual amounts reflect the assumed conversion of the Preferred Stock but not
the exercise of warrants which would otherwise expire upon the closing of
this Offering.
(6) Gives effect to cancellation of accrued Preferred Stock dividends upon the
assumed conversion of the Preferred Stock into Common Stock.
18
<PAGE> 21
SELECTED CONSOLIDATED ACTUAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The selected consolidated statement of operations data set forth below for
the years ended December 31, 1995, 1994 and 1993, except for the components of
net sales, are derived from the Company's audited Consolidated Financial
Statements included elsewhere in this Prospectus. The selected consolidated
statement of operations data set forth below for the years ended December 31,
1992 and 1991, except for the components of net sales, are derived from audited
financial statements of the Company not included in this Prospectus. The
selected actual consolidated statement of operations data for the three months
ended March 31, 1996 and 1995, the components of net sales for all periods
presented, and the balance sheet data at March 31, 1996 are derived from
unaudited financial statements of the Company, which, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations for the unaudited periods. The selected pro forma
statement of operations data are derived from the Unaudited Pro Forma Condensed
Consolidated Financial Statements included elsewhere in this Prospectus. The
unaudited interim information and pro forma information for the periods
presented are not necessarily indicative of the results which may be realized in
the future. The selected actual and pro forma consolidated financial and
operating data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Prospectus. The Company has not paid any cash dividends since its
inception.
<TABLE>
<CAPTION>
ACTUAL
-------------------------------------------------------------------- PRO FORMA(1)
THREE MONTHS --------------------------
ENDED THREE MONTHS
YEAR ENDED DECEMBER 31, MARCH 31, YEAR ENDED ENDED
----------------------------------------------- ------------------ DECEMBER 31, MARCH 31,
STATEMENT OF OPERATIONS: 1991 1992 1993 1994 1995 1995 1996 1995 1996
------- ------- ------- ------- ------- ------- -------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales:
Instruments.................. $ 50 $ 717 $ 1,162 $ 2,588 $ 4,644 $ 1,007 $ 1,594 $ 8,396 $1,733
Reagents and other........... 28 452 1,519 3,339 5,969 1,195 2,552 11,079 3,495
-------- -------- -------- -------- -------- --------
- - - -- - -
---------
Total net sales............ 78 1,169 2,681 5,927 10,613 2,202 4,146 19,475 5,228
Cost of goods sold............. 49 832 1,722 2,531 4,282 936 1,432 9,096 1,924
-------- -------- -------- -------- -------- --------
- - - -- - -
---------
Gross profit................... 29 337 959 3,396 6,331 1,266 2,714 10,379 3,304
Operating expenses:
Research and development..... 1,352 1,194 2,100 1,926 2,239 556 613 4,407 771
Selling, general and
administrative............. 892 2,465 4,067 6,899 7,435 1,594 2,374 10,968 2,799
Nonrecurring expenses........ -- -- -- -- -- -- 9,983 9,983 --
Amortization of
intangibles................ -- -- -- -- -- -- 46 557 139
-------- -------- -------- -------- -------- --------
- - - -- - -
---------
Loss from operations........... (2,215) (3,322) (5,208) (5,429) (3,343) (884) (10,302) (15,536) (405)
Interest income (expense)...... 23 48 229 59 74 50 (5) 74 (5)
-------- -------- -------- -------- -------- --------
- - - -- - -
---------
Net loss....................... $(2,192) $(3,274) $(4,979) $(5,370) $(3,269) $ (834) $(10,307) $(15,462) $ (410)
========= ========= ========= ========== ========= ========= =========
Per share data(2):
Net loss per share, as
adjusted................... $ (0.38) $ (0.10) $ (1.16) $ (1.52) $(0.04)
========= ========= =========
Shares used in computing net
loss per share, as
adjusted................... 8,664 8,529 8,895 10,167 10,398
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................................... $ 3,436 $ 5,061
Long-term debt...................................................................................... 15,035 --
Working capital..................................................................................... 419 2,044
Total assets........................................................................................ 21,742 23,367
Accumulated deficit(4).............................................................................. (32,436 ) (32,436)
Total stockholders' equity(deficit)(4).............................................................. (1,560 ) 15,100
</TABLE>
- ---------------
(1) Adjusted to reflect the acquisition of BioTek as if it had occurred on
January 1, 1995. BioTek was acquired February 26, 1996.
(2) See Note 1 to Consolidated Financial Statements and Note 8 to the Unaudited
Pro Forma Condensed Consolidated Financial Statements for information
concerning the computation of net loss per share.
(3) Adjusted to give effect to the receipt of the net proceeds from the sale of
the Shares of Common Stock offered by the Company hereby and the application
thereof at the initial public offering price of $10.00 per share. See "Use
of Proceeds," and "Capitalization" and "Dividend Policy."
(4) Gives effect to the cancellation of accrued Preferred Stock dividends upon
the assumed conversion of the Preferred Stock into Common Stock. Actual
amounts reflect the assumed conversion of the Preferred Stock but not the
exercise of warrants which would otherwise expire upon the closing of this
Offering.
19
<PAGE> 22
SELECTED OPERATING DATA:
The following table sets forth the Company's annual pro forma instrument
placements and instrument installed base for the periods indicated as if the
acquisition of BioTek had occurred on January 1, 1992:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------------- -------------
1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
INSTRUMENT PLACEMENTS (UNITS)(1):
Patient priority.................................. 17 56 74 113 28 33
Batch processing.................................. 4 37 106 128 35 12
--
--- --- --- --- ---
Total current placements..................... 21 93 180 241 63 45
== === === === === ===
RPs in current placements......................... 6 19 19 22 8 6
== === === === === ===
INSTRUMENT INSTALLED BASE (UNITS)(1):
Patient priority.................................. 18 74 148 261 176 294
Batch processing.................................. 4 41 147 275 182 287
--
--- --- --- --- ---
Total instrument installed base.............. 22 115 295 536 358 581
== === === === === ===
RPs in installed base............................. 6 25 44 66 52 72
== === === === === ===
</TABLE>
- ---------------
(1) Instrument placements refers to the number of instruments placed by the
Company (either through a direct sale, rental, or RP) during a particular
fiscal period (e.g., a fiscal quarter or year). Instrument installed base
refers to the cumulative number of instruments shipped to customers as of
the end of a particular fiscal period. Instrument installed base includes
batch processing instruments shipped to DAKO and recognized as sales, over
85% of which the Company believes DAKO has placed with end-users.
20
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and historical and pro
forma results of operations of the Company should be read in conjunction with
the Financial Statements and related Notes thereto included elsewhere in this
Prospectus. This Prospectus contains forward-looking statements which involve
risks and uncertainties. The Company's actual results may differ materially from
those anticipated by the forward-looking statements as a result of certain
factors, including those set forth in Risk Factors and elsewhere in this
Prospectus.
OVERVIEW
Ventana develops, manufactures and markets proprietary instrument/reagent
systems that automate IHC and ISH tests for the analysis of cells and tissues on
microscope slides. Each Ventana proprietary system placed typically provides a
recurring revenue stream as customers consume reagents and supplies sold by the
Company with each test conducted. Reagents consist of two components: a primary
antibody and a detection chemistry which is used to visualize the primary
antibody. Therefore, the principal economic drivers for the Company are the
number, type and method of placement of instruments placed and the amount of
reagents and consumables used by the customer. The Company's strategy is to
maximize the number of instruments placed with customers and thereby increase
its ongoing, higher margin reagent revenue stream. The Company expects that
reagents will comprise a greater proportion of total revenues in the future as
its installed base of instruments increases, as new instrument placements
represent a smaller percentage of the Company's existing installed base of
instruments and as RP placements increase as a percentage of total instrument
placements.
In February 1996, Ventana acquired BioTek for aggregate consideration of
$18.8 million, consisting of cash, promissory notes and the assumption of
liabilities. BioTek, founded in 1990, markets and sells automated diagnostic
systems that perform reliable, high volume batch processing of a single IHC test
on multiple patient biopsies. Ventana acquired BioTek for several strategic
reasons including its installed instrument base and complementary product line.
Historically, BioTek generated lower gross and operating margins than Ventana
due to its employment of a different business strategy which primarily involved
the use of third parties for key activities. BioTek's instruments were produced
by third-party manufacturers which prevented BioTek from capturing manufacturing
margin. BioTek's instruments have an open configuration, enabling the customer
to use reagents purchased from BioTek or others which impacted both the price
and volume of reagents purchased by customers from BioTek. In contrast,
Ventana's instruments have a closed configuration requiring the customer to use
Ventana's prepackaged detection chemistries. BioTek also realized lower gross
margins on reagents than Ventana due to its utilization of intermediate
materials in the manufacturing process which resulted in the capture of fewer
value-added steps. BioTek used CMS and DAKO as third-party distributors in the
United States and international markets, respectively, and supported its United
States sales efforts with field sales and technical support personnel. As a
result, BioTek experienced both lower gross margins than if it had sold its
products directly and a higher level of selling expense than typically incurred
in conjunction with third-party distribution arrangements.
Ventana's goal is to integrate the operations of BioTek into the Ventana
business model, in which manufacturing, sales and marketing activities are
performed by Company employees. In May 1996, the Company completed the
integration of the BioTek and Ventana direct field sales and technical
personnel. The Company does not intend to renew the United States distribution
agreement with CMS which expires in April 1998. The Company is engaged in
discussions with DAKO regarding various aspects of the distribution arrangement.
The international distribution agreement with DAKO expires in December 1999. The
Company expects to complete the consolidation of BioTek's reagent manufacturing
into Ventana's Tucson facilities in September 1996. Following this
consolidation, the Company intends to convert BioTek's reagent manufacturing to
the process used by Ventana in which basic raw materials are used and important
value-added steps are performed internally. The Company believes that in the
near term it will be more cost effective to continue sourcing batch processing
instruments from third-party manufacturers. The Company has entered into a
manufacturing agreement with Kollsman for the TechMate 500 instrument and has
entered into a manufac-
21
<PAGE> 24
turing agreement with LJL for production of the Company's next generation batch
processing instrument, the TechMate 250.
From its inception in 1985 through its first commercial sale in late 1991,
Ventana's activities consisted primarily of research and development of its
instrument and reagent systems. During this period, Ventana incurred aggregate
net losses of $5.2 million. During the period from January 1, 1992 through March
31, 1996, the Company incurred additional net losses of $27.2 million including
$10.0 million related to the expensing of in-process research and development
and restructuring costs associated with the acquisition of BioTek, resulting in
cumulative losses of $32.4 million as of March 31, 1996. Similarly, BioTek
incurred over $18.2 million in losses from operations from its inception in
October 1990 until its acquisition by the Company in February 1996. The Company
expects that it will continue to incur losses through at least the first half of
1997 primarily as a result of expenses associated with the integration of
BioTek's operations and expenses associated with the expansion of manufacturing,
sales and marketing activities. There can be no assurance that the Company will
achieve profitability or that profitability, if achieved, will be sustained on
an annual or quarterly basis, or at all.
The Company places instruments through direct sales, including nonrecourse
leases, instrument rentals and the Company's reagent programs ("RPs"). In an RP,
the Company provides the customer with the use of
an instrument with no capital investment which creates an opportunity for the
Company to generate reagent revenue. The terms and conditions of RP instrument
placements can vary from formal agreements specifying minimum volumes and unit
pricing for reagent purchases to short-term, informal arrangements where
customers purchase reagents on a month-to-month basis. For RP placements, the
Company incurs the cost of manufacturing or procuring instruments and recognizes
revenues only as customers purchase reagents rather than at the time of
instrument placement. The manufacturing cost of instruments placed through RPs
is charged to cost of goods sold by depreciating standard costs over a period of
three or four years. As a result, gross profit for instruments placed through
RPs is recognized over a three or four year period rather than at the time of
placement, as is the case in direct sales. Revenue associated with instruments
placed through RPs is based on a volume pricing matrix which is designed to
enable the Company to recover the sales value of the instrument through an
increased price on the reagents purchased by the user. The Company typically
recovers the cash costs associated with the placement of instruments through RPs
in less than two years, although the Company's ability to recover such costs may
be affected by the volume and pricing of reagents purchased by customers. Due to
the working capital requirements associated with RPs, the Company has
historically sought to limit the amount of instruments placed through RPs to
approximately 30% of instrument placements. However, the Company anticipates
that the percentage of instruments placed through RPs, in particular RP
placements without formal reagent purchase commitments, will increase with the
introduction of the NexES and TechMate 250 and as the Company obtains the
additional working capital required to support additional RP placements. This is
likely in the future to result in a decrease in instrument sales both in
absolute dollars and as a percentage of total revenues. Instruments provided to
customers under RPs without formal reagent purchase commitments are only
considered placements if and when certain reagent purchase criteria are met by
the customer. The Company typically only provides an instrument under an RP
without a formal reagent purchase commitment if the Company believes that the
customer performs a minimum number of IHC tests annually. As of March 31, 1996,
the Company had placed 72 instruments through RPs.
The Company's future results of operations may fluctuate significantly from
period to period due to a variety of factors. The initial placement of an
instrument is subject to a longer, less consistent sales cycle than the sale of
reagents which begin and typically are recurring once an instrument is placed.
The Company's operating results in the future are likely to fluctuate
substantially from period to period because instrument sales are likely to
remain an important part of revenues in the near future. The degree of
fluctuation will depend on the timing, level and mix of instruments placed
through direct sales and instruments placed through RPs. In addition, average
daily reagent use by customers may fluctuate from period to period, which may
contribute to future fluctuations in revenues. Sales of instruments may also
fluctuate from period to period because sales to the Company's international
distributors typically provide such distributors with several months of
instrument inventory, which the distributors will subsequently seek to place
with end-users. The Company's instrument installed base includes instruments
shipped to DAKO and recognized as sales, over
22
<PAGE> 25
85% of which the Company believes DAKO has placed with end users. Results of
operations for the remainder of 1996 are also expected to be affected by costs
associated with the integration of BioTek's operations. These include costs
associated with centralizing reagent manufacturing, expanding reagent product
offerings for batch processing instruments and eliminating operational
redundancies. Other factors that may result in fluctuations in operating results
include the timing of new product announcements and the introduction of new
products and new technologies by the Company and its competitors, market
acceptance of the Company's current or new products, developments with respect
to regulatory matters, availability and cost of raw materials purchased from
suppliers, competitive pricing pressures, increased sales and marketing expenses
associated with the implementation of the Company's market expansion strategies
for its instruments and reagent products, and increased research and development
expenditures. Future instrument and reagent sales could also be adversely
affected by the configuration of the Company's patient priority systems, which
require the use of the Company's detection chemistries, particularly if and to
the extent that competitors are successful in developing and introducing new IHC
instruments or if competitors offer reagent supply arrangements having pricing
or other terms more favorable than those offered by the Company. In connection
with future introductions of new products, the Company may be required to incur
charges for inventory obsolescence in connection with unsold inventory of older
generations of products. To date, however, the Company has not incurred material
charges or expenses associated with inventory obsolescence in connection with
new product introductions. In addition, a significant portion of the Company's
expense levels is based on its expectation of a higher level of revenues in the
future and is relatively fixed in nature. Therefore, if revenue levels are below
expectations, operating results in a given period are likely to be adversely
affected.
Total revenues grew from $2.7 million in 1993 to $10.6 million in 1995, a
compound annual growth rate of 98%. Instrument sales grew from $1.2 million in
1993 to $4.6 million in 1995, a compound annual growth rate of 96%. Reagent
sales grew from $1.5 million in 1993 to $6.0 million in 1995, a compound annual
growth rate of 100%. The growth in revenues is primarily attributable to the
growth in (i) instrument placements and (ii) the instrument installed base and
the associated corresponding increase in the aggregate recurring reagent revenue
stream. The Company's installed base of instruments increased from 74 at
December 31, 1993 to 261 at December 31, 1995. Instrument placements have
increased in every year, from 56 in 1993 to 113 in 1995. The Company's installed
base of instruments was significantly enhanced by the BioTek acquisition in the
first quarter of 1996.
Gross margin increased from 36% in 1993 to 60% in 1995 as both instrument
and reagent gross margins increased. Gross margin increased primarily due to a
higher level of revenues available to cover fixed costs, economies of scale and
efficiencies in purchasing and manufacturing activities. Research and
development and selling, general and administrative expenses in the period were
maintained at levels that anticipated a higher level of revenues in the future,
which resulted in operating losses in each year between 1993 and 1995.
23
<PAGE> 26
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996
For the quarter ended June 30, 1996, which was the first full fiscal
quarter following completion of the acquisition of BioTek, the Company had total
net sales of $5.5 million. Sales consisted of instrument sales of $1.7 million
and reagent and other revenues of $3.8 million. Gross profit for the quarter
ended June 30, 1996 was $3.4 million, resulting in an overall gross margin of
62%. Operating expenses for the quarter ended June 30, 1996 were $4.1 million,
which consisted of research and development expenses of $0.8 million, selling,
general and administrative expenses of $3.0 million, nonrecurring expenses
relating to consolidation of BioTek of $0.2 million and amortization expenses of
$0.1 million. The Company's net loss from operations for the quarter ended June
30, 1996 was $0.7 million, which included deductions of nonrecurring charges and
amortization of $0.3 million. At June 30, 1996, the Company had cash and cash
equivalents of $3.2 million, as compared to cash and cash equivalents of $3.4
million at March 31, 1996.
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Ventana acquired BioTek on February 26, 1996. Consequently, approximately
one month of BioTek operations are included in the results of operations for the
three months ended March 31, 1996.
Net Sales
Presented below is a summary of revenue, instrument placements and
instrument installed base for the three months ended March 31, 1996 and 1995.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------
1995
---------------------
$
------ 1996
REVENUE SUMMARY: ---------------------
% OF SALES $ % OF SALES
---------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Instruments............................... $1,007 46% $1,594 38%
Reagents and other........................ 1,195 54% 2,552 62%
------ ---- ------ ----
Total revenue..................... $2,202 100% $4,146 100%
====== ==== ====== ====
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------
INSTRUMENT PLACEMENTS (UNITS): 1995
----
1996
----
<S> <C> <C>
Patient priority................................................... 28 33
Batch processing................................................... -- 7
-- -
---
Total current placements................................. 28 40
=== ===
RPs in current placements.......................................... 8 6
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
------------------
INSTRUMENT INSTALLED BASE (UNITS): 1995 1996
---- -------
<S> <C> <C>
Patient priority................................................... 176 294
Batch processing................................................... -- 287
--- ---
Total instrument installed base.......................... 176 581
=== ===
RPs in installed base.............................................. 52 72
</TABLE>
Net sales for the three months ended March 31, 1996 increased 88% to $4.1
million from $2.2 million in the three months ended March 31, 1995. The increase
in net sales was attributable to a 58% increase in instrument sales and a 114%
increase in reagent sales. Instrument sales increased due to increased
instrument placements and higher selling prices associated with gen II
placements. Reagent sales increased due to sales of reagents to new customers,
as well as to increases in reagent sales to existing customers. United States
patient
24
<PAGE> 27
priority reagent consumption by customers with instruments in place before
October 1, 1994 increased an average of 19% from the first quarter of 1995 to
the first quarter of 1996. Sales in the three months ended March 31, 1996
included $0.6 million in sales of batch processing instruments and related
reagents following the BioTek acquisition on February 26, 1996.
Gross Margin
Gross profit for the three months ended March 31, 1996 increased to $2.7
million from $1.3 million in the three months ended March 31, 1995. Gross margin
for the three months ended March 31, 1996 increased to 65% from 58% in the three
months ended March 31, 1995. Overall gross margins increased primarily due to a
shift in revenue mix toward higher margin reagent products. Gross margins on
instrument sales increased due to increased sales of gen II instruments,
improvements in manufacturing efficiencies and increased absorption of
manufacturing overhead. Gross margins on reagent sales increased due to
economies of scale associated with increased volumes and improvements in
manufacturing efficiencies.
Research and Development
Research and development expense was approximately equal in the three
months ended March 31, 1996 and 1995, but declined to 15% of net sales in the
period ended March 31, 1996 from 25% of net sales in the period ended March 31,
1995. Research and development expense for the three months ended March 31, 1996
related primarily to the development of new reagents and instruments, including
the NexES. Research and development expense for the period ended March 31, 1995
related primarily to gen II instrument development and reagent development.
Selling, General and Administrative ("SG&A")
Presented below is a summary of SG&A expense for the three months ended
March 31, 1996 and 1995.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------
1995 1996
--------------------- ---------------------
$ % OF SALES $ % OF SALES
------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Sales and marketing......................... $1,212 55% $1,796 43%
Administration.............................. 382 17% 578 14%
------ ---------- ------ ----------
Total SG&A........................ $1,594 72% $2,374 57%
====== ======== ====== ========
</TABLE>
SG&A expense in the three months ended March 31, 1996 increased to $2.4
million from $1.6 million in the three months ended March 31, 1995, but declined
to 57% of net sales in the period ended March 31, 1996 from 72% of net sales in
the period ended March 31, 1995. The fluctuation in SG&A expense from period to
period reflects the growth of Ventana's internal sales and marketing
organization to facilitate its market expansion strategy and a corresponding
increase in infrastructure expenses to support a larger business base. The
growth in sales and marketing expense is the result of the Company's decision to
service the market through its own sales and marketing staff and expenses needed
to support sales growth. Increases in administrative expense are associated with
the Company's regulatory strategy and costs associated with supporting an
expanding business base.
In-Process Research and Development Expense
In accordance with Statement of Financial Accounting Standards No. 2
"Accounting for Research and Development Costs" ("FAS 2"), the Company charged
to expense at the date of the acquisition of BioTek, $7.9 million relating to
the portion of the purchase price allocated to those in-process research and
development projects where technological feasibility had not yet been
established and for which there are no alternative future uses.
25
<PAGE> 28
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Net Sales
Presented below is a summary of revenue, instrument placements and
instrument installed base for the three years ended December 31, 1995, 1994 and
1993.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1993 1994 1995
------------------- ------------------- --------------------
$ % OF SALES $ % OF SALES $ % OF SALES
------ ---------- ------ ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUE SUMMARY:
Instruments..................... $1,162 43% $2,588 44% $ 4,644 44%
Reagents and other.............. 1,519 57% 3,339 56% 5,969 56%
------ ---- ------ ---- ----
Total revenue......... $2,681 100% $5,927 100% $10,613 100%
====== ==== ====== ==== ====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
INSTRUMENT PLACEMENTS (UNITS): 1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Current placements...................................................... 56 74 113
RPs in current placements............................................... 19 19 22
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
INSTRUMENT INSTALLED BASE (UNITS): 1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Instrument installed base............................................... 74 148 261
RPs in installed base................................................... 25 44 66
</TABLE>
Net sales for the year ended December 31, 1995 increased by 79% to $10.6
million from $5.9 million for the year ended December 31, 1994. Net sales for
the year ended December 31, 1994 increased by 121% to $5.9 million from $2.7
million for the year ended December 31, 1993. The increases in net sales were
attributable to increases in instrument sales as well as increases in reagent
sales. Instrument sales increased over the prior year by 79% in 1995 and 123% in
1994, respectively. Reagent sales increased over the prior year by 79% in 1995
and 120% in 1994, respectively. Instrument sales increased during these periods
primarily due to increased placements. Instrument sales in 1995 were positively
impacted by the higher selling prices associated with gen II instrument
placements. Instrument sales in 1995 and 1994 were impacted by the placement of
a significant number of instruments through RPs, which resulted in lower
instrument revenues than if the placements had been made on a direct sale basis.
Reagent sales grew primarily because of the growth in the installed base of
instruments, as well as increased sales to existing customers. Despite the
growth in the Company's installed base of instruments from 1993 to 1995, reagent
sales as a percentage of net sales did not increase significantly. This was due
primarily to (i) the high percentage of new instrument placements in each year
relative to the existing installed base of instruments, (ii) the recognition of
revenues on direct instrument sales at the time of sale and (iii) the receipt of
reagent revenue for only that portion of the year during which an instrument was
in place.
Gross Margin
Gross profit for the year ended December 31, 1995 increased to $6.3 million
from $3.4 million in the year ended December 31, 1994 and $1.0 million in the
year ended December 31, 1993. Gross margin increased to 60% in 1995 from 57% in
1994 and 36% in 1993. The improvement in gross margin resulted primarily from a
higher volume of revenues available to cover the Company's fixed costs,
economies of scale and efficiencies in manufacturing operations. Gross margins
on instruments increased in 1994 as compared to 1993 primarily due to reductions
in instrument manufacturing costs. Instrument gross margins in 1995 were
approximately equivalent to 1994. Reagent gross margins decreased in 1994 as
compared to 1993 due primarily to primary antibody promotional programs
initiated during 1994 and partially offset by improvements in manufacturing
efficiencies during 1994. Reagent gross margins in 1995 increased compared to
1994 and exceeded the margins achieved in 1993 because the Company (i)
discontinued its primary antibody promotional programs,
26
<PAGE> 29
(ii) realized lower material prices from higher purchasing volumes and (iii)
achieved improvements in manufacturing efficiencies.
Research and Development
Research and development expense in the year ended December 31, 1995
increased to $2.2 million from $1.9 million in the year ended December 31, 1994
and $2.1 million in the year ended December 31, 1993. Research and development
expense primarily reflects gen II and NexES development and development of
additional primary antibodies.
Selling, General and Administrative
Presented below is a summary of the various components of SG&A expense and
their respective percentages of net sales during the years ended December 31,
1995, 1994 and 1993.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1993 1994 1995
--------------------- --------------------- ---------------------
$ % OF SALES $ % OF SALES $ % OF SALES
------ ---------- ------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Sales and marketing.............. $2,748 103% $4,843 81% $5,674 53%
Administration................... 1,319 49% 2,056 35% 1,761 17%
------ ---------- ------ ---------- ------ -----
Total SG&A............. $4,067 152% $6,899 116% $7,435 70%
====== ======== ====== ======== ====== ========
</TABLE>
SG&A expense in the year ended December 31, 1995 increased to $7.4 million
from $6.9 million in the year ended December 31, 1994 and $4.1 million in the
year ended December 31, 1993. The fluctuation in SG&A expense from period to
period reflects the growth of Ventana's internal sales and marketing
organization to facilitate its market expansion strategy and a corresponding
increase in infrastructure expenses to support a larger business base. The
growth in sales and marketing expense is the result of the decision by the
Company to service the market through its own sales and marketing staff and
costs needed to support sales growth during these periods. The increase in
administrative expense is associated with the Company's regulatory strategy and
costs associated with supporting an expanding business base.
INCOME TAXES
Ventana and BioTek have neither provided for nor paid any federal income
taxes since their respective inceptions because neither company generated
taxable income in any fiscal year. At December 31, 1995, Ventana had net
operating loss carryforwards for federal and state purposes of approximately
$12.0 million. These federal and state carryforwards will begin to expire in
2000 and 1996 respectively, if not previously utilized. The Company also has
research and development tax credit carryforwards of approximately $0.7 million
which will begin to expire in 2005, if not previously utilized. Utilization of
Ventana's net operating loss carryforwards will be subject to limitations due to
the "change in ownership" provisions of the Internal Revenue Code of 1986, as
amended (the "Code") as a result of the Company's prior issuances of equity
securities. These carryforwards, therefore, may expire prior to being fully
utilized. Future financings may cause additional changes in ownership and
further limitations on the use of federal net operating loss carryforwards. Due
to the losses incurred by Ventana since inception, deferred tax assets of
approximately $8.6 million at December 31, 1995, related to these carryforwards,
credits and temporary differences, have been fully reserved in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("FAS 109").
At December 31, 1995, BioTek had net operating loss carryforwards for
federal and state purposes of approximately $10.8 million. These federal and
state carryforwards will begin to expire in 2008, if not previously utilized.
Utilization of BioTek's net operating loss carryforwards will be subject to
limitations due to the change in ownership provisions of the Code as a result of
the acquisition by Ventana. Therefore, these carryforwards may expire prior to
being fully utilized. Due to the losses incurred by BioTek since inception,
27
<PAGE> 30
deferred tax assets of $5.7 million at December 31, 1995, related to these
carryforwards, have been reserved in accordance with FAS 109.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), was issued. FAS 123 is
effective for the Company's 1996 financial statements. The Company intends to
continue to account for employee stock options in accordance with APB Opinion
No. 25 and will include the pro forma disclosures required by FAS 123 beginning
in 1996.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The Company acquired BioTek for $18.8 million on February 26, 1996. The pro
forma results of operations reflect the Company's operations as if it had
acquired BioTek on January 1, 1995 and are adjusted to reflect the sale of
1,890,907 shares of Common Stock by the Company in this Offering and the
application of the net proceeds therefrom. The acquisition has been accounted
for as a purchase. The composition of the consideration paid for BioTek and the
allocation of the purchase price is presented below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
The purchase price for BioTek consisted of:
Cash consideration................................................... $ 2,500
Stock issued to BioTek noteholders................................... 3,007
Exchange Notes issued................................................ 8,978
Note payable -- escrow for contingencies............................. 234
Net historical liabilities assumed................................... 4,044
-----
Total purchase price......................................... $ 18,763
=====
The purchase price was allocated as follows:
Tangible net assets.................................................. $ 2,288
In-process research & development.................................... 7,900
Goodwill and other intangibles....................................... 1,675
Developed technology................................................. 2,800
Customer base........................................................ 4,100
-----
Total purchase price......................................... $ 18,763
=====
</TABLE>
In accordance with FAS 2, the Company charged to expense at the date of the
acquisition $7.9 million relating to the portion of the purchase price allocated
to those in-process research and development projects where technological
feasibility had not yet been established and where there are no alternative
future uses.
Upon the closing of the acquisition, BioTek's revenue recognition policy
was changed to adopt the Company's policy of recording certain sales upon
shipment of instruments and reagents to end-users. The pro forma sales and
related costs of goods sold, are adjusted as if BioTek had followed this policy
beginning January 1, 1995. The combined effect of the change in accounting
policy is an increase in pro forma net sales in 1995. This is primarily due to
(i) shipments of instruments and reagents to CMS in 1994 which were subsequently
placed with end-users in 1995 and (ii) sales being recorded at prices paid by
the end-user as opposed to the net price paid by CMS. Accordingly, cost of goods
sold has been adjusted to reflect the differences in the timing of sales and the
mix of products sold, and selling expense has been increased to reflect the
distribution commission paid to CMS. The commission is equal to the product of
(i) the number of units shipped to end-users and (ii) the difference between the
price paid by the end-user to CMS and the net price paid by CMS.
The pro forma financial results reflect cost savings associated with (i)
consolidation of facilities (allocated to cost of goods sold (50%), research and
development expense (10%), and selling, general, and
28
<PAGE> 31
administrative expense (40%)) and (ii) elimination of certain redundant selling
and administrative positions. The pro forma financial results also reflect
nonrecurring items including $7.9 million of acquired in-process research and
development which was charged to expense (as discussed above) and $2.1 million
of costs associated with the acquisition and integration of BioTek. These
charges were incurred in the first quarter of 1996 and are reflected in the pro
forma financial statements as if such charges had been incurred in the year
ended December 31, 1995.
Comparisons of pro forma results for the first quarter of 1996 to actual
results for the first quarter of 1996 are not meaningful because Ventana's
actual results of operations for the first quarter of 1996 include approximately
one month of BioTek operations.
PRO FORMA RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 AND THREE MONTHS ENDED MARCH 31, 1996
Net Sales
Presented below is a summary of pro forma consolidated revenue, instrument
placements and instrument installed base for the year ended December 31, 1995
and the three months ended March 31, 1996.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
---------------- -----------------
1995 1996
---------------- -----------------
$ % $ %
------- ---- ------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUE SUMMARY:
Instruments............................................. $ 8,396 43% $ 1,733 33%
Reagents and other...................................... 11,079 57% 3,495 67%
------- --- ------ ---
Total revenue......................................... $19,475 100% $ 5,228 100%
======= === ====== ===
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH
DECEMBER 31, 31,
INSTRUMENT PLACEMENTS (UNITS): 1995 1996
------------ ------------
<S> <C> <C>
Patient priority...................................................... 113 33
Batch processing...................................................... 128 12
--- ---
Total current placements......................................... 241 45
=== ===
RPs in current placements............................................. 22 6
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ------------
<S> <C> <C>
INSTRUMENT INSTALLED BASE (UNITS):
Patient priority...................................................... 261 294
Batch processing...................................................... 275 287
--- ---
Total instrument installed base.................................. 536 581
=== ===
RPs in installed base................................................. 66 72
</TABLE>
Pro forma instrument placements and sales during the fourth quarter of 1995
and first quarter of 1996 were adversely affected by BioTek's inability to
procure instruments due to insufficient working capital.
