<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 13, 1996
REGISTRATION NO. 333-4461
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
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. / /
------------------------
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.
SUBJECT TO COMPLETION, DATED MAY 24, 1996
3,000,000 SHARES
LOGO
VENTANA MEDICAL SYSTEMS, INC.
COMMON STOCK
------------------------------
Of the 3,000,000 shares (the "Shares") of common stock, par value $.001 per
share (the "Common Stock"), offered hereby (the "Offering"), 2,200,000 Shares
are being sold by Ventana Medical Systems, Inc. ("Ventana" or the "Company") and
800,000 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. It is
currently estimated that the initial public offering price will be between
$14.00 and $16.00 per share. See "Underwriting" for a discussion of the factors
to be 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 7.
------------------------------
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.......................... $ $ $ $
- -------------------------------------------------------------------------------------------------------
Total(3)........................... $ $ $ $
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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) Certain of the Selling Stockholders have granted the Underwriters a 30-day
option to purchase up to an additional 450,000 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 and Proceeds to Selling Stockholders will be
$ , $ and $ , 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 , 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.
, 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.
2
<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 to be effected prior to the closing of this Offering,
(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 64,244 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 the diagnosis of and selection of 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 is approximately
five times as large as the combined installed base of instruments of all of the
Company's current competitors. Ventana has placed instruments with 35 of the 42
cancer centers designated 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 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 of March 31, 1996, 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 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. The Company estimates that these institutions and
laboratories create the opportunity for the placement of as many as 2,500
automated IHC testing instruments. The Company believes that less than 20% 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 approximately 55% 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 its 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 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 agreement plans ("RAPs"), through which a customer
obtains the use of an instrument with no capital investment in exchange for the
customers' commitment to purchase reagents from the Company at a higher price
than if the instrument had been purchased. The Company believes that it can
accelerate the rate of expansion of its installed base of instruments by using
RAPs 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.......................... 2,200,000 shares
By the Selling Stockholders............. 800,000 shares
Total........................... 3,000,000 shares
Common Stock to be outstanding after the
Offering................................ 10,974,883 shares(1)
Use of proceeds........................... For repayment of approximately $15.9 million of
indebtedness, capital expenditures, working
capital and general corporate purposes.
Proposed Nasdaq National Market Symbol.... VMSI
</TABLE>
- ---------------
(1) Includes 8,710,639 outstanding shares of Common Stock, 64,244 shares of
Common Stock issuable upon the exercise of outstanding warrants which would
otherwise expire upon the closing of this Offering and the 2,200,000 Shares
of Common Stock offered by the Company hereby. Excludes 879,183 shares of
Common Stock issuable upon exercise of warrants that may remain outstanding
after the completion of this Offering and 840,357 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 MARCH 31,
DECEMBER 31,
--------------------------- ------------------ ------------------- -----------------
1993 1994 1995 1995 1996 1994 1995 1995 1996
------- ------- ------- ------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales:
Instruments....................... $ 1,162 $ 2,588 $ 4,644 $ 1,007 $ 1,594 $ 5,798 $ 8,396 $ 2,040 $ 1,733
Reagents and others............... 1,519 3,339 5,969 1,195 2,552 6,647 11,079 2,378 3,495
------- ------- ------- ------- ------- ------- ------- ------- -------
Total net sales................. 2,681 5,927 10,613 2,202 4,146 12,445 19,475 4,418 5,228
Cost of goods sold................. 1,722 2,531 4,282 936 1,435 5,883 9,096 2,134 1,927
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit....................... 959 3,396 6,331 1,266 2,711 6,562 10,379 2,284 3,301
Operating expenses:
Research and development.......... 2,100 1,926 2,239 556 613 2,687 4,407 721 771
Selling, general and
administrative.................. 4,067 6,899 7,435 1,594 2,279 9,942 10,968 2,367 2,704
------- ------- ------- ------- ------- ------- ------- ------- -------
Loss from operations before
nonrecurring expenses and
amortization of intangibles....... (5,208) (5,429) (3,343) (884) (181) (6,067) (4,996) (804) (174)
Nonrecurring expenses.............. -- -- -- -- (7,083) (8,373) -- -- --
Amortization of intangibles........ -- -- -- -- -- (1,344) (1,344) (336) (336)
------- ------- ------- ------- ------- ------- ------- ------- -------
Loss from operations............... (5,208) (5,429) (3,343) (884) (7,264) (15,784) (6,340) (1,140) (510)
Interest income (expense).......... 229 59 74 50 (5) 59 74 50 (5)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net loss........................... $(4,979) $(5,370) $(3,269) $ (834) $ (7,269) $(15,725) $ (6,266) $(1,090) $ (515)
======= ======= ======= ======= ======= ======= ======= ======= =======
Net loss per share, as
adjusted(2)....................... $ (0.39) $ (0.10) $ (0.85) $ (0.66) $ (0.12) $ (0.05)
======= ======= ======= ======= ======= =======
Shares used in computing net loss
per share, as adjusted(2)......... 8,354 8,220 8,585 9,466 9,331 9,696
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 3,436 $ 18,413
Long-term debt......................................................................... 15,035 --
Working capital........................................................................ 1,195 16,172
Total assets........................................................................... 24,752 39,729
Accumulated deficit(4)................................................................. (29,398) (29,398)
Total stockholders' equity(4).......................................................... 1,475 31,487
</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
== == === === ===
RAPs in installed base............................................. 6 25 44 66 72
== == === === ===
</TABLE>
- ---------------
(1) Adjusted to reflect the acquisition of BioTek as of January 1, 1994. 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 an assumed initial public offering price of $15.00 per share).
See "Use of Proceeds" and "Capitalization."
(4) 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 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.
Continuing Losses; Uncertainty of Future Profitability. The Company has
incurred cumulative losses of $29.4 million from its inception in 1985 through
March 31, 1996. In February 1996, the Company acquired BioTek, which had
sustained cumulative losses of $17.7 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 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 profitablity 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 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 RAPs. In addition, average daily reagent use by customers may
fluctuate from period to period, which may contribute to future fluctuations in
revenues. 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 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. 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 field of 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 the diagnosis of cancer and additional disease states. In particular, the
Company must successfully and timely introduce the NexES and TechMate 250. These
instruments are
6
<PAGE> 9
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 widespread
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. 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. 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. Many of the companies
selling or developing diagnostic devices, instruments, reagents and genetic
probe tests have financial, manufacturing, marketing and distribution resources
significantly greater than those of Ventana. In addition, many of these
competitors have long-term supplier relationships with Ventana's existing and
potential customers. 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 its instruments that can be used with reagents supplied
by third parties. See "Business -- Competition."
Manufacturing Risks and Dependence on Key Suppliers; Third-Party
Manufacturers. 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 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.
7
<PAGE> 10
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 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."
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 is in the
process of negotiating a contract with Kollsman for the continued 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 and 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. Although the
Company believes that these manufacturers have an economic incentive to perform
such manufacturing for the Company, 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.
Dependence on Distributors. The Company's patient priority systems and
reagents are sold directly by Company personnel to end-users in North America
and internationally. 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. In Europe, batch processing
instruments are sold through DAKO A/S ("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.
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
8
<PAGE> 11
United States. These developments could have a material adverse effect on the
Company's business, financial condition and results of operations.
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. 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 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. 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 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 adversely affect the Company's results of operations.
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 acquisitions 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 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
9
<PAGE> 12
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."
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, will be adequate to satisfy its
capital requirements through at least the next 18 to 24 months. 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 RAPs, 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."
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."
10
<PAGE> 13
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 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
11
<PAGE> 14
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 insure 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. To date, compliance with these
laws and regulations has not had a material effect on the Company's financial
position; however, 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 "Business -- Government
Regulation."
Availability of Third-Party Reimbursement and 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."
Product Liability and Recalls; Product Liability Insurance. Although to
date the Company has not experienced any product liability claims, the marketing
and sale of the Company's diagnostic instruments and reagents entails such
risks. 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.
12
<PAGE> 15
Control by Existing Stockholders; Anti-Takeover Provisions. After this
Offering, the Company's officers, directors and principal stockholders will
beneficially own approximately 55% 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 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. See "Principal and
Selling Stockholders" 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 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 10,974,883 shares of Common Stock outstanding,
of which the 3,000,000 Shares offered hereby will be freely tradable (unless
held by affiliates of the Company) and the remaining 7,974,883 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 8,778 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 7,551,250 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 7,900,451 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 310,908 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. 7,277,777 of the shares outstanding
immediately following the completion
13
<PAGE> 16
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."
14
<PAGE> 17
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) 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 $30.0 million assuming an
initial public offering price of $15.00 per share and after deducting the
estimated underwriting discounts and commissions and expenses of the Offering.
The Company intends to use $15.9 million of the estimated net proceeds from
the Offering to repay (i) $13.9 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 Acquisition Debt is due and payable 30 days
after the completion of this Offering. 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 expects to use approximately $1.8 million
of the net proceeds during the next 12 months for capital expenditures for
manufacturing and computer equipment. The Company anticipates that the estimated
remaining net proceeds of $12.3 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.
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<PAGE> 18
DILUTION
The net tangible book value of the Company at March 31, 1996 was $(10.9)
million or $(1.33) per share after giving effect to the conversion of the
Preferred Stock into Common Stock and the issuance of 64,244 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 assumed initial public offering price of $15.00
per share and (ii) the issuance of 64,244 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 $30.0 million and the net tangible book value of the Company at
March 31, 1996 would be $19.3 million or $1.74 per share. This represents an
immediate increase in net tangible book value of $3.07 per share to existing
stockholders and an immediate dilution in net tangible book value of $13.26 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.......................... $15.00
Net tangible book value per share before the Offering.................. $(1.33)
Increase per share attributable to new investors....................... 3.07
------
Net tangible book value per share after the Offering..................... 1.74
------
Immediate dilution per share to new investors............................ $13.26
======
</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 (assuming an
initial public offering price of $15.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 8,073,117 79% $31,508,000 49% $ 3.90
New investors...................... 2,200,000 21% 33,000,000 51% 15.00
------- --- ------- ---
Total.................... 10,273,117 100% $64,508,000 100% $ 6.28
======= === ======= ===
</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 64,244 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 646,659 shares issued upon the
exercise of stock purchase rights and 55,107 shares issued upon the exercise of
options and warrants through May 15, 1996. At May 15, 1996, there were options
outstanding to purchase 840,357 shares of Common Stock at an exercise price of
$2.48 per share. In addition, warrants to purchase 879,183 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.
16
<PAGE> 19
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;
8,008,890 shares issued and outstanding and; 10,273,117 shares
issued and outstanding, as adjusted-amount paid in(3)(4)(5)...... 31,016 61,028
Accumulated deficit(6)................................................ (29,398) (29,398)
Cumulative foreign currency translation adjustment.................... (143) (143)
-------- --------
Total stockholders' equity(4)(5).................................... 1,475 31,487
-------- --------
Total capitalization........................................ $ 16,510 $ 31,487
======== ========
</TABLE>
- ---------------
(1) As adjusted shares outstanding includes the issuance of 64,244 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 840,357 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 879,183 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 646,659 shares issued upon exercise of stock
purchase rights and 55,107 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 which will be repaid with the proceeds of this Offering.
(3) Assumes net proceeds of $30.0 million from this Offering based on an assumed
initial public offering price of $15.00 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.
17
<PAGE> 20
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 is 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.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA(1)
-------------------------------------------------------------------- -------------------------------------
THREE MONTHS THREE MONTHS
ENDED YEAR ENDED
YEAR ENDED DECEMBER 31, MARCH 31, DECEMBER 31, ENDED MARCH 31,
STATEMENT OF ----------------------------------------------- ------------------ ------------------ ----------------
OPERATIONS: 1991 1992 1993 1994 1995 1995 1996 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------- -------- ------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales:
Instruments...... $ 50 $ 717 $ 1,162 $ 2,588 $ 4,644 $ 1,007 $ 1,594 $ 5,798 $ 8,396 $ 2,040 $1,733
Reagents and
other.......... 28 452 1,519 3,339 5,969 1,195 2,552 6,647 11,079 2,378 3,495
------- ------- ------- -------- ------- ------- ------- ------ ------
Total net
sales........ 78 1,169 2,681 5,927 10,613 2,202 4,146 12,445 19,475 4,418 5,228
Cost of goods
sold............. 49 832 1,722 2,531 4,282 936 1,435 5,883 9,096 2,134 1,927
------- ------- ------- -------- ------- ------- ------- ------ ------
Gross profit....... 29 337 959 3,396 6,331 1,266 2,711 6,562 10,379 2,284 3,301
Operating expenses:
Research and
development.... 1,352 1,194 2,100 1,926 2,239 556 613 2,687 4,407 721 771
Selling, general
and
administrative... 892 2,465 4,067 6,899 7,435 1,594 2,279 9,942 10,968 2,367 2,704
------- ------- ------- -------- ------- ------- ------- ------ ------
Loss from
operations before
nonrecurring
expenses and
amortization of
intangibles...... (2,215) (3,322) (5,208) (5,429) (3,343) (884) (181) (6,067) (4,996) (804) (174)
Nonrecurring
expenses......... -- -- -- -- -- -- (7,083) (8,373) -- -- --
Amortization of
intangibles...... -- -- -- -- -- -- -- (1,344) (1,344) (336) (336)
------- ------- ------- -------- ------- ------- ------- ------ ------
Loss from
operations....... (2,215) (3,322) (5,208) (5,429) (3,343) (884) (7,264) (15,784) (6,340) (1,140) (510)
Interest income
(expense)........ 23 48 229 59 74 50 (5) 59 74 50 (5)
------- ------- ------- -------- ------- ------- ------- ------ ------
Net loss........... $(2,192) $(3,274) $(4,979) $(5,370) $(3,269) $ (834) $ (7,269) $(15,725) $(6,266) $(1,090) $ (515)
======= ======= ======= ======== ======= ======= ======= ====== ======
Per share data(2):
Net loss per
share, as
adjusted....... $ (0.39) $ (0.10) $ (0.85) $ (0.66) $ (0.12) $(0.05)
======= ======= ======= ======
Shares used in
computing net
loss per share,
as adjusted.... 8,354 8,220 8,585 9,466 9,331 9,696
======= ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................................ $ 3,436 $ 18,413
Long-term debt................................................................................... 15,035 --
Working capital.................................................................................. 1,195 16,172
Total assets..................................................................................... 24,752 39,729
Accumulated deficit(4)(5)........................................................................ (29,398 ) (29,398)
Total stockholders' equity(5).................................................................... 1,475 31,487
</TABLE>
- ---------------
(1) Adjusted to reflect the acquisition of BioTek as of January 1, 1994. 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 an assumed initial public offering price of $15.00 per share. See
"Use of Proceeds" and "Capitalization."
(4) Gives effect to cancellation of accrued Preferred Stock dividends upon the
assumed conversion of the Preferred Stock into Common Stock.
(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.
18
<PAGE> 21
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 taken place 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):
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
== === === === === ===
RAPs in current placements........................ 6 19 19 22 8 6
== === === === === ===
INSTRUMENT INSTALLED BASE (UNITS):
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
== === === === === ===
RAPs in installed base............................ 6 25 44 66 52 72
== === === === === ===
</TABLE>
19
<PAGE> 22
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 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 sale 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 RAP
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 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 expects to complete a
contract manufacturing agreement with Kollsman for the TechMate 500 instrument
and has entered into an
20
<PAGE> 23
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 $24.2 million including
$7.1 million related to the expensing of in-process research and development and
restructuring costs associated with the acquisition of BioTek for cumulative
losses of $29.4 million as of March 31, 1996. Similarly, BioTek incurred over
$17.7 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 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 provides a number of alternatives for instrument placements
including direct sales, non-recourse lease and rental programs and RAPs. Under a
RAP, the customer obtains the use of an instrument with no capital investment in
exchange for the customer's commitment to purchase reagents from the Company at
a higher price per unit than if the customer had purchased the instrument. The
terms of RAP arrangements vary from customer to customer; however, the Company's
current RAPs are generally for a one-year term, are renewed automatically unless
the customer gives notice of nonrenewal and are cancellable during an initial
180-day trial period. To date, no instruments placed through RAPs have been
returned by the user and some RAP customers have purchased the instruments. For
instruments placed through RAPs, 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 RAPs 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 RAPs 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 RAPs 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 RAPs in less than two years. Due to
the working capital requirements associated with RAPs, the Company has
historically sought to limit the amount of instruments placed through RAPs to
approximately 30% of instrument placements. However, the Company anticipates
that the percentage of instruments placed through RAPs will increase with the
introduction of the NexES and TechMate 250 and as the Company obtains the
additional working capital required to support additional RAP placements, which
may in the future 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 RAPs.
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 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. 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 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, and
increased research and development expenditures. 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
21
<PAGE> 24
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.
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 in 1993 to
261 in 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 and 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.
RESULTS OF OPERATIONS
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
INSTRUMENT PLACEMENTS (UNITS): ENDED MARCH 31,
---------------
Patient priority: 1995
---- 1996
----
<S> <C> <C>
IHC/ES............................................................. 23 30
ISH/gen II......................................................... 5 3
-- -
---
Total patient priority..................................... 28 33
Batch processing..................................................... -- 7
-- -
---
Total current placements................................... 28 40
=== ===
RAPs in current placements........................................... 8 6
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
MARCH 31,
------------------
INSTRUMENT INSTALLED BASE (UNITS): 1995 1996
---- -------
<S> <C> <C>
Patient priority:
IHC/ES........................................................... 174 276
ISH/gen II....................................................... 2 18
--- ---
Total patient priority................................... 176 294
Batch processing................................................... -- 287
--- ---
Total instrument installed base.......................... 176 581
=== ===
RAPs 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 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.
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% $1,701 41%
Administration.............................. 382 17% 578 14%
------ ---------- ------ ----------
Total SG&A........................ $1,594 72% $2,279 55%
====== ======== ====== ========
</TABLE>
SG&A expense in the three months ended March 31, 1996 increased to $2.3
million from $1.6 million in the three months ended March 31, 1995, but declined
to 55% 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
23
<PAGE> 26
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, $5.0 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.
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>
Patient priority:
IHC/ES................................................................ 56 74 98
ISH/gen II............................................................ -- -- 15
--
--- ---
Total current placements...................................... 56 74 113
== === ===
RAPs in current placements.............................................. 19 19 22
== === ===
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
INSTRUMENT INSTALLED BASE (UNITS): 1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Patient priority:
IHC/ES................................................................ 74 148 246
ISH/gen II............................................................ -- -- 15
--
--- ---
Total instrument installed base............................... 74 148 261
== === ===
RAPs 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
24
<PAGE> 27
placement of a significant number of instruments through RAPs, 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, (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.
25
<PAGE> 28
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,
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, 1994 and are adjusted to reflect the sale of
2,200,000 shares of Common Stock by the Company in this Offering and the
application
26
<PAGE> 29
of the net proceeds therefrom. The acquisition has been accounted for as a
purchase. The composition of the consideration paid for BioTek and the
preliminary 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.................................... 5,000
Goodwill............................................................. 1,875
Developed technology................................................. 2,000
Customer base........................................................ 4,200
Covenant not to compete.............................................. 1,800
Assembled work force................................................. 500
Trademark and trade names............................................ 1,100
-----
Total purchase price......................................... $ 18,763
=====
</TABLE>
In accordance with FAS 2, the Company charged to expense at the date of the
acquisition $5.0 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 closing of the acquisition, BioTek's revenue recognition policy was
changed to adopt the Company's policy to record sales only upon the ultimate
sale of products by CMS 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, 1994. The combined effect of the pro forma change in accounting policy is an
increase in net sales in both 1994 and 1995. This is primarily due to (i)
shipments of instruments and reagents to CMS in 1993 and 1994 which were
subsequently placed with end-users in 1994 and 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 administrative expense
(40%)) and (ii) elimination of certain redundant selling and administrative
positions. The pro forma financial results also reflect nonrecurring items
including $5.0 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,
1994.
Comparisons of pro forma results for the first quarter of 1996 to the first
quarter of 1995 are not meaningful because Ventana's results of operations for
the first quarter of 1996 include approximately one month of BioTek operations.
27
<PAGE> 30
PRO FORMA RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994 AND THREE MONTHS ENDED MARCH 31,
1996 AND 1995
Net Sales
Presented below is a summary of pro forma consolidated revenue, instrument
placements and instrument installed base for the years ended December 31, 1995
and 1994 and the three months ended March 31, 1996 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------------- -------------------------------
1994 1995 1995 1996
-------------- -------------- ------------- -------------
$ % $ % $ % $ %
------- ---- ------- ---- ------ ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE SUMMARY:
Instruments........................... $ 5,798 47% $ 8,396 43% $2,040 46% $1,733 33%
Reagents and other.................... 6,647 53% 11,079 57% 2,378 54% 3,495 67%
------- ---- ------- ---- ------ ---- ------ ----
Total revenue....................... $12,445 100% $19,475 100% $4,418 100% $5,228 100%
======= ==== ======= ==== ====== ==== ====== ====
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH
DECEMBER 31, 31,
------------- -------------
INSTRUMENT PLACEMENTS (UNITS): 1994 1995 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Patient priority:
IHC/ES......................................................... 74 98 23 30
ISH/gen II..................................................... -- 15 5 3
--- --- --- ---
Total patient priority...................................... 74 113 28 33
Batch processing................................................. 106 128 35 12
--- --- --- ---
Total current placements.................................... 180 241 63 45
=== === === ===
RAPs in current placements....................................... 19 22 8 6
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------- -------------
1994 1995 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
INSTRUMENT INSTALLED BASE (UNITS):
Patient priority:
IHC/ES......................................................... 148 246 174 276
ISH/gen II..................................................... -- 15 2 18
--- --- --- ---
Total patient priority...................................... 148 261 176 294
Batch processing................................................. 147 275 182 287
--- --- --- ---
Total instrument installed base............................. 295 536 358 581
=== === === ===
RAPs in installed base........................................... 44 66 52 72
</TABLE>
Total consolidated pro forma net sales increased 57% in 1995 as compared to
1994 and 18% during the first quarter of 1996 as compared to the first quarter
of 1995. The increase in net sales resulted from increased instrument placements
and reagent sales by both companies.
Consolidated pro forma instrument sales increased 45% during 1995 as
compared to 1994 and declined 15% during the first quarter of 1996 compared to
the first quarter of 1995. Despite increased international unit sales by BioTek,
the increase in pro forma instrument sales in 1995 was less than that
experienced by Ventana due to lower average selling prices on European units and
a decrease in United States instrument placements by BioTek. 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.
BioTek instruments sold internationally by DAKO, which compose
approximately 40% of BioTek's installed base of instruments, generate recurring
royalty income from DAKO in exchange for DAKO's right to supply such customers
with reagents. Pro forma reagent sales increased 67% during 1995 as compared to
the 79% reagent sales growth experienced by Ventana during the same time period.
Pro forma reagent sales growth in 1995 was less than Ventana's because BioTek's
installed base of instruments shifted towards
28
<PAGE> 31
European placements and such placements generated a fixed royalty income stream
which is less per instrument than the recurring reagent revenue stream
associated with United States placements.
Gross Margin
Pro forma gross profit in the quarter ended March 31, 1996 increased to
$3.3 million from $2.3 million in the quarter ended March 31, 1995 and increased
to $10.4 million in the year ended December 31, 1995 from $6.6 million in the
year ended December 31, 1994. Pro forma gross margin increased to 63% in the
quarter ended March 31, 1996 from 52% in the quarter ended March 31, 1995. Pro
forma gross margin was 53% in each of the years ended December 31, 1995 and
1994. Pro forma gross margins are lower than Ventana's stand-alone gross margins
because BioTek's margins are 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.
Research and Development
Pro forma research and development expense was approximately equal in the
quarters ended March 31, 1996 and 1995. Pro forma research and development
expense in the year ended December 31, 1995 increased to $4.4 million from $2.7
million in the year ended December 31, 1994. Pro forma research and development
expense reflects increased expenditures by Ventana to support the development of
new instruments and reagents including the gen II, the NexES and primary
antibodies. These expenditures also reflect BioTek's development of the TechMate
250 instrument and an ISH oven. During 1995 and the first quarter of 1996,
BioTek reduced its research and development expenditures primarily due to
working capital constraints.
Selling, General and Administrative
Pro forma SG&A expense increased to $2.7 million in the quarter ended March
31, 1996 from $2.4 million in the quarter ended March 31, 1995 and increased to
$11.0 million in the year ended December 31, 1995 from $9.9 million in the year
ended December 31, 1994. Pro forma SG&A expense reflects increased expenditures
to expand sales and marketing capabilities in the United States and Europe and
increased administrative expenditures to support higher manufacturing and sales
volumes. SG&A expenditures at BioTek were limited due to BioTek's working
capital constraints and its use of third-party distributors in the United States
and Europe.