Gross Margin and Operating Expenses
Pro forma gross margin was 63% in the quarter ended March 31, 1996 as
compared to 53% in the year ended December 31, 1995. Pro forma gross margin is
lower than Ventana's stand-alone gross margin because BioTek's margin is
adversely affected by BioTek's (i) use of contract manufacturers and third-party
distributors, (ii) lower value-added reagent manufacturing strategy and (iii)
lower reagent volumes and pricing due to the open configuration of BioTek's
instruments. Pro forma research and development expenditures for 1995 also
reflect BioTek's development of the TechMate 250 instrument and an ISH oven.
29
<PAGE> 32
During the first quarter of 1996, BioTek reduced research and development and
SG&A expenditures due to working capital constraints.
QUARTERLY PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS
The following table contains summary unaudited quarterly pro forma
consolidated statements of operations data for the five quarters ended March 31,
1996. Management has prepared the quarterly pro forma consolidated statements of
operations data on the same basis as the Unaudited Pro Forma Condensed
Consolidated Statements of Operations contained in this Prospectus. The
Company's results of operations have varied and may continue to fluctuate
significantly from quarter to quarter. Results of operations in any period
should not be considered indicative of the results to be expected for any future
period.
SUMMARY UNAUDITED QUARTERLY PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE
1995 MONTHS
------------------------------------- ENDED
FIRST SECOND THIRD FOURTH MARCH 31,
QUARTER QUARTER QUARTER QUARTER 1996
------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales:
Instruments................................... $ 2,040 $ 2,148 $ 2,461 $ 1,747 $ 1,733
Reagents and other............................ 2,378 2,484 2,931 3,286 3,495
------- ------- ------- ------- -------
Total net sales....................... 4,418 4,632 5,392 5,033 5,228
Cost of goods sold.............................. 2,134 2,236 2,438 2,288 1,924
------- ------- ------- ------- -------
Gross profit.................................... 2,284 2,396 2,954 2,745 3,304
Operating expenses:
Research and development...................... 721 1,815 1,002 869 771
Selling, general and administrative........... 2,367 3,130 2,675 2,796 2,799
Nonrecurring expenses......................... 9,983 -- -- -- --
Amortization of intangibles................... 139 139 140 139 139
------- ------- ------- ------- -------
Loss from operations............................ (10,926) (2,688) (863) (1,059) (405)
Interest income (expense)....................... 50 37 25 (38) (5)
------- ------- ------- ------- -------
Net loss........................................ $(10,876) $(2,651) $ (838) $(1,097) $ (410)
------- ------- ------- ------- -------
Pro forma net loss per share.................... $ (1.11) $ (0.27) $ (0.08) $ (0.11) $ (0.04)
======= ======= ======= ======= =======
Pro forma shares used in computing net loss
per share..................................... 9,840 9,962 10,034 10,060 10,398
======= ======= ======= ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have significantly exceeded its net
sales, resulting in an accumulated deficit of $32.4 million at March 31, 1996.
The Company has funded its operations primarily through the private placement of
approximately $31.0 million of equity and debt securities. At March 31, 1996,
the Company's principal source of liquidity consisted of cash and cash
equivalents of $3.4 million and available borrowing capacity under the Company's
bank credit facility.
Net cash flow from operating activities during the three months ended March
31, 1996 and 1995 was approximately $(1.2) million and $(0.4) million,
respectively. Net cash flow from operating activities was approximately $(2.9)
million, $(5.3) million and $(5.1) million for the years ended December 31,
1995, 1994 and 1993, respectively. Net cash flow from operating activities
during these periods primarily reflects the Company's operating losses.
Net cash flow from investing activities was $(2.6) million and $(0.4)
million for the three months ended March 31, 1996 and 1995, respectively. The
Company expended $2.5 million in cash as part of the consideration for the
purchase of BioTek in the three months ended March 31, 1996. Net cash flow from
30
<PAGE> 33
investing activities (excluding sales or purchases of short-term investments)
was approximately $(1.0) million, $(0.6) million and $(1.7) million for the
years ended December 31, 1995, 1994 and 1993. Net cash flow from investing
activities was primarily used for capital expenditures to increase manufacturing
capacity and to upgrade management information systems.
Net cash flow from financing activities was $6.1 million and $2.4 million
for the three months ended March 31, 1996 and 1995, respectively. Net cash flow
from financing activities was $2.6 million, $3.0 million and $5.1 million for
the years ended December 31, 1995, 1994 and 1993, respectively. Net cash flow
from financing activities was primarily the result of private placements of
equity securities.
During the quarter ended March 31, 1996, the Company raised $4.6 million
through the private placement of subordinated notes. An additional $0.5 million
was raised through the private placement of such notes subsequent to March 31,
1996. In connection with the issuance of such subordinated notes, the Company
issued warrants to purchase an aggregate of 887,740 shares of Common Stock of
the Company at an exercise price of $5.82 per share. The proceeds of these notes
were used to fund the cash portion of the BioTek acquisition consideration and
to provide working capital. These notes bear interest at 7% per annum, which
will be forgiven if the notes are repaid prior to December 31, 1996. The
subordinated notes are required to be repaid by the Company within 30 days of
the completion of this Offering.
The Company also has a credit facility with a bank lender which consists of
a term loan facility of $2.0 million and a revolving line of credit of $2.7
million. The term loan and the revolving line of credit bear interest at the
lender's prime rate plus 2.0% per annum and mature in 1999. The revolving line
of credit permits the Company to borrow up to a specified percentage of eligible
accounts receivable. The credit facility is secured by a pledge of substantially
all of the Company's assets and is subject to certain financial covenants,
including certain financial ratios and dividend restrictions. At March 31, 1996,
the Company had borrowed $1.0 million under the revolving credit line which was
subsequently converted to a term loan. Subsequent to March 31, 1996, the Company
borrowed an additional $1.0 million under the term loan facility. The Company
plans to repay the entire $2.0 million balance of the term loan with the net
proceeds of this Offering.
In 1994, the Company arranged, on a non-recourse basis, for third-party
lease financing for instrument purchases by customers. To date, this program has
generated 12 non-recourse leases and has had a small positive net cash flow
impact for the Company.
In connection with the acquisition of BioTek, Ventana issued an aggregate
of $12.2 million in exchange notes (collectively, the "Exchange Notes") to the
holders of outstanding indebtedness of BioTek. The Exchange Notes bear interest
at the rate of 7% per annum which will be forgiven if the Exchange Notes are
repaid prior to December 31, 1996. The Exchange Notes provided each holder with
the opportunity, during a 30-day period, to convert Exchange Notes into shares
of Ventana Common Stock at a conversion price of $13.53 per share. Upon
expiration of the conversion period, an aggregate of $3.0 million in principal
amount of Exchange Notes were converted into 222,973 shares of Common Stock and
an aggregate of $9.2 million of Exchange Notes remained outstanding. These
Exchange Notes are intended to be repaid with the net proceeds of this Offering.
In connection with BioTek's agreement with DAKO, DAKO made two loans
secured by a pledge of substantially all of BioTek's assets. DAKO also made
prepayments on future instrument sales and reagent royalties to BioTek. These
loans and prepayments were used to fund TechMate 250 instrument development and
working capital requirements. The aggregate balance of the secured loans and
prepayments was $1.6 million and $0.9 million, respectively, at March 31, 1996.
Of the secured loans, $0.3 million bear interest at 5% per annum and the
remaining $1.3 million does not bear interest. The prepayments do not bear
interest. The secured loans and prepayments are recorded as advances from
distributor in the Company's Consolidated Financial Statements. The loans are
repaid through discounts on DAKO's purchases of instruments from BioTek. Upon
termination of the distribution agreement or in the event of a default by BioTek
under the distribution agreement, these loans will convert to fixed term loans
that will be due and payable in 12 equal quarterly installments commencing upon
such event. See "Business -- Sales, Marketing and Customer Support."
31
<PAGE> 34
The Company intends to make capital expenditures of approximately $1.8
million during the next 12 months for manufacturing and computer equipment. The
Company anticipates that it will finance these expenditures with its existing
capital resources, borrowings under its credit facility or new capital equipment
financing, which the Company believes could be obtained on acceptable terms if
needed.
The Company believes that the anticipated net proceeds from this Offering
together with its existing capital resources and available borrowing capacity
under the Company's revolving credit line and interest earned thereon, will be
adequate to satisfy its working capital requirements through at least 1997. The
Company's future capital requirements will depend on many factors, including the
extent to which the Company's products gain market acceptance, the mix of
instruments placed through direct sales or RPs, progress of the Company's
product development programs, competing technological and market developments,
expansion of the Company's sales and marketing activities, the cost of
manufacturing scale-up activities, possible acquisitions of complementary
businesses, products or technologies, the extent and duration of operating
losses and timing of regulatory approvals. The Company may be required to raise
additional capital in the future through the issuance of either equity
securities or debt instruments or both. There is no assurance such capital will
be available to the extent required by or on terms acceptable to the Company or
at all.
32
<PAGE> 35
BUSINESS
OVERVIEW
Ventana develops, manufactures and markets proprietary instrument/reagent
systems that automate IHC and ISH tests for the analysis of cells and tissues on
microscope slides. These tests are important tools used in diagnosing and
selecting treatment for cancer. The Company believes that it is the worldwide
leader in the automated IHC testing market, as the Company estimates that its
worldwide installed base of 581 instruments as of March 31, 1996 is
approximately five times as large as the combined installed base of all of the
Company's current competitors. Ventana has placed instruments with 31 of the 40
leading cancer centers according to U. S. News & World Report and 35 of the 42
cancer centers identified as principal cancer research centers by the National
Cancer Institute, including the Mayo Clinic, the Dana Farber Cancer Institute,
The Johns Hopkins University, the M.D. Anderson Cancer Center and the Fred
Hutchinson Cancer Center. Each Ventana proprietary system placed provides a
recurring revenue stream as customers consume reagents and supplies sold by the
Company with each test conducted. Consequently, two key elements of the
Company's strategy are to increase the number of instrument placements and to
maximize the recurring revenue stream per placement through increased sales of
reagents and supplies.
In late 1991, Ventana began commercial shipment of its first system, the
Ventana 320 instrument and related reagents used for automated IHC tests. Since
then, Ventana has developed and introduced the Ventana ES, the successor to the
320, as well as the Ventana gen II, which is capable of performing ISH tests in
addition to IHC tests. These patient priority systems use Ventana's proprietary
horizontal slide processing technology to perform multiple tests rapidly on a
single patient biopsy. In February 1996, Ventana acquired BioTek which
introduced its first automated IHC system, the TechMate 1000, in 1992, and has
also introduced the successor TechMate 500 instrument. BioTek's batch processing
systems use proprietary vertical slide processing technology to reliably and
cost effectively process high volumes of single tests on multiple patient
biopsies. These complementary product lines enable Ventana to serve a broad
range of customers. Smaller hospitals, which generally do not handle a high
volume of cancer patients, typically use patient priority systems to meet their
automated testing needs. Reference and research laboratories which serve
numerous institutions typically use batch processing systems to process large
volumes of tests. Large hospitals with a high volume of patients and a broad
range of test requirements may use both patient priority and batch processing
systems.
Cancer is the second leading cause of death in the United States accounting
for 25% of deaths (approximately 555,000 deaths per year). Currently,
approximately 10 million people in the United States have a history of invasive
cancer, and it is estimated that approximately 1.4 million new cases of invasive
cancer will be diagnosed each year. The vast majority of IHC testing associated
with cancer diagnosis and treatment in the United States is conducted in an
aggregate of approximately 2,200 clinical institutions and reference and
research laboratories which the Company estimates creates the opportunity for
the placement of as many as 2,500 automated IHC testing instruments. The Company
believes that less than 25% of such institutions and laboratories currently
conduct IHC testing on an automated basis. The international market for
automated IHC and ISH testing is estimated by the Company to be approximately
1.2 times the size of the United States market, with Europe accounting for the
majority of the international market potential.
Currently most IHC testing is performed manually which often yields
inconsistency of test results. As compared to manual IHC testing, Ventana's
automated systems provide improved reliability, reproducibility and consistency
of test results. The systems' economic advantages include reduced cost per test,
faster turnaround time, increased test throughput and a reduced dependence on
skilled laboratory technicians. Additional benefits include the ability to
perform new and emerging diagnostic tests, improved visual clarity which aids
the interpretation of test results, and the ability to obtain maximum clinical
information from minimally sized biopsies. The Company believes it will play a
critical, expanding role in cancer science as researchers will use Ventana
systems to accelerate the identification and development of new tests and that
its installed base of instruments will speed the commercialization and clinical
implementation of such new tests.
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The Company anticipates that its reagent test menu will expand due to the major
emphasis of cancer research on the identification of new prognostic IHC and ISH
indicators.
ACQUISITION OF BIOTEK
Ventana acquired BioTek in February 1996 for total consideration of $18.8
million. The acquisition of BioTek enhanced Ventana's competitive position and
enabled the Company to become the worldwide leader in the automated IHC and ISH
testing market. Ventana's installed base of instruments increased from 294
instruments to 581 instruments as of March 31, 1996 as a result of the
acquisition. The increase in the instrument base also increased the aggregate
recurring revenue stream from reagents and supplies sold to customers. The
acquisition also enabled Ventana to add a number of prestigious cancer centers
to its list of customers. BioTek's product line complements Ventana's and
enables the Company to meet the differing needs of customers requiring patient
priority or batch processing systems, or both. The acquisition also creates the
opportunity for operational synergies including the change to higher value-added
and consolidation of reagent manufacturing, the rationalization of sales and
marketing forces and the elimination of redundant regulatory, general and
administration functions and personnel.
Historically, BioTek generated lower gross margins than Ventana due to its
employment of a different business strategy which primarily involved the use of
third parties for key activities. BioTek's instruments were produced by
third-party manufacturers which prevented BioTek from capturing manufacturing
margin. BioTek's instruments have an open configuration, enabling the customer
to use reagents purchased from BioTek or others, which impacted both the price
and volume of reagents purchased by customers from BioTek. In contrast,
Ventana's instruments have a closed configuration requiring the customer to use
Ventana's prepackaged detection chemistries. BioTek also realized lower gross
margins on reagents than Ventana due to its utilization of intermediate
materials in the manufacturing process which resulted in the capture of fewer
value-added steps. BioTek used CMS and DAKO as third-party distributors in the
United States and international markets, respectively, and supported its United
States sales efforts with field sales and technical support personnel. As a
result, BioTek experienced both lower gross margins than if it had sold its
products directly and a higher level of selling expense than typically incurred
in conjunction with third-party distribution arrangements.
Ventana's goal is to integrate the operations of BioTek into the Ventana
business model, in which manufacturing, sales and marketing activities are
performed by Company employees. In May 1996, the Company completed the
integration of the BioTek and Ventana direct field sales and technical
personnel. The Company does not intend to renew the United States distribution
agreement with CMS which expires in April 1998. The Company is engaged in
discussions with DAKO regarding various aspects of the distribution arrangement,
which expires in December 1999. The Company expects to complete the
consolidation of BioTek's reagent manufacturing into Ventana's Tucson facilities
in September 1996. Following this consolidation, the Company intends to convert
BioTek's reagent manufacturing to the process used by Ventana in which basic raw
materials are used and important value-added steps are performed internally. The
Company believes that in the near term it will be more cost effective to
continue sourcing batch processing instruments from third-party manufacturers.
The Company has entered into a manufacturing agreement with Kollsman for the
TechMate 500 instrument and has entered into an agreement with LJL for
production of the Company's next generation batch processing instrument, the
TechMate 250.
INDUSTRY BACKGROUND
IMMUNOHISTOCHEMISTRY
Cancer is the second leading cause of death in the United States accounting
for 25% of deaths (approximately 555,000 deaths per year). Currently,
approximately 10 million people in the United States have a history of invasive
cancer, and it is estimated that approximately 1.4 million new cases will be
diagnosed each year. In the United States, the lifetime risk of developing
invasive cancer is 47% for males and 38% for females. The risk of developing
cancer increases with age. Among the principal forms of cancer are leukemia,
lymphoma and cervical, breast, urinary, lung, prostate, ovarian, colon and
rectal cancer.
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Early detection is the number one factor in increasing the long term
survival of cancer patients. Health care professionals are increasing their
emphasis on and use of screening and early detection programs for cancer because
cancer treatments are generally significantly more effective and less costly the
earlier that cancer is detected. Complementing screening and early detection are
recent advances in less invasive biopsy methods that can obtain tissue samples
from progressively smaller tumors. As a result of these developments, there has
been a steady increase in the initial diagnosis of invasive cancer. However,
smaller tissue samples are often difficult to analyze with traditional
diagnostic tests, increasing the dependence of surgical pathologists on IHC for
accurate diagnosis of early stage cancer.
After preliminary screening of a biopsy to determine the presence of
cancer, IHC is the principal diagnostic test method used for cancer diagnosis
and therapy selection. IHC tests use specific antibodies to identify and detect
antigens (proteins) in cells and tissues which assist pathologists in assessing
various aspects of a patient's cancer. IHC tests, or assays, have two major
components: primary antibodies and detection chemistries. The primary antibody
is the specific antibody used to bind to the antigen in question. Detection
chemistries are composed of multiple reagents including secondary antibodies,
enzyme conjugates/complexes and chromogenic enzyme substrates which allow
visualization of the primary antibody.
IHC tests are performed on cells and tumor tissue to:
- determine the type of cancer
- determine the site of the primary tumor
- determine the degree of malignancy
- determine if the cancer has metastasized
- assist in the selection of the most appropriate therapy
- monitor patient progress
- develop a prognosis
Correct prognosis is essential in selecting the appropriate therapy regimen
and monitoring program for individual cancer patients. IHC assays provide
significant prognostic information such as cell cycle and hormone receptor
status which, in many cases, cannot be obtained from other tests. This
information allows the pathologist to improve risk assessment on an individual
patient basis. IHC testing is therefore instrumental to controlling and reducing
health care costs and improving cancer survival rates because earlier, more
accurate diagnoses and prognoses can lead to earlier, more targeted therapy and
may reduce the risk of use of an incorrect or inappropriate treatment.
Manual IHC assays require skilled technical personnel to perform as many as
60 individual processes and can require several days to complete. For the assay
to be successful, each process must be performed in the proper sequence and for
the proper length of time. In addition, the length of time and the reagents used
for each of the steps varies depending upon the primary antibody used in the
assay. The complexity of manual IHC assays leads to poor reproducibility and
inconsistency of results. Therefore, while IHC has been used routinely in
clinical diagnosis for over 10 years, the requirement of skilled technical
personnel, labor intensity (approximately 40 slides per day per technician) and
lack of standardization has limited the growth of clinical IHC.
The development of new diagnostic systems composed of instruments and
reagents has resulted in the automation of tests in a number of diagnostic
market segments. The trend toward automation of diagnostic testing began in the
1960s with the automation of hematology testing by Coulter Electronics
Corporation and clinical chemistry testing by Technicon Instruments Corporation.
In the 1980s, Abbott Laboratories, Inc. ("Abbott") introduced two instruments
with proprietary prepackaged reagents to automate immunoassay tests performed on
serum or urine. Ventana's systems are fundamental enabling technologies that
overcome major obstacles, including the inherent limitations of manual
processing, which have historically prevented both the broader use and growth of
IHC.
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IN SITU HYBRIDIZATION
ISH tests are advanced tests for infectious disease and cancer diagnosis
and other applications that generate visual signals based on probes used to
detect the presence of specific nucleic acids (DNA/RNA) contained in a cell.
Over the next decade, Ventana believes that ongoing research and development in
the field of molecular analysis will result in the continued introduction of new
IHC and ISH tests.
ISH assays are technically far more challenging and labor intensive than
IHC assays. In addition to requiring a similar number of processes which must be
performed in the proper sequence and for the proper length of time, ISH assays
require multiple wash solutions, or buffers, and the temperature at which each
of the steps must be executed typically ranges from 37(++)C to 98(++)C.
Furthermore, the conditions for each of these processes is dependent upon the
specific probe being used. Due to this extreme degree of technical difficulty,
there are very few clinical laboratories capable of performing manual ISH
assays. Ventana's gen II system represents a fundamental enabling technology for
the rapid, accurate and cost effective identification of unique RNA and DNA
(probe diagnostics) and is designed to overcome the inherent limitations of
manual processing.
VENTANA STRATEGY
The Company's objective is to strengthen its worldwide leadership position
in the automated IHC testing market and to develop and expand the automated ISH
testing market. The following represent key elements of the Company's strategy:
Maximize Instrument Placements. The Company's objective is to strengthen
its competitive position in the automation of IHC testing by establishing a
larger installed base of instruments that current or future market entrants must
overcome. The Company estimates that its worldwide installed base of 581
instruments is approximately five times as large as the combined installed base
of instruments of all of the Company's current competitors. The Company believes
that its placement of instruments in 35 of the 42 cancer centers identified as
principal cancer research centers by the National Cancer Institute provides a
powerful reference tool for potential new customers. To facilitate instrument
placements, the Company offers customers a wide selection of instruments which
address the patient priority needs of hospital clinical laboratories and the
batch processing needs of large hospitals and reference and research
laboratories. In order to satisfy the broad spectrum of customers' operational
and financial criteria, the Company intends to continue to offer several
instrument procurement options, including RPs, and to expand the range and price
points of its instrument offerings. In an RP, the Company provides the customer
with the use of an instrument with no capital investment which creates an
opportunity for the Company to generate reagent revenue. The Company believes it
can accelerate the rate of expansion of its installed base by increasing its
emphasis on the placement of instruments through RPs because the required
capital investment associated with a purchase, a significant sales hurdle, will
be eliminated.
Maximize Revenue Stream Per Placement. Each instrument placed typically
provides the Company with a recurring revenue stream through the sale of
reagents and supplies. The Company seeks to increase this revenue stream by
converting all existing manual tests performed by the customer to full
automation and by selling to the customer all reagents required for such tests.
The Company then seeks to have the customer expand its test menu through the
inclusion of all tests that are offered by Ventana as well as new tests as they
are introduced. To meet these objectives, the Company's systems have been
designed as broad enabling platforms which permit customers to easily expand
their test menu. The Company also has a comprehensive customer education program
which includes on-site technical training in instrument use, user group meetings
and Company-sponsored national teleconferences with leading medical experts who
regularly update customers on diagnostic and testing developments.
Develop New and Enhanced Products. Since 1991, the Company has successfully
introduced and commercialized the Ventana ES, the Ventana gen II and the
TechMate 500, as well as 48 new reagents. The Company intends to introduce lower
priced instruments which it expects it will place through RPs in order to
provide greater financial flexibility for its customers in instrument
procurement. Ventana recently initiated broad-scale commercialization of its gen
II ISH system and has placed 15 systems in leading research sites in
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the United States and Europe. The Company intends to continue to innovate in the
field of automated cellular diagnostics through the development and introduction
of new instruments, software and reagents.
Expand Intellectual Property Position. The Company seeks to expand its
intellectual property position by entering into strategic alliances, acquiring
rights of first refusal on future commercial developments and licensing existing
technologies. The Company evaluates and intends to pursue the licensing of
nucleic acid probe technology for ISH applications from biopharmaceutical
companies, research institutions and others. In conjunction with gen II system
placements, the Company has and continues to enter into agreements with
customers which provide the Company with a right of first refusal to
commercialize new tests developed by such customers for use on the gen II
system. The Company believes customers are willing to enter into these
arrangements because the gen II is an enabling platform that facilitates the
development and commercialization of new ISH tests.
PRODUCTS
The Company offers proprietary systems composed of instrumentation,
reagents and consumable products which are designed to enable clinical and
research laboratories to perform standardized IHC and ISH testing. The
proprietary nature of the Company's systems is based upon the interrelationship
among the electronics and mechanical and software control of the instrument and
the stabilization, composition, packaging and delivery of reagents. The
Company's broad line of products includes patient priority systems targeted to
hospital clinical laboratories and batch processing systems targeted to large
hospital clinical laboratories and reference and research laboratories. The
Company's patient priority systems are "closed" in that customers must purchase
detection chemistries from Ventana in order to operate the instruments. Although
the Company's existing batch processing systems are "open," providing the
customer with the ability to purchase reagents from either the Company or other
sources, users of more than 85% of the Company's United States installed batch
processing systems regularly purchase reagents from the Company. The following
are the principal benefits of automated cellular and tissue analysis using the
Company's integrated systems as compared with manual methods:
- improved reliability, reproducibility and consistency of test results
- reduced cost per test
- faster turnaround time for test results
- increased test throughput for the testing laboratory
- ability to perform new and emerging molecular tests
- reduced dependence on skilled laboratory technicians
- ability to perform special staining applications (batch processing
instruments)
- ability to obtain maximum clinical information from minimally-sized
biopsies
- ability to document processing protocols (patient priority
instruments)
- enhanced cellular differentiation through multiple staining on a
single slide
To confirm the cost advantages of automated analysis using the Company's
instruments as compared to manual methods, the Company completed a cost study
involving 11 representative users of the Company's systems. These users
encompass a cross-section of the Company's customers and include hospitals of
varying sizes and a reference laboratory. The cost data compiled in the study
was based on the users' internal allocations of IHC test costs. The results of
the study indicate that automated IHC analysis using the Company's products
results in cost savings per test of approximately 10% as compared to manual
methods.
INSTRUMENT PRODUCTS
Patient Priority Instruments. Ventana currently offers two patient priority
systems, the Ventana ES and the Ventana gen II. The Ventana patient priority
systems provide a complete automated approach, requiring users to only prepare
specimens and place them on microscope slides. The patient priority systems are
barcode driven and are designed for multiple tests on a single patient biopsy
with rapid turnaround time and walk-away convenience. A barcode label affixed to
each slide positively identifies the slide and the test procedures to be
performed. Up to 40 slides can be processed at one time in the reaction chamber
of the instrument utilizing as
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many as 25 individual reagents, providing the user with significant flexibility.
The instrument scans the barcodes on the slides and the reagent dispensers and
processes each slide with the unique steps necessary to perform each test. The
Company's proprietary software controls all aspects of the test procedures. The
steps of dispensing, incubating (i.e. temperature and time control) and washing
are performed by the instrument using a series of proprietary
chemical/mechanical methods developed by Ventana. These methods are critical to
obtaining precise, sensitive and rapid test results and make the system reliable
and easy to use. Typically, the processing of slides on the instrument requires
less than two hours.
The Ventana gen II uses the same basic architecture as the Ventana ES
instrument and has additional functions enabling it to perform ISH tests. These
functions are (i) an improved heating system which allows for incubation
temperatures of up to 98(++)C, (ii) rapid incubation temperature cycling and
(iii) additional and improved wash stations which permit the use of multiple
buffers and instrument controlled changes in the concentration of buffers.
Ventana's gen II system represents a fundamental enabling technology for the
rapid, accurate and cost effective identification of unique RNA and DNA (probe
diagnostics) and is designed to overcome the inherent limitations of manual
processing.
The Company is currently in the process of developing a new IHC instrument,
the NexES. The NexES, a patient priority system having IHC capabilities similar
to the Ventana ES, will be offered at a lower price per unit than the ES. Unlike
the Ventana ES, the NexES is based upon a modular design and an external
personal computer with a Windows 95 operating environment for software control.
Each module holds up to 20 slides in the reaction chamber and 25 reagents in its
reagent carousel. The modular design of the NexES and external personal computer
will permit the linkage of up to eight NexES modules together, creating the
capacity to process up to 160 slides using up to 200 reagents at one time. The
NexES will therefore offer users a significant degree of flexibility as users
can purchase from one to eight modules depending upon their test volume
requirements. Initial prototypes of the NexES are currently at the in-house
testing stage with beta site testing scheduled for early 1997. Commercial
introduction of the NexES is currently scheduled for 1997.
Batch Processing Instruments. The Company's line of TechMate batch
processing instruments are designed for large volume testing using a single
antibody on multiple patient biopsies and research applications in which long
incubation times and unique detection chemistries are required. The Company's
batch processing instruments employ capillary action to perform IHC tests.
Patient biopsies are placed on capillary gap slides which maintain a space of
predetermined width between adjacent slides when loaded into TechMate systems.
Reagents are loaded into disposable reagent trays and programmable software
directs the instrument to apply the reagents in the proper sequence. The
instrument immerses the bottoms of the slides in the reagents as programmed and
the reagents are drawn up the slide and over the tissue specimen by capillary
action. After each reagent application and incubation, the instrument removes
the reagent from the specimen by placing the slides onto disposable blotting
pads.
The Company's original batch instrument, the TechMate 1000, has a 300 slide
capacity. This large capacity is suited to large reference laboratories which
run a limited number of antibody tests on vast numbers of patient biopsies. The
Company has ceased production of the TechMate 1000. The successor instrument,
the TechMate 500, has a 120 slide capacity, which is applicable to both large
and moderately-sized reference laboratories and large research laboratories. The
Company has completed development of, and through LJL is initiating production
of, the TechMate 250 instrument. The TechMate 250, which has a 40 slide
capacity, is targeted primarily for the European market.
REAGENT AND CONSUMABLE PRODUCTS
Reagent Products
Reagent products are composed of primary antibodies and detection
chemistries, each of which is required for an IHC test. Customers that have
patient priority systems must use Ventana detection chemistries on all tests;
such customers have the option of purchasing primary antibodies from Ventana or
other sources. Customers who have the Company's batch processing systems have
the option of purchasing both antibodies and detection chemistries from Ventana
or other sources. Users of more than 85% of the Company's United States
installed batch processing systems regularly purchase reagents from the Company.
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Primary Antibodies. Ventana sells a line of in excess of 30 primary
antibodies used to detect antigens in combination with detection chemistry kits
on the Company's instruments. Ventana markets all of the antibodies used to
perform the IHC tests that currently account for approximately 85% of total IHC
test volume.
Detection Kits. Detection chemistries typically account for approximately
70% of the total expenditures for reagents required to perform IHC tests using
the Company's instruments. Ventana produces a line of detection chemistries for
use on both patient priority and batch processing systems which provide the user
with standardized reagents, thereby giving the user convenient and rapid
results. The detection chemistries have been developed by the Company using
proprietary formulations which, when combined with the Company's primary
antibodies and other reagents, optimize the results of tests performed on the
Company's instruments. These kits generate the visual signal in an IHC reaction
at the site where a primary antibody is bound to a specific antigen or molecule
in the cell or tissue. The patient priority system utilizes detection kits which
include (i) a DAB Kit which generates a brown color; (ii) an AEC Kit which
generates a deep red color; (iii) an AlkPhos Red Kit which generates a bright
red color; and (iv) an AlkPhos Blue Kit which generates a deep blue color. The
Company currently sells DAB and AlkPhos Red for use with its batch processing
instruments. The detection kits are designed to perform tests on a wide variety
of specimens, so a laboratory can, for example, perform tests on tissue
preserved in paraffin and on frozen tissue simultaneously. The Company's
detection chemistries have been formulated to provide long term stability for
reproducibility and ease of use as well as a high signal to noise ratio for
optimal sensitivity.
Consumable Products
Ventana offers a line of consumable ancillary products that are necessary
for processing slides on the Company's instruments. These include buffers for
optimizing the IHC reaction and counterstains for staining cell nuclei, which
are used with both patient priority and batch processing instruments. The
buffers ensure good morphology, low backgrounds and high signals. The
counterstains provide additional convenience for the customer by eliminating the
need for additional processing of the slides after staining on the instrument.
For use with patient priority instruments, Ventana also supplies a proprietary
liquid coverslip which is used to inhibit evaporation during processing in the
instrument, fixatives for maintaining the morphology of cells or tissues,
enzymes for unmasking antigens, and slide barcodes for use in identifying the
slide and its specific IHC reaction steps. For use with batch processing
instruments, the Company also provides disposable reagent trays which are used
to hold the reagents during IHC reactions, capillary gap slides and wicking pads
used for reagent removal between applications.
MARKETS AND CUSTOMERS
There are approximately 4,200 acute care hospitals and clinics in the
United States. Of these, there are approximately 1,900 hospitals with over 200
beds which perform the vast majority of surgical and other medical procedures
related to cancer diagnosis and treatment. In addition, there are approximately
200 reference and research laboratories and approximately 100 biotechnology and
pharmaceutical companies which also perform substantial numbers of IHC and ISH
tests. The combination of these health care institutions creates a total
instrument site potential of 2,200 locations. Ventana considers this to be its
core market segment for cancer testing and focuses the bulk of its sales and
marketing efforts on these institutions.
The Company estimates there are as many as 2,500 instrument placement
opportunities in the 2,200 potential instrument site locations in the United
States. The international market for instrument placements is estimated by the
Company to be approximately 1.2 times the size of the United States market.
Europe is estimated to account for the majority of the international market
potential, and Japan, the Pacific Rim and Latin American markets constitute the
balance of the international market opportunity.
As of March 31, 1996, the Company had 441 instrument placements in 406 of
the 2,200 potential United States instrument sites. The Company believes that
less than 25% of such United States potential instrument sites currently conduct
IHC testing on an automated basis. The Company believes that its worldwide
installed base of 581 instruments is approximately five times as large as the
combined installed base of instruments of all of the Company's current
competitors.
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Ventana has placed instruments with 31 of the top 40 cancer centers
according to U.S. News & World Report and 35 of the 42 cancer centers identified
as principal cancer research centers by the National Cancer Institute, including
the Mayo Clinic, the Dana Farber Cancer Institute, The Johns Hopkins University,
the M.D. Anderson Cancer Center and the Fred Hutchinson Cancer Center.
The Company intends to introduce lower priced instruments, including the
NexES and the TechMate 250, which it expects to place through RPs in order to
provide greater financial flexibility for its customers in equipment
procurement. The Company believes that lower priced systems and the RP
placements will have particular appeal to those hospitals which are currently
losing reimbursement revenue and incurring increased costs as a result of not
performing IHC tests internally. Additionally, smaller hospitals can benefit
from the Company's RP placements and lower priced instruments due to the absence
of an initial capital expenditure and an increased ability to compete with
larger hospitals by providing IHC testing and consultation on site.
SALES, MARKETING AND CUSTOMER SUPPORT
Ventana markets and sells its instruments and reagents in North America
through a direct sales force and CMS. The Company markets and sells its
instruments and reagents in Europe through a direct sales organization
headquartered in Strasbourg, France, distribution relationships in certain
countries and a distribution arrangement with DAKO, a manufacturer and supplier
of reagents used in manual IHC testing. The distribution arrangements with CMS
in the United States and DAKO in Europe were inherited with the BioTek
acquisition and only relate to batch processing systems. The Company plans to
seek a strategic partner for the Japanese market and is in the early stages of
evaluating distributors for other geographic markets.
Although BioTek used third parties for sales and distribution, BioTek
maintained a small field sales organization in the United States in order to
support the efforts of CMS. Ventana completed the integration of BioTek's field
based personnel in May 1996. Ventana's direct sales force in North America now
consists of 24 direct representatives, 4 regional managers, a national managed
care accounts manager, a national sales manager, 7 field based technical
marketing representatives and 4 field service engineers. Ventana's patient
priority systems are sold through its direct sales force. The sales force is
organized around geographic territories which have been designed to provide each
sales representative with an approximately equal number of sales opportunities.
The Company's sales representatives typically have technical backgrounds or
prior medical capital equipment sales experience. The Company's sales
representatives are incentivized to both increase instrument placements and
maximize recurring reagent sales.
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BioTek entered into its distribution agreement with CMS in January 1993.
Under the agreement, CMS has exclusive United States distribution rights for
TechMate instruments and related reagents. The agreement requires CMS to make
good-faith commercial efforts to purchase certain specified quantities of
instruments and to maintain a sufficient inventory of reagents to meet customer
requests. Under the terms of the agreement, CMS is guaranteed specified gross
profit margins on instruments, subject to BioTek's prior approval of sales below
prices prescribed by the agreement. Repairs, customer service and provision of
spare parts are the responsibility of BioTek. BioTek is obligated to repurchase
at cost all unsalable instruments and any slow-moving reagents. Unless earlier
amended, replaced or terminated, the agreement with CMS expires in April 1998.
United States sales through CMS are subject to several operating
conditions. In particular, it has historically been necessary for BioTek to
support, and the Company anticipates that it will need to continue to support,
the efforts of CMS with direct field sales and support personnel. As a result,
the Company generates lower gross margins on sales through CMS than it would
generate were it to sell directly to end-users and incurs higher selling
expenses than typically associated with third-party distribution arrangements.
As a result of these factors and due to the presence of the Company's direct
sales force in the United States, the Company does not intend to renew the
agreement with CMS upon its expiration in April 1998. The Company has had
discussions regarding possible modifications to or early termination of the
relationship with CMS. However, these discussions are not currently ongoing.
Ventana's sales force in Europe consists of eight sales and support
personnel located in France. This sales force markets and sells Ventana's
patient priority systems direct in France, Germany and the Benelux countries and
markets and sells through distribution relationships in Italy, Spain and
Scandinavia. This sales force is geographically organized and is compensated in
a manner similar to the United States sales force. Ventana expects to
significantly expand its direct sales and marketing activities in Europe in 1996
and 1997.
BioTek entered into its agreement with DAKO in September 1994. DAKO is a
market leader in Europe in supplying reagents for use in manual IHC tests. DAKO
has exclusive rights to distribute TechMate instruments and related accessories
in Europe and several other territories. The agreement also permits DAKO to
supply customers with its own reagents for the instruments in return for paying
BioTek a fixed dollar royalty amount over a five-year royalty term for each
instrument installed at a customer site. As of March 31, 1996, there were 115
instruments included in the royalty base. Under the agreement, DAKO is subject
to certain minimum purchase requirements for instruments.
In connection with BioTek's agreement with DAKO, DAKO made two loans
secured by a pledge of substantially all of BioTek's assets. DAKO also made
prepayments on future instrument sales and reagent royalties to BioTek. These
loans and prepayments were used to fund TechMate 250 instrument development and
working capital requirements. The aggregate balance of the secured loans and
prepayments was $1.6 million and $0.9 million, respectively, at March 31, 1996.
Of the secured loans, $0.3 million bears interest at 5% per annum and the
remaining $1.3 million does not bear interest. The prepayments do not bear
interest. The secured loans and prepayments are recorded as advances from
distributor in the Company's Consolidated Financial Statements. The amounts
payable under these loans are repaid through discounts on DAKO purchases of
instruments from BioTek. Upon termination of the distribution agreement or in
the event of a default by BioTek under the distribution agreement (including a
failure to satisfy development milestones with respect to the TechMate 250
instrument), these loans will convert to fixed term loans that will be due and
payable in 12 equal quarterly installments commencing upon such event.
Since the acquisition of BioTek, Ventana and DAKO have been engaged in
discussions regarding various provisions of the distribution agreement. DAKO has
asserted that BioTek has not fulfilled its obligations with respect to the
development and commercial introduction of the TechMate 250 instrument. The
Company denies this assertion and believes that it is in substantial compliance
with its obligations under these development milestones. In particular, the
Company believes that the recent contract manufacturing agreement with LJL will
enable it to satisfy DAKO's requirements for TechMate 250 instruments.
Nevertheless, the negotiations with DAKO could result in an attempt by DAKO to
exercise contractual remedies available to it under the distribution agreement
and the terms of the secured loans, an interruption in the distribution of the
Company's batch processing instruments outside the United States or litigation
between the parties with respect to the agreement, which would involve
significant costs as well as diversion of
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management time. Any of the foregoing could have a material adverse effect on
the Company's business, financial condition and results of operations. There can
be no assurance that the Company would prevail in any litigation involving the
agreement. DAKO's remedies under the agreement include (i) requiring repayment
of the secured loans in 12 equal quarterly installments commencing upon a
default by BioTek and (ii) an irrevocable license to manufacture TechMate
instruments for resale internationally and a related reduction in the fixed
dollar royalty rate paid by DAKO to BioTek for each instrument included in the
royalty base.
There can be no assurance as to the future course or outcome of the
Company's negotiations with DAKO or as to the Company's future relationship with
DAKO. If DAKO were successful in obtaining a manufacturing license for TechMate
instruments, the Company could experience a loss of instrument revenue which
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, termination of the agreement
with DAKO could materially adversely affect the Company's business, financial
condition and results of operations.
Ventana's sales and marketing strategy for its systems is focused on
increasing its penetration of the hospital and laboratory market through several
instrument placement options. The Company places instruments through direct
sales including nonrecourse leases, instrument rentals and the Company's RPs. In
an RP, the Company provides the customer with the use of an instrument with no
capital investment which creates an opportunity for the Company to generate
reagent revenue. The terms and conditions of RP instrument placements can vary
from formal agreements specifying minimum volumes and unit pricing for reagent
purchases to short-term, informal arrangements where customers purchase reagents
on a month-to-month basis. Due to the working capital requirements associated
with RPs, the Company has historically sought to limit the amount of instruments
placed through RPs to approximately 30% of instrument placements. However, the
Company anticipates that the percentage of instruments placed through RPs, in
particular RP placements without formal reagent purchase commitments, will
increase with the introduction of the NexES and TechMate 250 and as the Company
obtains the additional working capital required to support additional RP
placements, which is likely in the future to result in a decrease in instrument
sales both in absolute dollars and as a percentage of total revenues. As of
March 31, 1996, the Company had placed 72 instruments through RPs.
A key component of the Company's business strategy is to increase the sale
of reagents into its installed instrument base through a high level of customer
support. The Company's technical marketing representatives assist in training
customers in the use of the Company's systems and seek to increase customer
reagent utilization by facilitating the transfer of workload from manual
procedures. Through direct customer contact, the Company's technical marketing
representatives are able to promote sales of reagents and suggest new IHC test
applications to customers. New customers receive initial training on the systems
either in the field or at Ventana's facilities in Tucson, Arizona. The Company's
technical marketing representatives then visit the customer to provide
additional on-site training. Thereafter, Ventana actively supports customers
with periodic product bulletins and provides 24-hour customer telephone support.
Ventana actively markets its products through participation at industry trade
shows, video and audio presentations by leading pathologists and direct mail.
The Company provides emergency field service for instruments during an
initial warranty period of 6 to 12 months. After the warranty period has
expired, field service is provided under service contract or on a billed time
and material basis. As of April 30, 1996 the Company had 85 instruments under
service contracts out of a total of approximately 230 instruments in the United
States that are outside the warranty period. Current annual service contract
prices typically range from $4,250 to $6,500.
MANUFACTURING
The Company manufactures its patient priority instruments at its facilities
in Tucson, Arizona. The Company is currently in the process of expanding its
manufacturing operations in Tucson and believes that this expansion will provide
the Company with sufficient manufacturing capacity to meet its anticipated
requirements for patient priority instruments for approximately the next three
years. Components for patient priority instruments are purchased from a variety
of vendors, subject to stringent quality specifications. The components are
assembled by Ventana's highly skilled manufacturing technicians into finished
products. A
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quality assurance group performs tests at regular intervals in the manufacturing
cycle to verify compliance with the Company's specifications and regulatory
requirements, including FDA GMP requirements.
A number of the components used in the ES and gen II systems are fabricated
on a custom basis to the Company's specifications and are currently obtained
from a limited number of sources. To date, however, the Company has not
experienced any material disruptions in the supply of such components. The
Company believes that additional suppliers, if required, could be obtained and
qualified. To date, the Company has not experienced significant difficulties
with manufacturing yields and has experienced minimal manufacturing waste in the
patient priority instrument manufacturing process.
The Company has relationships with third-party manufacturers for the
manufacture of batch processing instruments. The Company uses Kollsman for the
manufacture of TechMate 500 instruments and LJL for the manufacture of TechMate
250 instruments. The Company has entered into contract manufacturing agreements
with LJL and Kollsman.
Reagents sold for use with the Company's patient priority instruments are
manufactured by Ventana, which purchases basic raw materials and performs
value-added manufacturing processes, such as formulation and packaging, at its
facilities. Certain components and raw materials, primarily antibodies, used in
the manufacturing of the Company's reagent products are currently provided by
single source vendors. To date, the Company has not experienced any material
disruptions in supply from these vendors and has experienced levels of
manufacturing waste in the reagent manufacturing process that it believes to be
below industry averages. Reagents sold for use with the Company's batch
processing instruments have historically been manufactured by third parties,
with only a few final steps in the manufacturing process being performed
internally.
The Company expects to complete the consolidation of batch processing
reagent manufacturing into Ventana's Tucson facilities in September 1996.
Following this consolidation, Ventana intends to convert the manufacturing
process for such reagents to the process used by Ventana in which basic raw
materials are used and important value-added steps are performed internally. The
goals of this transition are to capture margin and value added currently being
lost through payments to third-party manufacturers, increase economies of scale
in both raw material purchasing and manufacturing, standardize procedures and
processes, increase control over scheduling and improve manufacturing
flexibility.
The Company's reagent manufacturing process at its Tucson, Arizona facility
is currently semi-automated. The Company anticipates that as production volumes
increase it will increase the level of automation. The Company currently has
sufficient reagent manufacturing capacity to meet its anticipated needs for
approximately the next three years. The Company's long-term plans are to build a
separate reagent manufacturing facility in the Tucson area to increase its
reagent manufacturing capacity and increase the level of automation of the
manufacturing process. The Company anticipates commencing construction of this
facility in 1998.
The Company's manufacturing operations are required to be conducted in
accordance with FDA GMP requirements. GMP requires the Company to maintain
documentation and process control in a prescribed manner with respect to
manufacturing, testing and quality control. In addition, the Company is subject
to FDA inspections to verify compliance with GMP requirements. The Company also
intends to implement manufacturing policies and procedures which will enable the
Company to receive ISO 9000 certification. ISO 9000 standards are global
standards for manufacturing process control and quality assurance. After
mid-1998, the Company will be required to obtain the CE mark for continued sale
of its products in the countries comprising the European Union. The CE mark is
an international symbol of quality assurance and compliance with applicable
European Union medical device directives.
RESEARCH AND DEVELOPMENT
The Company's research and development projects are generally divided
between reagent development and instrumentation development. Reagent development
emphasizes existing instrumentation, and with the recent acquisition of BioTek,
is divided into consolidation and integration, patient priority, IHC and ISH
projects. Instrument development emphasizes the development of new instruments
and enhancements to existing instruments.
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Reagent Development Projects. Ventana's objective is to consolidate the
reagent manufacturing process for both patient priority and batch processing
systems in order to have common formulations to improve manufacturing
efficiencies. The Company estimates that reagent manufacturing will be
consolidated at Ventana's Tucson facilities in September 1996 and that by 1998
the Company will have fully integrated the reagent formulations and
manufacturing processes for patient priority and batch processing reagents.
Ventana's principal focus in the area of new reagent product development is the
introduction of new prognostic indicators. Ventana closely monitors third-party
development of new primary antibodies with prognostic potential. When such
prognostic markers appear, Ventana will seek to incorporate the marker into its
product line or will use its licensed fusion protein technology to develop
similar markers. Ventana is also developing a second generation estrogen
receptor ("ER") assay for use in breast cancer diagnosis. The assay incorporates
an improved primary antibody clone which significantly increases the assay's
sensitivity. The improved ER assay is currently undergoing beta testing and is
expected to be available for sale labelled for research use only in the fourth
quarter of 1996. The Company also intends to seek appropriate FDA approvals or
clearances for this product. Ventana is also improving its detection chemistry
sensitivity by developing a first generation amplification kit. This
amplification system will be compatible with all four existing patient priority
detection chemistries marketed by the Company as well as the first generation of
ISH detection chemistries currently under development. Through the use of
monoclonal antibodies that recognize each of the molecules used to label nucleic
acid probes in ISH tests, Ventana is developing a line of ISH detection
chemistries for research use. The Company's ISH detection chemistries are
scheduled for beta testing during the third quarter of 1996 with availability
for commercial sale for research use expected in 1997.
Instrumentation Development Projects. In addition to completion of
development of the NexES instrument, Ventana has two major instrument
development projects underway. The first, the COSMIC, is a microscope system
which is aimed at the emerging field of telepathology and information transfer.
This system uses rastering of focused light and conventional optics to provide
high resolution digital images in real time. The images generated by the
microscope are digitized and stored or sent to remote sites. Twelve production
prototypes are currently being manufactured and beta site testing is scheduled
for 1997. Ventana is also developing a barcode label printing system for use
with its patient priority instruments, all of which are barcode driven. To
support its patient priority systems, Ventana currently maintains a stock
inventory of 125 different prepackaged barcodes. The barcode printer will enable
customers to print their own barcode labels from a stock of proprietary blank
barcodes. This will reduce the number of stock inventory barcode labels
maintained by Ventana to one and enable the customer to include pertinent
patient information on each slide for tracking purposes.
At May 31, 1996, Ventana's research and development group consisted of 24
persons, many of whom have graduate degrees. Ventana's research and development
activities are performed primarily in-house by Ventana employees. These efforts
are supplemented by consulting services and assistance from Ventana's scientific
advisors.
In addition to these projects, the Company inherited with the acquisition
of BioTek a development program for an ISH oven designed for use with TechMate
1000 and 500 instruments. This instrument will require substantial additional
development work and will also require the development of detection chemistries
for use with the instrument.
During the years ended December 31, 1995, 1994 and 1993, Ventana spent $2.2
million, $1.9 million and $2.1 million, respectively, on research and
development. Pro forma spending for the year ended December 31, 1995 was $4.4
million.
PATENTS AND PROPRIETARY RIGHTS
Ventana has pursued a strategy of patenting key technology as it relates to
both the automation and the chemistry of analyzing cells and tissues on
microscope slides. Ventana holds 11 United States patents and eight foreign
patents, including two European patents, and has filed additional United States
and foreign patent applications. Three of Ventana's United States patent
applications have been allowed. Several of Ventana's issued United States
patents relate to reagent formulations and methods, including a reagent
formulation characterized by long-term stability and a method of inhibiting
evaporation of reagents during processing. Other issued United States patents
relate to a reagent dispenser, a tissue fixative and various
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aspects of the capillary gap technology and methods and devices for batch
processing of slides. Pending applications relate to mechanical aspects of
automated instruments for performing reactions on slides and processing methods
used in these instruments. In addition, a patent application filed by the
Company covers an evaporation inhibitor liquid that is effective for high
temperature applications. The expiration dates of the Company's issued United
States patents range from September 2005 to November 2013.
There can be no assurance that the Company's patent applications will
result in patents being issued or that any issued patents will provide
protection against competitive technologies or will be held valid if challenged.
Others may independently develop products or processes similar to those of the
Company or design around or otherwise circumvent patents issued to the Company.
Because patent applications in the United States are maintained in secrecy
until patents are issued and since publication of discoveries in scientific
literature tends to lag behind actual discoveries by several months, Ventana
cannot be certain that it was the first creator of inventions covered by its
patents or pending patent applications or that it was the first to file patent
applications for such inventions. Moreover, the Company may have to participate
in interference proceedings declared by the United States Patent and Trademark
Office to determine the priority of inventions, which could result in
substantial cost to the Company. In the event that any relevant claims of
third-party patents are upheld as valid and enforceable, the Company could be
prevented from practicing the subject matter claimed in such patents, or would
be required to obtain licenses from the patent owners of each of such patents or
to redesign its products or processes to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be
available on terms acceptable to the Company or that the Company would be
successful in any attempt to redesign its products or processes to avoid
infringement. If the Company does not obtain necessary licenses, it could be
subject to litigation and encounter delays in product introductions while it
attempts to design around such patents. Alternatively, the development,
manufacture or sale of such products could be prevented. Litigation would result
in significant cost to the Company as well as diversion of management time. The
outcome of any such litigation cannot be predicted with any assurance. Adverse
determinations in any such proceedings could have a material adverse effect on
the Company's business, financial condition and results of operations.
BioTek is a party to litigation initiated by BioGenex relating to past
infringements of patent rights of BioGenex. For a discussion of these
proceedings, see "Legal Proceedings."
Ventana also relies upon trade secret protection for its confidential and
proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information or
techniques, gain access to Ventana's trade secrets or disclose such technology,
or that Ventana can effectively protect its trade secrets. Litigation to protect
Ventana's trade secrets would result in significant cost to the Company as well
as diversion of management time. Adverse determinations in any such proceedings
or unauthorized disclosure of Ventana trade secrets could have a material
adverse effect on Ventana's business, financial condition and results of
operations.
Ventana's policy is to require its employees, consultants and significant
scientific collaborators to execute confidentiality agreements upon the
commencement of an employment or consulting relationship with Ventana. These
agreements generally provide that all confidential information developed or made
known to the individual during the course of the individual's relationship with
Ventana is to be kept confidential and not disclosed to third parties except in
specific circumstances. Agreements with employees provide that all inventions
conceived by the individual in the course of rendering services to Ventana shall
be the exclusive property of Ventana. There can be no assurance, however, that
these agreements will not be breached or that they will provide meaningful
protection or adequate remedies for unauthorized use or disclosure of Ventana's
trade secrets.
COMPETITION
Competition in the diagnostic industry is intense and is expected to
increase. Competition in the diagnostic industry is based on, among other
things, product quality, performance, price and the breadth of a company's
product offerings. Ventana's instrument and reagent systems for IHC tests
compete with products offered by various manufacturers as well as with manual
diagnostic methods. In addition, flow cytometry can be used for cellular testing
and may, in certain markets, be competitive with the Company's products. The
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Company's competitors may succeed in developing products that are more reliable
or effective or less costly than those developed by the Company and may be more
successful than the Company in manufacturing and marketing their products.
Although the Company plans to continue to work to develop new and improved
products, there are other companies engaged in research and development of
diagnostic devices or reagents, and the introduction of such devices or
alternative methods for diagnostic testing could hinder the Company's ability to
compete effectively and could have a material adverse effect on the Company's
business, financial condition and results of operations.
In the instrument market, several companies, including Leica (a division of
Leitz Microscope GmbH), Shandon Scientific Limited (a division of Life Sciences
International PLC), BioGenex and DAKO (U.S.), offer instruments that perform IHC
tests and can be used with any supplier's reagents, which may be attractive to
certain customers. As of March 31, 1996, the Company had an installed base of
581 instruments which the Company estimates is more than five times the combined
installed base of instruments of all of the Company's current competitors. The
Company has included semi-automated instruments manufactured by its competitors
in arriving at its estimates of its market share. In addition, any future growth
in the market for automated IHC instruments may result in additional market
entrants and increased competition, including more aggressive price competition.
Many of the companies selling or developing diagnostic devices and instruments
and many potential entrants in the automated IHC market have financial,
manufacturing, marketing and distribution resources significantly greater than
those of Ventana. In addition, many of these current and potential competitors
have long-term supplier relationships with Ventana's existing and potential
customers. These competitors may be able to leverage existing customer
relationships to enhance their ability to place new IHC instruments. Competition
in the market for automated IHC instruments, including the advent of new market
entrants and increasing price competition, could have a material adverse effect
on the Company's business, financial condition and results of operations.
In the market for reagents, the Company encounters competition from
suppliers of primary antibodies and detection chemistries. The major suppliers
of primary antibodies in the anatomical pathology market in the United States
are DAKO, BioGenex and Coulter Immunology. The principal suppliers of detection
chemistries in the United States are Vector Laboratories, BioGenex and DAKO. The
Company's patient priority instruments require the use of the Company's
detection chemistries but can be used with primary antibodies supplied by third
parties, and the Company's batch processing instruments can be used with both
detection chemistries and primary antibodies supplied by third parties.
Accordingly, the Company encounters significant competition in the sale of
reagents for use on those of its instruments that can be used with reagents
supplied by third parties. Lower prices for reagents used in manual IHC tests
could also limit the growth of automation. Certain of the Company's current and
potential competitors in the reagent market have financial, manufacturing,
marketing and distribution resources greater than those of the Company.
Competition in the market for reagents could also increase as a result of new
market entrants providing more favorable reagent supply arrangements than the
Company, including lower reagent prices. In particular, new entrants in the
instrument market may seek to enhance their competitive position through reduced
reagent pricing or more favorable supply arrangements; the Company's current
instrument customers may find it attractive to purchase primary antibodies for
patient priority instruments and primary antibodies and detection chemistries
for batch processing instruments from such competitors. Increased competition in
the reagent market could have a material adverse effect on the Company's
business, financial condition and results of operations.
GOVERNMENT REGULATION
The manufacturing, marketing and sale of the Company's products are subject
to regulation by governmental authorities in the United States and other
countries. In the United States, clinical diagnostic devices are subject to
rigorous FDA regulation. The Federal Food, Drug and Cosmetic Act governs the
design, testing, manufacture, safety, efficacy, labeling, storage, record
keeping, approval, advertising and promotion of the Company's products.
Obtaining regulatory approval for new products within this regulatory framework
may take a number of years and involves the expenditure of substantial
resources. In addition, there can be no assurance that this regulatory framework
will not change or that additional regulation will not arise, which may affect
approval of or delay an application or require additional expenditures by the
Company.
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The FDA regulates, as medical devices, instruments, diagnostic tests and
reagents that are traditionally manufactured and commercially marketed as
finished test kits or equipment. Some clinical laboratories, however, choose to
purchase individual reagents intended for specific analytes and develop and
prepare their own finished diagnostic tests. Although neither the individual
reagents nor the finished tests prepared from them by the clinical laboratories
have traditionally been regulated by the FDA, the FDA has recently proposed a
rule that, if adopted, would regulate the reagents sold to clinical laboratories
as medical devices. The proposed rule would also restrict sales of these
reagents to clinical laboratories certified under CLIA as high complexity
testing laboratories. The Company intends to market some diagnostic products as
finished test kits or equipment and others as individual reagents; consequently,
some or all of these products will be regulated as medical devices.
The Company's clinical diagnostic systems are regulated by the FDA under a
3-tier classification system -- Class I, II and III. The degree of regulation,
as well as the cost and time required to obtain regulatory approvals, generally
increases from Class I to Class III. Most diagnostic devices are regulated as
Class I or Class II devices, although certain diagnostic tests for particular
diseases may be classified as Class III devices. Prior to entering commercial
distribution, most Class I, II, or III medical devices must undergo FDA review
under one of two basic review schemes depending upon the type of device or
procedure. These review schemes are the 510(k) pre-market notification process
and the PMA process. A 510(k) notification is generally a filing submitted to
demonstrate that the device in question is "substantially equivalent" to another
legally marketed device. Approval under this procedure may be granted within 90
days, but generally takes longer, and in some cases up to a year or more. Class
I and II devices, as well as certain Class III devices for which the FDA has not
called for a PMA, are reviewed under the 510(k) process. For all other Class III
products, the manufacturer must file a PMA to show that the product is safe and
effective based on extensive clinical testing and controlled trials among
several diverse testing sites and population groups. These controlled trials may
be conducted under an Investigational Device Exemption ("IDE") cleared by the
FDA, or they may be conducted without FDA review if exempt from IDE
requirements. The PMA process typically involves significantly more clinical
testing than does the 510(k) procedure and could involve a significantly longer
FDA review period after the date of filing. In responding to a PMA application,
the FDA can either accept it for filing or reject it and require the
manufacturer to include additional information in a resubmitted application. PMA
applications that are accepted for filing may be reviewed by an FDA scientific
advisory panel, which issues either a favorable or unfavorable recommendation
regarding the device. The FDA is not bound by the panel's recommendation, but
tends to give it significant weight. By law, the PMA process is to be completed
within 180 days of acceptance of the PMA application for filing, although this
time period can be, and typically is, extended by the FDA. A PMA application can
take from one to several years to complete, and there can be no assurance that
any submitted PMA application will ultimately be approved. Further, clearance or
approval may place substantial restrictions on to whom and the indications for
which the product may be marketed or to whom it may be marketed. Additionally,
there can be no assurance that the FDA will not request additional data, or
request that the Company conduct further clinical studies.
The Company's instruments, with respect to automated IHC testing functions,
have been categorized by the FDA as automated cell staining devices and have
been exempted from the 510(k) notification process. To date, ISH tests have not
received FDA approval and, therefore, use of the gen II for ISH tests will be
restricted to research applications. New instrument products that the Company
may develop and introduce could require 510(k) notifications and clearances or
PMA applications.
All of the detection chemistries and most of the primary antibody products
being sold by the Company are currently classified as Class II devices. Many of
Ventana's detection chemistries have received 510(k) clearance from the FDA.
Some of the antibodies being marketed by the Company are labeled for diagnostic
use and have received 510(k) clearance from the FDA. The Company may wish to
market certain antibodies with a label indicating that they can be used in the
diagnosis of particular diseases, including cancer. These devices may be
classified as Class III devices and may therefore require a PMA.
After products have been cleared for marketing by the FDA, the Company will
be subject to continuing FDA obligations. Clearances may be withdrawn or
products may be recalled if compliance with regulatory standards is not
maintained or if problems occur after the product reaches the market. The FDA
may require
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surveillance programs to monitor the effect of products which have been
commercialized, and has the power to prevent or limit further marketing of the
product based on the results of these post-marketing programs. The FDA enforces
regulations prohibiting the marketing of products for unapproved uses. Further,
if the Company wanted to make changes on a product after FDA clearance or
approval, including changes in indications or intended use or other significant
modifications to labeling or manufacturing, additional clearances or approvals
would be required. The FDA has broad regulatory and enforcement powers including
the ability to levy fines and civil penalties, suspend or delay issuance of
approvals, seize or recall products, withdraw clearances or approvals, restrict
or enjoin the marketing of products, and impose civil and criminal penalties,
any one or more of which could have a material adverse effect upon the Company.
The Company is subject to FDA GMP regulations. The Company is in the
process of implementing policies and procedures which are intended to allow the
Company to receive ISO 9000 certification. ISO 9000 standards are worldwide
standards for manufacturing process control, documentation and quality
assurance. There can be no assurance that the Company will be successful in
meeting ISO 9000 certification requirements. Under GMP regulations and ISO 9000
standards, the Company is subject to ongoing FDA and international compliance
inspections.
Laboratories using the Company's diagnostic devices for clinical use in the
United States are regulated under CLIA, which is intended to ensure the quality
and reliability of medical testing. Regulations implementing CLIA establish
requirements for laboratories and laboratory personnel in the areas of
administration, participation and proficiency testing, patient test management,
quality control, personnel, quality assurance and inspection. Under these
regulations, the specific requirements that a laboratory must meet depend on the
complexity of the test being performed by the laboratory. Under CLIA
regulations, all laboratories performing moderately complex or highly complex
tests will be required to obtain either a registration certificate or
certificate of accreditation from the Health Care Financing Administration. CLIA
requirements may prevent some clinical laboratories from using certain of the
Company's diagnostic products. Therefore, there can be no assurance that CLIA
regulations and future administrative interpretations of CLIA will not have a
material adverse impact on the Company by limiting the potential market for the
Company's products.
The Company sells products in certain international markets and plans to
enter additional international markets. International sales of medical devices
are subject to foreign government regulation, the requirements of which vary
substantially from country to country. These range from comprehensive device
approval requirements for some or all of the Company's medical device products
to requests for product data or certifications. FDA approval is required for the
export of Class III devices.
In addition to the foregoing, the Company is subject to numerous federal,
state and local laws and regulations relating to such matters as safe working
conditions, laboratory and manufacturing practices, fire hazard control,
disposal of hazardous or potentially hazardous substances and other
environmental matters. To date, compliance with these laws and regulations has
not had a material effect on the Company's financial position, and the Company
has no plans for material capital expenditures relating to such matters. The
Company currently uses third party disposal services to remove and dispose of
the hazardous materials used in its processes. The Company could in the future
encounter claims from individuals, governmental authorities or other persons or
entities in connection with exposure to or disposal or handling of such
hazardous materials or violations of environmental laws by the Company or its
contractors and could also be required to incur additional expenditures for
hazardous materials management or environmental compliance. Costs associated
with environmental claims, violations of environmental laws or regulations,
hazardous materials management and compliance with environmental laws could have
a material adverse effect on the business, financial condition or results of
operations of the Company.
Although the Company believes it will be able to comply with all applicable
regulations regarding the manufacture and sale of diagnostic products, such
regulations are always subject to change and depend heavily upon administrative
interpretations. Delays in or failure to receive clearances or approvals of
products the Company plans to introduce, or changes in the applicable regulatory
climates could have a material adverse effect upon the business, financial
condition or results of operations of the Company.
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THIRD-PARTY REIMBURSEMENT
Third-party payors, such as governmental programs and private insurance
plans, can indirectly affect the pricing or relative attractiveness of the
Company's products by regulating the maximum amount of reimbursement they will
provide to the Company's customers for diagnostic testing services. In recent
years, health care costs have risen substantially, and third-party payors have
come under increasing pressure to reduce such costs. In this regard, legislative
proposals relating to health care reform and cost containment have been
introduced at the state and federal levels. The cost-containment measures that
health care payors are instituting and the impact of any health care reform
could have a material adverse effect on the levels of reimbursement the
Company's customers receive from third-party payors and as a result on the
Company's ability to market and sell its products. Such factors could have a
material adverse effect on the Company's business, financial condition and
results of operations.