29
<PAGE> 32
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 AND OPERATING 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 1,927
------- ------- ------- ------- -------
Gross profit.................................... 2,284 2,396 2,954 2,745 3,301
Operating expenses:
Research and development...................... 721 1,815 1,002 869 771
Selling, general and administrative........... 2,367 3,130 2,675 2,796 2,704
------- ------- ------- ------- -------
Loss from operations before amortization of
intangibles................................... (804) (2,549) (723) (920) (174)
Amortization of intangibles..................... (336) (336) (336) (336) (336)
------- ------- ------- ------- -------
Loss from operations............................ (1,140) (2,885) (1,059) (1,256) (510)
Interest income (expense)....................... 50 37 25 (38) (5)
------- ------- ------- ------- -------
Net loss........................................ $(1,090) $(2,848) $(1,034) $(1,294) $ (515)
------- ------- ------- ------- -------
Pro forma net loss per share(1)................. $ (0.12) $ (0.30) $ (0.11) $ (0.14) $ (0.05)
======= ======= ======= ======= =======
Pro forma shares used in computing net loss
per share(1).................................. 9,331 9,453 9,525 9,551 9,696
======= ======= ======= ======= =======
OPERATING DATA:
Instrument placements (Units):
Patient priority (Ventana).................... 28 23 30 32 33
Batch processing (BioTek)..................... 35 38 39 16 12
------- ------- ------- ------- -------
Total annual placements............... 63 61 69 48 45
======= ======= ======= ======= =======
Instrument installed base (Units):
Patient priority (Ventana).................... 176 199 229 261 294
Batch processing (BioTek)..................... 182 220 259 275 287
------- ------- ------- ------- -------
Total installed base.................. 358 419 488 536 581
======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Pro forma shares used in computing pro forma net loss per share are adjusted
to reflect the sale of 1,112,000 shares of Common Stock by the Company in
this Offering to repay acquisition debt.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have significantly exceeded its net
sales, resulting in an accumulated deficit of $29.4 million at March 31, 1996.
The Company has funded its operations primarily through the private placement of
approximately $31.6 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.
30
<PAGE> 33
Net cash flow from operating activities during the three months ended March
31, 1996 and 1995 was approximately $(0.9) 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
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 $5.7 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 which included warrants to
purchase an aggregate of 879,183 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 225,100 shares of Common Stock and
an aggregate of $9.2 million of Exchange Notes remained outstanding. These
Exchange Notes are due and payable 30 days after the completion of this Offering
and will 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
31
<PAGE> 34
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."
The Company believes that the anticipated net proceeds from this Offering
together with its existing capital resources, and interest earned thereon, will
be sufficient 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 RAPs, 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 the diagnosis of and
selection of 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 instruments
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 designated 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. The Company estimates that these institutions and
laboratories create the opportunity for the placement of as many as 2,500
automated IHC testing instruments. The Company believes that less than 20% 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 approximately 55% 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.
33
<PAGE> 36
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 DAKO and CMS 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 expects to complete a contract 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 (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 designated 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 RAPs, and to
expand the range and price points of its instrument offerings. Under a RAP, the
customer obtains the use of an instrument with no capital investment in exchange
for the customer's commitment to purchase reagents from the Company at a higher
price than if the instrument had been purchased. The Company believes it can
accelerate the rate of expansion of its installed base by increasing its
emphasis on the placement of instruments through RAPs because the required
capital investment associated with a purchase, a significant sales hurdle, will
be eliminated.
Maximize Revenue Stream Per Placement. Each instrument placed 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 RAPs 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
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performed. Up to 40 slides can be processed at one time in the reaction chamber
of the instrument utilizing as 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 approximately 55% of the international market
potential, Japan approximately 20% and the Pacific Rim and Latin American
markets 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 designated
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.
Presented below is a selected list of existing customers:
HOSPITALS AND CLINICS
Albany Medical Center Hospital (3 units)
Baylor School of Medicine
Boston University
City of Hope National Medical Center (3 units)
Cleveland Clinic (3 units)
Columbia Presbyterian
Dana Farber Cancer Institute
Fox Chase Cancer Center
Fred Hutchinson Cancer Center (2 units)
Georgetown University (2 units)
Harvard University Medical School (2 units)
The Johns Hopkins University (2 units)
REFERENCE AND RESEARCH LABORATORIES
Corning Nichols/MetPath (2 units)
Dianon (2 units)
National Cancer Institute
National Institutes of Health (5 units)
M.D. Anderson Cancer Center (2 units)
Mayo Clinic (4 units)
New York University (2 units)
Northwestern University
Ochsner Clinic
Stanford University
UCLA Medical Center
University of Chicago (4 units)
University of Michigan (4 units)
Walter Reed Army Medical Center (2 units)
Yale University
BIOTECHNOLOGY AND PHARMACEUTICAL
Amgen, Inc. (2 units)
Bristol-Myers Squibb Company
Eli Lilly and Company
Prizm Pharmaceuticals
Schering-Plough Corporation
The Company intends to introduce lower priced instruments, including the
NexES and the TechMate 250, which it expects to place through RAPs in order to
provide greater financial flexibility for its customers in equipment
procurement. The Company believes that lower priced systems and the RAP program
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 RAP programs 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 adversely affect the Company's 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 options include conventional sales, financing
through a third-party lease company and RAPs. RAP contracts currently being
offered by the Company are generally for a one-year term, are automatically
renewed unless the customer gives notice of nonrenewal and are cancellable
during an initial 180-day trial period. Due to the working capital requirements
associated with RAPs, the Company has historically sought to limit the amount of
instruments placed through RAPs to approximately 30% of instrument placements.
However, the Company anticipates that the percentage of instruments placed
through RAPs will increase with the introduction of the NexES and TechMate 250
and as the Company obtains the additional working capital required to support
additional RAP placements, which may in the future 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 RAPs.
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 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.
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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 a contract manufacturing agreement
with LJL and is negotiating a contract manufacturing agreement with 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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<PAGE> 46
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 April 30, 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 years ended December 31, 1995 and 1994
was $4.4 million and $2.7 million, respectively.
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 has been issued 10 United States patents and one
European patent and has filed additional United States and international patent
applications. Three of Ventana's United States patent applications have been
allowed. Several of Ventana's issued United
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<PAGE> 47
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 Ventana issued United States
patents relate to Ventana's reagent dispenser, the use of Ventana's liquid
coverslip as an evaporation inhibitor, a tissue fixative and various aspects of
the capillary gap technology underlying BioTek's batch processing instruments.
Pending applications relate to chemical engineering aspects of the methods used
in the automated instrument for performing IHC tests on slides and inventions
related to the Company's reagents and their formulations. In addition, a patent
application filed by the Company covers an improved liquid coverslip for high
temperature applications. The expiration dates of the Company's issued United
States patents range from March 2005 to July 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.
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COMPETITION
Competition in the diagnostic industry is intense and is expected to
increase. 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. Several
companies, including Leica (a division of Leitz Microscope GmbH), Shandon
Scientific Limited (a subsidiary of Life Sciences International PLC), BioGenex
and DAKO (U.S.) have instruments that perform IHC tests and that can be used
with any supplier's reagents. Although these instruments are not fully
automated, the ability of these instruments to be used with any suppliers'
reagents 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 major suppliers of primary antibodies in the
anatomical pathology market in the United States are DAKO, BioGenex and Coulter
Immunology. The primary suppliers of detection chemistries in the United States
are Vector Laboratories, BioGenex and DAKO.
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. 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. Many of the companies
selling or developing diagnostic devices, instruments, reagents and genetic
probe tests have financial, manufacturing, marketing and distribution resources
significantly greater than those of Ventana. In addition, many of these
competitors have long-term supplier relationships with Ventana's existing and
potential customers. 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.
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.
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.
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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,
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 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.
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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.
However, there can be no assurance that it will not be required to incur
significant costs to comply with such laws and regulations in the future, or
that such laws or regulations will not in the future have a material adverse
effect on the Company's business. Any violation of, and the cost of compliance
with, these regulations could have a material adverse effect on the Company's
business, financial condition and results of operations.
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.
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.
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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 April 30, 1996, Ventana employed 126 persons full time. Of these
employees, 57 were engaged in sales and marketing, 24 in research and
development, 30 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 patents held by BioGenex relating to an antigen retrieval method used in
IHC tests. BioGenex's claims include claims of both direct 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 May 15, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------- --- ---------------------------------
<S> <C> <C>
Jack W. Schuler(1) 55 Chairman of the Board of
Directors
R. James Danehy 51 President, Chief Executive
Officer and Director
Stephen A. Tillson, Ph.D. 55 Vice President, Scientific
Affairs and Quality Assurance
R. Michael Rodgers 50 Vice President, Finance, Chief
Financial Officer and Secretary
Michael K. Cusack 39 Vice President, Marketing
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 72 Director
Michael R. Danzi 36 Director
Edward M. Giles(1) 60 Director
Thomas M. Grogan, M.D. 50 Director
John Patience(2) 48 Director
C. Anthony Stellar, M.D. 66 Director
James M. Strickland 53 Director
James R. Weersing(2) 57 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
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 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
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Affairs and Quality Assurance. From January 1990 to May 1992, Dr. Tillson was 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. Cusack has served as Vice President of Marketing since September 1994.
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 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
51
<PAGE> 54
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.
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. 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
52
<PAGE> 55
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.
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, Marketing
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 $8,800 annual automobile allowance.
(4) Consists entirely of commissions earned through employment as the Company's
Northern Regional Sales Manager prior to his promotion to National Sales
Manager in June of 1995.
53
<PAGE> 56
STOCK OPTION INFORMATION
The following table contains information concerning the stock option grants
made to each of the Named Officers for the year ended December 31, 1995.
OPTION GRANTS IN LAST YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------ ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM(4)
OPTIONS EMPLOYEES PRICE EXPIRATION -------------------
NAME GRANTED(1) IN 1995(2) ($/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 $19,496 $49,406
David P. Pauluzzi......... 23,098 7.12 0.84 4/4/05- 12,185 30,879
6/30/05
Michael K. Cusack......... -- -- -- -- -- --
R. Michael Rodgers........ 15,152 4.67 0.84 4/4/05 7,993 20,256
</TABLE>
- ---------------
(1) Options were granted under the Company's 1988 Stock Option Plan. These
generally vest over four years from the date of grant.
(2) Based on an aggregate of 324,467 options granted by the Company in the year
ended December 31, 1995 under the Company's 1988 Stock Option Plan to all
employees of and consultants to the Company, including the Named Executive
Officers.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the
Company's Board of Directors.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the
10-year option term will be at the assumed 5% and 10% levels or at any other
defined level. Unless the market price of the Common Stock appreciates over
the option term, no value will be realized from the option grants made to
the executive officers.
AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES
The following table sets forth, for each of the Named Executive Officers,
the shares acquired and the value realized on exercises of stock options during
the year ended December 31, 1995 and the year-end number and value of
exercisable and unexercisable options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 1995 AT DECEMBER 31, 1995
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($) 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.
54
<PAGE> 57
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 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. 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.
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, 298,453
shares of Common Stock had been issued upon exercise of stock options, options
to purchase an aggregate of 840,357 shares were outstanding at a weighted
average exercise price of $2.48 per share, and 200,842 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 have been
authorized for issuance under the 1991 Purchase Plan of which 82,408 shares have
been issued. 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 will
terminate 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. 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
55
<PAGE> 58
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.
56
<PAGE> 59
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 8,780
Entities affiliated with Marquette Venture
Partners.................................. 475,123 6,716
</TABLE>
- ---------------
(1) Each share of Preferred Stock will convert into one share of Common Stock
upon the closing of this Offering.
In April 1996, the Company sold an aggregate of 646,659 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. 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. 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 193,946 shares (including 97,010 shares purchased by Mr. Schuler,
66,753 shares purchased by Mr. Patience and 30,183 shares purchased by
Marquette) will become vested upon the completion of this Offering, (ii) 172,462
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) 129,347 shares purchased by Mr.
Patience and 150,904 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.
In August 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
57
<PAGE> 60
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 28,974 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 $85,620 and
$1,110,094, 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 225,100 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 800,343 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, $0.45
million principal amount of Notes and Warrants to acquire 78,808 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
58
<PAGE> 61
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 M. Strickland............................................ 5,000 860
Thomas M. Grogan, M.D.(1) ..................................... 2,667 459
</TABLE>
- ---------------
(1) Represents shares beneficially owned by C. Ovens, Inc.
59
<PAGE> 62
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 21.9% 444,017 1,474,633 13.4%
MBW Venture Partners, L.P.(5)
James R. Weersing
365 South Street
Morristown, NJ 07960........................ 1,442,351 16.1 -- 1,442,351 13.0
State Farm Mutual Automobile Insurance
Company(6)
One State Farm Plaza
Bloomington, IL 61701....................... 887,173 10.0 -- 887,173 8.0
Jack W. Schuler(7)
1419 Lake Cook Road, Suite 415
Deerfield, IL 60015......................... 965,963 10.9 -- 965,963 8.7
R. James Danehy(8)............................ 209,890 2.4 -- 209,890 1.9
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 2.6
Thomas M. Grogan, M.D.(15).................... 169,820 1.9 -- 169,820 1.5
John Patience(16)............................. 292,789 3.3 -- 292,789 2.6
C. Anthony Stellar, M.D.(17).................. 19,959 * -- 19,959 *
James M. Strickland(7)(18).................... 402,547 4.6 -- 402,547 3.7
James R. Weersing(5)(19)...................... 1,448,560 16.5 -- 1,448,560 13.2
All directors and executive officers as
a group (17 persons)........................ 3,940,247 41.2 -- 3,932,579 33.5
</TABLE>
60
<PAGE> 63
<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)....... 1,186,047 13.4% 101,945 1,084,102 9.8%
Interwest Partners IV, L.P. .................. 1,003,616 11.4 86,265 917,351 8.4
Victoria Bannister(21)........................ 286,863 3.3 10,744 276,119 2.5
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 * 931 46,062 *
Jan Karel Smeets.............................. 31,271 * 15,635 15,636 *
Douglas F. Sweet.............................. 30,465 * 716 29,749 *
Richard B. Peterson(24)....................... 25,955 * 5,157 20,798 *
Thomas B. Healey.............................. 20,882 * 10,441 10,441 *
Dorothy L. O'Neal Revocable Trust(25)......... 19,903 * 8,814 11,089 *
Wm. Kent Wonders(26).......................... 12,839 * 1,895 10,944 *
Entities affiliated with the Myron S. and Joan
D. Eichen Family Trust(27).................. 10,175 * 2,043 8,132 *
Charles J. Casebeer(28)....................... 9,765 * 260 9,505 *
Jessica Youle(29)............................. 9,630 * 4,264 5,366 *
Mary Cawley(30)............................... 6,653 * 3,326 3,327 *
Lawrance A. Brown, Jr.(31).................... 4,958 * 613 4,345 *
Philip E. McCarthy(32)........................ 2,941 * 96 2,845 *
Entities affiliated with the Thomas H. and
Rosemary S. Tisch Trust..................... 2,349 * 546 1,803 *
Ned M. Weinshenker Money Purchase
Pension Plan................................ 905 * 210 695 *
Wayne L. Clevenger Pension Plan............... 411 * 96 315 *
</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 8,774,883 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 64,244 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 10,974,883
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.
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<PAGE> 64
In the event that the Over-Allotment Option is exercised, entities
affiliated with Marquette Venture Partners, The CIT Group/Venture Capital,
Inc., Interwest Partners IV, L.P., Victoria Bannister, David Nunnery,
Douglas F. Sweet, Richard B. Peterson, entities affiliated with Myron S.
Eichen and Joan D. Eichen Family Trust, Charles J. Casebeer, Lawrance A.
Brown, Jr., Philip E. McCarthy, entities affiliated with the Thomas H. and
Rosemary S. Tisch Trust, Ned M. Weinshenker Money Purchase Plan and Wayne
L. Clevenger Pension Plan will sell to the Underwriters a percentage of the
shares subject to the Over-Allotment Option approximately equal to the
percentage of the Shares being offered by such Selling Stockholder (and set
forth in the table above) bears to the total number of Shares being offered
by all such Selling Stockholders (and set forth in the table above).
(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 1,280,292 shares beneficially owned by MBW Venture Partners, L.P.
(of which 162,059 shares are 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.
(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.); 36,741 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.
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<PAGE> 65
(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.
(20) Includes 77,351 shares issuable upon exercise of warrants held by the CIT
Group/Venture Capital, Inc.
(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 6,668 shares issuable upon the exercise of warrants held by Mr.
Peterson.
(25) Includes 2,274 shares issuable upon the exercise of warrants held by the
Dorothy L. O'Neal Revocable Trust.
(26) Includes 1,467 shares issuable upon the exercise of warrants held by Mr.
Wonders.
(27) Includes 1,134 shares issuable upon the exercise of warrants held by the
Myron S. and Joan D. Eichen Family Trust.
(28) Includes 1,116 shares issuable upon the exercise of warrants held by Mr.
Casebeer.
(29) Includes 1,101 shares issuable upon the exercise of warrants held by Ms.
Youle.
(30) Includes 370 shares beneficially owned by Ms. Cawley as custodian for
Andrew C. Cawley, and 370 shares beneficially owned by Ms. Cawley as
custodian for Graham D. Cawley.
(31) Includes 1,851 shares issuable upon the exercise of warrants held by Mr.
Brown.
(32) Includes 2,119 shares issuable upon the exercise of warrants held by Mr.
McCarthy, and 822 shares owned by the Philip E. McCarthy Pension Plan.
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 10,974,883 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 64,244 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 879,183 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
64
<PAGE> 67
person became an interested stockholder, unless (with certain exceptions) the
"business combination" or the 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 10,974,883
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
64,244 shares of Common Stock that will terminate if not exercised upon the
completion of this Offering. Of these 10,974,883 shares, the 3,000,000 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 7,974,883 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 7,551,250 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 8,778 shares of Common
Stock will be saleable between 90 and 180 days after this Offering. Upon
expiration of the lock-up agreements, approximately 7,900,451 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 310,908 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. 7,277,777 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, 840,357 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
65
<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 110,000 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 7,277,777 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...........................................
Dillon, Read & Co. Inc............................................
---------
Total................................................... 3,000,000
========
</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
$ per share. Additionally, the Underwriters may allow, and such dealers
may reallow, a concession of not more than $ 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.
Certain of the Selling Stockholders have granted to the Underwriters an
option to purchase up to 450,000 additional Shares of Common Stock 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 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 7,551,250 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
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<PAGE> 70
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 69,760
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.
own an aggregate of 36,356 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 6,159 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.
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.
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.
68
<PAGE> 71
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, 1994.......................................................... F-4
Unaudited Pro Forma Condensed Consolidated Statements of Operations for the Year
Ended December 31, 1995.......................................................... F-5
Unaudited Pro Forma Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 1995...................................................... F-6
Unaudited Pro Forma Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 1996...................................................... F-7
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements............ F-8
VENTANA MEDICAL SYSTEMS, INC.
Report of Ernst & Young LLP, Independent Auditors..................................... F-11
Audited Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996
(unaudited)...................................................................... F-12
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-13
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-14
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-15
Notes to Consolidated Financial Statements.......................................... F-16
BIOTEK SOLUTIONS, INC.
Report of Ernst & Young LLP, Independent Auditors..................................... F-26
Audited Financial Statements
Balance Sheets as of June 30, 1995 and December 31, 1995............................ F-27
Statements of Operations for the year ended June 30, 1995 and six months ended
December 31, 1995................................................................ F-28
Statements of Changes in Stockholders' Deficit for the year ended June 30, 1995 and
six months ended December 31, 1995............................................... F-29
Statements of Cash Flows for the year ended June 30, 1995 and six months December
31, 1995......................................................................... F-30
Notes to Financial Statements....................................................... F-31
BIOTEK SOLUTIONS, INC.
Report of Arthur Andersen LLP, Independent Public Accountants......................... F-37
Audited Financial Statements
Balance Sheets as of June 30, 1993 and 1994......................................... F-38
Statements of Operations for the years ended June 30, 1993 and 1994................. F-39
Statements of Changes in Shareholders' Deficit for the years ended June 30, 1993 and
1994............................................................................. F-40
Statements of Cash Flows for the years ended June 30, 1993 and 1994................. F-41
Notes to Financial Statements....................................................... F-42
</TABLE>
F-1
<PAGE> 72
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 years ended December 31, 1994 and
1995 and for the three months ended March 31, 1995 and 1996 have been prepared
as if the acquisition of BioTek had been consummated as of January 1, 1994. 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> 73
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 $ 14,977(a) $ 18,413
Accounts receivable.................................. 2,834 2,834
Inventories.......................................... 2,472 2,472
Other................................................ 695 695
-------- --------
Total current assets................................... 9,437 24,414
Property, plant and equipment, net..................... 2,923 2,923
Intangibles, net....................................... 12,392 12,392
-------- ------- --------
Total assets................................. $ 24,752 $ 14,977 $ 39,729
======== ======= ========
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable..................................... $ 1,216 $ 1,216
Other current liabilities............................ 7,026 7,026
-------- --------
Total current liabilities.............................. 8,242 8,242
-------- --------
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 57,691 61,028
Accumulated deficit.................................. (37,854) 8,456(b) (29,398)
Cumulative foreign currency transactions
adjustment........................................ (143) (143)
-------- ------- --------
Total stockholders' equity (deficit)......... (34,660) 66,147 31,487
-------- ------- --------
Total liabilities, convertible redeemable
preferred stock and stockholders' equity
(deficit).................................. $ 24,752 $ 14,977 $ 39,729
======== ======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 74
VENTANA MEDICAL SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
VENTANA BIOTEK PRO FORMA PRO FORMA
HISTORICAL HISTORICAL(1) ADJUSTMENTS COMBINED
---------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales............................... $ 5,927 $ 5,642 $ 876(2) $ 12,445
Cost of goods sold...................... 2,531 3,643 (291)(2)(3) 5,883
------- ------- ------- --------
Gross profit............................ 3,396 1,999 1,167 6,562
Operating expenses:
Research and development.............. 1,926 785 (24)(3) 2,687
Selling, general and administrative... 6,899 4,636 (1,593)(2)(3)(4) 9,942
------- ------- ------- --------
Loss from operations before nonrecurring
expenses and amortization of
intangibles........................... (5,429) (3,422) 2,784 (6,067)
Nonrecurring expenses................... -- 877 7,496(5) 8,373
Amortization of intangibles............. -- -- 1,344(6) 1,344
------- ------- ------- --------
Loss from operations.................... (5,429) (4,299) (6,056) (15,784)
Interest expense........................ 59 (1,610) 1,610(7) 59
------- ------- ------- --------
Net loss................................ $ (5,370) $(5,909) $(4,446) $ (15,725)
======= ======= ======= ========
</TABLE>
See accompanying notes.
F-4
<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
------- ------- ------ -------
Loss from operations before
amortization of intangibles.......... (3,343) (3,069) 1,416 (4,996)
Amortization of intangibles............ -- -- 1,344(6) 1,344
------- ------- ------ -------
Loss from operations................... (3,343) (3,069) 72 (6,340)
Interest (expense) income.............. 74 (2,224) 2,224(7) 74
------- ------- ------ -------
Net loss............................... $ (3,269) $(5,293) $ 2,296 $(6,266)
======= ======= ====== =======
Pro forma net loss per share, as
adjusted............................. $ (0.39) $ (0.66)
======= =======
Pro forma weighted average shares
outstanding, as adjusted............. 8,354 9,466(8)
======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 76
VENTANA MEDICAL SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 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................................ $ 2,202 $ 1,421 $ 795(2) $ 4,418
Cost of goods sold....................... 936 875 323(2)(3) 2,134
------- ------ ---- -------
Gross profit............................. 1,266 546 472 2,284
Operating expenses:
Research and development............... 556 173 (8)(3) 721
Selling, general and administrative.... 1,594 779 (6)(2)(3)(4) 2,367
------- ------ ---- -------
Loss from operations before amortization
of intangibles......................... (884) (406) 486 (804)
Amortization of intangibles.............. -- -- 336(6) (336)
------- ------ ---- -------
Loss from operations..................... (884) (406) 150 (1,140)
Interest (expense) income................ 50 (498) 498(7) 50
------- ------ ---- -------
Net loss................................. $ (834) $ (904) $ 648 $(1,090)
======= ====== ==== =======
Pro forma net loss per share, as
adjusted............................... $ (0.10) $ (0.12)
======= =======
Pro forma weighted average shares
outstanding, as adjusted............... 8,220 9,331(8)
======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 77
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.................... 1,435 593 (101)(2)(3) 1,927
-------- ------- ------- ------
Gross profit.......................... 2,711 504 86 3,301
Operating expenses:
Research and development............ 613 163 (5)(3) 771
Selling, general and
administrative................... 2,279 368 57(2)(3)(4) 2,704
-------- ------- ------- ------
Loss from operations before
nonrecurring expenses and
amortization of intangibles......... (181) (27) 34 (174)
Nonrecurring expenses................. 7,083 413 (7,496)(5) --
Amortization of intangibles........... -- -- 336(6) 336
-------- ------- ------- ------
Loss from operations.................. (7,264) (440) 7,194 (510)
Interest (expense) income............. (5) (944) 944(7) (5)
-------- ------- ------- ------
Net loss.............................. $ (7,269) $(1,384) $ 8,138 $ (515)
======== ======= ======= ======
Pro forma net loss per share, as
adjusted............................ $ (0.85) $ (0.05)
======== ======
Pro forma weighted average shares
outstanding, as adjusted............ 8,585 9,696(8)
======== ======
</TABLE>
See accompanying notes.
F-7
<PAGE> 78
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, 1994 and are adjusted to reflect the sale of
2,200,000 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
preliminary 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.......................... 5,000
Goodwill..................................................... 1,875
Developed technology......................................... 2,000
Customer base................................................ 4,200
Covenant not to compete...................................... 1,800
Assembled work force......................................... 500
Trademark and trade names.................................... 1,100
--------------
$ 18,763
===========
</TABLE>
In accordance with FAS 2, the Company charged to expense at the date of the
acquisition $5.0 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
ranging from 3 to 20 years.