FACILITIES
Ventana's research laboratories, instrument and reagent manufacturing
facilities and administrative offices are located in approximately 30,000 square
feet of leased space in Tucson, Arizona. The lease expires in March 2001,
subject to renewal terms. The BioTek research laboratory and reagent
manufacturing facilities are located in a 8,500 square foot facility in Santa
Barbara, California. This lease expires in September 1998; however, these
operations are expected to be consolidated into the Tucson facilities in
September 1996. The Company believes these premises can be subleased for the
remaining term of the lease.
EMPLOYEES
As of May 31, 1996, Ventana employed 128 persons full time. Of these
employees, 58 were engaged in sales and marketing, 24 in research and
development, 31 in manufacturing and 15 in general and administrative functions.
None of Ventana's employees are covered by a collective bargaining agreement.
Ventana considers its relations with its employees to be satisfactory.
BACKLOG
Ventana typically ships orders for instruments and reagents shortly after
receipt, and accordingly does not maintain a significant backlog.
LEGAL PROCEEDINGS
In March 1995, BioGenex sued BioTek in federal court for infringement of
certain patent rights held by BioGenex relating to an antigen retrieval method
used in IHC tests. BioGenex's claims include claims of both direct, indirect and
contributory infringement. BioTek has denied infringement and has asserted
several defenses, including invalidity of the patent that is the subject of the
litigation. In April 1995, BioTek ceased offering the products that were the
subject of the alleged infringements. BioTek's total sales of these products
during the period were approximately $0.6 million. A trial is currently
scheduled for October 1, 1996. The parties have, from time to time, engaged in
settlement negotiations. There can, however, be no assurance that a pre-trial
settlement will be reached. Although there can be no assurance as to the
ultimate resolution of this matter, based on currently available information,
the Company does not believe that the resolution of this matter will have a
material adverse effect on the Company's business, financial condition or
results of operations.
The Company has received notices of various claims from certain current and
former employees of BioTek. To date, no litigation has been instituted by any of
these individuals. However, there can be no assurance that such individuals will
not institute litigation against the Company. Based on its review of these
matters, the Company does not believe that their resolution will have a material
adverse effect on the Company's business, financial condition or results of
operations.
Other than the foregoing litigation, the Company is not a party to any
material pending litigation.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company as of June 30, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------- --- ---------------------------------
<S> <C> <C>
Jack W. Schuler(1)(III) 55 Chairman of the Board of
Directors
R. James Danehy(III) 51 President, Chief Executive
Officer and Director
Stephen A. Tillson, Ph.D. 55 Vice President, Scientific
Affairs and Quality Assurance
R. Michael Rodgers 51 Vice President, Finance, Chief
Financial Officer and Secretary
Carl W. Hull 38 Vice President, Marketing and
Business Development
Michael K. Cusack 39 Vice President, International
Anthony L. Hartman 45 Vice President, Research and
Development
Brian J. McGraw 35 Director of Engineering
David P. Pauluzzi 35 National Sales Manager
Bernard O. C. Questier 42 Vice President, European
Operations
Rex J. Bates(II) 72 Director
Michael R. Danzi(II) 36 Director
Edward M. Giles(1)(II) 60 Director
Thomas M. Grogan, 50 Director
M.D.(III)
John Patience(2)(III) 48 Director
C. Anthony Stellar, 66 Director
M.D.(I)
James M. Strickland(I) 53 Director
James R. Weersing(1)(2)(I) 57 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(I) Class I director
(II) Class II director
(III) Class III director
Mr. Schuler has served as a director of Ventana since April 1991 and as
Chairman of the Board of Directors since November 1995. Mr. Schuler has been
Chairman of the Board of Directors of Stericycle, Inc., a specialized medical
waste management company, since March 1990. Mr. Schuler is also a partner in
Crabtree Partners, a Chicago based venture capital firm. Prior to joining
Stericycle, Mr. Schuler held various executive positions at Abbott from December
1972 through August 1989, serving most recently as President and Chief Operating
Officer. He is currently a director of Medtronic, Inc., Somatogen, Inc. and
Chiron Corporation. Mr. Schuler received a B.S. in Mechanical Engineering from
Tufts University and an M.B.A. from Stanford University.
Mr. Danehy has served as President and Chief Executive Officer and a
director of Ventana since September 1994. From June 1994 to September 1994, Mr.
Danehy served as a consultant to the Company. From November 1993 to June 1994,
Mr. Danehy served as an interim Chief Executive Officer and consultant for
BioStar Diagnostics, where he also served as a director from January 1994 to
March 1995. From 1972 to 1993, Mr. Danehy worked in a variety of capacities for
Abbott. From 1977 through 1989, Mr. Danehy held marketing and general management
responsibilities in Abbott's Diagnostics Division that included Product Manager
for hepatitis products, Marketing Manager for Clinical Chemistry Systems, Group
Marketing
50
<PAGE> 53
Manager for TDx Systems, Director of Marketing for North America and General
Manager for Transfusion Diagnostics which included the AIDS test. Mr. Danehy
received a B.S. in Chemistry from St. Joseph's College and an M.B.A. from Loyola
University of Chicago.
Dr. Tillson has served as Vice President of Scientific Affairs and Quality
Assurance since August 1995. From the time of his joining Ventana in May 1992
until July 1995, Dr. Tillson served as Director of Scientific Affairs and
Quality Assurance. From January 1990 to May 1992, Dr. Tillson served as a
principal of Ticon Company Consulting. He has 25 years experience in the
diagnostic and pharmaceutical industry. Dr. Tillson holds a Ph.D. from Purdue
University and received a B.S. from California State Polytechnic University and
an M.B.A. from St. Mary's College of California.
Mr. Rodgers joined Ventana in February 1994 as Chief Financial Officer and
was appointed Vice President, Finance and Secretary in May 1994. From June 1992
until October 1993, Mr. Rodgers was Vice President and Chief Financial Officer
with BioMedical Waste Systems, Inc., a medical waste management firm. From
December 1988 to December 1991, Mr. Rodgers served as Executive Vice President
of Friedkin Investments, Inc., a merchant banking firm. Mr. Rodgers received a
B.S. in Business and Accounting from Menlo College and an M.B.A. from the
University of Houston. Mr. Rodgers is a Certified Public Accountant.
Mr. Hull joined Ventana in June 1996 as Vice President, Marketing and
Business Development. From 1989 until joining Ventana, Mr. Hull held various
marketing and management positions with several divisions of Abbott. He served
most recently as Vice President and General Manager of Abbott Puerto Rico from
February 1995 to June 1996, and as Marketing Manager at Sequoia-Turner Corp., a
subsidiary of Abbott, from October 1993 to February 1995. From March 1989 to
September 1992, Mr. Hull held various marketing and management positions in
Abbott's Diagnostic Division. Mr. Hull received a B.A. in Political Science and
International Relations from The Johns Hopkins University and an M.B.A. from the
University of Chicago.
Mr. Cusack joined Ventana as Vice President of Marketing in September 1994
and was promoted to Vice President, International in June, 1996. Mr. Cusack has
also served as President Directeur General of Ventana Medical Systems, S.A., a
wholly-owned subsidiary of Ventana, since September 1995. From November 1992
until joining Ventana, Mr. Cusack acted as General Manager, Europe and Mideast
for CYTYC S.A.R.L., a medical diagnostics company with operations in the United
States and abroad. Prior to CYTYC, Mr. Cusack held various marketing and
managerial positions with Abbott's Diagnostics Division. Mr. Cusack received a
B.S. from the University of Delaware and an M.B.A. from Temple University.
Mr. Hartman has served as Vice President of Research and Development since
April 1996. Mr. Hartman joined Ventana in August 1990 as Senior Research and
Development Scientist, and he has also served as Director of Product Development
and Customer Support. Prior to joining Ventana, Mr. Hartman was a Research
Assistant Professor of Pathology at the University of Cincinnati College of
Medicine where he supervised the departmental service laboratory for IHC and
ISH. Mr. Hartman received a B.S. in General Science from the University of
Portland and an M.S. in Biophysics and Genetics from the University of Colorado.
Mr. McGraw joined Ventana in September 1991 and has been the Director of
Engineering since December 1994. Prior to Mr. McGraw's promotion to Director of
Engineering, he was a Senior Engineer. From July 1987 until August 1991, Mr.
McGraw held various management and system design positions in Abbott's
Diagnostics Division. Mr. McGraw received a B.S. in Mechanical Engineering from
West Virginia University.
Mr. Pauluzzi has served as National Sales Manager of Ventana since June
1995. He had previously served in various sales positions since joining Ventana
in March 1993. From January 1985 until joining Ventana, Mr. Pauluzzi worked for
Abbott's Diagnostics Division in a variety of marketing and sales and product
management positions. Mr. Pauluzzi received a B.B.A. in Public Accounting from
Loyola University of Chicago.
Mr. Questier has served as Vice President of European Operations of Ventana
since February 1996. From October 1990 until joining Ventana in October 1995,
Mr. Questier held a number of management positions in
51
<PAGE> 54
E.I. DuPont de Nemours, most recently as Business Manager for New Products in
Europe. Mr. Questier received a degree in Chemical Engineering from the
Technical Institute in Oostende, Belgium.
Mr. Bates has served as a director of Ventana since April of 1996. From
August 1991 to May 1995, Mr. Bates served on the Board of Directors of Twentieth
Century Industries and was a member of its compensation committee. Prior to
Twentieth Century Industries, Mr. Bates served as the Vice-Chairman of the Board
of Directors of the State Farm Mutual Automobile Insurance Company. Mr. Bates
also served as State Farm's Chief Investment Officer. In March of 1991, Mr.
Bates retired from State Farm. Prior to Mr. Bates' employment with State Farm,
he was a partner in the investment firm of Stein, Roe & Farnham in Chicago. Mr.
Bates received a B.S. and an M.S. from the University of Chicago.
Mr. Danzi has served as a director of Ventana since April 1996. Prior to
the acquisition of BioTek, Mr. Danzi served as the President and Chairman of
BioTek and was associated with BioTek as a director and investor since 1993. Mr.
Danzi is the founder and Managing Director of Danzi Capital Group, a securities
firm. Mr. Danzi received a B.S. in Materials Science and Engineering from
Cornell University, is a graduate of the United States Naval Nuclear Power
School graduate level engineering program and received an M.B.A. from Harvard
University.
Mr. Giles has served as director of Ventana since September 1992. Mr. Giles
has served as Chairman and President of The Vertical Group, Inc., a venture
capital investment firm, since January 1989. Mr. Giles was previously President
of F. Eberstadt & Co., Inc., a securities firm, and Vice Chairman of Peter B.
Cannell & Co., Inc., an investment management firm. He is currently a director
of McWhorter Technologies, Inc. Mr. Giles received a B.S.E.E. in Chemical
Engineering from Princeton University and an M.S. in Industrial Management from
the Massachusetts Institute of Technology.
Dr. Grogan is a founder, a director and Chairman Emeritus of Ventana. He
has served as a director since the founding of the Company in June 1985 and as
Chairman of the Board of Ventana from June 1985 to November 1995. He is
currently a professor of pathology at the University of Arizona, College of
Medicine, where he has taught since 1979. He received a B.A. in Biology from the
University of Virginia and an M.D. from George Washington School of Medicine.
Dr. Grogan completed a post-doctorate fellowship at Stanford University.
Mr. Patience has served as a director of Ventana since July 1989. Mr.
Patience was a co-founder and served as a General Partner of Marquette Venture
Partners, a venture capital investment firm, from January 1988 until March 1995.
Since April 1995, Mr. Patience has been a partner in Crabtree Partners, a
Chicago-based venture capital firm. Mr. Patience was previously a partner in the
consulting firm of McKinsey & Co., specializing in health care. He is currently
a director of TRO Learning, Inc. Mr. Patience received a B.A. in Liberal Arts
and an L.L.B. from the University of Sydney, Australia, and an M.B.A. from the
University of Pennsylvania Wharton School of Business.
Dr. Stellar has served as a director of Ventana since April 1996. Since
1964, he has been in private practice as a surgeon in Laguna Hills, California.
Dr. Stellar is certified by the American Board of Surgery and the Board of
Thoracic Surgery and is a Fellow of the American College of Surgeons and the
College of Chest Physicians. Dr. Stellar received a B.S. and an M.D. from
Stanford University.
Mr. Strickland has served as a director of Ventana since December 1987. Mr.
Strickland is a founder and has been the General Partner of Coronado Venture
Management L.P., a venture capital investment firm, since October 1986. Mr.
Strickland was previously Vice President of Burr Brown Corporation, a
semiconductor manufacturer. Mr. Strickland received a B.S. and an M.S. in
Electrical Engineering from the University of New Mexico and an M.S. in
Industrial Administration from the Carnegie Institute of Technology.
Mr. Weersing has served as a director of Ventana since October 1994. Since
1984, Mr. Weersing has been a Managing Director of MBW Venture Partners, a
venture capital investment firm. Mr. Weersing has also served as President of
JRW Technology, Inc., a consulting firm. Mr. Weersing served as a director of
Circadian, Inc., an asthma dosage management company, from December 1993 until
January 1996. Circadian filed a petition under Chapter 7 of the federal
bankruptcy laws in January 1996. Mr. Weersing received an B.S.M.E. and an MBA
from Stanford University.
52
<PAGE> 55
BOARD OF DIRECTORS
The Company's Bylaws authorize and the Company currently has a board of 10
directors. All directors hold office until the next annual meeting of
stockholders or until their successors have been elected. The Company's
certificate of incorporation and Bylaws, however, provide that upon the
effective date of this Offering, the Board of Directors will be divided into
three classes. Each class will consist of three or four directors. The terms of
office of class I, class II and class III directors will expire at the Company's
1997, 1998 and 1999 annual meetings of stockholders, respectively. At each
annual meeting of stockholders at which the term of office of a particular class
of directors first expires, the persons elected to the board positions
represented by such class of directors will be elected to serve from the time of
election until the third annual meeting following election. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes of directors so that, as nearly as possible,
each class will consist of one-third of the directors. This classification of
the Board of Directors may have the effect of delaying or preventing changes in
control or management of the Company. Officers serve at the discretion of the
Board of Directors. There are no family relationships among any of the directors
or executive officers of the Company. The Company does not pay cash compensation
to directors for serving in that capacity, although the Company does reimburse
directors for expenses incurred in attending Board of Directors meetings. The
Board of Directors has, among other committees, a Compensation Committee that
makes recommendations concerning salaries and incentive compensation for
employees of and consultants to the Company and an Audit Committee that reviews
the results and scope of the audit and other services provided by the Company's
independent auditors. From and after the closing date of the acquisition of
BioTek and until the repayment of the principal amount of the Exchange Notes by
Ventana in exchange for notes held by holders of BioTek, Ventana is obligated to
nominate at its annual meetings of stockholders two representatives of BioTek
(the "BioTek Representatives") for election to Ventana's Board of Directors. The
BioTek Representatives who are currently serving on the Board of Directors
pursuant to this right are Michael R. Danzi and C. Anthony Stellar, M.D.
53
<PAGE> 56
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation of the Company's Chief Executive Officer and each of the other four
most highly compensated executive officers calculated on an annual basis (salary
and bonus) for services rendered in all capacities to the Company during the
year ended December 31, 1995 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------
AWARDS
-----------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES ALL OTHER
-------------------- STOCK UNDERLYING ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS($) OPTIONS COMPENSATION($)
- ------------------------------- ------ -------- ------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
R. James Danehy................ 1995 $200,000 -- -- -- --
President and Chief Executive
Officer
Bernard O. C. Questier......... 1995 150,000(1) 0(2) -- 36,956 $63,800(3)
Vice President, European
Operations
David P. Pauluzzi.............. 1995 84,855 48,207(4) -- 23,098 --
National Sales Manager
Michael K. Cusack.............. 1995 100,054 -- -- -- --
Vice President, International
R. Michael Rodgers............. 1995 97,030 -- -- 15,152 --
Vice President, Finance and
Chief Financial Officer and
Secretary
</TABLE>
- ---------------
(1) Mr. Questier joined the Company in October of 1995. During 1995, he was paid
$12,500 per month. His salary is fixed to the French Franc to protect
against currency fluctuations should the United States Dollar depreciate
relative to the French Franc; however, if the United States Dollar
appreciates relative to the French Franc, Mr. Questier's salary shall remain
unchanged.
(2) Although Mr. Questier received no bonus for 1995, he was guaranteed a
one-time nonrecurring $7,500 bonus in 1996 for signing his employment
contract in October of 1995 and meeting certain other conditions.
(3) Consists of relocation expenses of $55,000 associated with Mr. Questier's
move from Germany to France, which have been accrued but not yet fully paid,
and an $8,800 annual automobile allowance.
(4) Consists entirely of commissions earned through employment as the Company's
Northern Regional Sales Manager prior to his promotion to National Sales
Manager in June of 1995.
54
<PAGE> 57
STOCK OPTION INFORMATION
The following table contains information concerning the stock option grants
made to each of the Named Executive Officers for the year ended December 31,
1995.
OPTION GRANTS IN LAST YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------ ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM(4)
OPTIONS EMPLOYEES PRICE EXPIRATION -------------------
NAME GRANTED(1) IN 1995(2) ($/SH)(3) DATE 5%($) 10%($)
- -------------------------- ---------- ---------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
R. James Danehy........... -- -- -- -- -- --
Bernard O. C. Questier.... 36,956 11.39% $0.84 10/4/05 $19,523 $49,476
David P. Pauluzzi......... 23,098 7.12 0.84 4/4/05- 12,202 30,922
6/30/05
Michael K. Cusack......... -- -- -- -- -- --
R. Michael Rodgers........ 15,152 4.67 0.84 4/4/05 8,005 20,286
</TABLE>
- ---------------
(1) Options were granted under the Company's 1988 Stock Option Plan. These
generally vest over four years from the date of grant.
(2) Based on an aggregate of 324,505 options granted by the Company in the year
ended December 31, 1995 under the Company's 1988 Stock Option Plan to all
employees of and consultants to the Company, including the Named Executive
Officers.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the
Company's Board of Directors.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the
10-year option term will be at the assumed 5% and 10% levels or at any other
defined level. Unless the market price of the Common Stock appreciates over
the option term, no value will be realized from the option grants made to
the executive officers.
AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES
The following table sets forth, for each of the Named Executive Officers,
the shares acquired and the value realized on exercises of stock options during
the year ended December 31, 1995 and the year-end number and value of
exercisable and unexercisable options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 1995 AT DECEMBER 31, 1995(1)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
R. James Danehy........ -- -- 4,968 209,419 $ 3,898 $ 164,333
Bernard O.C.
Questier............. -- -- -- 36,956 -- 29,000
David P. Pauluzzi...... 1,899 $1,461 661 25,157 495 19,620
Michael K. Cusack...... -- -- 8,623 20,942 6,767 16,433
R. Michael Rodgers..... 9,239 6,500 4,157 31,320 3,150 23,040
</TABLE>
- ---------------
(1) The value of "in-the-money" stock options represents the positive spread
between the exercise price of stock options, which ranges from $0.60 per
share to $0.95 per share, and the fair market value for the Company's Common
Stock of $1.62 per share as of December 31, 1995, as determined by the
Company's Board of Directors.
55
<PAGE> 58
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Bernard O.C. Questier, its
Vice President of European Operations. The agreement provides for annual
compensation of $150,000, which is fixed to the French Franc to protect against
currency fluctuations should the United States Dollar depreciate relative to the
French Franc; however, if the United States Dollar appreciates relative to the
French Franc, Mr. Questier's salary shall remain unchanged. The agreement also
provides for, in the event of Mr. Questier's termination, continued compensation
through the quarter in which notice of termination is given plus one additional
full quarter. The agreement does not provide for any specified term of
employment. The Company currently has no employment contracts or agreements with
any of the other Named Executive Officers or with any other person.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Jack W.
Schuler, James R. Weersing and Edward M. Giles. The Compensation Committee makes
recommendations to the Board of Directors concerning salaries and incentive
compensation for employees of and consultants to the Company, except that the
Compensation Committee has full power and authority to grant stock options to
the Company's executive officers under the Company's 1996 Stock Option Plan. Mr.
Danehy served as a member of the Compensation Committee until April 1996.
STOCK PLANS
1996 Stock Option Plan. The Company's 1996 Stock Option Plan (the "1996
Stock Plan") was adopted by the Board of Directors in April 1996 and approved by
the Company's stockholders in July 1996. A total of 1,000,000 shares of Common
Stock are reserved for issuance under the 1996 Stock Plan. As of May 15, 1996,
no options to purchase shares of Common Stock have been granted pursuant to the
1996 Stock Plan. In the event of a change in control of the Company, including a
merger of the Company with or into another corporation or the sale of
substantially all of the assets of the Company, then all shares subject to
options granted under the 1996 Stock Plan will become fully vested and
exercisable unless such options are assumed by the successor or acquiring
company. The 1996 Stock Plan will terminate in April 2006, unless earlier
terminated in accordance with the terms of the 1996 Stock Plan.
1996 Director Option Plan. In June 1996, the Company's Board of Directors
adopted, and in July 1996 the Company's stockholders approved, a 1996 Director
Option Plan (the "Director Plan") and reserved a total of 250,000 shares of
Common Stock for issuance thereunder. Commencing with the Company's 1997 annual
meeting of stockholders, each nonemployee director will be granted a
nonstatutory option to purchase an amount of shares of Common Stock of the
Company equal to 5,000 shares multiplied by a fraction, the numerator of which
shall be $15.00 and the denominator of which shall be the fair market value of
one share of the Company's Common Stock on the date of grant. The exercise price
of options granted under the Director Plan will be equal to the fair market
value of one share of the Company's Common Stock on the date of grant. Each
option granted under the Director Plan will vest on a cumulative monthly basis
over a one-year period and will have a 10-year term. In the event of a change in
control of the Company, including a merger of the Company with or into another
corporation or the sale of substantially all of the assets of the Company, then
all shares subject to options granted under the Director Plan will become fully
vested and exercisable unless such options are assumed by the successor or
acquiring company. The Director Plan will terminate in June 2001, unless earlier
terminated in accordance with the terms of the Director Plan.
1988 Stock Option Plan. The Company's 1988 Stock Option Plan (the "1988
Stock Plan") was adopted by the Board of Directors in March 1988 and approved by
the stockholders in February 1989. A total of 1,339,663 shares of Common Stock
are reserved for issuance under the 1988 Stock Plan. As of May 15, 1996, 283,448
shares of Common Stock had been issued upon exercise of stock options, options
to purchase an aggregate of 840,399 shares were outstanding at a weighted
average exercise price of $2.48 per share, and 215,816 shares remained available
for future issuance under the 1988 Stock Plan.
1991 Employee Stock Purchase Plan. The Company's 1991 Employee Stock
Purchase Plan (the "1991 Purchase Plan") was adopted by the Board of Directors
in 1991 and approved by the stockholders in 1991. Shares of Preferred Stock
convertible into an aggregate of 92,391 shares of Common Stock had been
56
<PAGE> 59
authorized for issuance under the 1991 Purchase Plan as of March 31, 1996 of
which 82,403 shares have been issued as of such date. In June 1996, shares of
Preferred Stock convertible into an additional 12,627 shares of Common Stock
were reserved for issuance under the 1991 Purchase Plan to enable the Company to
complete the issuance of shares of Preferred Stock in the purchase period that
ended on June 30, 1996. The 1991 Purchase Plan, which is intended to qualify
under Section 423 of the Code, is administered by the Board of Directors of the
Company or by a committee appointed by the Board of Directors. The 1991 Purchase
Plan terminated on June 30, 1996 at the conclusion of the current purchase
period.
1996 Employee Stock Purchase Plan. The Company's 1996 Employee Stock
Purchase Plan (the "1996 Purchase Plan") was adopted by the Board of Directors
in April 1996 and was approved by the Company's stockholders in July 1996. A
total of 200,000 shares of Common Stock are reserved for issuance under the 1996
Purchase Plan. Under the 1996 Purchase Plan, the Company withholds a specified
percentage of each salary payment to participating employees over certain
offering periods. Any employee who is currently employed for at least 20 hours
per week and more than five months in a calendar year by the Company or any
majority owned subsidiary designated by the Board of Directors from time to
time, and who does not own 5% or more of the total combined voting power or
value of all classes of the capital stock of the Company or of any subsidiary of
the Company, is eligible to participate in the 1996 Purchase Plan. Unless the
Board of Directors determines otherwise, each offering period will run for 24
months and will be divided into four consecutive periods of approximately six
months. The first offering period and first purchase period will commence on or
about the date of this Prospectus. New offering periods will commence every six
months. The price at which stock is purchased under the 1996 Purchase Plan is
equal to 85% of the fair market value of the Common Stock on the first day of
the applicable offering period or the last day of the applicable purchase
period, whichever is lower.
SECTION 401(K) PLAN
In September 1993, the Company adopted a Retirement Savings and Investment
Plan that is intended to qualify under Section 401(k) of the Code (the "401(k)
Plan") covering the Company's full-time employees located in the United States.
Pursuant to the 401(k) Plan, employees may elect to reduce their current
compensation by up to the statutorily prescribed annual limit ($9,500 in 1996)
and have the amount of such reduction contributed to the 401(k) Plan. The 401(k)
Plan permits, but does not require, additional matching contributions to the
401(k) Plan by the Company on behalf of all participants in the 401(k) Plan. To
date, the Company has not made any contributions to the 401(k) Plan.
LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
The Company has adopted provisions in its Restated Certificate of
Incorporation that eliminate the personal liability of its directors for
monetary damages arising from breach of their fiduciary duties in certain
circumstances to the fullest extent permitted by law, and authorize the Company
to indemnify its directors and officers to the fullest extent permitted by law.
Such limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company will indemnify its directors
and officers to the fullest extent permitted by Delaware law, including
circumstances in which indemnification is otherwise discretionary under Delaware
law. The Company has entered into indemnification agreements providing for the
foregoing with its directors and executive officers. The indemnification
agreements may require the Company, among other things, to indemnify such
officers and directors against certain liabilities that may arise by reason of
their status or service as officers or directors (other than liabilities arising
from willful misconduct of a culpable nature) and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company where indemnification is required or
permitted, nor is the Company aware of any threatened litigation or proceeding
that may result in a claim for such indemnification.
57
<PAGE> 60
CERTAIN TRANSACTIONS
Since January 1, 1993, the Company has sold shares of Series D Preferred
Stock convertible into shares of Common Stock in private financings. In
connection with such sales, the Company has also issued warrants to acquire
shares of Series D Preferred Stock at an exercise price of $5.82 which are
convertible into shares of Common Stock. The purchasers of the Series D
Preferred Stock included the following 5% stockholders, directors and entities
affiliated with directors.
<TABLE>
<CAPTION>
SHARES OF
SERIES D
SHARES OF SERIES D PREFERRED STOCK
NAME PREFERRED STOCK(1) UNDERLYING WARRANTS
-------------------------------------------- ------------------ -------------------
<S> <C> <C>
DIRECTORS AND ENTITIES AFFILIATED WITH
DIRECTORS
Entities affiliated with Coronado Venture
Fund
(James M. Strickland)..................... 103,136 860
Edward M. Giles IRA......................... 1,211 61
MBW Venture Partners, L.P. (James R.
Weersing)................................. 90,466 4,524
Jack W. Schuler............................. 12,200 611
Entities affiliated with The Vertical Group
(Edward M. Giles)......................... 10,624 533
Rex J. Bates................................ 5,090 255
OTHER 5% STOCKHOLDERS
State Farm Mutual Automobile Insurance
Company................................... 171,890 8,595
Entities affiliated with Marquette Venture
Partners.................................. 475,123 6,568
</TABLE>
- ---------------
(1) Each share of Preferred Stock will convert into 0.37 shares of Common Stock
upon the closing of this Offering.
In April and May 1996, the Company sold an aggregate of 646,664 shares of
Common Stock to Jack Schuler, the Company's Chairman, John Patience, a director
of the Company, and venture capital funds affiliated with Marquette Venture
Partners ("Marquette"), a principal stockholder of the Company, at a purchase
price of $1.62 per share. Messrs. Schuler and Patience paid the purchase price
for their shares 10% in cash and 90% through a full recourse promissory note
secured by the underlying shares of Common Stock. The promissory notes bear
interest of 6% per annum and are due and payable in full on February 26, 1998.
Marquette paid the purchase price for their shares in cash. These stock
purchases were approved by the Company's Board of Directors in principle in
January 1996 and the specific terms of the stock purchases were approved by the
Board of Directors on February 23, 1996. The purchase price of $1.62 per share
was determined by the Board of Directors of the Company in January 1996 and
equals the fair market value of Company's Common Stock as of such date, as
determined by the board. Messrs. Schuler and Patience were provided with the
opportunity to purchase these shares in connection with (i) their efforts and
assistance in completing the BioTek acquisition and assisting management with
the integration of the companies, (ii) Mr. Schuler's decision to serve as
Chairman of the Board of Directors and (iii) Mr. Schuler's and Mr. Patience's
devotion of a significant portion of their work time to the Company's business.
These shares are subject to a right of repurchase at cost in favor of the
Company, which repurchase right will lapse as the shares become vested. The
shares will become vested as follows: (i) an aggregate of 193,948 shares
(including 97,011 shares purchased by Mr. Schuler, 66,754 shares purchased by
Mr. Patience and 30,183 shares purchased by Marquette) will become vested upon
the completion of this Offering, (ii) 172,463 shares purchased by Mr. Schuler
will vest in 48 equal monthly installments commencing February 26, 1996 provided
that Mr. Schuler continues to serve as Chairman of the Board of Directors, and
(iii) 129,348 shares purchased by Mr. Patience and 150,905 shares purchased by
Mr. Schuler will vest in 24 equal monthly installments provided that such
individuals devote one-half of their work time to the Company's business on a
cumulative basis over such vesting period.
58
<PAGE> 61
In 1994 the Company hired R. James Danehy to serve as President, Chief
Executive Officer and a director of the Company. In connection therewith, the
Company issued Mr. Danehy a stock option (the "Option") covering 295,650 shares
of Common Stock at an exercise price of $0.84 per share. In addition, the
Company provided Mr. Danehy the opportunity to purchase up to $200,000 of Series
D Preferred Stock at $5.82 per share. As an incentive to purchase such shares,
the Company also provided Mr. Danehy the opportunity to purchase approximately
0.37 additional shares of Common Stock at $0.84 per share for each two shares of
Series D Preferred Stock purchased. Mr. Danehy acquired 34,378 shares of Series
D Preferred Stock and 17,189 shares of Common Stock pursuant to this right in
January 1996. In order to facilitate the transfer of shares to Mr. Danehy's
individual retirement account ("IRA"), the Company in November 1995 cancelled
81,263 shares subject to the Option which had vested and allowed Mr. Danehy to
purchase 81,263 shares of Common Stock at a purchase price of $0.84 per share
through his self-directed IRA. In January 1996 the Company granted Mr. Danehy
options to acquire 28,975 shares of Common Stock at $1.62 per share.
In February 1996 the Company acquired BioTek for aggregate consideration of
$18.8 million including the issuance of approximately $12.0 million in Exchange
Notes in exchange for notes held by the holders of BioTek. In addition, $0.2
million in Exchange Notes were held back from the amounts payable at the closing
of the acquisition and placed in escrow to indemnify Ventana from losses
incurred in connection with certain matters related to the acquisition. Until
the Exchange Notes have been repaid, the Company is obligated to nominate at its
annual meeting of stockholders two BioTek Representatives for election to
Ventana's Board of Directors. The BioTek Representatives currently serving on
the Ventana Board are Michael R. Danzi and C. Anthony Stellar, M.D. In
connection with the acquisition, Mr. Danzi and Dr. Stellar exchanged BioTek
notes for Exchange Notes in aggregate principal amounts of $352,496 and
$1,196,511, respectively.
The Exchange Notes provide each holder, during a 30-day period, the
opportunity to convert Exchange Notes into shares of Ventana Common Stock at a
conversion price of $13.53 per share. Holders of Exchange Notes who did not make
an election to convert all or any portion of such holders' Exchange Notes were
deemed to have automatically converted one-half of the principal amount of such
holders' Exchange Notes. No interest was deemed to accrue on the balance of
Exchange Notes which were converted. Upon expiration of the conversion period,
an aggregate of $3.0 million in principal amount of Exchange Notes were
converted into 222,973 shares of Common Stock and an aggregate of $9.2 million
of Exchange Notes remained outstanding.