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 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
F-8
<PAGE> 79
VENTANA MEDICAL SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
the ultimate sale of products to the end-users as if such policy had been in
effect as of January 1, 1994. The combined effect of the pro forma change in
accounting policy is to increase net sales in both 1994 and 1995. This is
primarily due to (i) shipments of instruments and reagents to CMS in 1993
and 1994 which were subsequently placed with end-users in 1994 and 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 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 $5.0 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, 1994.
(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.
F-9
<PAGE> 80
VENTANA MEDICAL SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(8) The calculation of pro forma weighted average number of shares outstanding
is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ---------------
1995 1995 1996
------------ ----- -----
<S> <C> <C> <C>
Weighted average shares outstanding.................... 957 903 1,119
Assumed conversion of Series A, C, and D preferred
shares............................................... 6,580 6,499 6,648
Assumed exercise of warrants to purchase Series D
preferred shares..................................... 48 48 48
Stock options and restricted stock issued within one
year of initial filing............................... 769 769 769
Shares of common stock issued in connection with the
initial public offering to be used to retire
acquisition debt..................................... 1,112 1,112 1,112
------ ----- -----
Weighted average shares outstanding, as adjusted....... 9,466 9,331 9,696
========== ===== =====
</TABLE>
F-10
<PAGE> 81
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 10,
as to which the date is , 1996
---------------------------------------------
The foregoing report is in the form that will be signed upon completion of
the recapitalization described in Note 10 to the Consolidated Financial
Statements.
Tucson, Arizona
May 21, 1996
F-11
<PAGE> 82
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 2,472
Other...................................... 38 24 695
-------- -------- -----------
Total current assets......................... 4,893 4,819 9,437
Property and equipment, net (Note 3)......... 2,169 2,258 2,923
Intangibles, net (Note 10)................... 217 301 12,392
-------- -------- -----------
Total assets................................. $ 7,279 $ 7,378 $ 24,752
======== ======== =========
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 7,026
-------- -------- -----------
Total current liabilities.................... 1,173 2,054 8,242
Long-term debt............................... -- -- 15,035
Commitments (Notes 6, 9 and 10)
Convertible redeemable preferred stock at
aggregate mandatory redemption value (Notes
6 and 10):................................. 30,237 35,180 36,135 $ --
Stockholders' equity (deficit) (Notes 7 and
10):
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 1,347,049 shares issued and
outstanding at December 31, 1994 and
1995 and
March 31, 1996, respectively (50,000,000
shares authorized, 8,008,890 shares
issued and outstanding -- pro
forma) -- amount paid in................ 190 244 3,337 31,016
Accumulated deficit........................ (24,275) (29,980) (37,854) (29,398)
Cumulative foreign currency translation
adjustment.............................. (46) (120) (143) (143)
-------- -------- ----------- ----------------
Total stockholders' equity (deficit)......... (24,131) (29,856) (34,660) $ 1,475
============
-------- -------- -----------
Total liabilities, convertible redeemable
preferred stock, and stockholders' equity
(deficit).................................. $ 7,279 $ 7,378 $ 24,752
======== ======== =========
</TABLE>
See accompanying notes.
F-12
<PAGE> 83
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 1,435
--------- --------- --------- --------- ---------
959 3,396 6,331 1,266 2,711
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 2,279
--------- --------- --------- --------- ---------
Loss from operations before non-recurring
expenses................................ (5,208) (5,429) (3,343) (884) (181)
Nonrecurring expenses..................... -- -- -- -- (7,083)
--------- --------- --------- --------- ---------
Loss from operations...................... (5,208) (5,429) (3,343) (884) (7,264)
Interest income (expense)................. 229 59 74 50 (5)
--------- --------- --------- --------- ---------
Net loss.................................. $ (4,979) $ (5,370) $ (3,269) $ (834) $ (7,269)
======== ======== ======== ======== ========
Net loss per share, as adjusted........... $ (0.39) $ (0.10) $ (0.85)
======== ======== ========
Shares used in computing net loss per
share, as adjusted...................... 8,354 8,220 8,585
======== ======== ========
</TABLE>
See accompanying notes.
F-13
<PAGE> 84
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)...... -- -- -- -- 225,100 3,007 -- -- 3,007
Sale of common
stock
(unaudited)...... -- -- -- -- 101,785 86 -- -- 86
Translation
adjustment
(unaudited)...... -- -- -- -- -- -- -- (23) (23)
Net loss
(unaudited)...... -- -- -- -- -- -- (7,269) -- (7,269)
--------- --------- --------- ------- --------- -------- ------------ ----------- --------
Balance at March 31,
1996 (unaudited)... $ 536 $10,859 $24,740 $36,135 1,347,049 $ 3,337 $(37,854) $(143) $(34,660)
======== ======== ======== ======== ========= ========= ============ ========== =========
</TABLE>
See accompanying notes.
F-14
<PAGE> 85
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) $ (7,269)
Adjustments to reconcile net loss to net
cash used in operating activities:
Purchased in-process research and
development......................... -- -- -- -- 5,000
Depreciation and amortization.......... 334 477 911 211 252
Changes in operating assets and
liabilities:
Accounts receivable.................... (244) (941) (474) 165 (287)
Inventories............................ (258) (24) (874) (64) (577)
Other assets........................... (126) 37 (114) (39) (37)
Accounts payable....................... 69 321 422 48 (344)
Other current liabilities.............. 110 224 459 132 2,409
------- ------- ------- ------ --------
Net cash used in operating activities.... (5,094) (5,276) (2,939) (381) (853)
INVESTING ACTIVITIES:
Purchase of property and equipment,
net.................................... (1,700) (604) (956) (399) (59)
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) (2,559)
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 5,722
------- ------- ------- ------ --------
Net cash provided by financing
activities............................. 5,105 2,999 2,561 2,415 5,722
Effect of exchange rate changes on
cash................................... -- (46) (74) -- 23
------- ------- ------- ------ --------
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-15
<PAGE> 86
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 10 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 agreement plans, 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.
F-16
<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)
Intangibles: Intangible assets consist primarily of goodwill, customer
base, and developed technology acquired in the BioTek acquisition (see Note 10).
Such assets are amortized over estimated useful lives ranging from 3 to 20
years.
Revenue Recognition: Sales of instruments and reagents are generally
recognized upon shipment.
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 10).
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 common equivalent shares 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-17
<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)
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) $ (7,269)
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) $ (7,874)
========= ========= ========== ==========
Net loss per common share................. $ (4.17) $ (4.36) $ (3.30) $ (0.84) $ (4.17)
========= ========= ========== ==========
Weighted average shares outstanding....... 1,626 1,686 1,727 1,672 1,889
========= ========= ========== ==========
</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 1,142
---- ------ ------
$893 $1,767 $ 2,472
==== ====== ======
</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 2,340
Computers and related equipment.................. 187 284 275
Furniture and fixtures........................... 116 272 273
Leasehold improvements........................... 39 133 133
------ ------ ------
3,242 4,198 5,201
Less accumulated depreciation and amortization........ 1,073 1,940 2,278
------ ------ ------
$2,169 $2,258 $ 2,923
====== ====== ======
</TABLE>
F-18
<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)
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 1,008
---- ---- ------
$534 $993 $ 7,026
==== ==== ======
</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 10).
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-19
<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)
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 9,191,764
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 18,026,307
</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-20
<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)
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 92,391 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 and are convertible into 82,408 shares of common stock.
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......................................... 324,467 0.84
Exercised....................................... (160,210) 0.24 -- 0.95
Canceled........................................ (126,580) 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-21
<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)
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-22
<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)
10. 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.
If the Offering is consummated under terms presently anticipated, all of
the currently outstanding preferred stock will automatically convert into
6,661,841 shares of common stock, and 84,598 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............ 5,000
Goodwill....................................... 1,875
Developed technology........................... 2,000
Customer base.................................. 4,200
Covenant not-to-compete........................ 1,800
Assembled work force........................... 500
Trademark and trade name....................... 1,100
------
Total purchase price........................... $ 18,763
======
</TABLE>
The Company charged to expense at the date of the acquisition $5.0 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.
F-23
<PAGE> 94
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 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.
During the quarter ended March 31, 1996, the Company raised $4.6 million
through the private placement of subordinated notes which included warrants to
purchase an aggregate of 2,378,898 shares of Preferred Stock of the Company at
an exercise price of $2.15 per share which will convert into 879,183 shares of
Common Stock upon the completion of this Offering. 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.
On February 26, 1996, the Company sold 646,659 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 May 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.
F-24
<PAGE> 95
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)
In May 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.
F-25
<PAGE> 96
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.
Tucson, Arizona
February 2, 1996, except for Note 12,
as to which the date is February 20, 1996
F-26
<PAGE> 97
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-27
<PAGE> 98
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-28
<PAGE> 99
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-29
<PAGE> 100
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-30
<PAGE> 101
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.
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-31
<PAGE> 102
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-32
<PAGE> 103
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-33
<PAGE> 104
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-34
<PAGE> 105
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-35
<PAGE> 106
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-36
<PAGE> 107
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-37
<PAGE> 108
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-38
<PAGE> 109
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-39
<PAGE> 110
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-40
<PAGE> 111
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-41
<PAGE> 112
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-42
<PAGE> 113
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-43
<PAGE> 114
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-44
<PAGE> 115
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-45
<PAGE> 116
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-46
<PAGE> 117
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-47
<PAGE> 118
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-48
<PAGE> 119
- ------------------------------------------------------
- ------------------------------------------------------
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............................. 15
Use of Proceeds......................... 15
Dividend Policy......................... 15
Dilution................................ 16
Capitalization.......................... 17
Selected Consolidated Financial and
Operating Data........................ 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 20
Business................................ 33
Management.............................. 50
Certain Transactions.................... 57
Principal and Selling Stockholders...... 60
Description of Capital Stock............ 64
Shares Eligible for Future Sale......... 65
Underwriting............................ 67
Legal Matters........................... 68
Experts................................. 68
Additional Information.................. 68
Index to Consolidated Financial
Statements............................ F-1
</TABLE>
------------------
UNTIL , 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.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
SHARES
LOGO
VENTANA MEDICAL SYSTEMS, INC.
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
BEAR, STEARNS & CO. INC.
DILLON, READ & CO. INC.
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 120
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> 121
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>
- ---------------
* To be filed by amendment.
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> 122
(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> 123
<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.
10.9** 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* Form of Right of First Refusal.
10.20(a)* Silicon Valley Bank Loan and Security Agreement dated February 20, 1995.
10.20(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 (see page II-7).
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-4).
27.1** Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously Filed.
+ Confidential Treatment Requested.
II-3
<PAGE> 124
(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> 125
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 13th day of June, 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 June 13, 1996
- ----------------------------------------------- Officer and Director
(R. James Danehy) (Principal Executive Officer)
/s/ R. MICHAEL RODGERS* Vice President and Chief June 13, 1996
- ----------------------------------------------- Financial Officer (Principal
(R. Michael Rodgers) Financial and Accounting
Officer)
/s/ REX J. BATES* Director June 13, 1996
- -----------------------------------------------
(Rex J. Bates)
/s/ MICHAEL R. DANZI* Director June 13, 1996
- -----------------------------------------------
(Michael R. Danzi)
/s/ EDWARD M. GILES* Director June 13, 1996
- -----------------------------------------------
(Edward M. Giles)
/s/ THOMAS M. GROGAN, M.D.* Director June 13, 1996
- -----------------------------------------------
(Thomas M. Grogan, M.D.)
</TABLE>
II-5
<PAGE> 126
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------------ --------------
<S> <C> <C>
/s/ JOHN PATIENCE* Director June 13, 1996
- -----------------------------------------------
(John Patience)
/s/ JACK W. SCHULER* Director June 13, 1996
- -----------------------------------------------
(Jack W. Schuler)
/s/ C. ANTHONY STELLAR, M.D.* Director June 13, 1996
- -----------------------------------------------
(C. Anthony Stellar, M.D.)
/s/ JAMES M. STRICKLAND* Director June 13, 1996
- -----------------------------------------------
(James M. Strickland)
/s/ JAMES R. WEERSING* Director June 13, 1996
- -----------------------------------------------
(James R. Weersing)
*By: /s/ R. JAMES DANEHY
- -----------------------------------------------
(R. James Danehy)
(Attorney in-fact)
</TABLE>
II-6
<PAGE> 127
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 10, as to which the
date is 1996, of Ventana Medical Systems, Inc. in the Registration
Statement (Form S-1) and related Prospectus of Ventana Medical Systems, Inc.,
for the registration of 3,450,000 shares its common stock.
Tucson, Arizona
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the
completion of the restatement of capital accounts described in Note 10 to the
consolidated financial statements.
/s/ ERNST & YOUNG LLP
Tucson, Arizona
May 22, 1996
II-7
<PAGE> 128
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 the Registration
Statement (Form S-1) 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
May 22, 1996
II-8
<PAGE> 129
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
May 22, 1996
II-9
<PAGE> 130
INDEX TO 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, 1996.
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.
10.9** 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.
</TABLE>
<PAGE> 131
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------------- ------------------------------------------------------------------------
<S> <C>
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* Form of Right of First Refusal.
10.20(a)* Silicon Valley Bank Loan and Security Agreement dated February 20, 1995.
10.20(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 (see page II-7).
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-4).
27.1** Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously Filed.
+ Confidential Treatment Requested.
<PAGE> 1
EXHIBIT 10.1A
DISTRIBUTION AGREEMENT
This Agreement is made and entered into on this 27th day of September
1994, by and between BioTek Solutions Inc., 120B Cremona Drive, Santa Barbara,
California 93117, U.S.A. a corporation organized under the laws of the State of
California, hereinafter referred to as "BioTek" and
DAKO A/S Productionsvej 42, 2600 Glostrup/Copenhagen, Denmark, a
company organized under the laws of the Kingdom of Denmark, and its wholly or
partially owned subsidiaries currently, or those interests acquired by DAKO
or its subsidiaries in the future, hereinafter referred to as "DAKO." It
replaces in its entirety the Distribution Agreement between the two parties,
dated 1st April 1994.
WHEREAS DAKO and BioTek desire to promote and sell under a dual label
certain products (Schedules A and B) manufactured by or distributed for sale by
BioTek; and
WHEREAS BioTek and DAKO wish to promote and sell under a dual label
certain reagents (Schedule C) manufactured by DAKO together with said products
as an instrument system.
WHEREAS the parties desire to enter into a distributorship agreement
governing the terms of their relationship.
NOW THEREFORE, in consideration of the respective covenants of the
parties herein set forth, the parties hereto agree as follows:
<PAGE> 2
1. PRODUCTS
1a. The Products covered by this Agreement include (i) the instruments described
in Schedule A manufactured by or for BioTek, including components and base
software, and parts necessary for the maintenance and repair thereof
(hereinafter "Instruments"); (ii) accessories, components, buffers and supplies
listed in Schedule B, manufactured by or for BioTek, (hereinafter "Accessories")
and (iii) reagents listed in Schedule C, manufactured by DAKO (hereinafter
"Reagents"). Schedule X contains certain accessories and components bought in by
DAKO. Schedules A, B, C and X may be updated and amended from time to time by
mutual consent of the parties.
1b. BioTek shall make available to DAKO on an exclusive basis any improved or
updated versions and any similar or related Instruments and/or Accessories under
the same terms and conditions as set forth herein. Said updated and improved
Instruments and/or Accessories shall be included in Schedules A or B. DAKO shall
make available to on an exclusive basis any improved or updated versions of
Reagents for inclusion in Schedule C. Any and all changes in product
specifications shall be mutually agreed by the parties to this Agreement.
1c. For any period during which this Agreement is exclusive (see sections 2a.
and 2c below), BioTek shall offer to DAKO in writing the right to distribute,
during the term of this Agreement and on the same terms and conditions (other
than price) as set forth herein, any new products developed by or for BioTek,
and DAKO shall have the option to accept distribution rights with respect to
said new products in writing [*] of BioTek's written notice to DAKO of the
availability
-2-
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 3
thereof. If DAKO decides not to exercise this option, BioTek may distribute, or
enter into an agreement to distribute with a third party, any such new product
on terms that will also be offered to DAKO. Such terms to third parties may
change over time through volume discounts, price increases etc., at the sole
discretion of BioTek.
1d. BioTek shall ensure that spare parts and accessories necessary for the
operation and repair of any Instruments delivered to customers under this
Agreement shall be available for purchase by DAKO or any DAKO customer, at their
expense, including but not limited to parts, shipment and installation expenses,
in such circumstances that said parts are not covered by warranties provided
through DAKO (or BioTek as agreed), for the term of this Agreement. A spare
parts list is attached to this Agreement (Schedule P).
1e. All products promoted and sold under this Agreement shall be promoted and
sold under dual label, wherein both DAKO and BioTek labels and trademarks are of
equal size and character (see Schedule D). Some components for Reagents as well
as buffers required to optimize the use of instruments will be manufactured by
BioTek (see Schedule B). Incorporation of components and inclusion of buffers
into Reagents, and final manufacturing of Reagents and quality control will be
carried out by DAKO.
1f. DAKO and BioTek have signed a Confidentiality Agreement and will treat all
knowledge gained through collaboration on dual label products as trade secrets
for the term of this Agreement or
-3-
<PAGE> 4
any extensions to this Agreement plus a five (5) year period following the
termination of this Agreement for any reason.
2. GRANT OF DISTRIBUTORSHIP
2a. Upon the terms and subject to the conditions hereinafter set forth, BioTek
hereby appoints DAKO and DAKO accepts the appointment as the exclusive
distributor of Instruments and Accessories in the Territory as of the effective
date of this Agreement. Except as otherwise provided in sections 3a. (ii) or 3a.
(iii) below, BioTek reserves no right to distribute Instruments and Accessories
in the Territory and DAKO shall have no rights under this Agreement to sell or
distribute Instruments, Accessories or Reagents outside of the Territory unless
mutually agreed upon by the parties.
2b. The Territory in which DAKO has the rights described in section 2a. hereof
to distribute the Instruments and Accessories shall be Europe, the Middle East,
India and Africa (hereinafter "Territory"). DAKO and BioTek will enter into good
faith negotiations concerning (a) similar agreement(s) for Japan and South East
Asia.
2c. With the exception of the conditions described in section 2d., for any
period during which the arrangement between the parties for distribution of
Instruments and Accessories is exclusive, DAKO shall not sell within the
Territory any other automated immuno-histochemistry instrument which performs
multiple functions, or any other stainer which is competitive with any current
instruments
-4-
<PAGE> 5
included in Schedule A or newly-distributed instruments being made available for
inclusion in Schedule A (see section 1.b), and shall not sell within the
Territory any other accessories, components, buffers and supplies which are
directly competitive with the Accessories described in Schedule B hereto unless
otherwise mutually agreed.
2d. Notwithstanding section 2c., and limited to Italy, in the case of tenders
for sale of reagents in which said tender requires DAKO to offer instruments for
sale as an integral part of the tender, DAKO shall inform BioTek of such tender
offers prior to submission whereupon BioTek may offer alternative sales or
product options to DAKO to accommodate such tender requirements, and if this
does not allow BioTek's instrument to be sold through such tenders, then DAKO
shall be allowed to sell other automated immunohistochemistry instruments as
part of such tenders. For the second and subsequent instruments sold to the same
customer via such tenders the monthly royalty described in section 3g shall be
[*]
2e. Unless otherwise specifically agreed to the contrary, during the term of the
Agreement in which the arrangement between the parties for distribution of
Instruments and Accessories is exclusive, BioTek shall not sell within the
Territory any reagents which are specifically intended or designed for use with
Instruments described in Schedule A and DAKO shall include in Schedule C any
reagents which are specifically intended or designed for use with the
Instruments described in Schedule A. DAKO shall, unless prohibited by customer
demand, sell dual label Reagents for use on Instruments.
-5-
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 6
3. CONDUCT OF DAKO
3a. DAKO shall exclusively promote, distribute and sell Instruments, Accessories
and Reagents during the term of this Agreement, within contract periods
("Contract Periods") as are set forth below: The first Contract Period shall
commence on the date of installation at a customer location of the first
Instrument in the Territory and last until 1st July 1995. Subsequent Contract
Periods shall be twelve month periods beginning on the 1st July of each calendar
year.
<TABLE>
<CAPTION>
CONTRACT PERIOD NUMBER OF INSTRUMENTS
PER CONTRACT PERIOD CUMULATIVE
<S> <C> <C>
Until July 1, 1995 [*]
Year 2 [*] [*]
Year 3 [*] [*]
</TABLE>
(i) The foregoing shall constitute volume targets under which the continuation
of this Agreement shall be determined. DAKO shall be considered to have achieved
such target if the sum of total of Instruments placed within the Territory plus
firm orders to deliver, equals or exceeds the cumulative number of Instruments
given above at the end of a Contract Period.
(ii) Should DAKO not achieve a cumulative target, BioTek shall have the option,
within thirty (30) days thereof, as its sole and exclusive remedy for failure to
achieve the target, give DAKO thirty (30) days written notice of its intention
to sell the Instruments and Accessories in the Territory, either directly or
through third parties, as long as sales price is not less that the Transfer
Prices shown in Schedules A and B. If BioTek exercises such option, DAKO may;
continue to distribute
-6-
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 7
Instruments and Accessories on a non-exclusive basis; or DAKO may place firm
Purchase Orders to make up the shortfall in sales of Instruments so long as
delivery for such Instruments is within ninety (90) days; or, DAKO may elect to
terminate the Agreement by providing thirty (30) days prior written notice to
BioTek within thirty (30) days of receipt of said notice. Such termination shall
be without liability to either party, except for such other liabilities as may
otherwise specifically be set forth in this Agreement or under Law.
(iii) Should DAKO not achieve a cumulative target, DAKO shall have the option,
within thirty (30) day thereof, to give BioTek thirty (30) days written notice
of its intention to continue to distribute Instruments and Accessories on a
non-exclusive basis, or DAKO may elect to terminate the Agreement by giving
ninety (90) days written notice to BioTek. Such termination shall be without
liability to either party, except for such other liabilities as may otherwise
specifically be set forth in this Agreement or under Law.
(iv) Notwithstanding the foregoing, if DAKO is not able to achieve the target in
any Contract Period due to an act or omission of BioTek or due to any event(s)
which are beyond its reasonable control (e.g. section 11), such inability shall
not constitute grounds for BioTek to exercise the option to sell Instruments and
Accessories in the Territory, as aforesaid in section (ii). In the event that
DAKO is unable to achieve the target for any Contract Period due to failure of
BioTek to deliver the quantities of Instruments required to achieve the target,
the target shall be deemed to have been met for that Contract Period and the
cumulative numbers for subsequent Contract Periods shall be adjusted downwards
by the difference between the target and the numbers of Instruments delivered.
-7-
<PAGE> 8
(v) Notwithstanding the foregoing, if at any time after 1st January 1996, a
technological development occurs which substantially reduces the market for
Instruments, DAKO shall have the option to [*] notice to BioTek of its intention
to continue to distribute Instruments and Accessories on a non-exclusive basis
for a period of [*] and may thereafter terminate this Agreement. Such notice
shall be accompanied by evidence of substantial fall in Instrument placements.
In these circumstances, BioTek reserves the right to give similar notice as to
non-exclusivity and/or termination should such technological changes adversely
effect the on-going business of BioTek as deemed solely by BioTek.
3b. DAKO shall order Instruments and Accessories hereunder by submitting firm
purchase orders to BioTek. Such firm purchase orders shall be given on DAKO's
purchase order form and shall be acknowledged by BioTek by facsimile within two
(2) working days.
3c. In conjunction with this Agreement, DAKO has issued to BioTek firm purchase
orders [*] which shall be delivered by BioTek in accordance with the provisions
of section 4a. of this Agreement.
3d. DAKO may return for full credit or replacement, any Instrument or Accessory
for which DAKO is required to give a customer credit or replacement Instruments
or Accessories due to a defect or deficiency in the Instrument or Accessory,
provided that DAKO first gives BioTek the option of repairing such Instrument on
site, either through its own personnel or through the direction of DAKO
personnel or contractors, with on site time and parts expenses assumed by BioTek
and only
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then, if DAKO obtains from BioTek a returned goods authorization, which shall
not be unreasonably withheld or delayed by BioTek.
3e. DAKO agrees to mark Reagents (Schedule C) at the lowest saleable unit and on
all packaging and inserts with BioTek's trademarks in a form and size to be
mutually agreed by both parties. Such marking shall be fully described in
Schedule D which schedule shall be updated from time to time.
3f. DAKO agrees to bar-code Reagents at the lowest saleable unit using symbology
3 to 9 in accordance with Health Industry Bar Code ("HIBC").
3g. DAKO shall pay to BioTek a royalty based on TechMate 500 and TechMate 1000
Instruments that are sold and delivered to DAKO or delivered to DAKO's customers
based on DAKO's drop shipment directions. Such royalty shall be paid to BioTek
by DAKO for each Instrument installed by DAKO [*]. However, if
DAKO requests by the [*] a next generation instrument and if
BioTek by the [*] cannot demonstrate a capability to deliver such
an instrument by the [*], such royalty shall be paid to BioTek by
DAKO for a period of [*].