In connection with the acquisition in February 1996, the Company issued
(the "BioTek Financing") $4.6 million of convertible subordinated debt (the
"Notes") together with warrants to purchase 800,356 shares of Series D Preferred
Stock at an exercise price of $5.82 per share (the "Warrants") to certain
current stockholders of the Company. The proceeds from the issuance of the Notes
were used to fund all of the cash portion of the consideration paid by Ventana
to acquire BioTek plus related working capital requirements. In May 1996, the
Company provided all holders of Preferred Stock who did not participate in the
BioTek Financing the opportunity to purchase identical securities as were issued
in the BioTek Financing and pursuant to the election by such holders, $0.5
million in principal amount of Notes and Warrants to acquire 87,384 shares of
Series D Preferred Stock were issued. The Notes were convertible into Common
Stock at a conversion price of $13.53 per share for a period of 30 days from
issuance. No holders elected to convert their Notes into Common Stock. The
following table sets forth the aggregate principal amount of the Ventana
59
<PAGE> 62
Notes and the number of shares of Series D Preferred Stock to be issued upon
exercise of the Warrants held by executive officers, directors and 5%
stockholders:
<TABLE>
<CAPTION>
SHARES
LOAN UNDERLYING
PRINCIPAL WARRANTS
--------- ----------
<S> <C> <C>
MBW Venture Partners, L.P...................................... $ 938,424 162,059
State Farm Mutual Automobile Insurance Company................. 630,555 108,893
Jack W. Schuler................................................ 688,601 118,917
Entities affiliated with Edward M. Giles....................... 653,944 112,933
John Patience.................................................. 559,884 96,689
Rex J. Bates................................................... 64,698 11,173
James R. Weersing.............................................. 24,884 4,298
James M. Strickland............................................ 5,000 860
Thomas M. Grogan, M.D.(1) ..................................... 2,667 459
</TABLE>
- ---------------
(1) Represents shares beneficially owned by C. Ovens, Inc.
60
<PAGE> 63
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information known to the Company with
respect to the beneficial ownership of its Common Stock as of May 15, 1996
(assuming the exercise of all outstanding warrants and the conversion of all
outstanding shares of Preferred Stock into Common Stock), and as adjusted to
reflect the sale of Common Stock offered by the Company and by each of the
Selling Stockholders hereby, for (i) each Selling Stockholder, (ii) each person
who is known by the Company to own beneficially more than 5% of the Company's
Common Stock, (iii) each of the Company's directors, (iv) each Named Executive
Officer, and (v) all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO NUMBER OF OWNED AFTER THE
OFFERING(1)(2) SHARES OFFERING(3)
-------------------- BEING -------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- ---------------------------------------------- ---------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS, DIRECTORS OR 5%
STOCKHOLDERS
Entities affiliated with Marquette Venture
Partners(4)
520 Lake Cook Rd., Suite 450
Deerfield, IL 60015......................... 1,918,650 21.8% -- 1,918,650 18.0%
MBW Venture Partners, L.P.(5)
James R. Weersing
365 South Street
Morristown, NJ 07960........................ 1,442,351 16.1 -- 1,442,351 13.3%
State Farm Mutual Automobile Insurance
Company(6)
One State Farm Plaza
Bloomington, IL 61701....................... 887,173 10.0 -- 887,173 8.2%
Jack W. Schuler(7)
1419 Lake Cook Road, Suite 415
Deerfield, IL 60015......................... 965,963 10.8 -- 965,963 8.9%
R. James Danehy(8)............................ 209,890 2.4 -- 209,890 2.0%
R. Michael Rodgers(9)......................... 22,291 * -- 22,291 *
Michael K. Cusack(10)......................... 14,053 * -- 14,053 *
David P. Pauluzzi(11)......................... 10,927 * -- 10,927 *
Bernard O.C. Questier......................... 0 * -- 0 *
Rex J. Bates(12).............................. 31,301 * -- 31,301 *
Michael R. Danzi(13).......................... 9,566 * -- 9,566 *
Edward M. Giles(14)........................... 291,548 3.3 -- 291,548 2.7%
Thomas M. Grogan, M.D.(15).................... 169,820 1.9 -- 169,820 1.6%
John Patience(16)............................. 292,789 3.3 -- 292,789 2.7%
C. Anthony Stellar, M.D.(17).................. 19,959 * -- 19,959 *
James M. Strickland(7)(18).................... 402,547 4.6 -- 402,547 3.8%
James R. Weersing(5)(19)...................... 1,452,858 16.2 -- 1,452,858 13.4%
All directors and executive officers as
a group (17 persons)........................ 3,944,545 41.7 -- 3,944,545 34.8%
</TABLE>
61
<PAGE> 64
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO NUMBER OF OWNED AFTER THE
OFFERING(1)(2) SHARES OFFERING(3)
-------------------- BEING -------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- ---------------------------------------------- ---------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
OTHER SELLING STOCKHOLDERS
The CIT Group/Venture Capital, Inc.(20)....... 438,320 4.9% -- 438,320 4.1%
Victoria Bannister(21)........................ 286,863 3.3 10,881 275,982 2.6%
W. Ross Humphreys(22)......................... 148,218 1.7 73,558 74,660 *
J. David Lowell(23)........................... 64,191 * 28,428 35,763 *
David Nunnery................................. 46,993 * 943 46,050 *
Jan Karel Smeets.............................. 31,271 * 15,635 15,636 *
Douglas F. Sweet.............................. 30,465 * 725 29,740 *
Thomas B. Healey.............................. 20,882 * 10,441 10,441 *
Dorothy L. O'Neal Revocable Trust(24)......... 19,903 * 8,814 11,089 *
Wm. Kent Wonders(25).......................... 12,839 * 1,895 10,944 *
Jessica Youle(26)............................. 9,630 * 4,264 5,366 *
Mary Cawley................................... 6,653 * 2,956 3,697 *
Entities affiliated with the Thomas H. and
Rosemary S. Tisch Trust..................... 2,349 * 553 1,796 *
</TABLE>
- ---------------
* Less than 1%.
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.
(2) Applicable percentage of ownership is based on 8,790,091 shares of Common
Stock outstanding as of May 15, 1996 together with shares issuable pursuant
to applicable options and warrants of such stockholder which may be
exercised within 60 days after May 15, 1996. Shares of Common Stock subject
to options and warrants currently exercisable or exercisable within 60 days
after May 15, 1996 are deemed outstanding for computing the percentage
ownership of the person holding such options and warrants, but are not
deemed outstanding for computing the percentage of any other person.
Assumes the issuance of 81,530 shares of Common Stock upon the assumed
exercise of outstanding warrants which would otherwise expire upon the
closing of this Offering.
(3) Assumes no exercise of the Underwriters' Over-Allotment Option. See
"Underwriting." Applicable percentage ownership is based upon 10,680,998
shares of Common Stock outstanding as of May 15, 1996 together with shares
issuable pursuant to applicable options and warrants for each stockholder
currently exercisable or exercisable within 60 days after May 15, 1996.
(4) Includes 1,464,153 shares beneficially owned by Marquette Venture Partners,
L.P.; 441,871 shares beneficially owned by Marquette Venture Partners II,
L.P.; and 12,626 shares beneficially owned by MVP II Affiliate Fund, L.P.
(5) Includes 162,059 shares issuable upon the exercise of warrants held by MBW
Venture Partners, L.P. Mr. Weersing, a director of the Company, is Managing
Director of MBW Venture Partners Limited. Mr. Weersing disclaims beneficial
ownership of the shares beneficially owned by MBW Venture Partners, L.P.
except to the extent of his proportional partnership interest therein.
(6) Includes 108,893 shares issuable upon the exercise of warrants held by
State Farm Mutual Automobile Insurance Company.
(7) Includes 118,917 shares issuable upon the exercise of warrants held by Mr.
Schuler; 73,512 shares beneficially owned by Mr. Schuler, as custodian for
Tanya Eva Schuler; 73,513 shares beneficially owned by Mr. Schuler, as
custodian for Tess Heidi Schuler; and 73,512 shares beneficially owned by
Mr. Schuler, as custodian for Tino Hans Schuler.
(8) Includes 77,059 shares issuable upon the exercise of options exercisable
within 60 days of May 15, 1996 held by Mr. Danehy.
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<PAGE> 65
(9) Includes 13,050 shares issuable upon the exercise of options exercisable
within 60 days of May 15, 1996 held by Mr. Rodgers.
(10) Includes 12,935 shares issuable upon the exercise of options exercisable
within 60 days of May 15, 1996 held by Mr. Cusack.
(11) Includes 8,056 shares issuable upon the exercise of options exercisable
within 60 days of May 15, 1996 held by Mr. Pauluzzi.
(12) Includes 11,173 shares issuable upon the exercise of warrants held by Mr.
Bates.
(13) Includes 1,087 shares beneficially owned by Barbara A. Danzi.
(14) Includes 122,886 shares beneficially owned by Vertical Fund, L.P. (of which
85,945 shares are issuable upon the exercise of warrants held by Vertical
Fund, L.P.); 36,941 shares beneficially owned by Vertical Medical Partners,
L.P.; and 108,292 shares beneficially owned by Vertical Partners, L.P. (of
which 21,831 shares are issuable upon the exercise of warrants held by
Vertical Partners, L.P.). Also includes 23,429 shares beneficially owned by
Edward M. Giles IRA (of which 5,157 shares are issuable upon the exercise
of warrants held by Edward M. Giles IRA). Mr. Giles, a director of the
Company, is Chairman and President of The Vertical Group, Inc. Mr. Giles
disclaims beneficial ownership of the shares beneficially owned by such
entities affiliated with The Vertical Group, Inc. except to the extent of
his proportionate partnership interest therein.
(15) Includes 3,696 shares beneficially owned by Andrew Grogan; 7,710 shares
beneficially owned by C. Ovens, Inc. (of which 459 shares are issuable upon
the exercise of warrants held by C. Ovens, Inc.); and 38,306 shares
issuable upon exercise of options exercisable within 60 days of May 15,
1996 held by Dr. Grogan.
(16) Includes 96,689 shares issuable upon the exercise of warrants held by Mr.
Patience.
(17) Includes 740 shares beneficially owned by Diane Stellar, and 740 shares
beneficially owned by Andrew Stellar.
(18) Includes 860 shares issuable upon the exercise of warrants held by Mr.
Strickland. Also includes 120,670 shares beneficially owned by Coronado
Venture Fund; 163,059 shares beneficially owned by Coronado Venture Fund
II, L.P.; 103,996 shares beneficially owned by Coronado Venture Fund III,
L.P.; and 13,962 shares beneficially owned by Coronado Venture Co-Investor
Limited Partnership. Mr. Strickland, a director of the Company, is a
general partner of Coronado Venture Management. Mr. Strickland disclaims
beneficial ownership of the shares beneficially owned by such entities
except to the extent of his proportionate partnership interest therein.
(19) Includes 6,209 shares beneficially owned by James R. Weersing and Mary H.
Weersing, Trustees of the Weersing Family Trust U/D/T dated April 24, 1991.
Also includes 4,298 shares issuable upon the exercise of warrants held by
Mr. Weersing.
(20) The CIT Group/Venture Capital, Inc. has granted to the Underwriters an
Over-Allotment Option to purchase up to 103,243 shares of Common Stock.
(21) Includes 15,303 shares issuable upon the exercise of warrants held by Ms.
Bannister.
(22) Includes 1,101 shares issuable upon the exercise of warrants held by Mr.
Humphreys.
(23) Includes 7,334 shares issuable upon the exercise of warrants held by Mr.
Lowell.
(24) Includes 2,274 shares issuable upon the exercise of warrants held by the
Dorothy L. O'Neal Revocable Trust.
(25) Includes 1,467 shares issuable upon the exercise of warrants held by Mr.
Wonders.
(26) Includes 1,101 shares issuable upon the exercise of warrants held by Ms.
Youle.
63
<PAGE> 66
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company will consist of 50,000,000
shares of Common Stock and 5,000,000 shares of preferred stock after giving
effect to the restatement of the Company's Certificate of Incorporation upon the
closing of this Offering. Prior to this Offering, there has been no public
market for the Company's Common Stock. The following summary of certain
provisions of the Common Stock and preferred stock does not purport to be
complete and is subject to, and qualified in its entirety by, the provisions of
the Company's Restated Certificate of Incorporation which is included as an
exhibit to the Registration Statement of which this Prospectus is a part and by
the provisions of applicable law.
COMMON STOCK
As of May 15, 1996, there were 10,680,998 shares of Common Stock
outstanding which were held of record by 359 stockholders, as adjusted to
reflect the conversion of all outstanding shares of Preferred Stock upon the
closing of this Offering and the issuance of 81,530 shares of Common Stock upon
the exercise of outstanding warrants on the closing of this Offering.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after the payment of liabilities, subject to
prior distribution rights of preferred stock, if any, then outstanding. The
Common Stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are fully paid and
nonassessable, and the Shares of Common Stock to be issued upon the closing of
this Offering will be fully paid and non-assessable.
Provisions in the Company's Certificate of Incorporation and Bylaws (i)
prohibit the stockholders from acting by written consent without a meeting or
calling a special meeting of stockholders and (ii) require advance notice of
business proposed to be brought before an annual or special meeting of
stockholders. The amendment or modification of these provisions will require the
affirmative vote of the holders of 66 2/3% of the outstanding shares of Common
Stock.
PREFERRED STOCK
Effective upon the closing of this Offering, the Company will be authorized
to issue 5,000,000 shares of undesignated preferred stock, none of which will be
outstanding upon the closing of this Offering. The Board of Directors will have
the authority, without further action by the stockholders, to issue the
undesignated preferred stock in one or more series, to fix the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued shares of undesignated preferred stock and to fix the number of shares
constituting any series and the designation of such series. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders, may
discourage bids for the Company's Common Stock at a premium over the market
price of the Common Stock and may adversely affect the market price of and the
voting and other rights of the holders of Common Stock. At present, the Company
has no plans to issue any of the preferred stock.
WARRANTS
After the completion of this Offering, the Company will have outstanding
warrants to purchase 887,740 shares of Common Stock at an exercise price of
$5.82 per share. These warrants are currently exercisable, will terminate in
February 2001 and may be exercised on a net basis.
CERTAIN PROVISIONS OF DELAWARE LAW
Ventana is a Delaware corporation and subject to Section 203 of the
Delaware General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless (with
certain exceptions) the "business combination" or the
64
<PAGE> 67
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior, did
own) 15% or more of a corporation's voting stock. The existence of this
provision would be expected to have an anti-takeover effect with respect to
transactions not approved in advance by the Board of Directors, including
discouraging attempts that might result in a premium over the market price for
the shares of Common Stock held by stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Norwest Bank
Minnesota, N.A. Its telephone number is (800) 468-9716.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no market for the Common Stock of
the Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time. Sales
of substantial amounts of Common Stock of the Company in the public market after
the restrictions lapse could adversely affect the prevailing market price and
the ability of the Company to raise equity capital in the future.
Upon the completion of this Offering, the Company will have 10,680,998
shares of Common Stock outstanding, assuming no exercise of options after May
15, 1996 and no exercise of outstanding warrants other than warrants to purchase
81,530 shares of Common Stock that will terminate if not exercised upon the
completion of this Offering. Of these 10,680,998 shares, the 2,050,000 shares
sold in this Offering will be freely tradable without restriction under the
Securities Act, unless held by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act. The remaining 8,630,998 shares of
Common Stock held by existing stockholders were issued and sold by the Company
in reliance on exemptions from the registration requirements of the Securities
Act. These shares may be sold in the public market only if registered, or
pursuant to an exemption from registration such as Rule 144, 144(k) or 701 under
the Securities Act. The Company's directors, executive officers, certain
stockholders and all option holders, who in the aggregate hold 8,618,402 shares
of Common Stock, have entered into lock-up agreements under which they have
agreed not to offer, sell, contract to sell, grant any option to purchase or
otherwise dispose of, or agree to dispose of, directly or indirectly, any shares
of Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into Common Stock owned by them for a
period of 180 days after the date of this Prospectus, without the prior written
consent of Bear, Stearns & Co. Inc. The Company has entered into a similar
agreement, except that the Company may grant options and issue stock under its
current stock option and stock purchase plans and pursuant to other currently
outstanding options.
Approximately 39,703 shares of Common Stock will be available for immediate
public resale on the date of this Offering. An additional 2,023 shares of Common
Stock will be saleable at 90 days after the Offering. An additional 8,786 shares
of Common Stock will be saleable between 90 and 180 days after this Offering.
Upon expiration of the lock-up agreements, approximately 8,534,200 shares of
Common Stock (including approximately 349,201 shares subject to outstanding
vested options) will become eligible for immediate public resale, subject in
some cases to vesting provisions and volume limitations pursuant to Rule 144.
The remaining approximately 319,084 shares held by existing stockholders will
become eligible for public resale at various times over a period of less than
two years following the completion of this Offering, subject in some cases to
vesting provisions and volume limitations. 7,013,259 of the shares outstanding
immediately following the completion of this Offering will be entitled to
registration rights with respect to such shares upon the release of lock-up
agreements. The number of shares sold in the public market could increase if
such rights are exercised.
As of May 15, 1996, 840,399 shares were subject to outstanding options. All
of these shares are subject to the lock-up agreements described above. As soon
as practicable after the date of this Prospectus, the Company intends to file a
Registration Statement on Form S-8 covering shares issuable under the Company's
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<PAGE> 68
1988 Stock Plan (including shares subject to then outstanding options under such
plans), the Company's 1996 Stock Plan and 1996 Employee Stock Purchase Plan,
thus permitting the resale of such shares in the public market without
restriction under the Securities Act after expiration of the applicable lock-up
agreements.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years (including the holding period of any prior owner, except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (approximately 107,000 shares
immediately after this Offering) or (ii) the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the required filing of
a Form 144 with respect to such sale. Sales under Rule 144 are generally subject
to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least three years, is entitled to sell such shares
without having to comply with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Under Rule 701 under the Securities
Act, persons who purchase shares upon exercise of options granted prior to the
effective date of this Offering are entitled to sell such shares 90 days after
the effective date of this Offering in reliance on Rule 144, without having to
comply with the holding period requirements of Rule 144 and, in the case of
non-affiliates, without having to comply with the public information, volume
limitation or notice provisions of Rule 144.
The Securities and Exchange Commission has recently proposed reducing the
initial Rule 144 holding period to one year and the Rule 144(k) holding period
to two years. There can be no assurance as to when or whether such rule changes
will be enacted. If enacted, such modifications will have a material effect on
the times when shares of the Company's Common Stock become eligible for resale.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of 7,013,259 shares of Common Stock (including shares issuable
upon exercise of warrants) (the "Registrable Securities") or their transferees
are entitled to certain rights with respect to the registration of such shares
under the Securities Act of 1933, as amended (the "Securities Act"). These
rights are provided under the terms of an agreement between the Company and the
holders of Registrable Securities. Subject to certain limitations in the
agreement, if the holders of at least 25% of the Registrable Securities request,
the Company must on two occasions after six months from the effective date of
this Offering, use its best efforts to register the Registrable Securities for
public resale. If the Company registers any of its Common Stock either for its
own account or for the account of other security holders, the holders of
Registrable Securities are entitled to include their shares of Common Stock in
the registration, subject to the ability of the underwriters to limit the number
of shares included in the Offering. The holders of Registrable Securities may
also require the Company (but not more than once during any 12-month period) to
register all or a portion of their Registrable Securities on Form S-3 when use
of such form becomes available to the Company, provided, among other
limitations, that the proposed aggregate selling price is at least $1.0 million.
All registration expenses must be borne by the Company and all selling expenses
relating to Registrable Securities must be borne by the holders of the
securities being registered.
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<PAGE> 69
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Bear, Stearns &
Co. Inc. and Dillon, Read & Co. Inc. are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
set forth in the Underwriting Agreement, to purchase from the Company and the
Selling Stockholders, the number of Shares of Common Stock set forth opposite
their names below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
------------------------------------------------------------------ ---------
<S> <C>
Bear, Stearns & Co. Inc........................................... 675,000
Dillon, Read & Co. Inc............................................ 675,000
Alex. Brown & Sons Incorporated................................... 40,000
Cowen & Company................................................... 40,000
Donaldson, Lufkin & Jenrette Securities Corporation............... 40,000
Hambrecht & Quist LLC............................................. 40,000
Lehman Brothers Inc............................................... 40,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................ 40,000
Montgomery Securities............................................. 40,000
J.P. Morgan Securities Inc........................................ 40,000
Morgan Stanley & Co. Incorporated................................. 40,000
Robertson, Stephens & Company LLC................................. 40,000
Salomon Brothers Inc ............................................. 40,000
Smith Barney Inc.................................................. 40,000
Robert W. Baird & Co. Incorporated................................ 20,000
William Blair & Company, L.L.C.................................... 20,000
Cleary, Gull, Reiland & McDevitt Inc.............................. 20,000
Furman Selz LLC................................................... 20,000
Jeffries & Company................................................ 20,000
Needham & Company, Inc............................................ 20,000
Piper Jaffray Inc................................................. 20,000
Rauscher Pierce Refsnes, Inc...................................... 20,000
Raymond James & Associates, Inc................................... 20,000
Sands Brothers & Co., Ltd......................................... 20,000
Vector Securities International, Inc.............................. 20,000
---------
Total................................................... 2,050,000
========
</TABLE>
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters have agreed to purchase all of the Shares of Common Stock being
sold pursuant to the Underwriting Agreement if any are purchased (excluding
Shares covered by the Over-Allotment Option).
The Representatives have advised the Company that the Underwriters propose
to offer the Common Stock to the public initially at the public offering price
set forth on the cover page of this Prospectus and to selected dealers (who may
include Underwriters) at such price less a concession of not more than $0.42 per
share. Additionally, the Underwriters may allow, and such dealers may reallow, a
concession of not more than $0.10 per share to certain other dealers. After the
initial public offering, the public offering price and other selling terms may
be changed by the Underwriters.
One of the Selling Stockholders and the Company have granted to the
Underwriters an option to purchase up to 103,243 and 204,257 additional Shares
of Common Stock, respectively, at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus, solely to
cover over-allotments, if any. This option may be exercised in whole or in part
at any time within 30 days from the date of this Prospectus. To the extent that
the Underwriters exercise this option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage thereof which the
number of Shares
67
<PAGE> 70
of Common Stock to be purchased by it shown in the above table bears to the
total number of Shares of Common Stock offered hereby.
The Offering of the Shares is made for delivery, when, as and if accepted
by the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of Shares in whole or in part.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act and to contribute to payments the Underwriters may be required to
make in respect thereof.
The officers, directors and certain stockholders of the Company, who in the
aggregate own 8,618,402 shares of Common Stock, have agreed that they will not,
without the prior written consent of Bear, Stearns & Co. Inc., offer, sell, or
otherwise dispose of any shares of Common Stock, options or warrants to acquire
shares of Common Stock or securities exchangeable for or convertible into shares
of Common Stock owned by them during the 180 day period following the date of
this Prospectus. The Company has agreed that it will not, without the prior
written consent of Bear, Stearns & Co. Inc., offer, sell or otherwise dispose of
any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities exchangeable for or convertible into shares of Common Stock
during the 180 days following the date of this Prospectus, except that the
Company may issue shares of Common Stock and options to purchase Common Stock
under its 1996 Stock Plan and its 1996 Employee Stock Purchase Plan.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation among the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price are prevailing
market and economic conditions, revenues and earnings of the Company, market
valuations of other companies engaged in the health care industry, estimates of
the business potential and prospects of the Company, the present state of the
Company's operations, the Company's management and other factors deemed
relevant. The estimated initial public offering price range set forth on the
cover of this preliminary prospectus is subject to change as a result of market
conditions and other factors. The negotiated initial public offering price may
bear no relationship to the price at which Common Stock trades after the
Offering.
The Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
In February 1996, Bear, Stearns & Co. Inc. rendered a fairness opinion to
the Company in connection with the acquisition of BioTek for which Bear, Stearns
& Co. Inc. received a fee of $200,000, consisting of $50,000 in cash and 69,767
shares of Series D Preferred Stock which will convert into 25,784 shares of
Common Stock upon the completion of this offering. Bear, Stearns & Co. Inc. is
not selling any of its shares of Common Stock in the Offering. In addition, two
officers of Bear, Stearns & Co. Inc. and one officer of Dillon, Read & Co. Inc.
collectively own an aggregate of 29,753 shares of Common Stock.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. As of the date of this Prospectus, certain members of Wilson
Sonsini Goodrich & Rosati, Professional Corporation and investment partnerships
of which such persons are partners beneficially own 6,160 shares of the
Company's Common Stock. Christopher D. Mitchell, Assistant Secretary of the
Company, is a member of Wilson Sonsini Goodrich & Rosati, Professional
Corporation. Certain legal matters in connection with this Offering will be
passed upon for the Underwriters by Simpson Thacher & Bartlett (a partnership
which includes professional corporations), New York, New York.
68
<PAGE> 71
EXPERTS
The consolidated financial statements of Ventana Medical Systems, Inc. at
December 31, 1994 and 1995 and for each of the three years in the period ended
December 31, 1995 and the financial statements of BioTek Solutions, Inc. at June
30, 1995 and December 31, 1995 and for the year ended June 30, 1995 and the six
months ended December 31, 1995, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their respective reports thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
The financial statements of BioTek Solutions, Inc. as of June 30, 1993 and
1994 and for the two years in the period ended June 30, 1994 included in this
Prospectus and Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of such firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the Shares of Common Stock offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is made
to the Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract or
document to which reference is made are not necessarily complete and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. A copy of the Registration Statement may be
inspected without charge at the Commission's principal offices, and copies of
all or any part of the Registration Statement may be obtained from such office
upon the payment of the fees prescribed by the Commission. In addition, copies
of the Registration Statement may be obtained from the Commission's Internet
address at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by its independent auditors
and with quarterly reports containing unaudited financial information for each
of the first three quarters of each fiscal year.
69
<PAGE> 72
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
VENTANA MEDICAL SYSTEMS, INC.
Unaudited Pro Forma Condensed Consolidated Financial Statements
Introduction to Unaudited Pro Forma Condensed Consolidated Financial Statements..... F-2
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1996....... F-3
Unaudited Pro Forma Condensed Consolidated Statements of Operations for the Year
Ended December 31, 1995.......................................................... F-4
Unaudited Pro Forma Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 1996...................................................... F-5
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements............ F-6
VENTANA MEDICAL SYSTEMS, INC.
Report of Ernst & Young LLP, Independent Auditors..................................... F-8
Audited Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996
(unaudited)...................................................................... F-9
Consolidated Statements of Operations for the years ended December 31, 1993, 1994
and 1995 and three months ended March 31, 1995 and 1996 (unaudited).............. F-10
Consolidated Statements of Convertible Redeemable Preferred Stock and Stockholders'
Equity (Deficit) for the years ended December 31, 1993, 1994 and 1995 and three
months ended March 31, 1996 (unaudited).......................................... F-11
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995 and three months ended March 31, 1995 and 1996 (unaudited).............. F-12
Notes to Consolidated Financial Statements.......................................... F-13
BIOTEK SOLUTIONS, INC.
Report of Ernst & Young LLP, Independent Auditors..................................... F-23
Audited Financial Statements
Balance Sheets as of June 30, 1995 and December 31, 1995............................ F-24
Statements of Operations for the year ended June 30, 1995 and six months ended
December 31, 1995................................................................ F-25
Statements of Changes in Stockholders' Deficit for the year ended June 30, 1995 and
six months ended December 31, 1995............................................... F-26
Statements of Cash Flows for the year ended June 30, 1995 and six months December
31, 1995......................................................................... F-27
Notes to Financial Statements....................................................... F-28
BIOTEK SOLUTIONS, INC.
Report of Arthur Andersen LLP, Independent Public Accountants......................... F-34
Audited Financial Statements
Balance Sheets as of June 30, 1993 and 1994......................................... F-35
Statements of Operations for the years ended June 30, 1993 and 1994................. F-36
Statements of Changes in Shareholders' Deficit for the years ended June 30, 1993 and
1994............................................................................. F-37
Statements of Cash Flows for the years ended June 30, 1993 and 1994................. F-38
Notes to Financial Statements....................................................... F-39
</TABLE>
F-1
<PAGE> 73
VENTANA MEDICAL SYSTEMS, INC.
INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed consolidated balance sheet
as of March 31, 1996 includes the February 26, 1996 acquisition of BioTek
Solutions, Inc. (BioTek). The accompanying unaudited pro forma condensed
consolidated statements of operations for the year ended December 31, 1995 and
for the three months ended March 31, 1996 have been prepared as if the
acquisition of BioTek had been consummated as of January 1, 1995. The pro forma
balance sheet amounts are further adjusted to reflect the sale of the Shares of
Common Stock offered hereby and the utilization of the net proceeds of this
Offering as described under "Use of Proceeds."
The pro forma information is based on the historical financial statements
of Ventana and BioTek giving effect to the transaction under the purchase method
of accounting and the assumptions and adjustments described in the accompanying
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
The pro forma information is not indicative of actual results that would
have been achieved had the acquisition actually been completed as of the dates
indicated. The pro forma condensed consolidated financial statements should be
read in conjunction with "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and the respective historical financial
statements of Ventana Medical Systems, Inc. and BioTek Solutions, Inc. and the
related notes thereto included elsewhere in this Prospectus.
F-2
<PAGE> 74
VENTANA MEDICAL SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31,1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 3,436 $ 1,625(a) $ 5,061
Accounts receivable.................................. 2,834 2,834
Inventories.......................................... 2,383 2,383
Other................................................ 33 33
-------- ------- --------
Total current assets................................... 8,686 1,625 10,311
Property, plant and equipment, net..................... 2,949 2,949
Intangibles, net....................................... 10,107 10,107
-------- ------- --------
Total assets................................. $ 21,742 $ 1,625 $ 23,367
======== ======= ========
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable..................................... $ 1,216 $ 1,216
Other current liabilities............................ 7,051 7,051
-------- --------
Total current liabilities.............................. 8,267 8,267
-------- --------
Long term debt......................................... 15,035 $ (15,035)(a) --
Convertible redeemable preferred stock................. 36,135 (36,135)(b) --
Stockholders' equity (deficit):........................ --
Common stock -- amount paid in....................... 3,337 44,339 47,676
Accumulated deficit.................................. (40,892) 8,456(b) (32,436)
Cumulative foreign currency transactions
adjustment........................................ (140) (140)
-------- ------- --------
Total stockholders' equity (deficit)......... (37,695) 52,795 15,100
-------- ------- --------
Total liabilities, convertible redeemable
preferred stock and stockholders' equity
(deficit).................................. $ 21,742 $ 1,625 $ 23,367
======== ======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 75
VENTANA MEDICAL SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
VENTANA BIOTEK PRO FORMA PRO FORMA
HISTORICAL HISTORICAL(1) ADJUSTMENTS AS ADJUSTED
---------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.............................. $ 10,613 $ 6,920 $ 1,942(2) $ 19,475
Cost of goods sold..................... 4,282 4,294 520(2)(3) 9,096
------- ------- ------ -------
Gross profit........................... 6,331 2,626 1,422 10,379
Operating expenses:
Research and development............. 2,239 2,198 (30)(3) 4,407
Selling, general and
administrative.................... 7,435 3,497 36(2)(3)(4) 10,968
Nonrecurring expenses................ -- -- 9,983 9,983
Amortization of intangibles.......... -- -- 557(6) 557
------- ------- ------ -------
Loss from operations................... (3,343) (3,069) (9,124) (15,536)
Interest (expense) income.............. 74 (2,224) 2,224(7) 74
------- ------- ------ -------
Net loss............................... $ (3,269) $(5,293) $(6,900) $ (15,462)
======= ======= ====== =======
Pro forma net loss per share, as
adjusted............................. $ (0.38) $ (1.52)
======= =======
Pro forma weighted average shares
outstanding, as adjusted............. 8,664 10,167(8)
======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 76
VENTANA MEDICAL SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
VENTANA BIOTEK PRO FORMA PRO FORMA
HISTORICAL HISTORICAL(1) ADJUSTMENTS AS ADJUSTED
---------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales............................. $ 4,146 $ 1,097 $ (15)(2) $ 5,228
Cost of goods sold.................... 1,432 593 (101)(2)(3) 1,924
-------- ------- ------- ------
Gross profit.......................... 2,714 504 86 3,304
Operating expenses:
Research and development............ 613 163 (5)(3) 771
Selling, general and
administrative................... 2,374 368 57(2)(3)(4) 2,799
Nonrecurring expenses............... 9,983 413 (10,396)(5) --
Amortization of intangibles......... 46 -- 93(6) 139
-------- ------- ------- ------
Loss from operations.................. (10,302) (440) 10,337 (405)
Interest (expense) income............. (5) (944) 944(7) (5)
-------- ------- ------- ------
Net loss.............................. $ (10,307) $(1,384) $11,281 $ (410)
======== ======= ======= ======
Pro forma net loss per share, as
adjusted............................ $ (1.16) $ (0.04)
======== ======
Pro forma weighted average shares
outstanding, as adjusted............ 8,895 10,398(8)
======== ======
</TABLE>
See accompanying notes.