Such royalties per Instrument purchased shall be paid on a monthly basis on the
first day of each calendar month, starting on the first installation date of the
instrument as follows:
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<TABLE>
<CAPTION>
$ per month per instrument
<S> <C>
Installation to end of the calendar month (installation month) [*]
First and second calendar months [*]
Third and fourth calendar months [*]
Fifth, sixth, seventh and eighth calendar months [*]
Ninth, tenth, eleventh and twelfth calendar months [*]
Thereafter [*]
</TABLE>
Notwithstanding the above, such royalty shall not be paid for Instruments sold
to Pharmaceutical companies that purchase limited amounts of dual-labeled
Reagents from DAKO, but DAKO shall pay instead a [*].
In relation to the payment of these royalty fees, BioTek reserves the right and
DAKO grants the right to BioTek to audit the accounts of DAKO quarterly, at
BioTek's expense.
3h. DAKO shall maintain in its inventory at least such number of Instruments as
may be equal to the monthly average number of Instruments installed during the
[*]. DAKO will not be charged monthly royalty fees (according to section 3g) on
these inventory Instruments, during the first Contract Period, until such time
as they are placed at customer sites.
3i. DAKO shall at its own cost and expense provide appropriate personnel,
Instruments, Accessories and Reagents to prospective customers identified by
DAKO for conducting performance studies and product evaluations as may be
reasonably requested by qualified prospective customers.
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3j. DAKO will maintain at its own cost and expense, technical and sales support
in the form of full-time sales personnel and other dedicated applications
specialists as required at DAKO locations, for example in Milan and Paris. [*]
3k. DAKO shall establish at two separate locations, stocks of materials and
Reagents (hereinafter "Reagent Stock") as a buffer against changes in supply
conditions of Reagents. Each Reagent Stock shall contain materials and finished
Reagent products equivalent to the requirement [*] operation of the existing
placements of Instruments.
3l. If DAKO for some reason is unable to continue production and maintain
Reagent Stock levels, DAKO shall inform BioTek and promptly enter into agreement
with an alternative supplier (with first option to supply offered to BioTek) to
obtain the necessary materials and products to maintain such Reagent Stocks.
Should DAKO not be able to ensure such supply, BioTek shall have
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the option to supply directly or indirectly such Reagent materials and products
at the prices currently in effect with customers at the time DAKO ceases supply
and until DAKO can resume such supply, and negotiate on a good faith basis with
DAKO for payment for such supplies.
3m. BioTek will provide [*] TechMate 500 Instruments for DAKO to place into
prestigious, reference laboratories where DAKO and BioTek both agree there is
potential to generate significant other placements. [*] DAKO shall purchase said
Instruments according to section 3b, BioTek agrees to provide these [ * ]
at a billed rate of [ * ].
3n. DAKO will provide BioTek with rolling forecasts of monthly Instrument
requirements for twelve month intervals. These forecasts will be provided
quarterly. The first forecast will be provided for the interval starting 1st
January 1995. These forecasts shall be planning purposes only and shall not
constitute a purchase order. Further DAKO will provide quarterly rolling
forecasts for each quarter, based on the last two months of the preceding
quarter actual orders plus twenty five percent (25%). Such quarterly forecasts
will be provided 45 days in advance of the start of a quarter. DAKO will issue
firm Purchase Orders at least once a month based on the above quarterly rolling
forecasts.
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3o. DAKO together with BioTek will make a weekly update of a Distribution Plan
that details instruments ordered, agreed delivery and installation dates and the
locations in which the Instruments shall be installed.
4. CONDUCT OF BIOTEK
4a. BioTek shall ship promptly, but in any event [*] from receipt of order,
DAKO's orders for Instruments and Accessories. All orders shall be shipped
f.c.a. Boston Airport (or f.o.b. Port of Boston, or such location(s) as
appropriate) at which point title and risk of loss shall pass from BioTek to
DAKO, freight and insurance prepaid to such location(s) as DAKO may designate.
BioTek shall cooperate with DAKO in limiting drop shipments of Instruments and
Accessories to DAKO to an absolute minimum.
4b. In addition to the shipments mentioned above in section 4a., BioTek shall
ship to DAKO in Copenhagen by December 31, 1994, [*].
4c. BioTek shall give [*] prior written notice of increase
in price of any Instrument or Accessory and honour DAKO's purchase orders at the
prices in effect immediately prior to the effective date of any price increase.
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4d. BioTek shall notify DAKO immediately in writing should BioTek become aware
of any defect or condition which renders any Instrument or Accessory in
violation of any statute or regulation, or which in any way alters the
specifications or quality of the Instrument or Accessory.
4e. BioTek shall execute and abide by the terms of DAKO's Continuing Guaranty
(see Schedule E) incorporated herein by reference, with respect to Instruments
and Accessories and DAKO shall abide by the its General Terms and Conditions of
Sale with respect to Reagents. The terms and conditions of the Continuing
Guaranty and the General Terms and Conditions of Sale shall survive the
termination of this Agreement.
4f. BioTek shall provide DAKO with a Certificate of Insurance which meets the
requirements of section D of the Continuing Guaranty on or prior to execution of
this Agreement. BioTek shall provide DAKO with renewal insurance certificates in
the form mandated by section D of the Continuing Guaranty during the term of
this Agreement, without demand therefore by DAKO. Notwithstanding any provision
of the Continuing Guaranty to the contrary, the amount of the insurance required
of BioTek pursuant to the Continuing Guaranty during the first Contract Period
shall be [*]; for the next subsequent Contract Period [*]; for all subsequent
Contract Periods of the term of this Agreement [*].
4g. BioTek shall provide to DAKO's Sales personnel, at Santa Barbara or at a
location chosen by BioTek, training in the use, technical properties, sale
competitive features and benefits of Instruments and Accessories as may be
reasonably requested from time to time by DAKO. For purposes of such
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training, [*].
4g.(i) BioTek will provide Instrument and Accessory sales materials that will be
revised only to reflect necessary changes in language. It is clearly understood
by the parties that BioTek's Agreement must be confirmed in writing before any
changes are made to BioTek marketing materials or before the size, graphic
design, legend(s) trademark or logo of BioTek is altered, redesigned or used in
any way. In general, literature will be under DAKO's corporate identity and
conform with DAKO's current offerings, but will include the BioTek name and
trademark in similar size and character in all dual labeling (see Schedule D).
4h. BioTek shall provide technical support to DAKO's sales personnel at sites to
be determined by BioTek, and promptly provide to DAKO such additional types and
quantities of technical information developed or acquired by BioTek from time to
time as may reasonably be expected to be of assistance to DAKO in fulfilling its
obligations hereunder. In particular BioTek shall provide technical training for
DAKO's and DAKO Service Partner's field service engineers in the installation
and repair of TechMate instruments.
4i. BioTek shall supply at its expense reasonable quantities of such instruction
and training manuals and point of sale literature as may from time to time be
requested by DAKO for use in
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<PAGE> 16
connection with the distribution and sale of Instruments in the Territory.
Subject to DAKO's prior written approval, the DAKO name will be incorporated
into BioTek's advertising literature for Instruments and Accessories intended
for distribution by DAKO. If requested to do so by DAKO, BioTek shall furnish
DAKO with suitable copy and photographs for use by DAKO in cataloguing the
Instrument and Accessories.
4j. Any Instrument or Accessories owned by DAKO and rendered unsaleable due to
change in any product specification, discontinuation or elimination by BioTek of
any product from its product offering, release by BioTek of any improved or
updated version of any Instrument or Accessory, shall be repurchased from DAKO
by BioTek [*] following DAKO's written request therefore, at the price paid
for such product by DAKO. BioTek shall additionally pay for return freight and
related transportation and insurance charges for all such products.
4k. BioTek agrees to mark Instruments and Accessories (Schedules A and B) at the
lowest saleable unit and on all packaging and inserts with DAKO's trademarks in
a form and size to be mutually agreed by both parties. Such marking shall be
fully described in Schedule D which schedule shall be updated from time to time.
4l. BioTek agrees to bar-code Accessories at the lowest saleable unit using
symbology 3 to 9 in accordance with Health Industry Bar Code ("HIBC").
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4m. BioTek shall notify DAKO (and DAKO shall notify BioTek) in writing of any
special requirements determined for the storage and handling of Instruments or
Accessories and any laws, regulations, orders, ordinances and requirements of
all local state and country governments and agencies having jurisdictions over
these products.
4n. BioTek shall supply DAKO qualified leads which may come to its attention for
sales or placements of Instruments in the Territory.
4o. Upon execution of this Agreement, BioTek shall provide DAKO with all
necessary and appropriate information concerning all of BioTek's existing or
prospective customers in the Territory, which customers shall thereafter be the
customers of DAKO. BioTek shall cooperate with DAKO in notifying said customers
of the appointment of DAKO as BioTek's exclusive distributor of Instruments and
Accessories in the Territory and with the orderly transition of such customer
accounts to DAKO. Additionally, DAKO and BioTek agree to formulate and release
press and other public statements that serve to promote the announcement of
their relationship and any other noteworthy events that may serve the mutual
benefit of the parties. Content and copy will be mutually agreed upon by the
parties.
4p. Each quarter during the first Contract Period and semi-annually thereafter,
BioTek's Executive Management shall meet with DAKO's Executive Management for
general business review discussions on site at BioTek or at DAKO A/S or at a
DAKO subsidiary site, and mutually agreed in advance of such meetings.
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<PAGE> 18
4q. BioTek shall supply and DAKO shall purchase and wharehouse, [*], stocks of
materials and Accessories as a buffer against changes in supply conditions of
Accessories (hereinafter "Accessory Stock"). Each Accessory Stock shall contain
materials and finished Accessory products equivalent to the requirement for [*]
of operation of the existing placements of Instruments.
4r. If BioTek for some reason is unable to continue production and otherwise
maintain the Accessory Stock levels mentioned in section 4q. above, BioTek shall
inform DAKO and promptly enter into agreement with an alternative supplier (with
first option to supply offered to DAKO) to obtain the necessary materials and
products to maintain such Accessory Stocks. Should BioTek not be able to ensure
such supply, DAKO shall have the option to supply directly or indirectly such
accessory materials and products at the prices currently in effect with
customers at the time DAKO ceases supply and until DAKO can resume such supply,
and negotiate on a good faith basis with BioTek for payment for such supplies.
4s. BioTek hereby confers a non-exclusive license upon DAKO under all its
patents and copyrights to make, use and sell Dual Label reagents in accordance
with the terms and conditions of this Distribution Agreement. BioTek shall
forward to DAKO a License Agreement document in accordance with this section. In
case this Distribution Agreement is terminated, the License Agreement shall
survive the Distribution Agreement for a period of six months of the period
necessary in order to allow DAKO to continue to supply customers in an interim
period. Said License Agreement is attached as Schedule L.
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5. PRICE AND PAYMENT TERMS
5a. BioTek shall supply and ship Instruments and Accessories to DAKO at the
prices and subject to the discounts shown in Schedules A and B hereto for the
duration of the first contract Period. Thereafter BioTek shall supply and ship
Instruments to DAKO at prices that will be reduced by BioTek on a pro rata basis
of that percentage cost change from BioTek's Instrument manufacturer to BioTek.
5b. (Deleted)
5c. BioTek agrees to negotiate with DAKO any special discounted transfer
pricing: (i) on any large quantity order for instruments and/or Accessories
which may be requested by any DAKO customer, (ii) where required to meet
competition. In such cases of discounted transfer pricing, BioTek shall
pre-approve in writing (in such format as the parties may mutually agree) any
reduction in the attached schedules A or B discounted transfer prices as may be
required. Notice of acceptance or rejection of each such request for
pre-approval shall be communicated by BioTek to DAKO promptly following DAKO's
request therefore.
5d. Payment for delivered Instruments and Accessories shall be made within
current month plus [*] from the date of delivery by BioTek during the first
Contract Period and within current month plus [*] from the date of delivery in
all subsequent Contract Periods.
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5e. DAKO shall be entitled to resell Instruments and Accessories intended for
resale on such terms as it may, at its sole discretion, determine, including
without limitation, price, returns, credit and discounts.
5f. DAKO shall exclusively promote all products listed in Schedule B including
slides, pads and software. DAKO will include such products in reagent rental and
reagent contracts, and will offer these products on substantially the same terms
and conditions as products manufactured by DAKO.
5g. All sums due under this Agreement shall be made in United States Dollars by
wire transfer and BioTek shall pay any transfer fee.
6. TERM AND TERMINATION
6a. The initial term of this Agreement shall be for a period of five (5) years
starting from 27th September 1994. After said initial term, this Agreement shall
terminate, unless renewed by mutual Agreement between DAKO and BioTek for
additional and successive terms of [*]
6b. This Agreement shall terminate immediately upon written notice by the
non-breaching party if either party (i) commits or suffers an act of bankruptcy
or insolvency or, except as otherwise provided in this Agreement, (ii) fails to
cure any material breach in the provisions of this Agreement within [*] after
receipt of written notice of such breach.
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6c. On the termination or non-renewal of this Agreement, howsoever arising,
BioTek shall continue to honour DAKO's purchase orders for Instruments and
Accessories up to the effective date of termination or non-renewal.
6d. The rights and duties of each party under this Agreement and the schedules
hereto in respect of performance prior to termination or non-renewal shall
survive and be enforceable in accordance with the terms of this Agreement.
6e. Upon termination or non-renewal of this Agreement BioTek shall repurchase
from DAKO at DAKO's request, and at DAKO's cost therefor, such unsold
Instruments and Accessories as are then owned by DAKO. Delivery of Instruments
and Accessories repurchased from DAKO hereunder shall be f.c.a. DAKO's premises.
7. RIGHT OF FIRST REFUSAL
7a. If BioTek negotiates a transaction which would result in the sale by BioTek
of all or substantially all of its business or its stock or assets, BioTek shall
give written notice of such intention to DAKO, which shall have the option,
first, after Curtin Matheson Scientific Inc., USA ("CMS") to enter into good
faith negotiations for the purchase of BioTek. If CMS and BioTek are unable in
good faith to agree on terms for sale [*] after the notice given by BioTek of
such sale, or if CMS declines to purchase before terms are agreed, DAKO shall
have the right to negotiate in good faith with BioTek to try to agree upon
mutually satisfactory terms for said sale. If DAKO
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and BioTek are unable in good faith to agree on mutually satisfactory terms for
the proposed sale within a period of [*] of negotiation or if prior to
expiration of said [*] period DAKO declines to purchase, then BioTek shall have
the right to enter into such a transaction with any third party upon such terms
and conditions as may be agreed by BioTek and any such third party. If CMS or
such third party purchase all or substantially all of the business, stocks or
assets of BioTek, the purchaser shall assume all of the rights and obligations
of this Agreement with respect to the parties to this Agreement.
8. WARRANTIES
8a. In addition to the warranties set forth in this Agreement and in the
Continuing Guaranties which are attached hereto as Schedule E, BioTek and DAKO
warrant that each of the products will conform to specifications set forth in
the product literature prepared respectively by or on behalf of BioTek or DAKO
and that said products will comply and be manufactured, packaged, sterilized (if
applicable), labeled and shipped in compliance with all applicable Federal,
state and local laws, orders, regulations and standards. In particular BioTek
shall ensure that Instruments conform to EU instrument specifications and shall
issue any necessary certification to this effect.
8b. BioTek represents and warrants that Instruments and Accessories supplied to
DAKO under this Agreement shall not infringe upon the patients or proprietary
rights of any third party. To the extent that any third party owns any patents
or proprietary rights relating to Instruments or Accessories or to their
manufacture, BioTek represents and warrants that it has obtained valid license
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rights from such third party to manufacture and sell Instruments and/or
Accessories. Similarly DAKO warrants that Reagents manufactured by DAKO under
this Agreement shall not infringe upon the patents or proprietary rights of
BioTek or any third party. To the extent that any third party owns any patents
or proprietary rights relating to Reagents or to their manufacture, DAKO
represents and warrants that it has obtained valid license rights from such
third party to manufacture and sell Reagents.
8c. BioTek shall extend to DAKO customers its Suppliers' Warranties for
Instruments and Accessories which are set forth in Schedule F. BioTek shall not
modify any product Warranty without notifying DAKO with at least [*] notice.
BioTek warrants and represents that the products will perform in accordance
with, and that BioTek shall strictly comply with, the terms of BioTek's product
Warranties. DAKO's warranty for Reagents is included under the General Terms and
Conditions of Sale (Schedule E).
9. TRADEMARKS
9a. BioTek hereby grants to DAKO the royalty-free right to use the trademarks:
BioTek; TechMate; and ChemMate (see also Schedule D), on dual-labeled Reagents
during the term of this Agreement within the Territory, it being expressly
understood that DAKO shall discontinue the use of such trademarks upon
termination of this Agreement (except in connection with the distribution and
sale of DAKO's remaining inventory of Reagents or of Instruments or of
Accessories in the event that
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DAKO does not elect to exercise its rights under section 6e hereof) and disclaim
any rights in the trademarks other than the said licence.
9b. DAKO hereby grants to BioTek the royalty-free right to use DAKO's trademarks
on Instruments and Accessories within the Territory and during the term of this
Agreement, it being expressly understood that BioTek shall discontinue the use
of such trademarks upon termination of this Agreement and disclaim any rights in
the trademarks other than the said licence.
9c. BioTek recognizes that DAKO is the owner of the trademarks and tradenames
denoting DAKO or DAKO products which DAKO may elect to use in the promotion and
sale of Instruments and Accessories and that BioTek has no right or interest in
such trademarks or tradenames. Similarly, DAKO recognizes that BioTek is the
owner of the trademarks and tradenames denoting BioTek or BioTek products which
BioTek may elect to use in the promotion and sale of products and that DAKO has
no right or interest in such trademarks or tradenames.
10. CONFIDENTIALITY
10a. Each party acknowledges the confidential nature of information that may be
disclosed hereunder (including but not limited to names of customers and other
marketing-related information) and agrees to retain such information in
confidence. This provision shall survive the termination of this Agreement for a
period of three (3) years. Confidential information (especially technical
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<PAGE> 25
information) may also be the subject of separate confidentiality agreements
which the parties enter into.
11. FORCE MAJEURE
11a. The obligations of either party to perform under this Agreement shall be
excused during each period of delay caused by such matters as strikes, shortages
of power or raw material, government orders or acts of God, which are reasonably
beyond the control of the party obligated to perform. The affected party shall
make best efforts to remedy the effects of such Force Majeure. Any Force Majeure
event shall not excuse performance by the party, but shall delay performance,
unless such Force Majeure continues for a period in excess of [*]. In such
event, the party seeking performance may cancel its obligations hereunder.
12. NOTICES
12a. Any notice required by this Agreement shall be deemed sufficient if sent by
certified mail, postage prepaid, to the party to be notified at the address set
forth in the initial section of this Agreement until notice of a different
address is supplied and if receipt is acknowledged by the receiving party.
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12b. The parties to this Agreement shall give notification of any technical
problems or delays, or of any production difficulties of significance. Such
notice shall be given by facsimile with documentation and estimates of expected
recovery time.
13. ENTIRE AGREEMENT
13a. This Agreement including the Schedules hereto, constitutes the entire
Agreement between the parties relating to the subject matter hereof and
supersedes all prior agreements and understandings, whether written or oral,
between the parties with respect to such subject matter. In ordering and
delivery of products, the parties may employ their standard forms, but nothing
in these forms shall be construed to modify or amend the terms of this
Agreement.
14. APPLICABLE LAW
14a. This Agreement shall be governed by the laws of the State of California. In
the event of a dispute arising in any manner out of or in relation to this
Agreement, the parties shall attempt in good faith to amicably resolve such
dispute. Any disputes which cannot be amicably resolved shall be referred by one
party for resolution by arbitration according to the rules of the International
Chamber of Commerce. The language of arbitration shall be English and
arbitration shall take place at a place determined by the non-referring party.
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15. ASSIGNMENT AND SUCCESSION
15a. This Agreement shall not be assigned or transferred by BioTek either
voluntarily or by operation by law without the prior written consent of DAKO.
15b. This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their permitted successors and assigns.
16. AMENDMENTS
16a. No amendment or modification of the terms of this Agreement shall be
binding on either party, unless reduced to writing and signed by an authorized
officer of the party to be bound.
16b. BioTek and DAKO will enter into a Development Agreement that will set forth
the terms and conditions under which the work by developing new Reagents and
Accessories shall be defined. Said Agreement will become an integral part of the
present Agreement when it is agreed in writing by both BioTek and DAKO. DAKO
will facilitate a meeting of representatives of BioTek, DAKO and appropriate
DAKO subsidiaries to discuss, develop and execute said Development Agreement.
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17. EXISTING OBLIGATIONS
17a. Each party represents and warrants that the terms of this Agreement do not
violate any existing obligations or contracts of such party. Each party shall
defend, indemnify and hold harmless the other party from and against any and all
claims, demands, liabilities and causes of action which are hereafter made or
brought against such other party which allege any such violation.
18. RELATIONSHIP OF THE PARTIES
18a. Nothing herein contained shall be deemed to be or construed as constituting
either party as the agent or partner of the other.
19. COUNTERPARTS
19a. This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original for all purposes.
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IN WITNESS WHEREOF, the parties have by their duly authorized officers,
executed this Agreement on the dates set forth below.
FOR BIOTEK SOLUTIONS INC.
/s/ Michael C. Miller
- -------------------------
Michael C. Miller
President and CEO
FOR DAKO A/S
/s/ Torben Jorgensen /s/ John F. Place
- ------------------------- ----------------------------
Torben Jorgensen John F. Place MA
Managing Director Business Development Manager
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SCHEDULE A: INSTRUMENTS
TECHMATE 500
includes 386SX PC computer (486 Diamond Flower DFI) with colour monitor and
mouse, BioTek basic system software, 3 slide holders, uninterruptable power
supply and multiplug panel, free Warranty service (including parts and cure of
any manufacturing defect) for a period of one year from the date of
installation, user manual, service manual.
TRANSFER PRICE
[*] (See also section 6a)
TECHMATE 1000
includes 386SX PC computer (486 Diamond Flower DFI) with colour monitor and
mouse, BioTek basic system software, 3 slide holders, uninterruptable power
supply and multiplug panel, free Warranty service (including parts and cure of
any manufacturing defect) for a period of one year from the date of
installation, user manual, service manual.
TRANSFER PRICE
[*] (See also section 5a)
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Hybridization Oven (available on or after 1st July 1995)
<TABLE>
<CAPTION>
TRANSFER PRICE
<S> <C>
75/100um Slides (per 72) [*]
130/150um Slides (per 72) [*]
Pads (per 50) [*]
Software upgrade (per year) [*]
Hematoxylin (350 ml) [*]
Chromgens:
Alkaline phosphaltase [*]
DAB [*]
</TABLE>
Reagent trays shall be provided in reasonable quantities by BioTek at no charge
to DAKO.
The following buffers shall be provided in bulk, in reasonable quantities
sufficient for DAKO to prepare the kits and Reagents, at no charge to DAKO.
Buffers SDK 1, 2 and 3
Water wash
Microwaving buffer MWB101
Hydrogen peroxide blocking reagent
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EXHIBIT 10.1B
FIRST AMENDMENT TO
DISTRIBUTION AGREEMENT
THIS FIRST AMENDMENT TO DISTRIBUTION AGREEMENT (this"Amendment") is
between BIOTEK SOLUTIONS, INC., a California corporation ("BioTek"), and DAKO
A/S, a Danish corporation ("DAKO").
RECITALS:
A. BioTek and DAKO are the parties to that certain Distribution
Agreement dated September right to distribute in specified territories BioTek's
TechMate 500 and TechMate 1000 products and the related Accessories;
B. BioTek is now developing for sale a compact, competitive and
cost-effective new generation of TechMate Instrument (the "New TechMate") to be
marketed to customers not wishing to make a more substantial capital investment
or who lack the slide volumes to justify purchase of the TechMate 500 or the
TechMate 1000;
C. Paragraph 1c of the Agreement provides that during the period in
which the Agreement is exclusive BioTek shall offer to DAKO in writing the right
to distribute new products developed by BioTek, such as the New TechMate, on the
same terms and conditions (other than price) governing the sale of the TechMate
500 and TechMate 1000;
D. BioTek has requested that DAKO fund the development of the New
TechMate;
E. BioTek has therefore offered to DAKO the right to distribute the New
TechMate under the Agreement;
F. The parties by this Amendment desire to include the New TechMate as
one of the "Instruments" covered by the Agreement, subject to the modifications
set forth in this Amendment; and
G. The parties desire to make a number of changes in the Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
<PAGE> 2
SECTION 1
AMENDMENT
The Agreement is hereby amended as set forth on Exhibit A hereto (which
Exhibit is incorporated herein by this reference) and as follows:
1.1 Additions to Territory. Subsection 2b is hereby amended by deleting the
second sentence and by replacing it with the following:
"BioTek hereby grants to DAKO an option to include the following
countries and/or regions in the Territory: Canada, South America,
Australia, New Zealand, Japan, Southeast Asia, Central America and
Mexico (each, an "Option Area") on the following terms:
(i) The royalty payable with respect to Instruments
sold within any such Option Area shall be that standard
royalty set forth at Schedule G hereto and in 3g(i) below (for
the TechMate 500 and the TechMate 1 000) and that royalty set
forth in 3g (ii) below (for the New TechMate) or any such
royalty as hereafter may be agreed to by the parties hereto in
writing.