F-5
<PAGE> 77
VENTANA MEDICAL SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company acquired BioTek for $18.8 million on February 26, 1996. The pro
forma results of operations reflect the Company's operations as if it had
acquired BioTek on January 1, 1995 and are adjusted to reflect the sale of
1,890,907 shares of Common Stock by the Company in this Offering and the
application of the net proceeds therefrom. The acquisition has been accounted
for as a purchase. The composition of the consideration paid for BioTek and the
allocation of the purchase price is presented below:
<TABLE>
<S> <C>
The purchase price for BioTek consisted of:
Cash consideration............................................. $ 2,500
Stock issued to BioTek noteholders............................. 3,007
Exchange Notes issued.......................................... 8,978
Note payable - escrow for contingencies........................ 234
Net historical liabilities acquired............................ 4,044
--------------
Total purchase price................................. $ 18,763
===========
The purchase price was allocated as follows:
Tangible net assets.......................................... $ 2,288
In-process research and development.......................... 7,900
Goodwill and other intangibles............................... 1,675
Developed technology......................................... 2,800
Customer base................................................ 4,100
--------------
$ 18,763
===========
</TABLE>
In accordance with FAS 2, the Company charged to expense at the date of the
acquisition $7.9 million relating to the portion of the purchase price allocated
to those in-process research and development projects where technological
feasibility had not yet been established and where there are no alternative
future uses.
Intangible assets consist primarily of goodwill, customer base and
developed technology. Such assets are amortized over estimated useful lives of
15 years for developed technology and goodwill, and 20 years for customer base.
BALANCE SHEET ADJUSTMENTS
(a) Adjustment reflects net proceeds from the Offering to the Company after
repayment of outstanding Exchange Notes and bank debt.
(b) Adjustment reflects the automatic conversion of the Company's Preferred
Stock into Common Stock upon completion of an initial public offering. The
related accumulated unpaid dividends of approximately $8.5 million will be
canceled upon such conversion.
STATEMENT OF OPERATIONS ADJUSTMENTS
(1) BioTek's historical fiscal year ended on June 30. BioTek's historical
results of operations have been adjusted to a calendar year basis to conform
with the reporting period of Ventana.
(2) Adjustments reflect a change in revenue recognition policy to adopt the
Company's policy of recording certain sales upon shipment of instruments and
reagents to end-users. As such, the pro forma sales and related costs of
goods sold reflect the accounting policy of recognizing revenue, for United
States sales only, upon the ultimate sale of products to the end-users as if
such policy had been in effect as of January 1, 1995. The combined effect of
the change in accounting policy is an increase in pro forma net sales in
1995. This is primarily due to (i) shipments of instruments and reagents to
CMS in 1994 which were subsequently placed with end-users in 1995 and (ii)
recording sales based on prices paid by the end-user as opposed to the net
price paid by CMS. Accordingly, cost of goods sold has been adjusted to
reflect
F-6
<PAGE> 78
VENTANA MEDICAL SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
the differences in the timing of sales and the mix of products sold, and
selling expense has been increased to reflect the distribution commission
paid to CMS. The commission is equal to the product of (i) the number of
units shipped to end-users and (ii) the difference between the price paid by
the end-user to CMS and the net price paid by CMS to the Company.
(3) Adjustments reflect expense reductions associated with the consolidation of
manufacturing facilities into Ventana's facilities in Tucson, Arizona.
Effective September 1996, the Santa Barbara facility will no longer be used.
The resulting cost reductions from the facilities consolidation are
allocated among cost of goods sold (50%), research and development expense
(10%), and selling, general, and administrative expense (40%).
(4) Reductions in selling, general, and administrative expense reflect (i) an
increase in distribution expense associated with the change in revenue
recognition policy discussed in footnote (2) above, (ii) the consolidation
of the sales and marketing organizations of Ventana and BioTek, and (iii)
the elimination of certain redundant administrative positions.
A summary of the net savings recognized in the pro forma selling, general
and administrative expense follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------- -------------
1994 1995 1995 1996
------- ------- ----- -----
<S> <C> <C> <C> <C>
Distribution expense................................. $ 1,004 $ 1,038 $ 286 $ 166
Sales and marketing.................................. (1,331) (92) (75) 44
General and administrative........................... (1,266) (910) (217) (153)
------- ------- ----- -----
$(1,593) $ 36 $ (6) $ 57
======= ======= ===== =====
</TABLE>
(5) Adjustments for nonrecurring expenses reflect $7.9 million for acquired
in-process research and development which was charged to expense in
accordance with FAS 2, $2.1 million associated with the acquisition and
integration of BioTek, and $0.4 million in fees incurred related to the
BioTek acquisition. These charges were incurred in the first quarter of 1996
and are reflected as if such charges had been incurred in the year ended
December 31, 1995.
(6) Adjustment for amortization of intangibles arising from the BioTek
acquisition.
(7) Adjustment to eliminate interest expense on BioTek's debt as a result of the
merger and the retirement of debt with the net proceeds from the Offering.
(8) The calculation of pro forma weighted average number of shares outstanding
is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1995 1996
------------ ------------
<S> <C> <C>
Weighted average shares outstanding........................ 957 1,120
Assumed conversion of Series A, C, and D preferred
shares................................................... 6,580 6,648
Assumed exercise of warrants to purchase Series D preferred
shares................................................... 34 34
Stock, options and warrants issued within one year of
initial filing........................................... 1,093 1,093
Shares of common stock issued in connection with the
initial public offering to be used to retire acquisition
debt..................................................... 1,503 1,503
------ ------------
Weighted average shares outstanding, as adjusted........... 10,167 10,398
========== ==========
</TABLE>
F-7
<PAGE> 79
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Ventana Medical Systems, Inc.
We have audited the accompanying consolidated balance sheets of Ventana
Medical Systems, Inc., as of December 31, 1994 and 1995, and the related
consolidated statements of operations, convertible redeemable preferred stock
and stockholders' equity (deficit), and cash flows for each of the three years
in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Ventana Medical Systems, Inc., as of December 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
Tucson, Arizona
February 28, 1996, except for Note 11,
as to which the date is July 19, 1996
F-8
<PAGE> 80
VENTANA MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
--------------------- STOCKHOLDERS'
1994 1995 EQUITY (DEFICIT)
-------- -------- MARCH 31, 1996
MARCH 31, ----------------
1996
----------- (UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 2,511 $ 1,103 $ 3,436
Accounts receivable........................ 1,451 1,925 2,834
Inventories (Note 2)....................... 893 1,767 2,383
Other...................................... 38 24 33
-------- -------- -----------
Total current assets......................... 4,893 4,819 8,686
Property and equipment, net (Note 3)......... 2,169 2,258 2,949
Intangibles, net (Note 11)................... 217 301 10,107
-------- -------- -----------
Total assets................................. $ 7,279 $ 7,378 $ 21,742
======== ======== =========
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................... $ 639 $ 1,061 $ 1,216
Other current liabilities (Note 4)......... 534 993 7,051
-------- -------- -----------
Total current liabilities.................... 1,173 2,054 8,267
Long-term debt............................... -- -- 15,035
Commitments (Notes 6, 9 and 11)
Convertible redeemable preferred stock at
aggregate mandatory redemption value (Notes
6 and 10):................................. 30,237 35,180 36,135 $ --
Stockholders' equity (deficit) (Notes
7, 10 and 11):
Preferred stock -- $.001 par value; no
shares authorized, issued or outstanding
(5,000,000 shares authorized, no shares
issued or outstanding at March 31,
1996 -- pro forma)...................... -- -- -- --
Common stock -- $.001 par value; 30,000,000
shares authorized, 875,005, 1,020,164,
and 1,344,269 shares issued and
outstanding at December 31, 1994 and
1995 and
March 31, 1996, respectively (50,000,000
shares authorized, 8,031,894 shares
issued and outstanding -- pro
forma) -- amount paid in................ 190 244 3,337 31,016
Accumulated deficit........................ (24,275) (29,980) (40,892) (32,436)
Cumulative foreign currency translation
adjustment.............................. (46) (120) (140) (140)
-------- -------- ----------- ----------------
Total stockholders' equity (deficit)......... (24,131) (29,856) (37,695) $ (1,560)
============
-------- -------- -----------
Total liabilities, convertible redeemable
preferred stock, and stockholders' equity
(deficit).................................. $ 7,279 $ 7,378 $ 21,742
======== ======== =========
</TABLE>
See accompanying notes.
F-9
<PAGE> 81
VENTANA MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................. $ 2,681 $ 5,927 $ 10,613 $ 2,202 $ 4,146
Cost of goods sold........................ 1,722 2,531 4,282 936 1,432
--------- --------- --------- --------- ---------
959 3,396 6,331 1,266 2,714
Operating expenses:
Research and development................ 2,100 1,926 2,239 556 613
Selling, general and administrative..... 4,067 6,899 7,435 1,594 2,374
Nonrecurring expenses................... -- -- -- -- 9,983
Amortization of intangibles............. -- -- -- -- 46
--------- --------- --------- --------- ---------
Loss from operations...................... (5,208) (5,429) (3,343) (884) (10,302)
Interest income (expense)................. 229 59 74 50 (5)
--------- --------- --------- --------- ---------
Net loss.................................. $ (4,979) $ (5,370) $ (3,269) $ (834) $ (10,307)
======== ======== ======== ======== ========
Net loss per share, as adjusted........... $ (0.38) $ (0.10) $ (1.16)
======== ======== ========
Shares used in computing net loss per
share, as adjusted...................... 8,664 8,529 8,895
======== ======== ========
</TABLE>
See accompanying notes.
F-10
<PAGE> 82
VENTANA MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------------------------------------
CUMULATIVE
CONVERTIBLE REDEEMABLE FOREIGN
PREFERRED STOCK COMMON STOCK CURRENCY
------------------------------------------- -------------------- ACCUMULATED TRANSLATION
SERIES A SERIES C SERIES D TOTAL SHARES AMOUNT DEFICIT ADJUSTMENT TOTAL
--------- --------- --------- ------- --------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1993............... $ 536 $ 8,731 $ 9,034 $18,301 820,294 $ 165 $(10,147) $ -- $ (9,982)
Sale of Series D
preferred stock.. -- -- 5,117 5,117 -- -- -- -- --
Accretion of
preferred stock
redemption
requirement...... -- 656 1,140 1,796 -- -- (1,796) -- (1,796)
Sale of common
stock............ -- -- -- -- 88,800 33 -- -- 33
Repurchase of
stock............ -- (2) -- (2) (924) (1) -- -- (1)
Net loss............. -- -- -- -- -- -- (4,979) -- (4,979)
--------- --------- --------- ------- --------- -------- ------------ ----------- --------
Balance at December
31, 1993........... 536 9,385 15,291 25,212 908,170 197 (16,922) -- (16,725)
Sale of Series D
preferred stock.. -- -- 3,042 3,042 -- -- -- -- --
Accretion of
preferred stock
redemption
requirement...... -- 656 1,327 1,983 -- -- (1,983) -- (1,983)
Sale of common
stock............ -- -- -- -- 29,199 8 -- -- 8
Repurchase of
common stock..... -- -- -- -- (62,364) (15) -- -- (15)
Translation
adjustment....... -- -- -- -- -- -- -- (46) (46)
Net loss........... -- -- -- -- -- -- (5,370) -- (5,370)
--------- --------- --------- ------- --------- -------- ------------ ----------- --------
Balance at December
31, 1994........... 536 10,041 19,660 30,237 875,005 190 (24,275) (46) (24,131)
Sale of Series D
preferred stock.. -- -- 2,507 2,507 -- -- -- -- --
Accretion of
preferred stock
redemption
requirement...... -- 655 1,781 2,436 -- -- (2,436) -- (2,436)
Sale of common
stock............ -- -- -- -- 160,210 67 -- -- 67
Repurchase of
common stock..... -- -- -- -- (15,051) (13) -- -- (13)
Translation
adjustment....... -- -- -- -- -- -- -- (74) (74)
Net loss........... -- -- -- -- -- -- (3,269) -- (3,269)
--------- --------- --------- ------- --------- -------- ------------ ----------- --------
Balance at December
31, 1995........... 536 10,696 23,948 35,180 1,020,164 244 (29,980) (120) (29,856)
Sale of Series D
preferred stock
(unaudited)...... -- -- 350 350 -- -- -- -- --
Accretion of
preferred stock
redemption
requirement
(unaudited)...... -- 163 442 605 -- -- (605) -- (605)
Conversion of debt
into common stock
(unaudited)...... -- -- -- -- 222,973 3,007 -- -- 3,007
Sale of common
stock
(unaudited)...... -- -- -- -- 101,132 86 -- -- 86
Translation
adjustment
(unaudited)...... -- -- -- -- -- -- -- (20) (20)
Net loss
(unaudited)...... -- -- -- -- -- -- (10,307) -- (10,307)
--------- --------- --------- ------- --------- -------- ------------ ----------- --------
Balance at March 31,
1996 (unaudited)... $ 536 $10,859 $24,740 $36,135 1,344,269 $ 3,337 $(40,892) $(140) $(37,695)
======== ======== ======== ======== ========= ========= ============ ========== =========
</TABLE>
See accompanying notes.
F-11
<PAGE> 83
VENTANA MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------ --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................. $(4,979) $(5,370) $(3,269) $ (834) $(10,307)
Adjustments to reconcile net loss to net
cash used in operating activities:
Purchased in-process research and
development......................... -- -- -- -- 7,900
Depreciation and amortization.......... 334 477 911 211 298
Changes in operating assets and
liabilities:
Accounts receivable.................... (244) (941) (474) 165 (287)
Inventories............................ (258) (24) (874) (64) (488)
Other assets........................... (126) 37 (114) (39) (9)
Accounts payable....................... 69 321 422 48 (341)
Other current liabilities.............. 110 224 459 132 2,024
------- ------- ------- ------ --------
Net cash used in operating activities.... (5,094) (5,276) (2,939) (381) (1,210)
INVESTING ACTIVITIES:
Purchase of property and equipment,
net.................................... (1,700) (604) (956) (399) (69)
Acquisition of BioTek Solutions, Inc..... -- -- -- -- (2,500)
Sales (purchases) of short-term
investments available for sale......... (4,063) 4,063 -- -- --
------- ------- ------- ------ --------
Net cash (used in) provided by investing
activities............................. (5,763) 3,459 (956) (399) (2,569)
FINANCING ACTIVITIES:
Repayments of notes payable.............. (42) (36) -- -- --
Issuance of debt (including amounts from
related parties) and stock............. 5,147 3,035 2,561 2,415 6,092
------- ------- ------- ------ --------
Net cash provided by financing
activities............................. 5,105 2,999 2,561 2,415 6,092
Effect of exchange rate changes on
cash................................... -- (46) (74) -- 20
------- ------- ------- ------ --------
Net (decrease) increase in cash and cash
equivalents............................ (5,752) 1,136 (1,408) 1,635 2,333
Cash and cash equivalents, beginning of
period................................. 7,127 1,375 2,511 2,511 1,103
------- ------- ------- ------ --------
Cash and cash equivalents, end of
period................................. $ 1,375 $ 2,511 $ 1,103 $4,146 $ 3,436
======= ======= ======= ====== ========
</TABLE>
See accompanying notes.
F-12
<PAGE> 84
VENTANA MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION FOR THE PERIODS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization: Ventana Medical Systems, Inc. (the "Company") develops,
manufactures, and markets proprietary instruments and reagents that automate
diagnostic procedures used for molecular analysis of cells. Subsequent to year
end, the Company acquired all of the outstanding common stock of Biotek
Solutions, Inc. ("Biotek"). See Note 11 for discussion of the Company's
acquisition of Biotek. At present, the Company's principal markets are North
America and Europe.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company's wholly-owned foreign subsidiaries, Ventana Medical
Systems, S.A. and Ventana Medical Systems GmbH. All significant intercompany
accounts have been eliminated.
Interim Consolidated Financial Information: The consolidated financial
statements at March 31, 1996 and for the three months ended March 31, 1995 and
1996 are unaudited, but include all adjustments (consisting only of normal
recurring adjustments) that management considers necessary for a fair
presentation of the financial information set forth therein, in accordance with
generally accepted accounting principles. The results for the three months ended
March 31, 1996 are not necessarily indicative of the results for the entire
year.
Reclassifications: The consolidated financial statements for 1993 and 1994
have been reclassified to conform with the 1995 presentation.
Cash and Cash Equivalents: Cash equivalents include investments (primarily
money market accounts and overnight reverse repurchase agreements) with
maturities of three months or less from the date of purchase.
On December 31, 1994, the Company purchased $2.1 million of U.S. Government
Securities from Bank One, Arizona (the "Bank") under an agreement to resell such
securities. The Company did not take possession of the securities which were
instead held in the Company's safekeeping account at the Bank. The amortized
cost of this investment approximates the market value.
Inventories: Inventories, principally chemical and biological reagents and
instrument parts and finished instruments, are stated at the lower of cost
(first-in first-out) or market.
Property and Equipment: Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over estimated useful
lives of three to ten years. Amortization of leasehold improvements is
calculated using a straight-line method over the term of the lease. Maintenance
and repairs are charged to operations as incurred.
Diagnostic instruments include automated instruments used by customers
under cancelable reagent plans ("RPs"), which generally are cancelable upon 90
days written notice. These agreements also require the customer to purchase a
specified amount of reagents for tests from the Company over the term of the
agreement. The manufacturing cost of the related instruments is amortized over a
period of 36 to 48 months and charged to cost of goods sold. Diagnostic
instruments also include instruments placed with customers for evaluation or
demonstration as part of the Company's sales process.
Intangibles: Intangible assets consist primarily of goodwill, customer
base, and developed technology acquired in the BioTek acquisition (see Note 11).
Such assets are amortized over estimated useful lives of 15 years for developed
technology and goodwill, and 20 years for customer base. Impairment is
recognized in operating results if a permanent decline in value occurs. The
Company will measure possible impairment of its intangible assets periodically
by comparing the cash flows generated by those assets to their carrying values.
The Company will periodically evaluate the useful lives assigned to the various
categories of intangible assets
F-13
<PAGE> 85
VENTANA MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE PERIODS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
considering such factors as (i) demand, obsolescence, competition, market share,
and other economic factors; (ii) legal and regulatory provisions; and (iii) the
periods expected to be benefited.
Revenue Recognition: Sales of instruments and reagents are generally
recognized upon shipment. Sales through domestic distributors are recognized
upon shipment of products by the distributors to end users. Revenues from
reagents sold under RPs and similar leasing arrangements are recognized when
reagents are shipped.
Concentration of Credit Risk: The Company sells its instruments and
reagent products primarily to hospitals, medical clinics, reference
laboratories, and universities. Credit losses have been minimal to date. The
Company invests its excess cash primarily in U.S. government securities and has
an established policy relating to diversification and maturities that is
designed to maintain safety and liquidity. The Company has not experienced any
material losses on its cash equivalents or short-term investments.
Nonrecurring Expenses: Nonrecurring expenses consist of the estimated
costs of integrating Biotek's operations into Ventana's and the cost of research
and development in process acquired from Biotek (see Note 11).
Foreign Currency Translation: Foreign currency financial statements of the
Company's foreign subsidiaries are converted into United States dollars by
translating balance sheet accounts at the current exchange rate at year end and
statement of operations accounts at the average exchange rate for the year, with
resulting translation adjustments reported as a separate component of
stockholders' equity (deficit).
Income Taxes: The Company accounts for income taxes using the liability
method. Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using enacted tax rates and laws expected to be in effect when the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce the carrying amount of deferred tax assets to their net
realizable value.
Use of Estimates: The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments: The Company's cash, accounts
receivable, and convertible redeemable preferred stock represent financial
instruments as defined by Statement of Financial Accounting Standards No. 107,
Disclosures About Fair Value of Financial Instruments. The carrying value of
these financial instruments is a reasonable approximation of fair value.
Stock-Based Compensation: The Company accounts for its stock compensation
arrangements under the provisions of APB No. 25, Accounting for Stock Issued to
Employees, and intends to continue to do so.
Loss Per Common Share: Loss per common share is computed using the
weighted average number of shares of common stock outstanding, except as noted
below. Common equivalent shares from stock options and warrants are excluded
from the computation as their effect is antidilutive, except that, pursuant to
the Securities and Exchange Commission Staff Accounting Bulletins and Staff
policy, common and preferred shares, options, and warrants issued during the
period commencing 12 months prior to the initial filing of the proposed initial
public offering at prices below the anticipated public offering price are
presumed to have been in contemplation of the public offering and have been
included in the calculation as if they were outstanding for all periods
presented, determined using the treasury stock method and the anticipated price
from the initial public offering.
F-14
<PAGE> 86
VENTANA MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE PERIODS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
Net loss per common share was as follows:
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net loss.................................. $ (4,979) $ (5,370) $ (3,269) $ (834) $ (10,307)
Less accretion of preferred stock
redemption requirement.................. (1,796) (1,983) (2,436) (579) (605)
--------- --------- ---------- ----------
Net loss applicable to common stock....... $ (6,775) $ (7,353) $ (5,705) $ (1,413) $ (10,912)
========= ========= ========== ==========
Net loss per common share................. $ (3.47) $ (3.66) $ (2.78) $ (0.71) $ (4.93)
========= ========= ========== ==========
Weighted average shares outstanding....... 1,950 2,010 2,050 1,996 2,212
========= ========= ========== ==========
</TABLE>
The as adjusted calculation of net loss per share presented in the
consolidated statements of operations has been computed as described above, but
also gives effect to the conversion of all outstanding shares of convertible
redeemable preferred stock into common stock upon closing of the Company's
initial public offering (determined using the if-converted method) and the
assumed exercise of warrants to purchase Series D preferred stock which would
otherwise expire upon completion of the Offering.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1994 1995 1996
---- ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Raw materials and work-in-process...................... $752 $1,265 $ 1,330
Finished goods......................................... 141 502 1,053
---- ------ ------
$893 $1,767 $ 2,383
==== ====== ======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1994 1995 1996
------ ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Diagnostic instruments........................... $1,544 $2,008 $ 2,180
Machinery and equipment.......................... 1,356 1,501 2,366
Computers and related equipment.................. 187 284 275
Furniture and fixtures........................... 116 272 273
Leasehold improvements........................... 39 133 133
------ ------ ------
3,242 4,198 5,227
Less accumulated depreciation and amortization........ 1,073 1,940 2,278
------ ------ ------
$2,169 $2,258 $ 2,949
====== ====== ======
</TABLE>
F-15
<PAGE> 87
VENTANA MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE PERIODS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
4. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1994 1995 1996
---- ---- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Accrued payroll and payroll taxes................ $205 $289 $ 630
Accrued commissions.............................. 150 198 38
Deferred revenue................................. 46 127 1,955
Advances from distributor........................ -- -- 1,733
Accrued integration costs........................ -- -- 750
Accrued legal fees and settlement costs.......... -- -- 600
Sales tax payable................................ -- 167 312
Other accrued expenses........................... 133 212 1,033
---- ---- ------
$534 $993 $ 7,051
==== ==== ======
</TABLE>
5. LINE OF CREDIT
During 1995, the Company had $2.75 million available under a line of credit
arrangement with a bank. Borrowings under the line are collateralized by the
Company's receivables and intellectual property. The line contains certain
financial covenants with which the Company must comply. No borrowings were
outstanding under the line at December 31, 1995. Subsequent to year end, this
arrangement was amended (see Note 11).
6. CONVERTIBLE REDEEMABLE PREFERRED STOCK
Each share of Series A, C and D preferred stock is convertible, at the
option of the holder, into approximately 0.37 share of common stock (subject to
adjustments for events of dilution). Shares are automatically converted upon a
public offering of common stock meeting specified criteria, which principally
are a minimum amount of proceeds and price per share levels. Each share of
preferred stock has the same voting rights as common stock and is entitled to
the same number of votes as shares of common stock into which it is convertible.
Subsequent to payment of all accumulated dividends, any dividend declared or
paid would be pro rata and for preferred shares, would be based upon the number
of shares of common stock into which such preferred shares are convertible.
The holders of at least 50% of the outstanding preferred stock may request
the Company to redeem 1/8 of the outstanding preferred stock each quarter
beginning June 30, 1997. The redemption price of Series A preferred stock is
$0.715 per share. The redemption prices for Series C and D preferred stock are
$0.90 per share and $2.15 per share, respectively, plus accumulated unpaid
dividends. If funds are not available for such redemptions, the shares must be
redeemed as soon as funds are legally available.
F-16
<PAGE> 88
VENTANA MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE PERIODS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
The following is a summary of mandatory redemption value, accumulated
unpaid dividends and authorized, issued, and outstanding shares:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------- MARCH 31,
1993 1994 1995 1996
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Series A (non-cumulative):
Mandatory redemption................ $ 536 $ 536 $ 536 $ 536
Authorized, issued and outstanding
shares........................... 750,000 750,000 750,000 750,000
Series C (9% cumulative):
Mandatory redemption, including
accumulated dividends............ $ 9,385 $ 10,041 $ 10,696 $ 10,859
Accumulated dividends............... $ 2,109 $ 2,765 $ 3,420 $ 3,583
Authorized shares................... 8,300,000 8,300,000 8,300,000 8,300,000
Issued and outstanding shares....... 8,083,039 8,084,543 8,084,543 8,084,543
Series D (9% cumulative):
Mandatory redemption, including
accumulated dividends............ $ 15,291 $ 19,660 $ 23,948 $ 24,740
Accumulated dividends............... $ 1,338 $ 2,650 $ 4,431 $ 4,873
Authorized shares................... 6,750,000 10,250,000 10,250,000 10,250,000
Issued and outstanding shares....... 6,489,954 7,911,836 9,098,741 9,261,531
Totals
Mandatory redemption, including
accumulated dividends............ $ 25,212 $ 30,237 $ 35,180 $ 36,135
Accumulated dividends............... $ 3,447 $ 5,415 $ 7,851 $ 8,456
Authorized shares................... 15,800,000 19,300,000 19,300,000 19,300,000
Issued and outstanding shares....... 15,322,993 16,746,379 17,933,284 18,096,074
</TABLE>
In the event of the conversion of convertible redeemable preferred stock
into common stock as a result of a public offering, all accumulated unpaid
dividends on the preferred stock are canceled.
In the event of a liquidation or merger, the preferred stockholders would
receive $0.65 per share of Series A preferred stock, $0.90 per share plus any
accumulated unpaid dividends for Series C preferred stock, and $2.15 per share
plus any accumulated unpaid dividends for Series D preferred stock prior to any
distribution to the common stockholders. If the assets of the Company are
insufficient to permit the payment of the full amount of the liquidation
preference to the preferred stockholders, the assets of the Company would be
distributed to the preferred stockholders in proportion to the total number of
preferred shares then outstanding.
The articles of incorporation and the preferred stock agreements require
the Company to meet certain provisions related to transaction and debt
restrictions, stock dilution, redemption payments and administrative
restrictions. If such requirements are not met, the holders of at least 50% of
the outstanding preferred stock may request an increase in the number of
directors of the Company's Board of Directors as would constitute a minimum
majority and the holders of preferred stock, voting separately as a single
class, may elect individuals to fill such newly created directorships. All
preferences, covenants, and other provisions terminate upon an initial public
offering.
F-17
<PAGE> 89
VENTANA MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE PERIODS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
Through the Company's 1991 Employee Qualified Stock Purchase Plan (the
"1991 Purchase Plan"), employees of the Company are able to purchase Series D
preferred stock through accumulated payroll deductions for $2.15 per share. A
total of 250,000 shares of Series D preferred stock have been reserved for
issuance under this plan. Shares of 222,987 were issued and outstanding at
December 31, 1995, which are convertible into 82,403 shares of common stock.
Warrants for the purchase of 228,914 shares of Series D preferred stock are
outstanding at December 31, 1995, with exercise prices of $2.15 per share. Such
warrants will expire upon an initial public offering, to the extent not
previously exercised.
7. COMMON STOCK
1988 Stock Option Plan: Under the Company's 1988 Stock Option Plan (the
"Plan"), incentive and non-qualified stock options for the purchase of up to
1,339,663 shares of common stock are reserved for grant to employees and
directors. Options must be granted at not less than 100% of fair market value
(as determined by the Board of Directors) at the date of grant. Options
generally vest over a four year period and expire five to ten years after the
date of grant. However, the Board of Directors, at its discretion, may decide
the period over which options become exercisable and their expiration dates.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
-----------------------------
NUMBER OF EXERCISE
OPTIONS PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Balance at January 1, 1993........................ 312,092 $0.18 -- $0.60
Granted......................................... 44,717 0.60 -- 0.95
Exercised....................................... (54,987) 0.18 -- 0.24
Canceled........................................ (28,836) 0.24 -- 0.60
--------- ---------
Balance at December 31, 1993...................... 272,986 0.18 -- 0.95
Granted......................................... 564,836 0.84 -- 0.95
Exercised....................................... (28,090) 0.24 -- 0.95
Canceled........................................ (196,955) 0.18 -- 0.95
--------- ---------
Balance at December 31, 1994...................... 612,777 0.24 -- 0.95
Granted......................................... 324,505 0.84
Exercised....................................... (160,210) 0.24 -- 0.95
Canceled........................................ (126,618) 0.24 -- 0.95
--------- ---------
Balance at December 31, 1995...................... 650,454 0.24 -- 0.95
Granted......................................... 69,256 1.62
Exercised....................................... (7,616) 0.24 -- 0.95
Canceled........................................ (9,429) 0.60 -- 0.84
--------- ---------
Balance at March 31, 1996......................... 702,665 $0.24 -- $1.62
========= =========
</TABLE>
Options to purchase 133,716 shares of common stock were immediately
exercisable at December 31, 1995.
F-18
<PAGE> 90
VENTANA MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE PERIODS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
8. INCOME TAXES
The Company's deferred tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Non-current:
Net operating loss carryforwards....................... $ 4,345 $ 5,004
Capitalized research and development................... 2,256 2,471
General business credit carryforwards.................. 617 767
Other.................................................. 67 186
Current:
Miscellaneous.......................................... 19 154
------ ------
Total deferred tax assets................................ 7,304 8,582
Valuation allowance...................................... (7,304) (8,582)
------ ------
Net deferred tax assets.................................. $ -- $ --
====== ======
</TABLE>
The valuation allowance for deferred tax assets was increased by
$5,500,000, $1,843,000, and $1,319,000 in the years ended December 31, 1993,
1994, and 1995, respectively to fully offset deferred tax balances.
Temporary differences between the net operating losses for financial
reporting and income tax purposes primarily relate to the deferral of research
and development expenses for tax purposes.
At December 31, 1995, the Company has net operating loss carryforwards for
federal and state purposes of approximately $12.0 million. These federal and
state carryforwards will begin to expire in 2000 and 1996, respectively, if not
previously utilized. The Company also has research and development tax credit
carryforwards of approximately $700,000 which will begin to expire in 2005, if
not previously utilized. Utilization of the Company's net operating loss
carryforwards will be subject to limitations due to the "change in ownership"
provisions of the Internal Revenue Code of 1996, as amended, as a result of the
Company's prior issuances of equity securities. These carryforwards, therefore,
may expire prior to being fully utilized. Future financings may cause additional
changes in ownership and further limitations on the use of federal net operating
loss carryforwards.
9. OPERATING LEASES
The Company conducts its corporate operations from leased facilities. In
addition to monthly rental payments, the Company is responsible for certain
monthly operating and maintenance expenses of such facilities. The lease expires
in 2001. The future minimum rental payments under this and other operating lease
arrangements are as follows (in thousands):
<TABLE>
<S> <C>
1996.................................................. $185
1997.................................................. 151
1998.................................................. 137
1999.................................................. 245
2000.................................................. 289
Thereafter............................................ 72
</TABLE>
Rent expense totaled $125,000, $157,000 and $188,000 for the years ended
December 31, 1993, 1994 and 1995, respectively.