(ii) The term of this option shall coincide with the
term of this Agreement.
(iii) In the event that, prior to any exercise by
DAKO of this option respecting any of the above Option Areas,
BioTek desires to enter into an agreement to distribute the
Instruments in such Option Area with a third party, BioTek
shall give to DAKO written notice of such intent. DAKO shall
thereafter have 30 days to determine whether it wishes to
exercise its option relating to such Option Area. If DAKO
declines to exercise its option, BioTek shall have a period of
90 days after the end of such 30-day period during which to
enter into a written distribution agreement with a third party
respecting such Option Area. If BioTek enters into such
distribution agreement, DAKO's option hereunder with respect
to such Option Area will terminate. If BioTek does not enter
into a written contract before the expiration of such 90-day
period, DAKO"s option for such Option Area will be restored."
1.2 Royalties Per Instrument. Subsection 3g is hereby amended and restated in
its entirety to read as follows:
"3g. (i) TechMate 500 and 1000. DAKO shall pay to BioTek the
royalties set forth in Schedule G hereto with respect to TechMate 500
and TechMate 1000 Instruments that are sold and delivered to DAKO or
delivered to DAKO's customers based on DAKO's drop shipment directions.
Such royalty shall be paid to BioTek by DAKO for each Instrument
installed by DAKO [*]. However, if DAKO
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requests by the end of [*] a next generation instrument and if BioTek
by the end [*] cannot demonstrate a capability to deliver such an
instrument by the end of year five, such royalty shall be paid to
BioTek by DAKO for a period of [*] only.
Such royalties per Instrument purchased shall be paid on a
monthly basis on the first day of each calendar month, starting on the
first installation date of the Instrument.
Notwithstanding the above:
(1) The royalty payable during the ninth, tenth,
eleventh and twelfth months and thereafter will increase only
to a maximum of [*] for a maximum of [*] solely for DAKO's
European distributors in the following countries: Spain,
Holland, Belgium, Austria, Norway, Finland and Slovenia.
(2) Such royalty shall not be paid for Instruments
sold to pharmaceutical companies that purchase limited amounts
of dual-labeled Reagents from DAKO, but DAKO shall pay instead
a quarterly fee equal to [*] sold by DAKO for use on such
Instruments.
(3) Any Instrument installed after September 27, 1997
in any country in a hospital which already has one
royalty-bearing Instrument installed, shall be [*]. However,
if the volume of Reagents sold by DAKO for use in the
Instruments installed in such hospital in any [*] exceeds [*]
the average volume sold to hospitals with only one Instrument
during that period, then DAKO shall, with effect from the end
of that [*] pay royalties for [*] with such payments being
made retroactive to the date of installation of the second
Instrument.
(4) If DAKO's total volume of Reagents sold to a
particular customer for use in an Instrument over [*] is
reduced by more than [*] compared to the [*], then the royalty
payable by DAKO with respect to such Instrument for the rest
of the royalty period shall, commencing with the month
following such calculation, be calculated instead at [*] by
DAKO in each month (converted into US$ according to the
exchange rate in effect at the end of such month). The
relevant 12-month periods shall be the [*] installation and
each subsequent 12-month period.
(5) DAKO agrees that, with respect Instruments sold
in Sweden, The United Kingdom a France, in recognition of the
royalty reduction to maximum of [*] in such countries as
stated Schedule G, there may be an increase in the royalty
paid to BioTek by DAKO, calculated [*] of use
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<PAGE> 4
of an Instrument by any customer in the three aforementioned
countries if there is a sufficient increase in Reagent
purchases by any one customer in any of such countries as
determined by the following formula:
Reagent sales for months [*] in excess of Reagent sales for
months [*] (inclusive), reflected as a percentage increase,
will be adjusted by [*] points from any such percentage. Such
reduced percentage (if positive) will be the percentage
increase in royalty, retroactive to [*] of customer use and
will create the new royalty to apply from and after such [*].
This adjustment will be made again [*] of the royalty period,
and any increase adjusted retroactively, if applicable, for
the prior [*]. The base period, for purposes of calculating
the royalty adjustment at months [*], will also be the months
[*].
(ii) New TechMate. DAKO shall pay to BioTek a royalty based on
the New TechMate Instruments that are sold and delivered to
DAKO or delivered to DAKO's customers based on DAKO's drop
shipment directions. Such royalty shall be paid to BioTek by
DAKO for each Instrument installed by DAKO for [*]. Such
royalties per Instrument purchased shall be paid on a monthly
basis on the first day of each calendar month, starting on the
first installation date of the Instrument as follows:
<TABLE>
<CAPTION>
$ per mont per
instrument
----------
<S> <C>
Installation to end of the calendar month [*]
(installation month)
First and second calendar months [*]
Third and fourth calendar months [*]
Fifth and sixth calendar months [*]
Seventh, eighth and ninth calendar months [*]
Tenth, eleventh and twelfth calendar [*]
months
</TABLE>
Thereafter, the royalty figure shall increase [*] by an amount
equal to [*] per annum, with the first increase commencing on
the first anniversary of the first shipment of the New
TechMate. (For example, on such first anniversary, the royalty
for each installed Instrument shall increase to [*].)
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Notwithstanding the above, such royalty shall not be paid for
Instruments sold to pharmaceutical companies that purchase
limited amounts of dual-labeled Reagents from DAKO, but DAKO
shall pay instead a quarterly fee [*] after the end of each
quarter equal to [*] sold by DAKO for use on such Instruments.
(iii) Deinstalled Instruments. In the event that an
Instrument is returned by a customer of DAKO or is otherwise
removed from service, such Instrument shall not be counted for
purposes of calculating the above royalties until the shorter
of (x) such time as such Instrument is reinstalled, or (y)
[*], at which time the royalty payable with respect to such
Instrument will recommence pursuant to the applicable royalty
schedule."
1.3 Free and Discounted Units. Section 4(c) of the Agreement is hereby amended
and restated in its entirety to read as follows:
"4c. BioTek shall ship to DAKO, as soon as they. are
available, [*] for use as demonstration units, and, upon request by
DAKO, [*] discount from the transfer price set forth in Schedule A
(before any recoupment hereunder). If any of such [*] are sold by
DAKO to customers, such sale shall be subject to the terms and
conditions of this Agreement, including, without limitation, the
payment of the standard royalty set forth at Schedule G hereto and
at 3g(ii) of this Agreement."
Section 5(d) of the Agreement is hereby amended and restated in its entirety to
read as follows:
"5d. Until the start of the second Contract Period, that is,
through July, 1995, payment for shipped Instruments and Accessories
shall be received by BioTek, via wire transfer, on the fifth (5th) and
the twentieth (20th) of each month for those invoices outstanding, so
long as such invoices have been received in hard copy form by DAKO,
with accompanying documentation of direct shipments to DAKO or drop
shipments directly to DAKO customers. BioTek may submit such invoices
to DAKO at time of shipment, with confirmation. Beginning August 1,
1995 and thereafter, payment shall be made by the fifth (5th) of each
month on the remaining terms as described above. In the event that the
fifth (5th) or the twentieth (20th) day of a particular month is not a
business day, any payments due pursuant to this Section 5d shall be
made on the next day which is a business day."
1.4 Extension of Term. Subsection 6a of the Agreement is amended to read in its
entirety as follows:
"6a. (i) Term. The initial term of this Agreement shall be for
a period starting on September 27, 1994 and ending on December
31, 1999 (the "Initial Term"). After such Initial Term, the
term of this Agreement shall automatically be extended for an
additional one (1) year period (the "Second Term") unless DAKO
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<PAGE> 6
gives BioTek written notice that it desires to terminate this
Agreement at the end of the Initial Term, which notice must be
delivered on or before the end of the 4th year of the Initial
Term. Either party can terminate this Agreement (effective
after the Second Term) by [*] notice to the other party of
its intention to terminate this Agreement. Any termination
may be either: (x) in its entirety or (y) only with respect to
the exclusive nature of the rights and obligations of the
parties hereunder such that this Agreement becomes a
non-exclusive distribution agreement.
(ii) Repayment on Termination. ln the event that the
full amounts of the Kollsman Prepayment (defined below) and
the Development Prepayment (defined below) have not been
recouped by DAKO pursuant to the terms of Sections 20b and 21e
below, then: (x) If such termination is made by BioTek, any
and all unrecouped amounts shall be immediately due and
payable in accordance with the terms of the Kolisman Note and
the Development Note, respectively; and (y) if such
termination is made by DAKO (other than due to a material
breach by BioTek in its obligations hereunder, in which case
such termination shall be treated as a termination by BioTek
pursuant to (x) above), any and all unrecouped amounts shall
be payable [*] in accordance with the terms of the Kollsman
Note and the Development Note, respectively (unless such
quarterly installments had otherwise already commenced in
accordance with the terms of this Agreement, in which case
such quarterly installments shall continue as if there had
been no termination.)"
1.5 Warranties. Section 8 of the Agreement is hereby amended to include the
following subsections at the end thereof:
"8d. Indemnification. BioTek will indemnify and defend DAKO
against, and hold DAKO harmless from, any loss, cost, liability or
expense (including court costs and reasonable fees of attorneys and
other professionals) arising out of or resulting from any breach or
claimed breach of the above warranties and representations and from any
claim that DAKO's exercise of the rights granted to it herein, anywhere
in the Territories or agreed upon Option Areas, infringes any
intellectual property and/or proprietary right of any third party. In
the event of any such claim, DAKO agrees promptly to notify BioTek of
the claim and to permit BioTek, at BioTek's expense, to defend such
claim with counsel of BioTek's choosing reasonably acceptable to DAKO.
Notwithstanding the above, BioTek shall have no liability for any claim
of infringement based upon use or combination by DAKO of the
Intellectual Property Rights with other intellectual property not
provided by BioTek, if such infringement would have been avoided but
for such use or combination.
8e. Perfection. If the exercise by DAKO of any rights granted
to DAKO herein is enjoined, at DAKO's request and option, and without
prejudice to DAKO's other rights and remedies, BioTek at its expense
will: (i) procure from the person or persons
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<PAGE> 7
claiming infringement a license for DAKO and its licensees and
sublicensees to continue to exercise all rights granted under this
Agreement with respect to the Intellectual Property Rights, or (ii)
modify the allegedly infringing item to avoid the infringement, if that
can be done promptly and without materially impairing performance or
compliance with the specification for the involved item or otherwise
impairing DAKO's rights and benefits under this Distribution Agreement.
8f. New TechMate. NOTWITHSTANDING THE ABOVE WARRANTIES MADE BY
BIOTEK, BIOTEK MAKES NO WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO
THE SUCCESS OF THE RESEARCH AND DEVELOPMENT EFFORT FOR THE NEW TECHMATE
AND EXPRESSLY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY, DESCRIPTION OR
FITNESS FOR ANY PARTICULAR PURPOSE OR FUNCTION.
8g. Rights. DAKO expressly acknowledges that performance of
this Agreement by BioTek, as it relates solely to the development of
the New TechMate, may result in the development of new proprietary
concepts, methods, patents, techniques, processes and ideas. The
parties agree that the foregoing and any other item developed hereunder
shall belong solely and exclusively to BioTek without regard to the
origin thereof, subject, however, to the special licenses in DAKO's
favor as described at Subsection 21(h) and Section 22 of this
Agreement, as amended. BioTek acknowledges that, as the owner of the
proprietary rights described above, it is solely responsible for paying
for all of the legal expenses necessary to file and finalize any
patents or trademarks.
During the term of this Agreement any patent developed as a
byproduct of the development described in this Agreement will be made
available by BioTek to DAKO under an irrevocable license in accordance
with the circumstances described in this Agreement, as amended. BioTek
will have the first option to patent any research developed under this
Agreement. If BioTek elects not to patent any such patentable research,
then it will so notify DAKO in writing, signed by the president of
BioTek, and DAKO will have the right after receipt of such written
notice to patent such research."
1.6 Notice. Section 12 of the Agreement is hereby amended in its entirety read
as follows:
"12. Notices. All notices, requests, demands, and other
communications required to or permitted to be given under this
Agreement shall be in writing and shall be conclusively deemed to have
been duly given (1) when hand delivered to the other party; or (2) when
received when sent by telex or facsimile at the address and number set
forth below (provided, however, that notices given by facsimile shall
not be effective unless either (a) a duplicate copy of such facsimile
notice is promptly given by depositing same in a United States or
Denmark post office (as applicable) using certified or registered mail
and addressed to the parties as set forth below, or lb) the receiving
party delivers a written confirmation of receipt for such notice either
by facsimile or any other method permitted
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<PAGE> 8
under this paragraph; additionally, any notice given by telex or
facsimile shall be deemed received on the next business day if such
notice is received after 5:00 p.m. (recipient's time) or on a
nonbusiness day); or (3) fourteen (1 4) business days after the same
have been deposited in a United States or Denmark post office (as
applicable) with registered or certified mail return receipt requested
postage prepaid and addressed to the parties as set forth below; or (4)
the two business days after same have been deposited with a national
overnight delivery service reasonably approved by the parties (Federal
Express and DHL WORLDWIDE Express being deemed approved by the
parties), postage prepaid, addressed to the parties as set forth below
with two business days delivery guaranteed, provided that the sending
party receives a confirmation of delivery from the delivery service
provider.
To: Mr. Torben Jorgensen To: Mr. Michael Miller
Managing Director BioTek Solution, Inc.
DAKO A/S 120 B Cremona Drive
Produktionsvei 42 Santa Barbara, CA 93117
DK-2600 Glostrup Tel: 805/562-3888
Denmark Fax: 805/562-3890
Tel: 4544920044
Fax: 4542841822
with a copy to with a copy to
Per Carsten Pedersen Joseph L. Cole
Pedersen & Jantzen Seed, Mackall & Cole
Nyropsgade 45 1332 Anacapa Street
DK-1 602 Copenhagen V Santa Barbara, California 93101
Denmark Tel: 805/963-0669
Tel: 4533129512 Fax: 805/962-1404
Fax: 4533129515
Each party shall make an ordinary, good faith effort to ensure that it
will accept or receive notices that are given in accordance with this
Section, and that any person to be given notice actually receives such
notice. A party may change or supplement the addresses given above, or
designate additional addresses, for purposes of this Section by giving
the other party written notice of the new address in the manner set
forth above."
1.7 Independent Contractors. Section 18 of the Agreement is hereby amended in
its entirety to read as follows:
"18a. Each party acknowledges that the relationship between
the parties pursuant to this Agreement is that of independent
contractors. No provision of this Agreement shall be construed to (i)
constitute the parties as partners, joint venturers or
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participants in a joint undertaking, or (ii) give either party the
power to direct and/or control the day-to-day activities of the other."
1.8 Kollsman and Development Funding. The Agreement is hereby amended by
inserting the following Sections after Section 19:
"20. Kollsman Prepayment.
20a. Transfer of Prepayments. DAKO has transferred funds to
Kollsman totaling [*] for DAKO's purchases of TechMates 500 and 1000
under this Agreement (the "Kollsman Prepayment"). Any outstanding
balance of the Kollsman Prepayment shall bear interest [*] per annum
calculated and paid quarterly in arrears from the date of disbursement
by DAKO to Kollsman in accordance with the terms of the Kollsman Note
(as defined below).
20b. Recoupment of Kollsman Prepayment. DAKO shall recoup the
Kollsman Prepayment by receiving the following credits with respect to
each TechMate 500 and/or TechMate 1000 sold and delivered to DAKO or a
customer of DAKO, until such time as all of the Kollsman Prepayment has
been recouped:
(i) Respecting the [*] shipped before [*];
(ii) Respecting each TechMate 500 or 1000 ordered
thereafter, [*]; provided, however, that in the event of a
Milestone Default (as defined in Subsection 21d(i) below) with
respect to the last Milestone, the amount of such credit shall
thereafter [*]; and
(iii) The obligation of BioTek to repay the Kollsman
Prepayment shall be evidenced by a promissory note
substantially in the form of Exhibit B hereto (the "Kollsman
Note").
21. New TechMate Development.
21a. BioTek hereby agrees to develop the New TechMate so that
it is ready for sale in accordance with the development milestones
(inclusive of timetable), budgets and benchmarks set forth at Schedule
H (collectively, the "Milestones"). A description of the New TechMate
development project is attached hereto as Schedule 1.
21b. Development Committee. BioTek agrees to establish a
Development Committee to oversee development of the New TechMate. The
Development Committee shall be chaired either by Mr. Robert Case or a
designated Chairman appointed by BioTek. In addition to such
chairperson, the Development Committee will consist of two
representatives named by BioTek, two representatives named by DAKO, and
a maximum of four other representatives to be
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appointed by Mr. Case or such other Chairman, for a maximum committee
of nine representatives. Case & Associates or such other chairman (or
his or her affiliate) shall be a party to a Project Management
Agreement with BioTek, a copy of which shall be provided to DAKO
within. 10 days after execution thereof.
21c. Development Funding. DAKO hereby agrees to provide [*]
("Development Prepayment") to BioTek in order to fund the development
of the New TechMate in accordance with the following provisions:
(i) Release of Development Funds. The first
installment of the Development Prepayment will be paid by DAKO
within five (5) business days after the Effective Date
(defined below) and will equal the amount budgeted for the
first Milestone as indicated on Schedule H. Thereafter, within
seven business days from having received the notice described
below that a Milestone has been completed, DAKO shall pay the
next installment of the Development Prepayment to BioTek in an
amount equal to the budgeted amount for the subsequent
Milestone as indicated in Schedule H. The Chairman of the
Development Committee shall notify DAKO in writing of the
satisfaction of each Milestone. Reasonable additional
documentation respecting the accomplishment of such Milestone
shall accompany such notice.
The intent of this Agreement is that BioTek shall be paid only
for its actual costs in reaching each Milestone, excluding any
markup for profit. While installments of the Development
Prepayment will be paid in the amount of the budgeted amounts
described at Schedule H, [*] after the end of each calendar
quarter BioTek shall provide DAKO with the actual costs for
any Milestones achieved and paid for in the preceding quarter.
If the paid installments exceed the actual costs so reported,
then the next Milestone payment shall be reduced by any such
excess amount. If actual costs exceed the paid budgeted
amount, DAKO shall after written submission by BioTek of
evidence of such actual costs, increase the next Milestone
payment by the amount of such excess amount: provided however,
that if such excess amount applied on an aggregate basis after
taking into account any shortfalls or overpayments from all
earlier Milestones is [*] of the amount budgeted in the
aggregate to such Milestone, then the next Milestone payment
shall be increased by [*] of such aggregate excess amount and
BioTek shall be responsible for funding the balance of such
excess. DAKO shall otherwise have exclusive control over any
disbursements. DAKO's total funding to this subsection
(i) [*].
(ii) Additional Prepayments. The parties acknowledge
that the expenses of developing the New TechMate [*] amount
described above, due to the uncertainties inherent in the
research and development process. If the costs of development
of the New TechMate in fact [*], the parties each agree to
extend matching funds up to a maximum of
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[*], with the disbursements by DAKO continuing to
benefit from the controls available to it under subsection (i)
above. The obligation of BioTek to repay any such increase in
additional disbursed funds shall be evidenced by the
Development Note. Any development funds in [*] would be
extended solely by BioTek. (Furthermore, reference is made
to Subsection 2ld(ii) below.)
(iii) No Further Obligation. Nothing herein contained
shall be deemed to create an obligation on the part of DAKO to
pay any amount over the amounts described in Subsections (i)
and (ii) above. (Furthermore, reference is made to Subsection
2ld(ii) below.)
21d. Termination of Funding.
(i) Failure to Achieve Milestones. DAKO shall have
the right to discontinue funding the development of the New
TechMate prior to the completion of such development in the
event that: (x) [*] late in completing any one of the
Milestones; (y) after such 60-day period DAKO delivers to
BioTek written notice of such lateness (the "Failure Notice");
and (z) BioTek fails to complete such Milestone [*] receipt of
the Failure Notice (such events collectively shall constitute
a "Milestone Default"). In the event of a Milestone Default,
DAKO [*] determine if: (1) it wishes to exercise the
Development License (defined below); or (2) it wishes to
trigger the repayment of the Development Note (defined below)
in twelve equal quarterly installments in accordance with the
terms of the Development Note. On or before the end of [*]
DAKO shall provide notice to BioTek of which of either "1" or
"2" above DAKO has chosen.
If DAKO chooses option "1" above, any amounts that it spends
thereafter on development of the New TechMate shall not be
added to the principal amount of the Development Note, but
shall count nonetheless as Development Prepayments for
purposes of recoupment only pursuant to subsection 2le below.
If DAKO chooses option "2" above: (A) DAKO shall have no right
to distribute the New TechMate under this Distribution
Agreement and shall have no ownership interest in the New
TechMate, including without limitation any intellectual
property rights relating thereto; (B) BioTek shall retain all
right, title and interest in and to all work in process and
intellectual property and all other rights respecting the New
TechMate and any related technology; and (C) BioTek's sole
obligation to DAKO respecting the Development Prepayments made
up to such date shall be represented by the Development Note
and related security documents.
(ii) Discontinuance At Will. DAKO shall have the
right at any time in its sole discretion to discontinue
funding the development of the New TechMate prior to its
completion [*] after delivery of written notice (the
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"Discontinuance Notice") to BioTek to that effect. If such
discontinuance is for any reason other than BioTek's failure
to meet Milestones as described in (i) above, DAKO agrees to
meet with BioTek to discuss the reasons for such
discontinuance in order to attempt to resolve the issues
involved in DAKO's decision to discontinue. If the parties
determine that they are unable to resolve the issues, DAKO
shall send BioTek written notice (the "Termination Notice")
that DAKO has permanently terminated funding the development
of the New TechMate. If DAKO decides in any event to disengage
from any further development or otherwise stops its funding
(other than for the failure to meet Milestones as described in
(i) above): (1) DAKO shall have no right to distribute the New
TechMate under this Distribution Agreement and shall have no
ownership interest in the New TechMate, including without
limitation any intellectual property rights relating thereto;
(2) BioTek shall retain all right, title and interest in and
to all work in process and intellectual property and all other
rights respecting the New TechMate and any related technology;
and (3) BioTek shall have no obligation to DAKO respecting the
Development Prepayments made up to such date, including
without limitation, any obligation to repay the Development
Note. This means, without limitation, that any discounts,
rebates or other recoupment described in this Agreement shall
not apply, except for recoupment obligations under the
Kollsman Note as provided herein. This also means without
limitation in such event that: (1) DAKO waives and holds
BioTek harmless from any and all amounts which may be due
under the Development Note, and, upon written demand by
BioTek, DAKO shall return to BioTek the signed original of
such Development Note; and (2) DAKO shall pay all amounts
necessary to satisfy any prospective contracts or commitments
to any third parties for goods or services entered into by
BioTek under the Milestones before the date of the
Discontinuance Notice (the "Commitments") [*] written demand
and submission of satisfactory evidence to DAKO of such
Commitments, provided, however, that DAKO's obligation
hereunder to pay such Commitments [*].
21e. Recoupment of Development Prepayment.
(i) DAKO shall recoup the Development Prepayment as
follows:
A. By receiving a discount on each New
TechMate sold and delivered to DAKO or to a customer
of DAKO [*] of BioTek's markup over its per unit
cost (or "margin") for the New TechMate (which unit
cost for the purposes hereof [*];
B. After the Kollsman Prepayment has been
fully recouped, by receiving a discount on each
TechMate 500 and TechMate 1000 sold and delivered to
DAKO or to a customer of DAKO, the recoupment amount
then in effect pursuant to subsection 20b above;
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C. By receiving a payment from BioTek with
respect to each New TechMate sold by BioTek to any
other party for resale, and/or use in any territory
other than the United States, in an amount equal to
the discount in effect under (A) above, which payment
BioTek shall send to DAKO quarterly; and
D. By receiving from BioTek $250 per New
TechMate sold in the United States, with such payment
occurring on a quarterly basis, until such time as
recoupment of the Development Prepayment is
satisfied.
(ii) The obligation of BioTek to repay the
Development Prepayment shall be evidenced by a promissory note
substantially in the form of Exhibit C hereto (the
"Development Note").
21f. Failure of Adequate Sales. Notwithstanding the above,
other than as may be permitted in this Agreement, if, following the
full market release of the New TechMate, DAKO fails to [*] after such
full market release (the "Fifteen Month Period"), then, upon written
notice by DAKO to BioTek (a "Sales Failure Notice"), the amounts due
under the Development Note shall thereafter become immediately payable
in twelve quarterly payments in accordance with the provisions of the
Development Note and DAKO shall have only non-exclusive rights
hereunder to distribute the New TechMate in the Territory, unless,
however, before the end of the Fifteen Month Period BioTek notifies
DAKO of its election to cure such sales deficiency during the
additional six month period described below. If BioTek makes such
written election to attempt such cure, the issuance of the Sales
Failure Notice shall be stayed until the end of the six month cure
period described below. If DAKO fails to [*], then, after the written
notice by BioTek to DAKO, BioTek shall have the right, but not the
obligation, to satisfy this threshold by BioTek's sales personnel or
agents achieving the remaining New TechMate installations in the
Territories over the course of the next six (6) months following the
Fifteen Month Period as may be necessary to satisfy [*]. If BioTek
successfully sells the remaining number of New TechMates necessary to
achieve the [*], then there shall be no "Failure Notice" issued by DAKO
to BioTek. DAKO will retain its rights to exclusive distribution in the
Territories under these circumstances. If BioTek in such circumstances
does not successfully sell the remaining number of New TechMates
necessary to achieve [*], then the Failure Notice will issue at the end
of such six month period.
It is expressly agreed that BioTek cannot use New TechMate's
which have been installed by it but not sold by it in order to meet
[*]. Accordingly, the threshold will only be met by adding New
TechMates sold by BioTek in the Territories to New TechMates installed
by DAKO. Furthermore, BioTek shall refrain from, directly or
indirectly, selling reagents for use in the New TechMates sold in the
Territories [*]. In the event that DAKO
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<PAGE> 14
sells reagents for such New TechMates, then DAKO shall pay royalties to
BioTek as if such New TechMates had been sold by DAKO.
Notwithstanding the foregoing provisions of this subparagraph,
BioTek will have also satisfied such contemplated adequate sales
threshold if BioTek demonstrates sales and market appeal by selling
[*]. If BioTek does so, DAKO shall have no right to issue a "Sales
Failure Notice" to BioTek. There is no default or failure under this
Section if BioTek fails to install the New TechMate in the United
States.
Additionally, DAKO agrees that in its efforts to install the
aforementioned [*], DAKO will not add a mark-up [*] the New TechMate
Instrument transfer price. Should BioTek undertake sales of New
TechMate Instruments under the six month provision mentioned above,
BioTek will adhere to the same [*] on the New TechMate transfer price
to DAKO in its efforts to achieve the [*].
21g. Failure to Deliver. In the event that BioTek breaches its
obligations under Section 4a hereof to ship Instruments and Accessories
[*] of an order from DAKO, and if such breach is not cured by BioTek
[*] by BioTek of written notice thereof from DAKO (the "Delivery
Failure"), DAKO shall have the right to either (x) use the license
granted under Subsection 22 below or (y) trigger the repayment of the
Notes [*] in accordance with their respective terms. DAKO shall send
written notice to BioTek of which of the above options it has elected
on or before [*] after such Delivery Failure. BioTek agrees to maintain
inventory access, either work in progress or finished Instruments, that
may be shipped to DAKO within five (5) working days, equal to the
monthly average number of Instruments installed by DAKO during the
previous three calendar months and DAKO agrees to maintain the number
of Instruments in inventory as provided at paragraph 3H of this
Distribution Agreement.
21h. License to Develop New TechMate.
(i) Grant of License. BioTek hereby grants to DAKO an
exclusive license, and/or sublicense, as the case may be,
under BioTek's Intellectual Property Rights as set forth at
Schedule J hereto (the "Intellectual Property Rights") to
complete the development of the New TechMate. Such license
shall be in addition to, and not in lieu of, any other license
granted under this Distribution Agreement.
(ii) Term. The term of the license granted by this
Subsection 21h shall commence automatically upon a Milestone
Default.
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<PAGE> 15
(ii) Consultants. In the event that the license
granted by this Section is exercised by DAKO, BioTek (if it is
still operating) hereby agrees that it will use its best
efforts to make available the employees (the "Consultants")
listed on Schedule K hereto (or any subsequent schedule which
is placed in escrow pursuant to the Escrow Agreement) to act
as consultants to DAKO until such time as the development of
the New TechMate is completed and DAKO agrees to reimburse
BioTek for the allocable salary of each such consultant.
BioTek considers the Consultants to include all of the
employees and/or consultants which are integral to the
development of the New TechMate.
(iv) Assignment of Confidentiality Agreements. BioTek
hereby assigns to DAKO, which assignment shall become
effective upon the commencement of the term of the license
granted by this Section, all of its right, title and interest
in to and under each of the confidentiality agreements between
it and each of the Consultants.
22. License to Manufacture the Instruments.
22a. Grant of License. BioTek hereby grants DAKO a
non-exclusive, irrevocable, fully-paid license and/or sublicense, as
the case may be, under the Intellectual Property Rights to manufacture,
or cause the manufacture of, each of the TechMate 500, the TechMate
1000 and the New TechMate. Such license shall be in addition to, and
not in lieu of, any other license granted under this Distribution
Agreement.
22b. Term. The term of the license granted by this Section 22
shall automatically commence (i) with respect to the TechMate 500 and
the TechMate 1000, upon a Delivery Failure of such Instruments; and
(ii) with respect to the New TechMate, on the earlier of (x) the
effectiveness of the license to develop the New TechMate granted under
subsection 21 h or (y) a Delivery Failure of such Instruments.
22c. Instrument Prices. If DAKO utilizes the license granted
by this subsection, DAKO shall pay to BioTek or its successors the full
transfer price in effect at such time that DAKO begins using such
license otherwise payable for each such Instrument hereunder, less the
amount which DAKO must pay to any manufacturer with respect to such
Instrument. The amount which must be paid to the manufacturer would be
tendered directly by DAKO to such manufacturer; provided, however, that
(i) if there is a cost reduction in the manufacturing price during any
period when DAKO is contracting directly with the manufacturer, the
benefits of any reduction in manufacturing cost shall be shared by
BioTek and DAKO equally, or (ii) if there is a cost increase in the
manufacturing price during any period when DAKO is contracting directly
with the manufacturer, if BioTek shall locate a bone fide manufacturer
on at least the same quality level as Kollsman Manufacturing and its
sub-suppliers in either the United States or Europe which is willing to
manufacture the Instrument for a lower price, then DAKO shall only be
able to decrease the transfer price by such lower amounts.
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<PAGE> 16
22d. Royalties. For the TechMate 500 and the TechMate 1000, in
the event of the circumstances described in this Subsection, the
royalties described in this Agreement [*] of the amounts that would
otherwise be due. For the New TechMate, in such circumstances, the
royalties described in this Agreement will be [*] of the amounts that
would otherwise be due as set forth above. In all other respects,
except for the respective reductions set forth above in this
Subsection, all such royalties will be due and payable as provided in
this Agreement.
22e. Assignment. BioTek hereby assigns to DAKO, which
assignment shall become effective upon the commencement of the term of
the license granted by this Section, all of its right (but no
obligations), title and interest in, to and under any oral or written
agreements entered into by and between BioTek and any of its
manufacturers and/or subsuppliers. BioTek's current subsuppliers are
listed in Schedule M hereto. In connection with the licenses granted
pursuant to Sections 21h and 22 hereof, BioTek is concurrently herewith
delivering the written Agreement of Erie Scientific substantially in
the form of Exhibit D hereto (the "Erie Agreement").
22f. Escrow of Technical Materials. In order to facilitate the
utilization of the licenses granted pursuant to Sections 21h and 22
hereof, BioTek is concurrently herewith placing in escrow for DAKO with
an escrow selected by the parties (the "Escrow") copies of all
Intellectual Property Rights and related technical materials necessary
to produce the Instruments and finalize the development of the New
TechMate and a list of BioTek's current subsuppliers (the "Technical
Materials") and is delivering herewith an executed Escrow Agreement,
which agreement will be in substantially the form attached hereto as
Exhibit E. BioTek agrees to update the Technical Materials one time per
each fiscal quarter until such time as such Technical Materials are
released from such Escrow.
23. Grant of Security Interest.
23a. As security for the payment of the Development Note and
the Kollsman Note (collectively, the "Notes"), BioTek hereby grants to
DAKO a security interest in the assets described in Schedule L hereto
(the "Collateral").
23b. DAKO agrees to subordinate the security interest hereby
created to any line of credit extended to BioTek for working capital
purposes by any bank or commercial finance lender licensed by the State
of California (the "Line of Credit"), provided, however, that such
subordination shall be subject to the following terms and conditions:
(i) The total principal amount of such Line of Credit
[*];
(ii) [*] in the aggregate amount of such Line of
Credit, the amount of each recoupment amount which otherwise
must be paid
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<PAGE> 17
by BioTek to DAKO hereunder respecting the Development
Prepayment and/or the Kollsman Prepayment shall be increased
as follows:
<TABLE>
<CAPTION>
Additional Recoupment
Line of Credit Amount Amount
--------------------- ---------------------
<S> <C>
$0 - $50,000 [*]
$50,001 - $100,000 [*]
$100,001 - $150,000 [*]
$150,001 - $200,000 [*]
$200,001 - $250,000 [*]
$250,001 - $300,000 [*]
$300,001 - $350,000 [*]
$350,001 - $400,000 [*]
$400,001 - $450,000 [*]
$450,001 - $500,000 [*]
</TABLE>
Once any such incremental recoupment amount is triggered as
set forth above, it shall not be reduced in any, manner, until
all amounts are paid under the Kollsman Note and/or the
Development Note, as provided in this Agreement, except that
if at any time such aggregate Line of Credit amount is reduced
to zero, then the Additional Recoupment Amount shall
simultaneously be reduced to zero.
23c. So long as BioTek is not in default under the Notes or
this Agreement and no event has occurred which with the giving of
notice or the lapse of time, or both, would constitute a default by
BioTek under the Notes or this Agreement, BioTek shall have the right
to sell, license, lease, or otherwise dispose of the Collateral,
provided such sale, license, lease or other disposal is (i) done in the
ordinary course of business of BioTek consistent with past practice,
and (ii) does not in any way impair or infringe the rights of DAKO
under the licenses granted pursuant to Section 21 h and 22 hereof.
23d. The security interest granted hereby to DAKO shall be
automatically released and/or terminated by DAKO upon the payment in
full by BioTek of the principal amount of each of the Notes and all
accrued interest thereon. Upon the release of the security interest
granted hereby, DAKO, on the written request of BioTek, will execute
and deliver such proper instruments of release and satisfaction as may
reasonably be requested to evidence such release, and any such
instrument, when duly executed by and
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<PAGE> 18
duly recorded in the places where the financing statements are
recorded, shall conclusively evidence the release of the security
interest granted herein.
23e. Concurrently with the delivery of the Notes, BioTek will
execute, file and/or record in the appropriate jurisdiction a UCC-1
Financing Statement covering the Collateral and naming the DAKO as
secured party. BioTek will give, execute, file and/or record any
further notice, financing statement, instrument, document or agreement
that DAKO may reasonably consider necessary or desirable to create,
preserve, continue, perfect or validate the security interest granted
hereby or which DAKO may reasonably consider necessary or desirable to
exercise or enforce its rights hereunder with respect to such security
interest including, but not limited to, any necessary filings with the
U.S. Patent and Trademark Office and the U.S. Copyright Office,
provided, however, DAKO acknowledges that its security interest shall
remain subordinate to those of BioTek's present Senior Secured Note
Holders.
24. Audit Rights. Solely for purposes of ensuring compliance with the
terms of this Agreement, each of the parties hereto grants the other
party the right to have an independent auditor audit its books and
ledgers subject to the following terms: (i) each audit will be at the
electing party's own expense; (ii) such audit will be conducted at the
non-electing party's premises by no more than two individuals of such
of such independent auditor; (iii) the electing party shall give the
other party at least 30 business days notice of its intent to have such
audit conducted; and (iv) such audits may not be conducted more
frequently than one time per fiscal quarter.
25. Representations and Warranties.
25a. Title. BioTek owns all right, title and interest in and
to the Intellectual Property Rights.
25b. Licenses. Except for the cross-licenses granted to Fisher
Scientific Company, the licenses granted to purchasers of the
Instruments, and those licenses granted to DAKO hereunder, BioTek has
not granted any rights, licenses or interest whatsoever in, under or to
the Intellectual Property Rights.
25c. Secured Interests. Except for the security interests of
the holders of BioTek's senior secured notes, the Intellectual Property
Rights are free and clear of all liens, encumbrances, security
interests and restrictions on transfer.
25d. Authority. BioTek has all necessary right, power and
authority to enter into this Amendment and to grant the licenses with
respect to the Intellectual Property Rights as contemplated by the
Agreement. To the extent required, BioTek has obtained all necessary
consents of shareholders or creditors in connection with such grant.
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<PAGE> 19
25e. No Infringement. To the best of BioTek's knowledge, the
Instruments do not infringe any patent, copyright, trademark, trade
secret or other proprietary or contractual rights of any third party.
25f. Manufacture. To the best of BioTek's knowledge, the
Intellectual Property Rights are sufficient to permit DAKO to
manufacture and/or develop the Instruments as contemplated by
Subsection 21 h and Section 22 hereof, in conjunction with the rights
granted under the Erie Agreement; the Technical Materials held in the
Escrow include all materials (including, but not limited, to source
code) necessary for DAKO to complete the development of the New
TechMate and arrange for the
25g. No Litigation. To the best of BioTek's knowledge, there
are no actions, suits, investigations, claims or proceedings pending or
threatened against BioTek or in any way relating to the Intellectual
Property Rights.
25h. No Formal Contracts. BioTek currently has no formal
written agreements with Kollsman Manufacturing or any of its other
subsuppliers or subcontractors.
1.9 Schedules.
(a) Schedule A is hereby amended by adding the following
provisions to the end of such schedule:
"New TechMate
Transfer Price
(1) The transfer price of the New TechMate shall be
BioTek's unit [*]; provided, however, that in no event shall
the transfer price be more [*].
(2) Notwithstanding the above, after the [*]
following the market introduction for sales of the New
TechMate, and so long as there is an outstanding balance on
the Notes, and if the cost of manufacturing of the New
TechMate increases compared to the cost price currently in
effect at the [*] period and/or the cost of any improvements
or enhancements to the New TechMate cause such increase in
cost then the transfer price to DAKO shall be calculated as
follows; provided, however, that in no event shall the
transfer price be more than [*]:
(i) Cost price up to [*]
+ (ii) [*]
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+ (iii) Cost price in [*], however, limited to
increase in cost after the twelve months
(see above).
(3) Notwithstanding the above, in case DAKO wants any
improvements or enhancements to the New TechMate, then the net
additional cost price plus the [*] of such improvement and/or
enhancement shall be added to the transfer price as calculated
in accordance with (1) plus (2) above.
(4) Notwithstanding the above, if at any time during
the term of this Agreement BioTek shall sell the New TechMate
(also if improved or enhanced) at a transfer price which is
less than that currently in effect with respect to purchases
by DAKO, BioTek hereby agrees that DAKO shall thereafter be
entitled to such lower transfer price with respect to future
purchases of the New TechMate."
(a) Schedule B is hereby amended by substituting the sentence:
"DAKO agrees to [*] per reagent tray for each tray provided by BioTek
to DAKO" for the pre-existing sentence: "Reagent trays shall be
provided in reasonable quantities by BioTek at no charge to DAKO."
SECTION 2
EFFECTIVENESS OF AMENDMENT
2.1 Effective Date. This Amendment shall only become effective, and the parties
obligations hereunder shall only arise upon the satisfactory completion of each
and every one of the following conditions precedent:
(a) BioTek shall have executed and delivered the Notes.
(b) The parties shall have executed and delivered the Erie
Agreement.
(c) The parties and the Escrow Agent shall have executed and
delivered the Escrow Agreement referred to herein and shall have placed
the Technical Materials in trust with the Escrow Agent pursuant
thereto.
(d) BioTek shall have executed and delivered to DAKO the UCC-1
Financing Statement referred to in this Amendment and shall have made
the appropriate filing with the U.S. Patent and Trademark Office and
the U.S. Copyright Office.
(e) Page Erickson and Steven Bernstein shall each have
executed and delivered a certificate in substantially the form of
Exhibit F hereto.
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<PAGE> 21
(f) The Certificate of Insurance described in Subsection 4f of
the Agreement shall have been delivered.
(g) BioTek's patent counsel shall have delivered patent
information and assurances in form and substance reasonably
satisfactory to DAKO's legal counsel.
(h) BioTek shall deliver a Good Standing Certificate issued by
the Secretary of State of the State of California certifying that
BioTek was duly incorporated in the State of California and that it is
in good standing in such State as of a date which is no later than two
(2) days prior to the Effective Date together with a Certificate of the
Franchise Tax Board of the State of California certifying that BioTek
is in good standing with such agency as of a date which is no later
than two (2) days prior to the Effective Date.
(i) BioTek shall have delivered a copy of the form of
Confidentiality Agreement which it utilizes for its employees and
consultants.
SECTION 3
MISCELLANEOUS
3.1 Capitalized Terms. All capitalized terms not otherwise defined herein shall
be defined with reference to the original Agreement dated September 27, 1 994.
3.2 Counterparts. This Amendment may be executed in one or more counterparts,
each of which shall be deemed an original for all purposes.
3.3 Full Force and Effect. Other than as expressly modified hereby, the
Agreement remains unchanged and in full force and effect.
3.4 Severability. If any provision of this Agreement as amended hereby is held
to be unenforceable, the remaining provisions shall, to the extent practicable,
continue in full force and effect. The waiver of any breach or default shall not
constitute a waiver of any other right hereunder or any subsequent breach or
default.
3.5 Further Assurances. The parties agree to execute and deliver such further
documents and instruments and shall take such other actions as may be reasonably
required or appropriate to carry out the intent and purpose of this Amendment.
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<PAGE> 22
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment, effective as of the date upon which the last party to execute this
document affixes his signature hereto.
"BioTek"
BioTek Solutions, Inc.
a California corporation
By:
- --------------------------- --------------------------------------
Date Michael C. Miller, CEO
(Signatures continue on following page.)
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<PAGE> 23
"DAKO"
DAKO A/S
By:
- --------------------------- --------------------------------------
Torben Jorgensen
Managing Director
By:
- --------------------------- --------------------------------------
John F. Place MA
Bus. Development Manager
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<PAGE> 24
Schedule List
Schedule G Royalties
Schedule H Milestones
Schedule I Description of New TechMate Project
Schedule J Intellectual Property Rights
Schedule K Consultants
Schedule L Collateral
Schedule M Subsuppliers
Exhibit List
Exhibit A Additional Amendments
Exhibit B Kollsman Note
Exhibit C Development Note
Exhibit D Erie Agreement
Exhibit E Escrow Agreement
Exhibit F Scientist's Certificate
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<PAGE> 25
Schedule G
Royalties
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<PAGE> 26
Schedule G
TechMate 500 and TechMate 1000 Royalty Schedule
<TABLE>
<CAPTION>
$ per month per
Standard Royalty: instrument
------------------------------------ ---------------
<S> <C>
Installation to end of the calendar [*]
month (installation month)
First and second calendar months [*]
Third and fourth calendar months [*]
Fifth, sixth, seventh and eighth [*]
calendar months
Ninth, tenth, eleventh and twelfth [*]
calendar months
Thereafter [*]
</TABLE>
Notwithstanding the terms of the above table of royalties, the
following royalty terms shall apply for the following countries:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
UK
FRANCE
ITALY SWITZERLAND GERMANY SWEDEN
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Installation month [*] [*] [*] [*]
- -------------------------------------------------------------------------------------
First calendar month [*] [*] [*] [*]
- -------------------------------------------------------------------------------------
2, 3, 4 calendar month [*] [*] [*] [*]
- -------------------------------------------------------------------------------------
5, 6 calendar month [*] [*] [*] [*]
- -------------------------------------------------------------------------------------
Thereafter [*] [*] [*] [*]
- -------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 27
Schedule H
Milestones
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<PAGE> 28
BioTek Solutions New System Development Plan
The following is a description of the milestones as indicated in the New System
Development Plan.
The Milestone #'s correspond to the line item numbers in the Development Plan
Outline.
<TABLE>
<CAPTION>
Completion
Milestone Activity Description Deliverables Date Funding Date/Budget
- --------- ------------ -------------------------------------------- ----------------------------- ---------- -------------------
<S> <C> <C> <C> <C> <C>
1 (31-50) 2.1-3.6 System Design and Specification A. System Level Specification [*] [*]
B. CAD 3-D System Model
System level design and specification of all
primary subsystems and industrial design of
housing
User Evaluation of system design via a
working model.
2 (53-68) 4.1-4.9 Detailed Subsystem Design A. Detailed CAD part drawings [*] [*]
B. Prelim. Assembly Drawings
Detailed design, specification and C. Engineering BOM
documentation of mechanical, electrical and D. Purchased Component Specs.
electronic subsystems and components. E. Test Procedure Doc.
Sourcing of purchased components. F. Hazard Analysis
Preliminary software testing and hazard
analysis.
3 (71-81) 4.10-4.13, & Evaluation Prototypes/Launch A. (3) Facsimile Prototypes [*] [*]
10.0 B. Performance est Results
Production of prototype patterns and molds C. Product launch
for facsimile molded plastic parts. Purchase D. Market Acclaim
of components.
Assembly and testing of (3) evaluation
prototypes
Clinical performance evaluation of prototype
units against TechMate 500.
4 (84) 4.14 Production tooling
Hard tooling for production units A. Hard Tooling [*] [*]
B. Sample Parts
</TABLE>
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<TABLE>
<CAPTION>
Completion
Milestone Activity Description Deliverables Date Funding Date/Budget
- --------- -------- ---------------------------------- --------------------------- ---------- -------------------
<S> <C> <C> <C> <C> <C>
5 (115-120) 9 Pilot Production A. (15) Pilot Units [*] [*]
B. Production Documentation
Update to production documentation C. V&V Test Results
D. Final Cost Roll-up
Pilot unit fabrication and testing
Pilot unit V&V testing
Product launch.
6 (124-126) 11 Release to Production A. Documentation Transfer [*] [*]
Transfer of final documentation to
production vendors.
</TABLE>
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<PAGE> 30
Exhibit A
Additional Amendments
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<PAGE> 1
EXHIBIT 10.1C
EXHIBIT 'A'
NOW, THEREFORE, in consideration of the respective covenants of the parties
herein set forth, the parties hereto agree as follows:
1. PRODUCTS
1a. The Products covered by this Agreement include (i) the instruments described
in Schedule A manufactured by or for BioTek, including components and base
software, and parts necessary for the maintenance and repair thereof
(hereinafter "Instruments") (BioTek) accessories, components, buffers and
supplies listed in Schedule B, manufactured by or for BioTek, (hereinafter
"Accessories") and (iii) reagents listed in Schedule C, developed and/or in a
formulation specifically intended or designed for use on instruments and
manufactured by DAKO (hereinafter "Reagents"). Other reagents manufactured and
sold by or for DAKO but not developed and/or in a formulation specifically
intended or designed for use on instruments, may be used on instruments, and
therefore may be used in payment calculations. Schedules A, B, and C may be
updated and amended from time to time by mutual consent of the parties.
1b. BioTek shall make available to DAKO on an exclusive basis any improved or
updated versions and any similar or related Instruments and/or Accessories under
the same terms and conditions as set forth herein. Said updated and improved
Instruments and/or Accessories shall be
<PAGE> 2
included in Schedules A or B. DAKO shall include any improved or updated
versions of Reagents in Schedule C. Any and all changes in product
specifications shall be mutually agreed by the parties to this Agreement.
1c. For any period during which this Agreement is exclusive BioTek shall offer
to DAKO in writing the right to distribute, during the term of this Agreement
and on the same terms and conditions (other than price) as set forth herein, any
new products developed by or for BioTek, and DAKO shall have the option to
accept distribution rights with respect to said new products in writing [*] of
BioTek's written notice to DAKO of the availability thereof. If DAKO decides not
to exercise this option, BioTek may distribute, or enter into an Agreement to
distribute with a third party, any such new product on terms that will also be
offered to DAKO. Such terms to third parties may change over time through volume
discounts, price increases etc., at the sole discretion of BioTek.
1d. BioTek shall ensure that spare parts and accessories necessary for the
operation and repair of any Instruments delivered to customers under this
Agreement shall be available for purchase by DAKO or any DAKO customer, at their
expense, including but not limited to parts, shipment and installation expenses,
in such circumstances that said parts are not covered by warranties provided
through DAKO (or BioTek as agreed), for the term of this Agreement. A spare
parts list is attached to this Agreement (Schedule P).
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1e. All products promoted and sold under this Agreement shall be promoted and
sold under dual label, wherein both DAKO and BioTek labels and trademarks are of
equal size and character (see Schedule D). Some components for Reagents as well
as buffers required to optimize the use of instruments will be manufactured by
BioTek (see Schedule B). Incorporation of components and inclusion of buffers
into Reagents, and final manufacturing of Reagents and quality control will be
carried out by DAKO.
1f. DAKO and BioTek have signed a Confidentiality Agreement and will treat all
knowledge gained through collaboration on dual label products as trade secrets
for the term of this Agreement or any extensions to this Agreement plus a five
(5) year period following the termination of this Agreement for any reason.
2. GRANT OF DISTRIBUTORSHIP
2a. Upon the terms and subject to the conditions hereinafter set forth, BioTek
hereby appoints DAKO and DAKO accepts the appointment as the exclusive
distributor of Instruments and Accessories in the Territory as of the effective
date of this Agreement. Except as otherwise provided in sections 3a. (BioTek) or
3a (iii) below, BioTek reserves no right to distribute Instruments and
Accessories in the Territory and DAKO shall have no rights under this Agreement
to sell or distribute Instruments, Accessories or Reagents outside of the
Territory unless mutually agreed upon by the parties.
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2b. The Territory in which DAKO has the rights described in section 2a. hereof
to distribute the Instruments and Accessories shall be Europe, the Middle East,
India and Africa (hereinafter "Territory"). DAKO and BioTek will enter into good
faith negotiations concerning (a) similar Agreement(s) for Japan and South East
Asia.