F-19
<PAGE> 91
VENTANA MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE PERIODS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
10. FOREIGN OPERATIONS, GEOGRAPHIC, AND SEGMENT DATA
The Company operates predominantly in one segment, the medical diagnostic
devices industry. Inventory transfers to foreign subsidiaries are made at
standard cost. The following summary includes both net sales to unaffiliated
customers and transfers between geographic areas. The North America operations
include corporate activity that benefits the Company as a whole. The North
America geographic area represents primarily the United States. The European
geographic area represents primarily France and Germany.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Net Sales:
North America unaffiliated customers........................ $ 2,681 $ 5,627 $ 9,657
Europe unaffiliated customers............................... -- 300 956
Consolidated subsidiaries................................... -- 903 521
------- ------- -------
2,681 6,830 11,134
Eliminations................................................ -- (903) (521)
------- ------- -------
$ 2,681 $ 5,927 $10,613
======= ======= =======
Net Loss:
North America............................................... $(4,979) $(3,974) $(2,654)
Europe...................................................... -- (1,164) (363)
------- ------- -------
(4,979) (5,138) (3,017)
Eliminations................................................ -- (232) (252)
------- ------- -------
$(4,979) $(5,370) $(3,269)
======= ======= =======
Identifiable Assets:
North America............................................... $ 9,151 $ 8,506 $ 8,823
Europe...................................................... -- 952 1,099
------- ------- -------
9,151 9,458 9,922
Eliminations................................................ -- (2,179) (2,544)
------- ------- -------
$ 9,151 $ 7,279 $ 7,378
======= ======= =======
</TABLE>
11. SUBSEQUENT EVENTS
In April 1996, the Company's Board of Directors authorized the Company to
file a Registration Statement with the Securities and Exchange Commission to
sell shares of its common stock in an underwritten public offering. The
Company's Board of Directors also approved a reduction in the number of
authorized shares of undesignated preferred stock to 5,000,000 and an increase
in the number of authorized shares of common stock to 50,000,000. Unaudited pro
forma stockholders' equity, as adjusted for the assumed conversion of the
Preferred Stock and concurrent cancellation of undeclared dividends of
$8,456,000, is set forth on the accompanying consolidated balance sheet.
In conjunction with the proposed Offering, the Board of Directors
authorized a 1-for-2.7059046 reverse split of its common stock to be effected
prior to the closing of the offering. The accompanying consolidated financial
statements have been adjusted retroactively to reflect the reverse split of the
common stock. The conversion ratios of the respective series of convertible
preferred stock were automatically adjusted to reflect the reverse split.
F-20
<PAGE> 92
VENTANA MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE PERIODS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
If the Offering is consummated under terms presently anticipated, all of
the currently outstanding preferred stock will automatically convert into
6,687,625 shares of common stock, and 81,530 shares of common stock will be
issued due to warrant exercises. Unaudited pro forma stockholders' equity as
adjusted for the assumed conversion (but not for the exercise of outstanding
warrants) is set forth in the accompanying balance sheet.
The Company acquired BioTek for $18.8 million on February 26, 1996. The
acquisition has been accounted for as a purchase.
The purchase price for BioTek consisted of:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Cash consideration............................. $ 2,500
Stock issued to BioTek noteholders............. 3,007
Exchange Notes issued.......................... 8,978
Note payable -- escrow for contingencies....... 234
Net historical liabilities assumed............. 4,044
-------
$ 18,763
=======
</TABLE>
The purchase price was allocated as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Tangible net assets............................ $ 2,288
In-process research and development............ 7,900
Goodwill and other intangibles................. 1,675
Developed technology........................... 2,800
Customer base.................................. 4,100
------
Total purchase price........................... $ 18,763
======
</TABLE>
The Company charged to expense at the date of the acquisition $7.9 million
relating to the portion of the purchase price allocated to those in-process
research and development projects where technological feasibility had not yet
been established and where there are no alternative future uses.
The Exchange Notes were convertible into the Company's common stock for 30
days subsequent to the acquisition. As of March 25, 1996 approximately
$3,007,000 of the Exchange Notes were converted into the Company's common stock.
The Exchange Notes are payable at the earlier of 30 days after an initial public
offering of the Company's common stock of at least $20 million or February 1998.
The Exchange Notes bear interest at 7% payable on December 31, 1996 and 1997.
The December 31, 1996 interest payment may be made in cash or common stock, at
the Company's option. If the Notes are redeemed prior to December 31, 1996, no
interest is payable.
On March 15, 1996, the Company amended its borrowing agreement with its
bank. The Company obtained a lending commitment for $2.0 million under a term
loan with interest at the bank's prime rate plus 2.0%. The Company will make
monthly interest payments on amounts borrowed through March 1997, at which time
any amount borrowed plus accrued interest must be repaid in 24 equal monthly
installments. The Company's line of credit was extended through March 1997.
Between February 26, 1996 and May 14, 1996, the Company issued
approximately $5.1 million of convertible subordinated notes together with
warrants to purchase an 2,402,058 shares of Preferred Stock of the Company at an
exercise price of $2.15 per share. The proceeds of these notes were used to fund
the cash
F-21
<PAGE> 93
VENTANA MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE PERIODS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
portion of the BioTek acquisition consideration and to provide working capital.
These notes bear interest at 7% per annum, which will be forgiven if the notes
are repaid prior to December 31, 1996. The subordinated notes are required to be
repaid by the Company within 30 days of the completion of this Offering.
On February 26, 1996, the Company sold 646,664 shares of common stock to
two directors of the Company and a related partnership at a price of $1.62 per
share for their efforts and assistance in completing the BioTek acquisition and
assisting management with its integration of the companies. These shares are
subject to buyback by the Company at the issuance price for various periods.
These buyback provisions lapse upon successful completion of an initial public
offering or sale of the Company for a price of at least $10.82 per share.
In April 1996, the Company established the 1996 Stock Option Plan (the
"1996 Stock Plan") and reserved 1,000,000 shares of common stock for issuance.
No options to purchase shares of common stock have been granted.
In April 1996, the Board of Directors authorized the 1996 Employee Stock
Purchase Plan (the "1996 Purchase Plan"). A total of 200,000 shares of common
stock are reserved for issuance under the 1996 Purchase Plan. No shares have
been issued under the 1996 Purchase Plan. The 1996 Purchase Plan permits
eligible employees to purchase common stock through payroll deductions, subject
to certain limitations. The price at which stock is purchased under the 1996
Purchase Plan is equal to 85% of the fair market value of the common stock on
the first day of the applicable offering period or the last day of the
applicable offering period, whichever is lower.
In June 1996, the Company adopted a 1996 Director Option Plan (the
"Director Plan") and reserved a total of 250,000 shares of common stock for
issuance thereunder. Commencing with the Company's 1997 annual meeting of
stockholders, each nonemployee director will be granted a nonstatutory option to
purchase an amount of shares of common stock of the Company equal to 5,000
shares multiplied by a fraction, the numerator of which shall be $15.00 and the
denominator of which shall be the fair market value of one share of the
Company's common stock on the date of grant. The exercise price of options
granted under the Director Plan will be equal to the fair market value of one
share of the Company's common stock on the date of grant. Each option granted
under the Director Plan will vest on a cumulative monthly basis over a one-year
period and will have a 10-year term. The Director Plan will terminate in June
2001, unless earlier terminated.
F-22
<PAGE> 94
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
BioTek Solutions, Inc.
We have audited the accompanying balance sheets of BioTek Solutions, Inc.,
as of June 30, 1995 and December 31, 1995, and the related statements of
operations, changes in stockholders' equity (deficit), and cash flows for the
year ended June 30, 1995 and the six-months ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BioTek Solutions, Inc. as of
June 30, 1995 and December 31, 1995, and the results of its operations and its
cash flows for the year ended June 30, 1995 and the six-months ended December
31, 1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Tucson, Arizona
February 2, 1996, except for Note 12,
as to which the date is February 20, 1996
F-23
<PAGE> 95
BIOTEK SOLUTIONS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS (Note 8)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER
1995 31, 1995
-------- -----------
<S> <C> <C>
Current assets:
Cash............................................................... $ 275 $ 31
Accounts receivable, net of allowance of $50 at June 30, 1995 and
$78 at December 31, 1995........................................ 425 523
Inventories (Note 4)............................................... 152 168
Prepaid expenses................................................... 115 607
-------- --------
Total current assets....................................... 967 1,329
Property and equipment, net (Note 5)................................. 940 795
Other assets (Note 6)................................................ 581 470
-------- --------
$ 2,488 $ 2,594
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................... $ 1,443 $ 1,128
Accrued expenses (Note 7).......................................... 3,700 5,228
Current portion of long-term debt (Note 8)......................... 1,106 8,685
-------- --------
Total current liabilities.................................. 6,249 15,041
Long-term debt, less current portion (Note 8)........................ 8,971 2,080
Commitments and contingencies (Note 11)
Stockholders' equity (deficit):
Common stock, no par value:
Authorized -- 10,000,000 shares
Outstanding -- 8,593,915 and 9,024,195 shares at June 30, 1995
and December 31, 1995, respectively............................ 3,047 3,051
Accumulated deficit................................................ (15,764) (17,563)
Treasury stock..................................................... (15) (15)
-------- --------
Total stockholders' equity (deficit)....................... (12,732) (14,527)
-------- --------
$ 2,488 $ 2,594
======== ========
</TABLE>
See accompanying notes.
F-24
<PAGE> 96
BIOTEK SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTHS
YEAR ENDED ENDED
JUNE 30, DECEMBER 31,
1995 1995
---------- ------------
<S> <C> <C>
Revenues............................................................ $ 6,043 $ 3,640
Cost of sales....................................................... 3,714 2,233
------- -------
2,329 1,407
Cost and expenses:
Research and development.......................................... 1,734 751
Selling, general and administrative expenses...................... 3,666 1,327
------- -------
Loss from operations................................................ (3,071) (671)
Interest expense.................................................... 1,730 979
Amortization and other.............................................. 298 149
------- -------
Net loss............................................................ $ (5,099) $ (1,799)
======= =======
</TABLE>
See accompanying notes.
F-25
<PAGE> 97
BIOTEK SOLUTIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------
SHARES ACCUMULATED TREASURY
OUTSTANDING AMOUNT DEFICIT STOCK TOTAL
----------- ------ ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1994................. 7,478,985 $2,335 $ (9,920) $ -- $ (7,585)
Net loss............................ -- -- (5,099) -- (5,099)
Issuance of common stock with
debt............................. 1,082,964 694 -- -- 694
Repurchase of founder's shares with
note............................. (950,000) -- (745) (15) (760)
Shares issued as compensation for
financings....................... 574,770 6 -- -- 6
Exercise of warrants................ 407,196 12 -- -- 12
--------- ------ -------- ---- --------
Balance, June 30, 1995................ 8,593,915 3,047 (15,764) (15) (12,732)
Net loss............................ -- -- (1,799) -- (1,799)
Exercise of warrants................ 430,280 4 -- -- 4
--------- ------ -------- ---- --------
Balance, December 31, 1995............ 9,024,195 $3,051 $ (17,563) $(15) $(14,527)
========= ====== ======== ==== ========
</TABLE>
See accompanying notes.
F-26
<PAGE> 98
BIOTEK SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTHS
YEAR ENDED ENDED
JUNE 30, DECEMBER 31,
1995 1995
---------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................................ $ (5,099) $ (1,799)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization..................................... 1,501 776
Changes in operating assets and liabilities:
Accounts receivable............................................... (306) (98)
Inventories....................................................... 379 (16)
Other assets...................................................... (152) (15)
Accounts payable.................................................. (233) (834)
Other liabilities................................................. 571 781
---------- ------------
Net cash used in operating activities............................... (3,339) (1,205)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment................................. (84) --
---------- ------------
Net cash used in investing activities............................... (84) --
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock............................................ 18 4
Issuance of notes payable, net of loan origination fees............. 3,418 957
---------- ------------
Net cash provided by financing activities........................... 3,436 961
---------- ------------
Net increase (decrease) in cash..................................... 13 (244)
Cash, beginning of period........................................... 262 275
---------- ------------
Cash, end of period................................................. $ 275 $ 31
======== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.............................................. $ 351 $ 69
======== ==========
</TABLE>
See accompanying notes.
F-27
<PAGE> 99
BIOTEK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. BACKGROUND
BioTek Solutions, Inc. (the Company) develops, manufactures, markets and
supports proprietary computerized instruments that automate biopsy tests for the
diagnosis of cancer, viruses and other conditions and diseases. These
instruments use the Company's chemical reagents and utilize monoclonal
antibodies, DNA probes and other sophisticated analytical techniques. This
system effectively replaces the labor-intensive, manually-performed sequences of
immunohistochemistry analysis of the biopsy, and allows the user to perform up
to five test routines simultaneously with increased accuracy and significant
cost reduction. The Company also provides extensive after-sale support and
maintenance.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue: Revenue generally is recognized upon shipment of products. Revenue
from service contracts is recognized ratably over the lives of the contracts.
Export sales, which were made primarily to Denmark, totaled $1,478,000 and
$2,492,000 for the 6 months ended December 31, 1995 and the year ended June 30,
1995.
Credit Risk: Virtually all of the Company's sales are made through two
distributors. The Company has not experienced bad debts from these distributors
in the past. The domestic distribution agreement expires in April 1998, and the
international distribution agreement expires in December 1999, if not renewed by
the parties.
A portion of the cash flows from these distribution agreements have been
pledged to repay the advances from one of the distributors and to reimburse
contract manufacturers for start-up expenses (see Note 7).
Inventories: Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Property and Equipment: Property and equipment are stated at cost. The
Company capitalizes expenditures that materially increase asset lives and
charges ordinary repairs and maintenance to operations as incurred. Depreciation
and amortization are provided using the straight-line method over the estimated
useful lives of the assets, which are generally three to five years.
Income Taxes: The Company accounts for income taxes using the liability
method. Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using enacted tax rates and laws expected to be in effect when the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce the carrying amount of deferred tax assets to their net
realizable value.
Stock-Based Compensation: The Company accounts for its stock compensation
arrangements under the provisions of APB 25, Accounting for Stock Issued to
Employees, and intends to continue to do so.
Use of Estimates: The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's cash, accounts receivable, and long-term debt represent
financial instruments as defined by Statement of Financial Accounting Standards
No. 107, Disclosures About Fair Value of Financial Instruments. The carrying
value of these financial instruments is a reasonable approximation of fair
value.
F-28
<PAGE> 100
BIOTEK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1995
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and work-in-process...................... $100 $102
Finished goods......................................... 52 66
---- ----
$152 $168
==== ====
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1995
--------- -------------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment............................... $ 1,311 $ 1,312
Furniture and fixtures................................ 31 31
Leasehold improvements................................ 135 135
Other................................................. 22 18
------ ------
1,499 1,496
Less accumulated depreciation and amortization........ 559 701
------ ------
$ 940 $ 795
====== ======
</TABLE>
6. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1995
--------- -------------
(IN THOUSANDS)
<S> <C> <C>
Patents, net.......................................... $ 148 $ 167
Loan origination fees, net............................ 417 282
Deposits and other.................................... 16 21
---- ----
$ 581 $ 470
==== ====
</TABLE>
Patents are net of amortization of $14,000 and $19,000 at June 30, 1995 and
December 31, 1995, respectively. Loan origination fees are net of amortization
of $512,000 and $647,000 at June 30, 1995 and December 31, 1995, respectively.
Loan origination fees were paid to a broker/dealer controlled by a member
of the Company's Board of Directors in connection with private placement
offerings. These fees include a commission of 10% of the funds raised from
investors not identified by the Company and 5% for investors identified by the
Company, as well as five-year warrants to buy common stock equal to 10% of
common stock issued for investors not identified by the Company and 6% for
investors identified by the Company. These fees are included in other assets in
the accompanying balance sheets and are being amortized over the terms of the
related notes payable.
F-29
<PAGE> 101
BIOTEK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1995
--------- -------------
(IN THOUSANDS)
<S> <C> <C>
Advances from distributor............................. $ 1,402 $ 2,239
Legal fees and settlements............................ 868 1,124
Accrued interest...................................... 380 676
Deferred revenue...................................... 341 455
Reimbursement of start-up expenses to contract
manufacturers....................................... 230 242
Due to officers....................................... 210 227
Other................................................. 269 265
------ ------
$ 3,700 $ 5,228
====== ======
</TABLE>
8. LONG-TERM DEBT
Long-term debt, consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1995
--------- -------------
(IN THOUSANDS)
<S> <C> <C>
Notes payable issued through private placements:
7.5% due July 31, 1995, extended (see below)........ $ 1,500 $ 1,500
7.5% due December 31, 1996.......................... 1,146 1,087
7.5% due March 31, 1996............................. 500 500
7.5% due June 30, 1996.............................. 600 600
8.25% due September 30, 1996........................ 5,869 5,869
Zero coupon, due September 30, 1997................. 1,113 1,334
Other................................................. 881 877
------ ------
11,609 11,767
Less:
Original issue discount............................. 1,532 1,002
Current portion..................................... 1,106 8,685
------ ------
$ 8,971 $ 2,080
====== ======
</TABLE>
Substantially all of the Company's financing has consisted of financing
units. Each unit consists of a note payable with a fixed interest rate and a
specified number of shares of the Company's common stock. The value of the
common stock has been recorded as imputed interest on the notes payable, and is
being amortized as additional interest expense over the life of the notes. This
discount increases the interest rates on the notes from stated rates of between
7.5% and 8.25% to effective rates of between 7.8% and 31.6%.
Annual maturities of the Company's long-term debt are $8,685,000 in 1996
and $2,080,000 in 1997.
During the fiscal year ended June 30, 1995, investors holding notes with a
face value of $966,000 and accrued interest of $180,000 due December 31, 1994
exchanged these notes for new notes with a face value of $1,146,000 due December
31, 1996 with interest payable quarterly at 7.5%.
In accordance with the terms of the offering document, the Company extended
the maturity of the notes originally due July 31, 1995 until October 31, 1995.
Under the terms of the offering document, holders of
F-30
<PAGE> 102
BIOTEK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
these notes must proceed against the Company as a group (defined as holders of
at least 50% of the total principal balance) to declare the notes in default.
The Company has obtained waivers from holders of greater than 50% of the
outstanding principal balance, deferring any action against the Company until
March 31, 1996.
Notes with a face value of $1,113,000 and $1,334,000 at June 30, 1995 and
December 31, 1995 are convertible into the Company's common stock at a
conversion rate of one share of stock per $1.00 of note principal.
All notes call for quarterly payments of interest. The notes may be called
prior to maturity at the option of the Company. The Company may extend the
maturity of the notes by three months upon notice. The notes are automatically
due in full upon liquidation of the Company, sale of the Company, default or an
initial public offering in excess of $5,000,000. The notes are collateralized by
substantially all of the Company's assets.
In connection with the business combination transaction (see Note 12),
Ventana Medical Systems, Inc. ("Ventana") replaced substantially all of the
above notes with Ventana exchange notes ("Exchange Notes"). The Exchange Notes
are payable at the earlier of 30 days after a successful public offering of
Ventana stock or February 1998. The Exchange Notes bear interest at 7%, payable
December 31, 1996 and 1997. The interest due December 31, 1996 is payable either
in cash or Ventana common stock, at Ventana's option. If the notes are redeemed
prior to December 31, 1996, no interest is payable. The Exchange Notes are
convertible into Ventana common stock at a price of $5.00 per share for 30 days
subsequent to the closing of the transaction.
9. STOCKHOLDERS' EQUITY (DEFICIT)
In January 1994, the Board of Directors adopted the Amended and Restated
1991 Stock Incentive Plan (the Plan). The Plan provides for the granting of
options to purchase common stock that are either intended to qualify as
incentive common stock options or nonqualified options. All officers, directors,
employees, consultants, advisers, independent contractors and agents are
eligible to receive options under the Plan, except that only employees may
receive incentive common stock options. The maximum number of common shares
available for issuance under the Plan is 1,250,000.
The exercise price of incentive common stock options granted under the Plan
must be at least equal to the fair market value of the shares on the date of
grant (110% of fair market value in the case of participants who own shares
possessing more than 10% of the combined voting power of the Company) and may
not have a term in excess of ten years from the date of grant (five years in the
case of participants who own shares possessing more than 10% of the combined
voting power of the Company). A summary of changes in the common shares under
option follows:
<TABLE>
<CAPTION>
SHARES PRICE
UNDER OPTION RANGE
------------ -------------
<S> <C> <C>
Balance, July 1, 1994............................ 818,000 $.45 -- $3.00
Granted........................................ 8,000 2.50
Canceled....................................... (119,419) .45 -- 2.50
------------ -------------
Balance, June 30, 1995........................... 706,581 .45 -- 3.00
Granted........................................ -- --
Canceled....................................... -- --
------------ -------------
Balance, December 31, 1995....................... 706,581 $.45 -- $3.00
========== ============
</TABLE>
In January 1996, the Company's Board of Directors terminated the Plan
pursuant to the Plan document. Upon termination, all options became fully
vested. All options not exercised within 30 days of the termination are
canceled.
F-31
<PAGE> 103
BIOTEK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Warrants for the purchase of 1,248,917 shares of common stock with exercise
prices between $.01-$3.33 were outstanding at December 31, 1995. All warrants
will be canceled upon closing of the Ventana acquisition (see Note 12).
10. INCOME TAXES
The Company's deferred tax assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30, 1995 DECEMBER 31, 1995
------------------- -------------------
NON- NON-
CURRENT CURRENT CURRENT CURRENT
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net operating loss carryforwards...... $ -- $ 3,954 $ -- $ 4,331
Capitalized research and
development......................... -- 1,025 -- 1,133
Research and development credits...... -- 76 -- 113
Basis of fixed assets................. -- 82 -- 110
Reserves and allowances not currently
deductible.......................... 355 -- 332 --
----- ------- ----- -------
355 5,137 332 5,687
Valuation allowance................... (355) (5,137) (332) (5,687)
----- ------- ----- -------
Net deferred tax assets............... $ -- $ -- $ -- $ --
===== ======= ===== =======
</TABLE>
Temporary differences between the federal net operating losses for
financial reporting and income tax purposes primarily relate to the deferral of
research and development expenses for tax purposes.
At June 30, 1995 and December 31, 1995, the Company had net operating loss
carryforwards for federal and state purposes of $9,884,000 and $10,828,000,
respectively. These federal and state carryforwards will begin to expire in
2008, if not previously utilized. Utilization of the Company's net operating
loss carryforwards will be subject to limitations due to the change in ownership
provisions of the Internal Revenue Code as a result of the acquisition by
Ventana (see Note 12). These carryforwards, therefore, may expire prior to being
fully utilized.
11. COMMITMENTS AND CONTINGENCIES
The Company leases its operating facility under an operating lease. The
Company has the following future minimum annual lease payments as of December
31, 1995:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1996........................... $147
1997........................... 113
1998........................... 66
----
$326
====
</TABLE>
Total rent expense related to these facility leases was approximately
$195,000 for the year ended June 30, 1995 and $110,000 for the six-months ended
December 31, 1995.
A competitor has filed suit against the Company alleging infringement of
certain patent rights. The Company is involved in various other litigation
arising in the normal course of business. Management, in conjunction with
outside counsel, periodically reviews such matters and makes any accruals deemed
necessary. Management is of the opinion that the disposition of these claims
will not have a material effect on the Company's financial statements.
F-32
<PAGE> 104
BIOTEK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENT
On February 20, 1996, the Company's stockholders approved the acquisition
of all of the Company's outstanding common stock by Ventana for consideration of
$18,763,000. The purchase price includes cash, issuance of Exchange Notes, and
the assumption of liabilities. The Company does not anticipate any funds will
remain for common stockholders once the Company's liabilities are settled. The
Company will become a wholly owned subsidiary of Ventana, which will provide the
financial resources for the Company to meet its operating needs.
The Company incurred $1,395,000 in costs subsequent to year end related to
the transaction, including the issuance of notes payable of $888,000 and the
payment of cash of $328,000 paid to officers and directors of the Company.
Subsequent to December 31, 1995, the Company renegotiated certain
obligations with its vendors. Accounts payable, accrued expenses, and long-term
debt with carrying values totaling $1,923,000 in the accompanying balance sheet
were settled for $1,120,000. The resulting gain of $803,000 is not included in
the accompanying statement of operations.
F-33
<PAGE> 105
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
BioTek Solutions, Inc.
We have audited the accompanying balance sheets of BIOTEK SOLUTIONS, INC.(a
California corporation) as of June 30, 1993 and 1994 and the related statements
of operations, shareholders' deficit and cash flows for the years then ended
June 30, 1993 and 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BioTek Solutions, Inc. as of
June 30, 1993 and 1994, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 2, 1996
(except with respect to
the information in Note 8
as to which the date is
February 20, 1996)
F-34
<PAGE> 106
BIOTEK SOLUTIONS, INC.
BALANCE SHEETS
AS OF JUNE 30, 1993 AND 1994
ASSETS
<TABLE>
<CAPTION>
1993 1994
---------- ----------
<S> <C> <C>
Current Assets:
Cash.............................................................. $ 100,519 $ 261,611
Accounts receivable, net of allowance of $41,650 and $44,984 at
June 30, 1993 and 1994, respectively........................... 246,115 421,269
Inventories....................................................... 332,038 530,926
Prepaid expenses.................................................. -- 26,466
---------- ----------
Total current assets...................................... 678,672 1,240,272
---------- ----------
Property, Equipment and Leasehold Improvements:
Equipment......................................................... 370,700 1,071,004
Furniture and fixtures............................................ 10,293 31,095
Leasehold improvements............................................ 30,754 130,841
Vehicles.......................................................... 5,000 5,000
Computer hardware and software.................................... 55,776 184,988
---------- ----------
472,523 1,422,928
Less -- Accumulated depreciation and amortization................. 55,076 279,139
---------- ----------
417,447 1,143,789
---------- ----------
Other Assets:
Patents, net of amortization of $1,929 and $6,543 at June 30, 1993
and 1994, respectively......................................... 59,957 90,319
Private placement origination fee, net of amortization of $51,816
and $168,897 at June 30, 1993 and 1994, respectively........... 206,684 464,816
Deposits.......................................................... 670 18,577
---------- ----------
267,311 573,712
---------- ----------
$1,363,430 $2,957,773
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable.................................................. $ 677,456 $1,862,903
Accrued liabilities............................................... 729,375 695,726
Other............................................................. 136,280 359,139
Restructuring reserve............................................. -- 611,441
Current portion of notes payable.................................. -- 979,000
Reimbursement of start-up expenses to contract manufacturer....... -- 662,000
---------- ----------
Total current liabilities................................. 1,543,111 5,170,209
---------- ----------
Notes Payable, net of current portion and original issue discount... 3,144,099 5,372,823
---------- ----------
Commitments and Contingencies (Note 4)
Stockholders' Deficit:
Common stock, no par value
Authorized -- 10,000,000 shares issued and outstanding
5,940,800 and 7,478,985 in 1993 and 1994 respectively.......... 743,646 2,335,031
Accumulated deficit............................................... (4,067,426) (9,920,290)
---------- ----------
(3,323,780) (7,585,259)
---------- ----------
$1,363,430 $2,957,773
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE> 107
BIOTEK SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1993 AND 1994
<TABLE>
<CAPTION>
1993 1994
----------- -----------
<S> <C> <C>
Revenues............................................................ $ 1,549,655 $ 6,159,843
----------- -----------
Cost and expenses:
Cost of revenues.................................................. 1,410,693 4,103,279
Research and development.......................................... 1,370,376 861,310
Selling, general and administrative expenses...................... 1,764,228 5,222,464
Restructuring expense............................................. -- 877,004
----------- -----------
4,545,297 11,064,057
----------- -----------
Loss from operations........................................... (2,995,642) (4,904,214)
----------- -----------
Interest expense (income), net:
Interest expense.................................................. 255,406 953,691
Interest income................................................... (7,722) (5,841)
----------- -----------
247,684 947,850
----------- -----------
Loss before provision for state income taxes................... (3,243,326) (5,852,064)
Provision for state income taxes.................................... 1,000 800
----------- -----------
Net loss............................................................ $(3,244,326) $(5,852,864)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 108
BIOTEK SOLUTIONS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 1993 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------
SHARES ACCUMULATED
OUTSTANDING AMOUNT DEFICIT
----------- ---------- -----------
<S> <C> <C> <C>
Balance, June 30, 1992................................ 3,945,000 $ 54,568 $ (823,100)
Issuance of Common Stock in connection with private
placement........................................ 229,800 2,298 --
Issuance of Common Stock in settlement of lawsuits
in connection with bridge loan................... 50,000 500 --
Issuance of Common Stock in connection with the
first private placement with a related party..... 900,000 9,000 --
Issuance of Common Stock in connection with the
second private placement with a related party.... 250,000 207,500 --
Issuance of Common Stock in settlement of lawsuit
with former board member......................... 266,000 220,780 --
Issuance of Common Stock in connection with the
third private placement with a related party..... 300,000 249,000 --
Net loss.............................................. -- (3,244,326)
--------- ----------- ------------
Balance, June 30, 1993................................ 5,940,800 743,646 (4,067,426)
Issuance of common stock upon the exercise of
warrants......................................... 5,000 2,250 --
Issuance of common stock in connection with the
fourth, fifth and sixth private placements with a
related party.................................... 1,533,185 1,589,135 --
Net loss.............................................. -- -- (5,852,864)
--------- ----------- ------------
Balance, June 30, 1994................................ 7,478,985 $2,335,031 $(9,920,290)
========= =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 109
BIOTEK SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1993 AND 1994
<TABLE>
<CAPTION>
1993 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................ $(3,244,326) $(5,852,864)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation................................................. 51,626 228,677
Interest and amortization of loan fees....................... 94,993 552,912
Issuance of Common Stock for settlement of lawsuits.......... 221,280 --
Restructuring reserve........................................ -- 611,441
Reimbursement of start-up expenses to contract
manufacturer................................................ -- 662,000
(Increase) decrease in:
Accounts receivable.......................................... (245,115) (175,154)
Inventories.................................................. (332,038) (198,888)
Prepaid expenses............................................. 6,520 (26,466)
Deposits..................................................... (48,989) (17,907)
Patents...................................................... 2,660 (34,976)
Increase (decrease) in:
Accounts payable............................................. 659,940 1,185,447
Accrued liabilities.......................................... 706,427 (33,649)
Other liabilities............................................ 91,280 222,859
----------- -----------
Net cash used in operating activities................... (2,035,742) (2,876,568)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and leasehold improvements...... (376,149) (950,405)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock........................................ -- 2,670
Issuance of notes payable....................................... 2,626,000 4,360,608
Loan fees paid in association with issuance of notes payable.... (258,500) (375,213)
----------- -----------
Net cash provided by financing activities............... 2,367,500 3,988,065
----------- -----------
NET INCREASE (DECREASE) IN CASH................................... (44,391) 161,092
Cash, beginning of period......................................... 144,910 100,519
----------- -----------
Cash, end of period............................................... $ 100,519 $ 261,611
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest..................................................... $ 50,000 $ 272,211
=========== ===========
Taxes........................................................ $ 1,000 $ 1,600
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE> 110
BIOTEK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1994
1. SIGNIFICANT RISKS
BUSINESS AND BASIS OF PRESENTATION
BioTek Solutions, Inc. ("the Company") develops, manufactures, markets and
supports proprietary computerized instruments that automate biopsy tests for the
diagnosis of cancer, viruses and other conditions and diseases. These
instruments use the Company's optimized chemical reagents and monoclonal
antibodies. This system effectively replaces the labor-intensive,
manually-performed sequences of the biopsy and surgical specimen preparation and
allows the user to precisely and simultaneously perform up to five test routines
with increased accuracy and significant cost reduction. The Company also
provides extensive after-sale support and maintenance.
The Company was formed in October 1990 and was a development stage company
through June 30, 1992. The Company began selling products in the first quarter
of fiscal 1993 and began volume sales in March 1993. The Company incurred net
losses of $3,244,326 and $5,852,864 for the years ended June 30, 1993 and 1994,
respectively. Continuing losses have adversely affected the liquidity of the
Company. As of June 30, 1994, the Company had a working capital deficit of
$3,929,937.