2c. With the exception of the conditions described in section 2d., for any
period during which the arrangement between the parties for distribution of
Instruments and Accessories is exclusive, DAKO shall not sell within the
Territory any other automated immuno-histochemistry instrument which performs
multiple functions, or any other stainer which is competitive being made
available for inclusion in Schedule A (see section 1.b), and shall not sell
within the Territory any other accessories, components, buffers and supplies
which are directly competitive with the Accessories described in Schedule B
hereto unless otherwise mutually agreed.
2d. Notwithstanding section 2c., and limited to Italy, in the case of tenders
for sale of reagents in which said tender requires DAKO to offer instruments for
sale as an integral part of the tender, DAKO shall inform BioTek of such tender
offers prior to submission whereupon BioTek may offer alternative sales or
product options to DAKO to accommodate such tender requirements, and if this
does not allow BioTek's instrument to be sold through such tenders, then DAKO
shall be allowed to sell other automated immunohistochemistry instruments as
part of such tenders.
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2e. Unless otherwise specifically agreed to the contrary, during the term of the
Agreement in which the arrangement between the parties for distribution of
Instruments and Accessories is exclusive, BioTek shall not sell within the
Territory any reagents which are specifically intended or designed for use with
Instruments described in Schedule A and DAKO shall include in Schedule C any
reagents which are specifically intended or designed for use with the
Instruments described in Schedule A. DAKO , sell dual label Reagents for use on
Instruments.
3. CONDUCT OF DAKO
3a. DAKO shall exclusively promote, distribute and sell Instruments and
Accessories during the term of this Agreement, within contract periods
("Contract Periods") as are set forth below: The first Contract Period shall
commence on the date of installation at a customer location of the first
Instrument in the Territory and last until 30th June 1995. Subsequent Contract
Periods shall be twelve month periods beginning on the 1st July of each calendar
year.
<TABLE>
<CAPTION>
CONTRACT PERIOD NUMBER OF INSTRUMENTS
PER CONTRACT PERIOD CUMULATIVE
<S> <C> <C>
Until July 1, 1995 [*]
Year 2 [*] [*]
Year 3 [*] [*]
</TABLE>
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<PAGE> 6
(i) The foregoing shall constitute volume targets under which the continuation
of this Agreement shall be determined. DAKO shall be considered to have achieved
such target if the sum of total of Instruments placed within the Territory plus
firm orders to deliver, equals or exceeds the cumulative number of Instruments
given above at the end of a Contract Period.
(ii) Should DAKO not achieve a cumulative target, BioTek shall have the option,
within thirty (30) days thereof, as its sole and exclusive remedy for failure to
achieve the target, give DAKO thirty (30) days written notice of its intention
to sell the Instruments and Accessories in the Territory, either directly or
through third parties, as long as sales price is not less that the Transfer
Prices shown in Schedules A and B. If BioTek exercises such option, DAKO may;
continue to distribute Instruments and Accessories on a non-exclusive basis; or
DAKO may place guaranteed Purchase Orders to make up the shortfall in sales of
Instruments so long as delivery for such Instruments is within ninety (90) days;
in which case BioTek shall withdraw said notice; or, DAKO may elect to terminate
the Agreement by providing thirty (30) days prior written notice to BioTek
within thirty (30) days of receipt of said notice. Such termination shall be
without liability to either party, except for such other liabilities as may
otherwise specifically be set forth in this Agreement or under Law.
(iii) Should DAKO not achieve a cumulative target, DAKO shall have the option,
within thirty (30) day thereof, to give BioTek thirty (30) days written notice
of its intention to continue to distribute Instruments and Accessories on a
non-exclusive basis, or DAKO may elect to terminate the Agreement by giving
ninety (90) days written notice to BioTek. Such termination shall be without
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liability to either party, except for such other liabilities as may otherwise
specifically be set forth in this Agreement or under Law.
(iv) Notwithstanding the foregoing, if DAKO is not able to achieve the target in
any Contract Period due to an act or omission of BioTek or due to any event(s)
which are beyond its reasonable control (e.g. section 11), such inability shall
not constitute grounds for BioTek to exercise the option to sell Instruments and
Accessories in the Territory, as aforesaid in section (BioTek). In the event
that DAKO is unable to achieve the target for any Contract Period due to failure
of BioTek to deliver the quantities of Instruments required to achieve the
target, the target shall be deemed to have been met for that Contract Period and
the cumulative numbers for subsequent Contract Periods shall be adjusted
downwards by the difference between the target and the numbers of Instruments
delivered.
(v) Notwithstanding the foregoing, if at any time after 1st January 1996, a
technological development occurs which substantially reduces the market for
Instruments, DAKO shall have the option to give [*] notice to BioTek of its
intention to continue to distribute Instruments and Accessories on a
non-exclusive basis for a [*] and may thereafter terminate this Agreement. Such
notice shall be accompanied by evidence of substantial fall in Instrument
placements. In these circumstances, BioTek reserves the right to give similar
notice as to non-exclusivity and/or termination should such technological
changes adversely effect the on-going business of BioTek as deemed solely by
BioTek.
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3b. DAKO shall order Instruments and Accessories hereunder by submitting firm
purchase orders to BioTek. Such firm purchase orders shall be given on DAKO's
purchase order form and shall be acknowledged by BioTek by facsimile within two
(2) working days.
3c. In conjunction with this Agreement, DAKO has issued to BioTek firm purchase
orders for [*], which shall be delivered by BioTek in accordance with the
provisions of section 4a. of this Agreement.
3d. DAKO may return for full credit or replacement, any Instrument or Accessory
for which DAKO is required to give a customer credit or replacement Instruments
or Accessories due to a defect or deficiency in the Instrument or Accessory,
provided that DAKO first gives BioTek the option of repairing such Instrument on
site, either through its own personnel or through the direction of DAKO
personnel or contractors, with on site time and parts expenses assumed by BioTek
and only then, if DAKO obtains from BioTek a returned goods authorization, which
shall not be unreasonably withheld or delayed by BioTek.
3e. DAKO agrees to mark Reagents (Schedule C) at the lowest saleable unit and on
all packaging and inserts with BioTek's trademarks in a firm and size to be
mutually agreed by both parties. Such marking shall be fully described in
Schedule D which schedule shall be updated from time to time.
3f. DAKO agrees to bar-code Reagents at the lowest saleable unit using symbology
3 to 9 in accordance with Health Industry Bar Code ("HIBC").
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3g. DAKO shall pay to BioTek a royalty based on TechMate 500 and TechMate 1000
Instruments that are sold and delivered to DAKO or delivered to DAKO's customers
based on DAKO's drop shipment directions. Such royalty shall be paid to BioTek
by DAKO for each Instrument installed by DAKO [*]. However, if DAKO requests by
[*] next generation instrument and if BioTek by [*] cannot demonstrate a
capability to deliver such an instrument by the [*], such royalty shall be paid
to BioTek by DAKO for a period [*].
Such royalties per Instrument purchased shall be paid on a monthly basis on the
first day of each calendar month, starting on the first installation date of the
instrument as follows:
<TABLE>
<CAPTION>
$ per month per instrument
<S> <C>
Installation to end of the calendar month (installation month) [*]
First and second calendar months [*]
Third and fourth calendar months [*]
Fifth, sixth, seventh and eighth calendar months [*]
Ninth, tenth, eleventh and twelfth calendar months [*]
Thereafter [*]
</TABLE>
Notwithstanding the above, such royalty shall not be paid for Instruments sold
to Pharmaceutical companies that purchase limited amounts of dual-labeled
Reagents from DAKO, but DAKO shall pay instead a [*] sold by DAKO for use on
such Instruments.
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<PAGE> 10
In relation to the payment of these royalty fees, BioTek reserves the right and
DAKO grants the right to BioTek to appoint an independent auditor to audit the
accounts of DAKO quarterly, at BioTek's expense.
3h. DAKO shall maintain in its inventory at least such number of Instruments as
may be equal to the monthly average number of Instruments installed during the
[*]. DAKO will not be charged monthly royalty fees (according to section 3g) on
these inventory Instruments until such time as they leave inventory and are
installed at customer sites.
3i. DAKO shall at its own cost and expense provide appropriate personnel,
Instruments, Accessories and Reagents to prospective customers identified by
DAKO for conducting performance studies and product evaluations as may be
reasonably requested by qualified prospective customers.
3j. DAKO will maintain at its own cost and expense, technical and sales support
in the form of full-time sales personnel and other dedicated applications
specialists as required at DAKO locations, for example in Milan and Paris. [*]
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<PAGE> 11
[*]
3k. DAKO shall establish at two separate locations, stocks of materials and
Reagents (hereinafter "Reagent Stock") as a buffer against changes in supply
conditions of Reagents. Each Reagent Stock shall contain materials and finished
Reagent products equivalent to the requirements for at least placements of
Instruments.
3l. If DAKO for some reason is unable to continue production and maintain
Reagent Stock levels, DAKO shall inform BioTek and promptly enter into agreement
with an alternative supplier (with first option to supply offered to BioTek) to
obtain the necessary materials and products to maintain such Reagent Stocks.
Should DAKO not be able to ensure such supply, BioTek shall have the option to
supply directly or indirectly such Reagent materials and products at the prices
currently in effect with customers at the time DAKO ceases supply and until DAKO
can resume such supply, and negotiate on a good faith basis with DAKO for
payment for such supplies.
3m. BioTek will provide [*] for DAKO to place into prestigious, reference
laboratories where DAKO and BioTek both agree there is a potential to generate
significant other placements. These laboratories are [*]
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[*] DAKO shall purchase said Instruments according to section 3b, BioTek agrees
to provide these [*] at a billed rate of [*]
3n. DAKO will provide BioTek with rolling forecasts of monthly Instrument
requirements for twelve month intervals. These forecasts will be provided
quarterly. The first forecast will be provided for the interval starting 1st
January 1995. These forecasts shall be planning purposes only and shall not
constitute a purchase order. Further DAKO will provide quarterly rolling
forecasts for each quarter, based on the last two months of the preceding
quarter actual orders plus twenty five percent (25%). Such quarterly forecasts
will be provided 45 days in advance of the start of a quarter. DAKO will issue
firm Purchase Orders at least once a month based on the above quarterly rolling
forecasts.
DAKO will provide by the end of each quarter rolling forecasts by quarter of the
forecasted requirement of instruments for the next four quarters. Once
introduced the forecasted number of instruments for a particular quarter may be
changed with each new quarterly forecast by maximum 20%. The number of
instruments forecasted for the quarter immediately following the date of the
forecast shall be ordered by DAKO in the form of a firm Purchase Order
3o. BioTek together with DAKO shall make a weekly update of a Distribution Plan
that details
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<PAGE> 13
for each instrument ordered; destination, requested ship date, projected
installation date, and firm ship date.
4. CONDUCT OF BIOTEK
4a. BioTek shall ship promptly, but in any event [*] from confirmation of order,
DAKO's orders for Instruments and Accessories. All orders shall be shipped
f.c.a. Boston Airport (or f.o.b. Port of Boston, or such location(s) as
appropriate) at which point title and risk of loss shall pass from BioTek to
DAKO, freight and insurance prepaid to such location(s) as DAKO may designate.
BioTek shall cooperate with DAKO in limiting drop shipments of Instruments and
Accessories to DAKO to an absolute minimum.
4b. In addition to the shipments mentioned above in section 4a., BioTek shall
ship to DAKO in Copenhagen by December 31, 1994, [*]
4c. [ * ]
4d. BioTek shall notify DAKO immediately in writing should BioTek become aware
of any defect or condition which renders any Instrument or Accessory in
violation of any statute or regulation, or which in any way alters the
specifications or quality of the Instrument or Accessory.
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<PAGE> 14
4e. BioTek shall execute and abide by the terms of BioTek's Continuing Guaranty
(see Schedule E) incorporated herein by reference, with respect to Instruments
and Accessories and DAKO shall abide by the its General Terms and Conditions of
with respect to Reagents. The terms and conditions of the Continuing Guaranty
and the General Terms and Conditions of Sale shall survive the termination of
this Agreement.
4f. BioTek shall provide DAKO with a Certificate of Insurance which meets the
requirements of section D of the Continuing Guaranty on or prior to execution of
this Agreement. BioTek shall provide DAKO with renewal insurance certificates in
the form mandated by section D of the Continuing Guaranty during the term of
this Agreement, without demand therefore by DAKO. Notwithstanding any provision
of the Continuing Guaranty to the contrary, the amount of the insurance required
of BioTek pursuant to the Continuing Guaranty during the first Contract Period
shall [*]; for the next subsequent Contract Period [*]; for all
subsequent Contract Periods of the term of this Agreement [*].
4g. BioTek shall provide to DAKO's Sales personnel, at Santa Barbara or at a
location chosen by BioTek, training in the use, technical properties, sale
competitive features and benefits of Instruments and Accessories as may be
reasonably requested from time to time by DAKO. For purposes of such training,
[*]
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<PAGE> 15
4g.(i) BioTek will provide Instrument and Accessory sales materials that will be
revised only to reflect necessary changes in language. It is clearly understood
by the parties that BioTek's Agreement must be confirmed in writing before any
changes are made to BioTek marketing materials or before the size, graphic
design, legend(s) trademark or logo of BioTek is altered, redesigned or used in
any way. In general, literature will be under DAKO's corporate identity and
conform with DAKO's current offerings, but will include the BioTek name and
trademark in similar size and character in all dual labeling (see Schedule D).
4h. BioTek shall provide technical support to DAKO's sales personnel at sites to
be determined by BioTek, and promptly provide to DAKO such additional types and
quantities of technical information developed or acquired by BioTek from time to
time as may reasonably be expected to be of assistance to DAKO in fulfilling its
obligations hereunder. In particular BioTek shall provide technical training for
DAKO's and DAKO Service Partner's field service engineers in the installation
and repair of TechMate instruments.
4i. BioTek shall supply at its expense reasonable quantities of such instruction
and training manuals and point of sale literature as may from time to time be
requested by DAKO for use in connection with the distribution and sale of
Instruments in the Territory. Subject to DAKO's prior written approval, the DAKO
name will be incorporated into BioTek's advertising literature for Instruments
and Accessories intended for distribution by DAKO. If requested to do so by
DAKO, BioTek shall furnish DAKO with suitable copy and photographs for use by
DAKO in cataloguing the Instrument and Accessories.
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4j. Any Instrument or Accessories owned by DAKO and rendered unsaleable due to
change in any product specification, discontinuation or elimination by BioTek of
any product from its product offering, release by BioTek of any improved or
updated version of any Instrument or Accessory, shall be repurchased from DAKO
by BioTek [*] following DAKO's written request therefore, at the price paid for
such product by DAKO. BioTek shall additionally pay for return freight and
related transportation and insurance charges for all such products.
4k. BioTek agrees to mark Instruments and Accessories (Schedules A and B) at the
lowest saleable unit and on all packaging and inserts with DAKO's trademarks in
a form and size to be mutually agreed by both parties.
4l. BioTek agrees to bar-code Accessories at the lowest saleable unit using
symbology 3 to 9 in accordance with Health Bar Code ("HIBC").
4m. BioTek shall notify DAKO (and DAKO shall notify BioTek) in writing of any
special requirements determined for the storage and handling of Instruments or
Accessories and any laws, regulations, orders, ordinances and requirements of
all local state and country governments and agencies having jurisdictions over
these products.
4n. BioTek shall supply DAKO qualified leads which may come to its attention for
sales or placements of Instruments in the Territory.
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<PAGE> 17
4o. Upon execution of this Agreement, BioTek shall provide DAKO with all
necessary and appropriate information concerning all of BioTek's existing or
prospective customers in the Territory, which customers shall thereafter be the
customers of DAKO. BioTek shall cooperate with DAKO in notifying said customers
of the appointment of DAKO as BioTek's exclusive distributor of Instruments and
Accessories in the Territory and with the orderly transition of such customer
accounts to DAKO. Additionally, DAKO and BioTek agree to formulate and release
press and other public statements that serve to promote the announcement of
their relationship and any other noteworthy events that may serve the mutual
benefit of the parties. Content and copy will be mutually agreed upon by the
parties.
4p. Each quarter during the first Contract Period and semi-annually thereafter,
BioTek's Executive Management shall meet with DAKO's Executive Management for
general business review discussions on site at BioTek or at DAKO A/S or at a
DAKO subsidiary site, and mutually agreed in advance of such meetings.
4q. BioTek shall maintain adequate inventories so as to supply to DAKO, stocks
of materials and Accessories as a buffer against changes in supply conditions of
Accessories (hereinafter "Accessory Stock"). Each Accessory Stock shall contain
materials and finished Accessory products equivalent to the requirement for
[*] of operation of the existing placements of Instruments.
4r. If BioTek for some reason is unable to continue production and otherwise
maintain the Accessory Stock levels mentioned in section 4q. above, BioTek shall
inform DAKO and promptly
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<PAGE> 18
enter into agreement with an alternative supplier (with first option to supply
offered to DAKO) to obtain the necessary materials and products to maintain such
Accessory Stocks. Should BioTek not be able to ensure such supply, DAKO shall
have the option to supply directly or indirectly such accessories at the prices
currently in effect with customers at the time BioTek ceases supply and until
BioTek can resume such supply, and negotiate on a good faith basis with BioTek
for payment for such supplies.
5. PRICE AND PAYMENT TERMS
5a. BioTek shall supply and ship Instruments to DAKO at the prices shown in
Schedules A hereto for the duration of the Agreement
5b. BioTek shall give at least thirty (30) days prior written notice of increase
in price of any accessory and honour DAKO's purchase orders at the prices at the
time the purchase is made, notwithstanding during the delivery dates. The
transfer prices given in Schedule B shall only be changed as a result of a
change in the cost to BioTek. BioTek shall not add to such cost to BioTek a
margin greater than 20% (twenty per cent) of such cost.
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relation to any such changes in price, DAKO reserves the right and BioTek grants
the right to DAKO to appoint an independent auditor to audit the accounts of
BioTek at DAKO's expense.
5c. BioTek agrees to negotiate with DAKO any special discounted transfer
pricing: (i) on any large quantity order for instruments and/or Accessories
which may be requested by any DAKO customer, (BioTek) where required to meet
competition. In such cases of discounted transfer pricing, BioTek shall
pre-approve in writing (in such format as the parties may mutually agree) any
reduction in the attached schedules A or B discounted transfer prices as may be
required. Notice of acceptance or rejection of each such request for
pre-approval shall be communicated by BioTek to DAKO promptly following DAKO's
request therefore.
5d. Payment for delivered Instruments and Accessories shall be made within
current month plus [*] the date of delivery by BioTek during the first Contract
Period and within current month plus [*] from the date of delivery in all
subsequent Contract Periods.
5e. DAKO shall be entitled to resell Instruments and Accessories intended for
resale on such terms as it may, at its sole discretion, determine, including
without limitation, price, returns, credit and discounts.
5f. DAKO shall exclusively promote all products listed in Schedule B including
slides, pads and software. DAKO will include such products in reagent rental and
reagent contracts, and will offer these products on substantially the same terms
and conditions as products manufactured by DAKO.
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5g. All sums due under this Agreement shall be made in United States Dollars by
wire transfer and BioTek shall pay any transfer fee.
6. TERM AND TERMINATION
6a. The initial term of this Agreement shall be for a period of five (5) years
starting from 27th September 1994. After said initial term, this Agreement shall
terminate, unless renewed by mutual Agreement between DAKO and BioTek for
additional and successive terms [*].
6b. This Agreement shall terminate immediately upon written notice by the
non-breaching party if either party (i) commits or suffers an act of bankruptcy
or insolvency or, except as otherwise provided in this Agreement, (BioTek) fails
to cure any material breach in the provisions of this Agreement [*] after
receipt of written notice of such breach.
6c. On the termination or non-renewal of this Agreement, howsoever arising,
BioTek shall continue to honour DAKO's purchase orders for Instruments and
Accessories up to the effective date of termination or non-renewal.
6d. The rights and duties of each party under this Agreement and the schedules
hereto in respect of performance prior to termination or non-renewal shall
survive and be enforceable in accordance with the terms of this Agreement.
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6e. Upon termination or non-renewal of this Agreement BioTek shall repurchase
from DAKO at DAKO's request, and at DAKO's cost therefor, such unsold
Instruments and Accessories as are then owned by DAKO. Delivery of Instruments
and Accessories repurchased from DAKO hereunder shall be f.c.a. DAKO's premises.
7. RIGHT OF FIRST REFUSAL
7a. If BioTek negotiates a transaction which would result in the sale by BioTek
of all or substantially all of its business or its stock or assets, BioTek shall
give written notice of such intention to DAKO, which shall have the option,
first, after Curtin Matheson Scientific Inc., USA ("CMS") to enter into good
faith negotiations for the purchase of BioTek. If CMS and BioTek are unable in
good faith to agree on terms for sale [*] the notice given by BioTek of such
sale, or if CMS declines to purchase before terms are agreed, DAKO shall have
the right to negotiate in good faith with BioTek to try to agree upon mutually
satisfactory terms for said sale. If DAKO and BioTek are unable in good faith to
agree on mutually satisfactory terms for the proposed sale within a period of
[*] of negotiation or if prior to expiration of said [*] period DAKO declines to
purchase, then BioTek shall have the right to enter into such a transaction with
any third party upon such terms and conditions as may be agreed by BioTek and
any such third party. If CMS or such third party purchase all or substantially
all of the business, stocks or assets of BioTek, the purchaser shall assume all
of the rights and obligations of this Agreement with respect to the parties to
this Agreement.
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8. WARRANTIES
8a. In addition to the warranties set forth in this Agreement and in the
Continuing Guaranties which are attached hereto as Schedule E, BioTek and DAKO
warrant that each of the products will conform to specifications set forth in
the product literature prepared respectively by or on behalf of BioTek or DAKO
and that said products will comply and be manufactured, packaged, sterilized (if
applicable), labeled and shipped in compliance with all applicable Federal,
state and local laws, orders, regulations and standards. In particular BioTek
shall ensure that Instruments conform to EU instrument specifications and shall
issue any necessary certification to this effect.
8b. BioTek represents and warrants that Instruments and Accessories supplied to
DAKO under this Agreement shall not infringe upon the patients or proprietary
rights of any third party. To the extent that any third party owns any patents
or proprietary rights relating to Instruments or Accessories or to their
manufacture, BioTek represents and warrants that it has obtained valid license
rights from such third party to manufacture and sell Instruments and/or
Accessories. Similarly DAKO warrants that Reagents manufactured by DAKO under
this Agreement shall not infringe upon the patents or proprietary rights of
BioTek or any third party. To the extent that any third party owns any patents
or proprietary rights relating to Reagents or to their manufacture, DAKO
represents and warrants that it has obtained valid license rights from such
third party to manufacture and sell Reagents.
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8c. BioTek shall extend to DAKO customers its Suppliers' Warranties for
Instruments and Accessories which are set forth in Schedule F. BioTek shall not
modify any product Warranty without notifying DAKO with at [*]. BioTek warrants
and represents that the products will perform in accordance with, and that
BioTek shall strictly comply with, the terms of BioTek's product Warranties.
DAKO's warranty for Reagents is included under the General Terms and Conditions
of Sale (Schedule E).
9. TRADEMARKS
9a. BioTek hereby grants to DAKO the royalty-free right to use the trademarks:
BioTek; TechMate; and ChemMate (see also Schedule D), on dual-labeled Reagents
during the term of this Agreement within the Territory, it being expressly
understood that DAKO shall discontinue the use of such trademarks upon
termination of this Agreement (except in connection with the distribution and
sale of DAKO's remaining inventory of Reagents or of Instruments or of
Accessories in the event that DAKO does not elect to exercise its rights under
section 6e hereof) and disclaim any rights in the trademarks other than the said
licence.
9b. DAKO hereby grants to BioTek the royalty-free right to use DAKO's trademarks
on Instruments and Accessories within the Territory and during the term of this
Agreement, it being expressly understood that BioTek shall discontinue the use
of such trademarks upon termination of this Agreement and disclaim any rights in
the trademarks other than the said licence.
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<PAGE> 24
9c. BioTek recognizes that DAKO is the owner of the trademarks and tradenames
denoting DAKO or DAKO products which DAKO may elect to use in the promotion and
sale of Instruments and Accessories and that BioTek has no right or interest in
such trademarks or tradenames. Similarly, DAKO recognizes that BioTek is the
owner of the trademarks and tradenames denoting BioTek or BioTek products which
BioTek may elect to use in the promotion and sale of products and that DAKO has
no right or interest in such trademarks or tradenames.
10. CONFIDENTIALITY
10a. Each party acknowledges the confidential nature of information that may be
disclosed hereunder (including but not limited to names of customers and other
marketing-related information) and agrees to retain such information in
confidence. This provision shall survive the termination of this Agreement for a
period of three (3) years. Confidential information (especially technical
information) may also be the subject of separate confidentiality agreements
which the parties enter into.
11. FORCE MAJEURE
11a. The obligations of either party to perform under this Agreement shall be
excused during each period of delay caused by such matters as strikes, shortages
of power of raw material, government orders or acts of God, which are reasonably
beyond the control of the party obligated to perform. The affected party shall
make best efforts to remedy the effects of such Force Majeure. Any Force
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<PAGE> 25
Majeure event shall not excuse performance by the party, but shall delay
performance, unless such Force Majeure continues for a period in excess [*]. In
such event, the party seeking performance may cancel its obligations hereunder.