The Company has relied upon private sales of equity and debt securities to
obtain necessary working capital to support its activities. On February 20,
1996, the Company's stockholders approved the acquisition of the Company by
Ventana Medical Systems, Inc. (Ventana)(see Note 8).
RESTRUCTURING CHARGES
During fiscal 1994, the Company recorded a $877,004 charge to income for
the repositioning of the Company's operations. The repositioning was
necessitated by plans of a new management team. The charge includes costs
associated with reductions in work force, removal of former president and
termination of various leases. The Company believes that the repositioning and
resulting expense reductions will allow it to operate in a more efficient manner
in the future.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue is recognized upon shipment of product. Revenue for the years ended
June 30, 1993 and 1994 were comprised of the following:
<TABLE>
<CAPTION>
1993 1994
---------- ----------
<S> <C> <C>
Instruments......................................... $ 938,896 $3,519,723
Chemistries, disposables, service and other......... 610,759 2,640,120
---------- ----------
$1,549,655 $6,159,843
========== ==========
</TABLE>
In January 1993, the Company signed an exclusive distribution agreement
with Curtin Matheson Scientific, Inc. (CMS). This gave CMS the exclusive rights
to sell instruments and consumables in the United States. Total sales to CMS for
the years ended June 30, 1993 and 1994 were $1,213,000 and $5,445,394,
respectively.
CREDIT RISK
Virtually all of the Company's sales are made through two distributors. The
Company has not experienced bad debts from these distributors in the past. The
distribution agreement with CMS expires in
F-39
<PAGE> 111
BIOTEK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
April 1998, and the international distribution agreement expires in December
1999, if not renewed by the parties.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORY
Inventory consists of automated instruments, chemical reagents, and
replacement parts for the automated instruments (see Note 4). As of June 30,
1993 and 1994, inventory consisted of:
<TABLE>
<CAPTION>
1993 1994
-------- --------
<S> <C> <C>
Raw materials.......................................... $219,633 $ 36,078
Work in process........................................ 71,729 114,328
Finished goods......................................... 40,676 380,520
-------- --------
$332,038 $530,926
======== ========
</TABLE>
Inventory is stated at the lower of cost (first-in, first-out) or market.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization is provided through the use of the
straight-line method over the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
ASSET TYPE USEFUL LIFE
--------------------------------------- -------------------------
<S> <C>
Equipment.............................. 5 years
Furniture & Fixtures................... 5 years
Leasehold Improvements................. Lesser of the asset life
or the life of the
respective lease
Vehicles............................... 5 years
Computer Hardware...................... 5 years
Computer Software...................... 3 years
</TABLE>
The Company capitalizes expenditures that materially increase asset lives
and charges ordinary repairs and maintenance to operations as incurred. When
assets are sold or otherwise disposed of, the cost and related accumulated
depreciation and amortization are removed from the accounts and any gain or loss
is included in results of operations.
CAPITALIZED PATENT COSTS
The Company capitalizes costs of obtaining patent rights for certain
products. Amortization of capitalized patent cost is provided on a straight-line
basis over 17 years.
F-40
<PAGE> 112
BIOTEK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
No provision was made for federal income tax purposes since the Company has
recorded a net operating loss from inception. The primary difference between
book and tax loss is the capitalization of research and development costs for
tax purposes. At June 30, 1994, the Company had net operating losses for federal
and state purposes of $6,754,000. These federal and state carryforwards will
begin to expire in 2006, if not previously utilized. Utilization of the
Company's net operating losses will be subject to limitations due to the change
in ownership provisions of the Internal Revenue Code as a result of the
acquisition by Ventana (see Note 8). These carryforwards, therefore, may expire
prior to being fully utilized.
3. CAPITAL TRANSACTIONS
On September 20, 1993, the shareholders approved an increase in the number
of authorized shares of common stock from 6,500,000 to 10,000,000.
In November 1990, the Company issued 1,000,000 shares of Common Stock to
each of its three founders in exchange for $45,118. In addition, two of the
founders transferred all their rights, title and interest in certain technology
and equipment which was valued at zero.
In July 1992, the Company issued 25,000 shares to each of two investors and
a $24,000 note due December 31, 1992 with no interest. The note and shares were
issued as part of a settlement agreement and mutual release among the investors,
the Company and an officer of the Company.
Between January 1992 and September 1992, the Company sold $979,000 in
aggregate principal amount of units in a private placement to various investors.
Each unit consisted of 30,000 shares of Common Stock and a senior secured note
in the principal amount of $25,000 with interest accruing at 7.5 percent until
maturity on July 31, 1995. Danzi Capital Group (DANZI) served as private
placement agent for the offering (see Note 6). The Common Stock was valued at
$.01 per share.
In September 1992, the Company sold $1,500,000 in aggregate principal
amount of units in a private placement to various investors. Each unit consisted
of 15,000 shares of Common Stock and a senior unsecured note in the principal
amount of $25,000 with interest accruing at 7.5 percent until maturity on July
31, 1995. Danzi served as private placement agent for the offering (see Note 6).
The Common stock was valued at $.01 per share.
In March 1993, the Company issued 266,000 shares to two former board
members. These shares were issued as part of settlement agreements and a mutual
release among the former board members and the Company.
In April 1993, the Company sold $500,000 in aggregate principal amount of
units in a private placement to various investors. Each unit consisted of 12,500
shares of Common Stock and a senior unsecured note in the principal amount of
$25,000 with interest accruing at 7.5 percent until maturity on March 31, 1996.
Danzi served as private placement agent for the offering (see Note 6). The
Common stock was valued at $.83 per share.
In May 1993, the Company sold $600,000 in aggregate principal amount of
units in a private placement to various investors. Each unit consisted of 12,500
shares of Common Stock and a senior unsecured note in the principal amount of
$25,000 with interest accruing at 7.5 percent until maturity on June 30, 1996.
Danzi served as private placement agent for the offering (see Note 6). The
Common Stock was valued at $.83 per share.
Between July 1993 to October 1993, the Company sold $2,250,000 in aggregate
principal amount of units in a private placement to various investors. Each unit
consisted of 10,000 shares of Common Stock and a senior unsecured note in the
principal amount of $25,000 with interest accruing at 8.25 percent until
maturity
F-41
<PAGE> 113
BIOTEK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
on September 30, 1996. Danzi served as private placement agent for the offering
(see Note 6). The Common Stock was valued at $.83 per share.
Between March 1994 to June 1994, the Company sold $2,110,608 in aggregate
principal amount of units in a private placement to various investors. Each unit
consisted of 7,500 shares of Common Stock and a senior unsecured note in the
principal amount of $25,000 with interest accruing at 8.25 percent until
maturity on September 30, 1996. Danzi served as private placement agent for the
offering (see Note 6). The Common Stock was valued at $1.33 per share.
The value of the common stock has been recorded as imputed interest on the
notes payable, and is being amortized as additional interest expense over the
life of the notes. This discount increases the interest rates on the notes from
stated rates of between 7.5 percent and 8.25 percent to effective rates of
between 7.8 percent and 31.6 percent.
4. COMMITMENTS AND CONTINGENCIES
ROYALTIES
In May 1993, the Company entered into a royalty agreement with a slide
manufacturer that obligates the Company to pay a percentage of the sales of
certain items to the manufacturer based on terms defined in the royalty
agreement with a guaranteed minimum of $50,000 per year for 4 years beginning in
fiscal 1994. There was royalty expense of $50,000 for the year ended June 30,
1994 and no royalty expense for the year ended June 30, 1993.
LEASES
The Company leased its office facility during 1992 under an operating lease
on a month to month basis. The Company also has four sales offices that are
rented on a month to month basis. Total rental expense related to these facility
leases was approximately $106,000 and $140,175 for the years ended June 30, 1993
and 1994, respectively. The future minimum annual lease payments under a new 5
year office lease agreement signed subsequent to year end is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
- ------------------------------
<S> <C>
1995.................... $112,794
1996.................... 112,794
1997.................... 112,794
1998.................... 112,794
$451,176
</TABLE>
DISTRIBUTOR LICENSING AGREEMENT
In January 1993, the Company entered into a 5 year exclusive distribution
agreement with CMS, a major distributor of medical products, to purchase and
promote the Company's products. As of June 30, 1994, CMS had purchased 104
TechMate(TM) systems. CMS is required to purchase a total of 300 units by April
1995 in order to retain its exclusive distribution rights. CMS has not met this
obligation; however no action has been taken.
STOCK PURCHASE AGREEMENT
On February 14, 1992, the Company entered into a buy/sell agreement (the
"Buy-Sell Agreement") with the three founders of the Company. Under the
agreement, if a founder should be terminated for cause or voluntarily resign
without written approval of the board, then the other founders and the Company
shall have the option, but not the obligation, at any time and from time to time
to purchase all or any portion of the
F-42
<PAGE> 114
BIOTEK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
shares owned by such founder. If the termination is determined to be without
cause, then such founder shall have the right to require the Company to purchase
all or a portion of the shares owned by-the-founder subject to certain
limitations as defined in the agreement. The purchase price will be at fair
market value determined on a semi-annual basis by the founders. If the fair
market value is not adjusted the last agreed upon rate will prevail. The last
established fair market value as set by the founders was $0.80 per share.
LITIGATION
As of July 6, 1994, the former president of the Company was terminated. As
a result of an arbitration ruling in July 1995, the Company has issued the
former president a note for $760,000 bearing interest at 7.5 percent per year
for the repurchase of his 950,000 shares.
In March 1995, a competitor filed suit against the Company alleging
infringement of certain patent rights. The Company is involved in various other
actions arising in the normal course of business. Management, in conjunction
with outside counsel, periodically reviews such matters and makes any accruals
deemed necessary. Management is of the opinion that the disposition of these
claims will not have a material effect on the Company's financial position or
results of operations.
5. NOTES PAYABLE
Notes payable, all issued in connection with private placements (see Notes
3 and 6), consisted of the following as of June 30, 1994:
<TABLE>
<S> <C>
Secured Notes payable, collateralized by the assets of the
Company, interest at 7.5 percent payable quarterly, due
December 31, 1994, subsequently extended to December 31,
1996........................................................ $ 979,000
Secured Notes payable, collateralized by the assets of the
Company, interest at 7.5 percent payable quarterly, due July
31, 1995, subsequently extended to October 31, 1996......... 1,500,000
Unsecured Notes payable, interest at 7.5 percent payable
quarterly, due March 31, 1996............................... 500,000
Unsecured Notes payable, interest at 7.5 percent payable
quarterly, due June 30, 1996................................ 600,000
Unsecured Notes payable, interest at 8.25 percent payable
quarterly, due September 30, 1996........................... 4,360,608
----------
7,939,608
----------
Less:
Original issue discount........................................ 1,587,785
Current portion................................................ 979,000
----------
$5,372,823
==========
</TABLE>
In connection with the sale of the Company to Ventana (see Note 8), the
outstanding notes were exchanged for Ventana notes which are interest free if
paid by December 31, 1996 and ultimately due with interest at 7 percent on
December 31, 1997. The entire amount is due 30 days after completion of an
initial public offering.
6. RELATED PARTIES
The Company has completed several private placement offerings in which
Danzi was the placement agent. In connection with these offerings Danzi was paid
a commission of 10 percent of the funds raised from
F-43
<PAGE> 115
BIOTEK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
investors not identified by the Company and 5 percent for investors identified
by the Company, payable upon the closing of the transactions. As additional
consideration, the Company granted Danzi five-year warrants to buy Common Stock
equal to 10 percent of Common Stock issued to investors not identified by the
Company and 6 percent for identified obtained by the Company. Total fees paid
and warrants issued to Danzi during the years ended June 30, 1993 and 1994 were
$258,500, and 140,300 warrants in 1993 and $427,000 and 126,171 warrants in
1994. The fees paid to Danzi have been capitalized and are being amortized over
the life of the related notes payable.
The warrants issued to Danzi are summarized as follows:
<TABLE>
<CAPTION>
EXPIRATION DATE EXERCISE PRICE UNDERLYING SHARES
------------------------------------------------------- -------------- -----------------
<S> <C> <C>
Between October 1997 and May 1998...................... $ 1.00 140,300
Between July 1998 and June 1999........................ $ 1.00 126,171
-------
266,471
=======
</TABLE>
7. STOCK OPTIONS
In November 1991, the Company adopted the Biotek Solutions, Inc. 1991 Stock
Incentive Plan (the "Plan"). In January 1994, the Board of Directors adopted the
Amended and Restated 1991 Stock Incentive Plan, subject to shareholder approval.
The Plan provides for the granting of options to purchase Common Stock that are
either intended to qualify as incentive Common Stock options or non-qualified
options. All officers, directors, employees, consultants, advisers, independent
contractors and agents are eligible to receive options under the Plan, except
that employees may only receive incentive Common Stock options. The maximum
number of shares available for issuance under the Plan is 1,250,000.
The exercise price of incentive Common Stock options granted under the Plan
must be at least equal to the fair market value of the shares on the date of
grant (110 percent of fair market value in the case of participants who own
shares possessing more than 10 percent of the combined voting power of the
Company) and may not have a term in excess of 10 years from the date of grant
(five years in the case of participants who are more than 10 percent Common
Stockholders).
A summary of changes in the shares under option follows:
<TABLE>
<CAPTION>
SHARES PRICE RANGE
-------- -----------
<S> <C> <C>
Balance, June 30, 1992...................................... 430,750 $ 0.45
Granted................................................... 303,000 0.45-- 0.83
Canceled.................................................. -- --
------- -----------
Balance, June 30, 1993...................................... 733,750 0.45-- 0.83
Granted................................................... 176,750 0.83-- 3.00
Canceled.................................................. 92,500 0.83-- 2.50
------- -----------
Balance, June 30, 1994...................................... 818,000 $0.45--$3.00
======= ===========
</TABLE>
At June 30, 1993 expiration dates for options outstanding ranged from
fiscal 2002 to 2003. No amounts have been reflected in the Company's statements
of operations with respect to these stock options.
In January 1996, the Company's Board of Directors terminated the plan,
pursuant to the plan document. Upon termination, all options became fully
vested. All options not exercised within 30 days of the termination are
canceled.
F-44
<PAGE> 116
BIOTEK SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SUBSEQUENT EVENTS
On February 20, 1996, the Company's stockholders approved the acquisition
of the Company by Ventana. Under the terms of the acquisition agreement, Ventana
will pay $4.5 million in cash and notes and assume $12.5 million of the
Company's liabilities. Substantially all of the proceeds to the Company will be
used to retire existing liabilities. The Company does not anticipate any funds
will remain for common stockholders once the Company's liabilities are settled.
Subsequent to December 31, 1995, the Company renegotiated certain
obligations with its vendors. Accounts payable, accrued expenses, and long-term
debt with carrying values totaling $1,923,000 in the accompanying balance sheet
were settled for $1,120,000. The resulting gain of $803,000 is not included in
the accompanying statements of operations.
F-45
<PAGE> 117
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER, ANY UNDERWRITER
OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 6
The Company............................. 16
Use of Proceeds......................... 16
Dividend Policy......................... 16
Dilution................................ 17
Capitalization.......................... 18
Selected Consolidated Actual and Pro
Forma Financial and Operating Data.... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 21
Business................................ 33
Management.............................. 50
Certain Transactions.................... 58
Principal and Selling Stockholders...... 61
Description of Capital Stock............ 64
Shares Eligible for Future Sale......... 65
Underwriting............................ 67
Legal Matters........................... 68
Experts................................. 68
Additional Information.................. 68
Index to Financial Statements........... F-1
</TABLE>
------------------
UNTIL AUGUST 20, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,050,000 SHARES
LOGO
VENTANA MEDICAL SYSTEMS, INC.
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
BEAR, STEARNS & CO. INC.
DILLON, READ & CO. INC.
JULY 26, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 118
VENTANA MEDICAL SYSTEMS, INC.
APPENDIX -- GRAPHIC IMAGES
INSIDE FRONT COVER
(1) [Image: The Ventana ES System, an automated diagnostic instrument used to
perform standardized IHC testing in clinical and research laboratories.]
(2) [Image: The Ventana gen II, an automated diagnostic used to perform ISH (in
situ hybridization) testing in clinical and research laboratories.]
BACK INSIDE COVER
(3) [The BioTek TechMate 500 System, a semi-automated diagnostic instrument used
to perform standardized IHC testing in clinical and research laboratories.]
<PAGE> 119
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 19,035
NASD filing fee................................................... 6,020
Nasdaq National Market listing fee................................ 40,000
Printing and engraving costs...................................... 150,000
Legal fees and expenses........................................... 300,000
Accounting fees and expenses...................................... 200,000
Blue Sky fees and expenses........................................ 20,000
Transfer Agent and Registrar fees................................. 5,000
Directors and officers insurance coverage premiums................ 150,000
Miscellaneous expenses............................................ 34,945
--------
Total................................................... $925,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 10 of the Registrant's Certificate of Incorporation provides for
the indemnification of directors to the fullest extent permissible under
Delaware law.
Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors, employees and agents of the corporation if such person
acted in good faith and in a manner reasonably believed to be in and not opposed
to the best interest of the corporation, and, with respect to any criminal
action or proceeding the indemnified party had no reason to believe his conduct
was unlawful.
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
The Registrant will enter into indemnification agreements with its
directors and executive officers, and intends to enter into indemnification
agreements with any new directors and executive officers in the future.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1993, the Registrant has issued and sold (without payment
of any selling commission to any person) the following unregistered securities
(all of which are presented without giving effect to the reverse stock split to
be effected prior to the closing of the Offering):
(1) From inception of the Company, the Registrant issued and sold
807,585 shares of Common Stock to employees, directors and consultants at
prices ranging from $.09 to $.35, upon exercise of incentive stock options
under the Registrant's 1988 Stock Option Plan, or as stock purchases in
connection with their employment with or services to the Company.
(2) From inception of the Company, the Registrant issued and sold
222,989 shares of preferred stock to employees at prices ranging from $.90
to $2.15 per share pursuant to the 1991 Employee Stock Purchase Plan in
connection with their employment with the Company.
II-1
<PAGE> 120
(3) From March 25, 1993 to January 23, 1995, Registrant issued
4,747,119 shares of Series D Preferred Stock at a price of $2.15 per share
and 124,270 warrants for the purchase of Series D Preferred Stock with an
exercise price of $2.15 per share to a total of 38 investors.
(4) In October 1994, Registrant issued to R. James Danehy, President,
Chief Executive Officer and a director of the Company a stock option
covering 800,000 shares of Common Stock at an exercise price of $0.31 per
share. 219,891 shares subject to such option which had vested were
cancelled by the Company in November 1995, and the Company allowed Mr.
Danehy to purchase 219,891 shares of Common Stock at a purchase price of
$0.31 per share through his self-directed IRA.
(5) In August 1994 the Company provided to Mr. Danehy the opportunity
to purchase $200,000 of Series D Preferred Stock at $2.15 per share and an
additional share of Common Stock at $0.84 per share for each two shares of
Series D Preferred Stock purchased. Pursuant to his right, Mr. Danehy
purchased 93,023 shares of Series D Preferred Stock and 46,512 shares of
Common Stock at $0.31 per share in January 1996.
(6) In February 1996, the Company issued approximately $12 million in
Exchange Notes in exchange for notes held by 199 holders of BioTek notes as
consideration for the acquisition of BioTek Solutions, Inc. Such Exchange
Notes were convertible into Common Stock at a conversion price of $5.00 per
share. Between February 26, 1996 and May 14, 1996 the Company issued
approximately $5.1 million of convertible subordinated debt together with
warrants to purchase 2,378,898 shares of Series D Preferred Stock at an
exercise price of $2.15 per share to 68 investors (i.e., certain current
stockholders and officers and directors of the Company).
(7) In January 1996, the Company issued 69,767 shares of Series D
Preferred Stock to Bear, Stearns & Co. Inc. as partial consideration for
services rendered in connection with the acquisition of BioTek.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act, as transactions by an issuer not
involving a public offering or transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under such Rule 701.
The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and warrants issued in such transactions.
All recipients had adequate access, through their relationships with the
Company, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------- -------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement.
</TABLE>
<TABLE>
<S> <C>
3.1(i)(a)* Restated Certificate of Incorporation, as amended.
3.1(i)(b)* Form of Restated Certificate of Incorporation to be filed after the
closing of the offering made under this Registration Statement.
3.1(ii)(a)* Bylaws.
3.1(ii)(b)* Form of Bylaws to be effective on or about the closing of the Offering
made under this Registration Statement.
4.1* Specimen Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1(a)+* DAKO Distribution Agreement dated September 27, 1994.
10.1(b)+* First Amendment to DAKO Distribution Agreement dated March 24, 1995.
10.1(c)+* Further amendments to First Amendment to DAKO Distribution Agreement
dated March 24, 1995.
10.2(a)* Kollsman Secured Promissory Note dated December 4, 1994.
</TABLE>
II-2
<PAGE> 121
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------- -------------------------------------------------------------------------
<S> <C>
10.2(b)* Development Secured Promissory Note dated March 24, 1995.
10.3+* Curtin Matheson Scientific, Inc. Distribution Agreement dated January 18,
1993.
10.4(a)* Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19,
1996 -- Tranche 1.
10.4(b)* Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19,
1996 -- Tranche 2.
10.4(c)* Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19,
1996 -- Tranche 3.
10.5(a)* Restricted Stock Purchase Agreement with John Patience dated April 19,
1996 -- Tranche 1.
10.5(b)* Restricted Stock Purchase Agreement with John Patience dated April 19,
1996 -- Tranche 2.
10.6* Form of Indemnification Agreement for directors and officers.
10.7(a)* 1988 Stock Option Plan and forms of agreements thereunder.
10.7(b)* 1996 Stock Option Plan and forms of agreements thereunder.
10.8(a)* 1991 Employee Stock Purchase Plan.
10.8(b)* 1996 Employee Stock Purchase Plan.
10.8(c)* 1996 Directors Option Plan.
10.9* Questier Employment Agreement dated October 20, 1995.
10.10* Restated Investors Rights Agreement dated February 20, 1996.
10.11* Sublease of Premises between the Registrant and Jerry R. Jones &
Associates, Inc., dated February 29, 1996, with attached Master Lease,
dated October 26, 1988.
10.12* Master Lease Purchase Agreement between the Registrant and Copelco
Leasing Corporation dated April 13, 1994.
10.13(a)* Agreement and Plan of Reorganization dated January 19, 1996.
10.13(b)* Agreement and Plan of Merger dated February 26, 1996.
10.13(c)* Escrow Agreement dated February 26, 1996.
10.14(a)* Form of Stock Purchase Warrant to Purchase shares of Series D Preferred
Stock.
10.14(b)* Form of Preferred Stock Purchase Warrant.
10.14(c)* MBW and Marquette Warrants dated August 21, 1992.
10.14(d)* Schuler Warrant dated September 30, 1992.
10.15(a)* Form of Convertible Unsecured Promissory Note.
10.15(b)* Form of Convertible Unsecured Promissory Note.
10.17+* Novocastra Laboratories Ltd. Distribution Agreement dated August 19,
1992.
10.18+* LJL BioSystems, Inc. Techmate 250 Production Agreement dated May 1, 1996.
10.19(a)* Silicon Valley Bank Loan and Security Agreement dated February 20, 1995.
10.19(b)* Amendment to Silicon Valley Bank Loan and Security Agreement dated
March 28, 1996.
11.1 Statement regarding computation of Per Share Earnings.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Ernst & Young LLP, Independent Auditors (see page II-8).
23.3* Consent of Arthur Andersen LLP, Independent Public Accountants (see page
II-9).
23.4* Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney (see page II-5).
27.1* Financial Data Schedule.
</TABLE>
- ---------------
* Previously Filed.
+ Confidential Treatment Requested.
II-3
<PAGE> 122
(b) FINANCIAL STATEMENT SCHEDULES
No schedules have been filed herein because the information required to be
set forth therein is not applicable or is shown in the financial statements or
notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE> 123
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment to Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Tucson, State of Arizona, on the 25th day of July, 1996.
VENTANA MEDICAL SYSTEMS, INC.
By: /s/ R. JAMES DANEHY
------------------------------------
R. James Danehy, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------------- --------------
<S> <C> <C>
/s/ R. JAMES DANEHY President, Chief Executive July 25, 1996
- ----------------------------------------------- Officer and Director (Principal
(R. James Danehy) Executive Officer)
/s/ R. MICHAEL RODGERS* Vice President and Chief July 25, 1996
- ----------------------------------------------- Financial Officer (Principal
(R. Michael Rodgers) Financial and Accounting
Officer)
/s/ REX J. BATES* Director July 25, 1996
- -----------------------------------------------
(Rex J. Bates)
/s/ MICHAEL R. DANZI* Director July 25, 1996
- -----------------------------------------------
(Michael R. Danzi)
/s/ EDWARD M. GILES* Director July 25, 1996
- -----------------------------------------------
(Edward M. Giles)
/s/ THOMAS M. GROGAN, M.D.* Director July 25, 1996
- -----------------------------------------------
(Thomas M. Grogan, M.D.)
/s/ JOHN PATIENCE* Director July 25, 1996
- -----------------------------------------------
(John Patience)
</TABLE>
II-5
<PAGE> 124
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------------- --------------
<S> <C> <C>
/s/ JACK W. SCHULER* Director July 25, 1996
- -----------------------------------------------
(Jack W. Schuler)
/s/ C. ANTHONY STELLAR, M.D.* Director July 25, 1996
- -----------------------------------------------
(C. Anthony Stellar, M.D.)
/s/ JAMES M. STRICKLAND* Director July 25, 1996
- -----------------------------------------------
(James M. Strickland)
/s/ JAMES R. WEERSING* Director July 25, 1996
- -----------------------------------------------
(James R. Weersing)
*By: /s/ R. JAMES DANEHY
- -----------------------------------------------
(R. James Danehy)
(Attorney in-fact)
</TABLE>
II-6
<PAGE> 125
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 2, 1996, except for Note 10, as to which
the date is February 20, 1996, of BioTek Solutions, Inc. in Amendment No. 2 to
the Registration Statement (Form S-1 No. 333-4461) and related Prospectus of
Ventana Medical Systems, Inc. for the registration of 3,450,000 shares of its
common stock.
ERNST & YOUNG LLP
Tucson, Arizona
July 1, 1996
II-7
<PAGE> 126
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 2, 1996 (except with respect to the information in Note 8 as to
which the date is February 20, 1996) with respect to the financial statements of
BioTek Solutions, Inc. (and to all references to our Firm included in or made a
part of this Registration Statement (Form S-1).
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Los Angeles, California
July 1, 1996
II-8
<PAGE> 127
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------------- ------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1(i)(a)* Restated Certificate of Incorporation, as amended.
3.1(i)(b)* Form of Restated Certificate of Incorporation to be filed after the
closing of the offering made under this Registration Statement.
3.1(ii)(a)* Bylaws.
3.1(ii)(b)* Form of Bylaws to be effective on or about the closing of the Offering
made under this Registration Statement.
4.1* Specimen Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1(a)+ DAKO Distribution Agreement dated September 27, 1994.
10.1(b)+* First Amendment to DAKO Distribution Agreement dated March 24, 1995.
10.1(c)+ Further amendments to First Amendment to DAKO Distribution Agreement
dated March 24, 1995.
10.2(a)* Kollsman Secured Promissory Note dated December 4, 1994.
10.2(b)* Development Secured Promissory Note dated March 24, 1995.
10.3+* Curtin Matheson Scientific, Inc. Distribution Agreement dated January
18, 1993.
10.4(a)* Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19,
1996 -- Tranche 1.
10.4(b)* Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19,
1996 -- Tranche 2.
10.4(c)* Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19,
1996 -- Tranche 3.
10.5(a)* Restricted Stock Purchase Agreement with John Patience dated April 19,
1996 -- Tranche 1.
10.5(b)* Restricted Stock Purchase Agreement with John Patience dated April 19,
1996 -- Tranche 2.
10.6* Form of Indemnification Agreement for directors and officers.
10.7(a)* 1988 Stock Option Plan and forms of agreements thereunder.
10.7(b)* 1996 Stock Option Plan and forms of agreements thereunder.
10.8(a)* 1991 Employee Stock Purchase Plan.
10.8(b)* 1996 Employee Stock Purchase Plan.
10.8(c)* 1996 Directors Option Plan.
10.9* Questier Employment Agreement dated October 20, 1995.
10.10* Restated Investors Rights Agreement dated February 20, 1996.
10.11* Sublease of Premises between the Registrant and Jerry R. Jones &
Associates, Inc., dated February 29, 1996, with attached Master Lease,
dated October 26, 1988.
10.12* Master Lease Purchase Agreement between the Registrant and Copelco
Leasing Corporation dated April 13, 1994.
10.13(a)* Agreement and Plan of Reorganization dated January 19, 1996.
10.13(b)* Agreement and Plan of Merger dated February 26, 1996.
10.13(c)* Escrow Agreement dated February 26, 1996.
10.14(a)* Form of Stock Purchase Warrant to Purchase shares of Series D Preferred
Stock.
10.14(b)* Form of Preferred Stock Purchase Warrant.
10.14(c)* MBW and Marquette Warrants dated August 21, 1992.
</TABLE>
<PAGE> 128
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------------- ------------------------------------------------------------------------
<S> <C>
10.14(d)* Schuler Warrant dated September 30, 1992.
10.15(a)* Form of Convertible Unsecured Promissory Note.
10.15(b)* Form of Convertible Unsecured Promissory Note.
10.17+* Novocastra Laboratories Ltd. Distribution Agreement dated August 19,
1992.
10.18+* LJL BioSystems, Inc. Techmate 250 Production Agreement dated May 1,
1996.
10.19(a)* Silicon Valley Bank Loan and Security Agreement dated February 20, 1995.
10.19(b)* Amendment to Silicon Valley Bank Loan and Security Agreement dated
March 28, 1996.
11.1 Statement regarding computation of Per Share Earnings.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Ernst & Young LLP, Independent Auditors (see page II-8).
23.3* Consent of Arthur Andersen LLP, Independent Public Accountants
(see page II-9).
23.4* Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney (see page II-5).
27.1* Financial Data Schedule.
</TABLE>
- ---------------
* Previously Filed.
+ Confidential Treatment Requested.
<PAGE> 1
Exhibit 11.1
VENTANA MEDICAL SYSTEMS, INC.
NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31 March 31
-----------------------------------------------------------------------------------
1993 1994 1995 1995 1996
-----------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Historical
- ----------
Net loss (4,979,000) (5,270,000) (2,269,000) (834,000) (7,269,000)
Less accretion of preferred
stock redemption requirement (1,796,000) (1,983,000) (2,436,000) (579,000) (605,000)
-----------------------------------------------------------------------------------
Net loss applicable to common stock (6,775,000) (7,252,000) (5,705,000) (1,413,000) (7,874,000)
===================================================================================
Weighted average common shares
outstanding 857,191 917,179 957,280 903,013 1,119,455
Stock options and restricted stock
issued within one year of initial
filing (May 24, 1996) 1,092,779 1,092,779 1,092,779 1,092,779 1,092,779
-----------------------------------------------------------------------------------
Weighted average common shares and
common share equivalents
outstanding during the period 1,949,970 2,009,958 2,050,059 1,995,792 2,212,234
===================================================================================
Net loss per share $(3.47) $(3.66) $(2.78) $(0.71) $(4.93)
===================================================================================
<CAPTION>
Year Ended Three Months Ended
December 31 March 31
-----------------------------------------------
1995 1995 1996
-----------------------------------------------
<S> <C> <C> <C>
Pro Forma
- ---------
Net loss (3,269,000) (834,000) (7,269,000)
===============================================
Weighted average common shares
outstanding 957,280 903,013 1,119,455
Assumed conversion of Series A,
C, and D preferred shares 6,579,489 6,499,219 6,648,291
Assumed exercise of Series D
warrants 34,085 34,085 34,085
Stock options and restricted stock
issued within one year of initial
filing (May 24, 1996) 1,092,779 1,092,779 1,092,779
-----------------------------------------------
Weighted average common shares and
common share equivalents
outstanding during the period 8,663,633 8,529,096 8,894,610
===============================================
Net loss per share $(0.38) $(0.10) $(1.16)
===============================================
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 28, 1996, except for Note 11, as to which the
date is July 19, 1996, of Ventana Medical Systems, Inc. in Amendment No. 4 to
the Registration Statement (Form S-1 No. 333-4461) and related Prospectus of
Ventana Medical Systems, Inc., for the registration of 2,357,500 shares of its
common stock.
Tucson, Arizona
July 25, 1996