12. NOTICES
12a. Any notice required by this Agreement shall be deemed sufficient if sent by
certified mail, postage prepaid, to the party to be notified at the address set
forth in the initial section of this Agreement until notice of a different
address is supplied and if receipt is acknowledged by the receiving party.
12b. The parties to this Agreement shall give notification of any technical
problems or delays, or of any production difficulties of significance. Such
notice shall be given by facsimile with documentation and estimates of expected
recovery time.
13. ENTIRE AGREEMENT
13a. This Agreement including the Schedules hereto, constitutes the entire
Agreement between the parties relating to the subject matter hereof and
supersedes all prior agreements and understandings, whether written or oral,
between the parties with respect to such subject matter. In ordering and
delivery of products, the parties may employ their standard forms, but nothing
in these forms shall be construed to modify or amend the terms of this
Agreement.
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<PAGE> 26
14. APPLICABLE LAW
14a. This Agreement shall be governed by the laws of the State of California. In
the event of a dispute arising in any manner out of or in relation to this
Agreement, the parties shall attempt in good faith to amicably resolve such
dispute. Any disputes which cannot be amicably resolved shall be referred by one
party for resolution by arbitration according to the rules of the International
Chamber of Commerce. The language of arbitration shall e English and arbitration
shall take place at a place determined by the non-referring party.
15. ASSIGNMENT AND SUCCESSION
15a. Except as provided in section 7a, This Agreement shall not be assigned or
transferred by BioTek either voluntarily or by operation by law without the
prior written consent of DAKO.
15b. This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their permitted successors and assigns.
16. AMENDMENTS
16a. No amendment or modification of the terms of this Agreement shall be
binding on either party, unless reduced to writing and signed by an authorized
officer of the party to be bound.
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<PAGE> 27
16b. BioTek and DAKO will enter into a Development Agreement that will set forth
the terms and conditions under which the work by developing new Reagents and
Accessories shall be defined. Said Agreement will become an integral part of the
present Agreement when it is agreed in writing by both BioTek and DAKO. DAKO
will facilitate a meeting of representatives of BioTek, DAKO and appropriate
DAKO subsidiaries to discuss, develop and execute said Development Agreement.
17. EXISTING OBLIGATIONS
17a. Each party represents and warrants that the terms of this Agreement do not
violate any existing obligations or contracts of such party. Each party shall
defend, indemnify and hold harmless the other party from and against any and all
claims, demands, liabilities and causes of action which are hereafter made or
brought against such other party which allege any such violation.
18. RELATIONSHIP OF THE PARTIES
18a. Nothing herein contained shall be deemed to be or construed as constituting
either party as the agent or partner of the other.
19. COUNTERPARTS
19a. This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original for all purposes.
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IN WITNESS WHEREOF, the parties have by their duly authorized officers,
executed this Agreement on the dates set forth below.
FOR BIOTEK SOLUTIONS INC.
- -----------------------------
Michael C. Miller
President and CEO
FOR DAKO A/S
- ----------------------------- ----------------------------
Torben Jorgensen John F. Place MA
Managing Director Business Development Manager
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<PAGE> 29
SCHEDULE A: INSTRUMENTS
TECHMATE 500
includes 386SX PC computer (486 Diamond Flower DFI) with colour monitor and
mouse, BioTek basis system software, 3 slide holders, uninterruptable power
supply and multiplug panel, free Warranty service (including parts and cure of
any manufacturing defect) for a period of one year from the date of
installation, user manual, service manual.
TRANSFER PRICE
[*] (See also section 6a)
TECHMATE 1000
includes 386SX PC computer (486 Diamond Flower DFI) with colour monitor and
mouse, BioTek basic system software, 3 slide holders, uninterrutpable power
supply and multiplug panel, free Warranty service (including parts and cure of
any manufacturing defect) for a period of one year from the date of
installation, user manual, service manual.
TRANSFER PRICE
[*] (See also section 5a)
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<PAGE> 30
Hybridization Oven (available on or after 1st July 1995)
Schedule B: ACCESSORIES (Updated December 1994)
<TABLE>
<CAPTION>
TRANSFER PRICE
<S> <C>
75/100um Slides (per 72) [*]
130/150um Slides (per 72) [*]
Pads (per 50) [*]
Software upgrade per year [*]
Hematoxylin (350 ml) [*]
Chromgens:
Alkaline phosphaltase [*]
DAB [*]
</TABLE>
Reagent trays
The following buffers shall be provided in bulk, in reasonable quantities
sufficient for DAKO to prepare the kits and Reagents, at no charge to DAKO:
Buffers SDK 1, 2 and 3
Water wash
Microwaving buffer MWB101
Hydrogen peroxide blocking reagent
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EXHIBIT 10.3
CURTIN MATHESON SCIENTIFIC, INC.
DISTRIBUTION AGREEMENT
THIS AGREEMENT, made and entered into on this 18th day of January, 1993
in Houston, Texas, by and between BioTek Solutions, Inc., 120 B Cremona Drive,
Santa Barbara, California 93117, a corporation organized under the laws of the
state of California, hereinafter referred to as "Supplier", and Curtin Matheson
Scientific, Inc., 9999 Veterans Memorial Drive, Houston, Texas 77038, a
corporation organized under the laws of the state of Delaware, hereinafter
referred to as "CMS".
WITNESSETH
WHEREAS, Supplier desires to sell and/or market its products, and CMS
desires to purchase and promote Supplier's products for resale to customers; and
WHEREAS, the parties desire to enter into a distributorship agreement
governing the terms of their relationship.
NOW, THEREFORE, in consideration of the respective covenants of the
parties herein set forth, the parties hereto agree as follows:
1. Products.
a. The Products covered by this Agreement include that
certain instrument described in Schedule A, manufactured by or for the Supplier,
including accessories and parts and components necessary for the maintenance and
repair thereof (hereinafter the "Instrument") and those reagents, controls,
primary antibodies and accessories manufactured or produced by or for the
Supplier as described at Schedule B (hereinafter collectively referred to as the
"Reagents"). Schedules A and B may be amended from time to time by mutual
consent of the parties.
b. Supplier shall make available to CMS any improved or
updated versions and any similar or related Products under the same terms and
conditions as set forth herein.
c. For any period during which the arrangement between the
parties for distribution of the Products, as hereinafter defined, is exclusive,
Supplier shall offer to CMS in writing the right to distribute any new products
developed by Supplier during the term of this Agreement on the same terms and
conditions (other than price) as set forth herein, and CMS shall accept
distribution rights with respect to new products, if at all, in writing, within
sixty (60) days of Supplier's written notice to CMS of the availability thereof;
in the event CMS elects not to exercise such right within such period, Supplier
may distribute any new products described in Supplier's notice to third parties
on terms no more favorable than those offered to CMS.
d. The Instrument set forth on Schedule A and any improved
or updated versions thereof, the Reagents set forth on Schedule B and any
improved or updated versions thereof and any
<PAGE> 2
additional products accepted for distribution under Sections 1.b. and l.c. shall
hereinafter collectively be referred to as the "Products".
e. Supplier represents and warrants that all Reagents with
a limited shelf life are reflected on Schedule B with the useful life of each
Reagent stated in months from the date of manufacture.
f. Supplier shall ensure that spare parts necessary for the
operation and repair of any Instrument furnished hereunder shall be available
for purchase by CMS's customers for a period of five (5) years after date of
delivery of the Instrument in question to CMS's customers.
g. Supplier agrees to and shall provide required Material
Safety Data Sheets for any Reagent containing hazardous chemicals as required by
Federal, state or local law.
2. Grant of distributorship.
a. Upon the terms and subject to the conditions hereinafter
set forth, Supplier hereby appoints CMS and CMS accepts the appointment as the
exclusive distributor of the Products in the Territory during the term of this
Agreement. Except as otherwise provided in Section 3.a.(ii), Supplier reserves
no right to sell and distribute Products in the Territory, and CMS shall have no
right to sell or distribute Products outside of the Territory.
b. The Territory in which CMS has the rights described in
Section 2.a. hereof to distribute the Products shall be the fifty (50) United
States of America its territories and possessions.
c. For any period during which the arrangement between the
parties for distribution of Products is exclusive, CMS shall not sell any
automated immunohistochemistry instrument which performs multiple functions and
which is directly competitive with the instrument described on Schedule A hereto
or any reagents or controls which are intended for use in connection therewith.
3. Conduct of CMS.
a. CMS shall make good faith commercial efforts to promote,
distribute and sell the Products during the term. Specifically, CMS shall make
good faith commercial efforts to purchase from Supplier such number of
Instruments within such contract periods (the "Contract Period(s)") as are set
forth below:
<TABLE>
<CAPTION>
Contract Period (in months from date of Estimated number of Instruments to be
execution of this Agreement) (any purchased by CMS from Supplier
partial calendar month shall be month 1)
- -----------------------------------------------------------------------------------
<S> <C>
1 through 15 [*]
- -----------------------------------------------------------------------------------
16 through 27 [*]
- -----------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<S> <C>
28 through 39 [*]
- -----------------------------------------------------------------------------------
40 through 51 [*]
- -----------------------------------------------------------------------------------
52 through 63 [*]
- -----------------------------------------------------------------------------------
</TABLE>
(i) The foregoing shall constitute non-binding targets. CMS will be
considered to have achieved each such target if it purchases from Supplier [*]
in each of the respective Contract Periods. For purposes of this Section
3.a.(i), an Instrument shall be deemed purchased when a firm purchase order has
been received by Supplier from CMS. (ii) Should CMS fail to purchase [*] of the
term of this Agreement, Supplier may, within thirty (30) days thereof, as its
sole and exclusive remedy for CMS's failure to purchase the targeted number of
Instruments, give CMS sixty (60) days prior written notice of its intention to
sell the Products in the Territory, either directly or through third parties
provided that the terms of sale are no more favorable than those available to
CMS. If Supplier exercises such option within the period of time set forth
above, CMS may either continue to distribute the Products on a non-exclusive
basis or may elect to terminate the Agreement by providing thirty (30) days
prior written notice to Supplier within thirty (30) days of receipt of
Supplier's notice to CMS. Such termination shall be without liability to either
party, except for such other liabilities as may otherwise specifically be set
forth in this Agreement or under law. (iii) Notwithstanding the foregoing, if
CMS is unable to purchase the required number of Instruments in any Contract
Period due to an act or omission of Supplier or due to any event or events which
are beyond its reasonable control (as per paragraph 11), such failure shall not
constitute grounds for Supplier to sell the Products in the Territory, as
aforesaid. In the event that CMS is unable to meet its targeted Instrument
purchases for any Contract Period due to the failure of Supplier to deliver the
quantities of the Instruments required to meet such targeted levels after
Supplier's receipt of firm purchase orders, CMS's obligation to meet such
minimum will be deemed to have been met. In the event that CMS is unable to meet
its targeted Instrument purchases [*] Contract Periods due to Supplier's failure
to deliver the quantities of Instruments required to meet such targets, Supplier
agrees to enter into good faith negotiations to establish new targeted
Instrument purchase requirements that Supplier has the ability to supply. (iv)
In the event Supplier and CMS are unable to agree on new targeted Instrument
purchases, the new levels will be the number of Instruments that supplier was
actually able to supply during the prior Contract Period plus [*]. If Supplier
is unable to sell to CMS sufficient Instruments to permit CMS to meet the
targeted Instrument purchases for [*] Contract Periods, then CMS may terminate
this Agreement by giving Supplier written notice of such termination effective
thirty (30) days after the date notice is delivered or mailed in accordance with
Section 12. Such termination shall be without liability to either party, except
for such other liabilities as may otherwise specifically be set forth in this
Agreement.
b. At Supplier's request, CMS shall submit to Supplier such
reports as are customarily provided to suppliers similarly situated with
Supplier at CMS's standard charge for such reports then in effect.
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<PAGE> 4
c. CMS shall make purchases of Products hereunder by
submitting firm purchase orders to Supplier.
d. Upon execution of this Agreement, CMS shall issue to
Supplier a purchase order for thirty-five (35) Instruments, which shall be
delivered by Supplier in accordance with the provisions of Section 4.a. of this
Agreement. Within a reasonable time following the execution of this Agreement,
CMS shall issue purchase order(s) for such quantities of Reagents as may be
recommended by Supplier in order to fill orders from all former customers of
Supplier (referred to in Section 4.r of this Agreement) in a timely fashion.
e. CMS shall provide to Supplier qualified leads for sales
or placements of the instruments in the Territory in an electronic mail format
which is mutually acceptable to the parties. To that end, CMS will make
available to Supplier CMS's standard software to enable Supplier to communicate
only with designated CMS employees via electronic mail and by which CMS
employees can communicate qualified leads to Supplier. Supplier's right to use
CMS's software shall terminate upon the expiration or termination of this
Agreement, howsoever arising. Supplier shall not assign, transfer, copy,
duplicate or make any use of CMS's software except as specifically set forth in
this Agreement.
f. CMS may return, for full credit or replacement, any
Product for which CMS is required to give a customer credit or replacement
Product due to a defect or deficiency in the Product, provided that CMS first
obtains from Supplier a returned goods authorization which shall not be
unreasonably withheld or delayed by Supplier.
g. CMS shall provide to Supplier in writing, after site
visits to the accounts, account profile information on five hundred (500)
accounts selected by CMS and Supplier within [*] of the execution date of this
Agreement, to include such information as the parties may mutually agree.
h. During each Contract Period, CMS shall disburse [*] for
purposes of Product promotion and training which shall include, at CMS's
discretion, out-of-pocket costs for attendance at appropriate trade shows and
conventions, out-of-pocket costs (other than those of Supplier) incurred at
Product training sessions, seminars and workshops and in connection with the
preparation of miscellaneous Product literature, which literature shall be
reviewed and approved, in advance, by Supplier.
4. Conduct of Supplier.
a. Supplier shall ship promptly, but in any event not later
than thirty (30) days from receipt of order, CMS's orders for Reagents. Supplier
shall ship promptly, but in any event not later than sixty (60) days from
receipt of order, CMS's orders for Instruments; provided, however, that with
respect to CMS's initial order for Instruments, Supplier shall ship ten (10)
Instruments within thirty (30) days from receipt of CMS's initial order, ten
(10) Instruments within sixty (60) days of receipt of CMS's initial order and
fifteen (15) Instruments within ninety (90) days of receipt of CMS's initial
order. Time is of the essence with respect to Supplier's shipments of Products.
All orders shall be shipped f.o.b. Santa
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<PAGE> 5
Barbara, California, at which point title and risk of loss shall pass from
Supplier to CMS, freight and insurance prepaid, to such CMS location(s) as CMS
may designate. Supplier shall cooperate with CMS in arranging for drop shipments
of Product to customers on a case by case basis.
b. Supplier shall give at least ninety (90) days' prior
written notice of increase of price of any Product and honor CMS's existing
purchase orders at the prices in effect immediately prior to the effective date
of each price increase. Price increases shall be effective only on the first day
of any calendar quarter immediately following the expiration of the notice
period.
c. Supplier shall notify CMS immediately in writing should
Supplier become aware of any defect or condition which renders any of the
Products in violation of any statute or regulation, or which in any way alters
the specifications or quality of the Products.
d. Supplier shall ship Reagents so that [*] the shelf
life described in Schedule B will be remaining at the time of receipt at CMS's
facility, or at CMS's customer's facility, if drop-shipped. If requested to do
so by CMS, Supplier shall take back for full invoice credit plus shipping
charges any dated Reagents shipped contrary to this provision.
e. Supplier shall execute and abide by the terms of CMS's
Continuing Guaranty, a copy of which is attached hereto as Schedule C and
incorporated herein by reference, as modified herein. The terms and provisions
of the Continuing Guaranty shall survive the termination of this Agreement.
f. Supplier shall provide CMS with a Certificate of
Insurance which meets the requirements of Section D of the Continuing Guaranty
on or prior to execution of this Agreement. Supplier shall provide CMS with
renewal insurance certificates in the form mandated by Section D of the
Continuing Guaranty during the term of this Agreement, without demand therefor
by CMS. Notwithstanding any provision of the Continuing Guaranty to the
contrary, the amount of insurance required of Supplier pursuant to the
Continuing Guaranty during the first Contract Period shall be [*]; for the next
subsequent Contract Period, [*]; for all subsequent Contract Periods of the
term of this Agreement, [*].
g. Supplier shall provide to CMS's sales personnel training
in the use, technical properties, sale, competitive features and benefits of the
Products as may be reasonably requested from time to time by CMS. For purposes
of such training, Supplier shall make available at Supplier's expense, all
necessary, qualified instructors, appropriate types and quantities of training
materials and Products. CMS shall provide transportation and lodging expenses
for CMS personnel for the training of CMS sales personnel by Supplier. (i)
Within one-hundred twenty (120) days following the execution of this Agreement,
Supplier shall provide and CMS shall organize such training in such format as
may be agreed upon between the parties in advance, to CMS sales personnel at no
fewer than five (5) CMS branch locations. (ii) Additionally, at Supplier's
expense, Supplier shall provide to CMS's sales personnel at CMS's National Sales
Meeting in Phoenix, Arizona on February 14, 1993, a qualified instructor, a
video presentation concerning Supplier's Products and organization and
appropriate types and quantities of training materials, including, Product
literature, Product competitive matrices, cost-per-test data, and introductory
sales training manual materials as may be agreed between the parties. Supplier
will make
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<PAGE> 6
the presentation as outlined in CMS's December 4, 1992 "kickoff" memorandum to
Supplier. Supplier shall provide CMS with adequate opportunity to review and
approve all such written and videotaped materials in advance. CMS's approval
shall not be unreasonably withheld or delayed. (iii) Supplier shall provide and
CMS shall organize no fewer than [*] per Contract Period on the topic of
immunohistochemical methods to CMS customers, prospective customers and
user-groups at such locations as the parties mutually determine, in their
reasonable business judgment, may potentially offer the most beneficial
commercial opportunities. CMS shall within [*] after the execution of this
Agreement purchase [*] demonstration instruments (the "Demonstration Units") at
CMS's demonstration laboratories. Supplier shall sell Demonstration Units to CMS
at a cost of [*] and shall install, maintain and provide upgrades for same
sufficient to insure that the instruments function at a level which is at least
equal at all times to the most advanced model available for purchase by CMS from
Supplier.
h. Supplier shall provide technical support to CMS's sales
personnel and promptly provide to CMS such additional types and quantities of
technical information developed or acquired by Supplier from time to time as may
reasonably be expected to be of assistance to CMS in fulfilling its obligations
hereunder. Supplier will provide at its own expense a toll-free long distance
telephone service for customer and CMS sales personnel support. Supplier has
represented to CMS that on or before July 1, 1993, Supplier shall have
established at least [*] regional technical centers for the western,
mid-western, eastern and southern regions, respectively, with each such center
to be staffed by Supplier with a qualified general manager and staff scientist.
Supplier's regional technical centers shall provide all reasonable assistance to
purchasers of the Products and to CMS sales personnel with all technical aspects
of the Products and with Instrument installation, care and use. CMS is entering
into this Agreement in reliance on such representation.
i. Supplier shall provide, at its expense, reasonable
quantities of such instruction and training manuals and point of sale literature
as may from time to time be requested by CMS for use in connection with the
distribution and sale of the Products. Subject to CMS's prior written approval,
the CMS name will be incorporated in Supplier's advertising literature for the
Products intended for distribution by CMS sales representatives. If requested to
do so by CMS, Supplier shall furnish CMS with suitable copy and photographs for
use by CMS in cataloging the Products.
j. Supplier shall be responsible for the appointment of
qualified service representatives and shall bear all costs associated with the
service and repair of the Instruments, and shall ensure that authorized
Instrument service representatives will be available on-site at the customer's
facility within 48 hours or within industry standard, whichever is shorter,
following request for any Instrument repair which cannot be resolved through the
exchange of parts via mail between the customer and Supplier.
k. Any Products owned by CMS and rendered unsalable, in
CMS's reasonable opinion, due to a change in any Product specification,
discontinuation or elimination by Supplier of any Product from its product
offering, release by Supplier of any improved or updated version of any Product,
shall be repurchased from CMS by Supplier within thirty (30) days following
CMS's request
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<PAGE> 7
therefor at the price paid for such Product(s) by CMS. Supplier shall
additionally pay for return freight and related transportation and insurance
charges for all such Products.
l. (i) For each calendar quarter following the execution
hereof, CMS shall carry in stock an average inventory of Reagents to provide
adequate and timely service to CMS's customers at [*] service level as reflected
on CMS's Key Supplier (SA385) Report. CMS shall review its inventory at least
once in each calendar quarter and identify those Reagents which it considers, in
its absolute discretion, to be slow-moving. CMS shall notify the Supplier in
writing, describing such Reagents, and Supplier shall, exchange all such
Reagents for Reagents which are selected by CMS and Supplier shall pay all
associated freight therefor. (ii) CMS shall maintain in its inventory at least
such number of Instruments as may be equal to the average number of Instruments
installed by Supplier during the previous [*].
m. Supplier shall, at its sole cost and expense, provide
appropriate personnel, Instruments and Reagents to qualified prospective
customers identified by CMS and for conducting parallel performance studies and
Product evaluations as may be reasonably requested by qualified prospective
customers. Qualification of customers shall be as mutually agreed by the
parties. CMS will assist Supplier in conducting the customer evaluations.
Supplier reserves the right to affix a marking to such Instruments indicating
that such Products are "For Demonstration Purposes Only." Such marking shall not
be removed or obliterated by CMS.
n. Supplier agrees to bar code the Reagents at the lowest
saleable unit using symbology 3 of 9 in accordance with Health industry Bar Code
("HIBC"). Additionally, where applicable, Reagents will be bar coded to include
standard unit, alternate unit, lot number and expiration date.
o. Supplier shall notify CMS in writing of any special
requirements for the storage and handling of the Products and any laws, rules,
regulations, orders, ordinances and requirements of all local, state and federal
governments and agencies having jurisdiction over the Products, including, but
not limited to the requirements of the Food and Drug Administration which may
impact CMS's obligations with respect to the distribution and sale of the
Products.
p. Supplier shall provide to CMS qualified leads which may
come to its attention for sales or placements of the Instruments in the
Territory in a format which is mutually acceptable to the parties.
q. Supplier shall provide CMS with special pricing: (i) on
any large quantity order for Products which may be requested by any CMS
customer; (ii) in connection with customer leasing deals; (iii) in connection
with Reagent rental deals and (iv) and where required to meet competition. With
respect to Product sales which arise pursuant to the provisions of Sections 4
(i), (ii), (iii) and (iv), Supplier guarantees to CMS a gross profit on each
Instrument [*] and a gross profit on each Reagent [*], which shall be debited
from payments otherwise due from CMS to Supplier, except that Supplier shall
pre-approve in writing (in such format as the parties may mutually agree) any
reduction in the attached Schedules A or B prices as may be required to
guarantee
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<PAGE> 8
CMS such gross profit percentages. Notice of the acceptance or rejection of each
such request for pre- approval shall be communicated by Supplier to CMS promptly
following CMS's request therefor.
r. Upon execution of this Agreement, Supplier shall provide
CMS with all necessary and appropriate information concerning all of Supplier's
existing customers for the Products in the Territory which customers shall
thereafter be the customers of CMS. Supplier shall cooperate with CMS in
notifying each of the former customers of Supplier of the appointment of CMS as
Supplier's exclusive distributor of the Products in the Territory and with the
orderly transition of such customer accounts to CMS.
s. For each month of the first Contract Period, Supplier
shall make available appropriate employees to meet with CMS for the purpose of
general business review discussions either via telephone conference or personal
meetings, as the parties may subsequently agree.
5. Price and Payment Terms.
a. Supplier shall supply and ship Products at the prices
and subject to the discounts shown on Schedules A and B hereto for the duration
of the first Contract Period. Thereafter, such prices may be reduced by
Supplier, but may be increased only according to the terms and provisions of
this Agreement and such discounts shall not be decreased.
b. Supplier represents and warrants that the price and
terms pursuant to which the Products are and will be sold to CMS pursuant to
this Agreement shall be no less favorable than those made available to the
Supplier's most favored distributors, if any.
c. CMS shall pay for Product orders within thirty (30) days
from the date of delivery by Supplier during the first Contract Period and
within forty-five (45) days from the date of delivery in all subsequent Contract
Periods; provided, however, that CMS shall not be in breach of this Agreement
unless payment is received by Supplier greater than fourteen (14) days overdue.
Notwithstanding any provision set forth in this Agreement to the contrary, CMS
shall pay for its initial order for the first thirty-five (35) Instruments
described in Section 3.d. hereof at the time the purchase order is issued to
Supplier.
d. CMS shall be entitled to resell Products on such terms
as it may, in its sole discretion, determine, including, without limitation,
price, returns, credit and discounts.
6. Term and Termination.
a. The initial term of this Agreement shall be for a period
of five (5) years, plus an initial ninety (90) day launch period from the date
this Agreement is executed on behalf of CMS, and, unless notice shall be given
by one party to the other within ninety (90) days of such anniversary date
(which shall be calculated from the ninety-first (91st) day following the
execution date hereof) and thereafter subsequent annual anniversary dates, shall
be automatically renewed for additional and successive terms of one (1) year
each.
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<PAGE> 9
b. This Agreement shall terminate immediately upon written
notice by the non-breaching party if either party (i) commits or suffers an act
of bankruptcy or insolvency or, except as otherwise provided in this Agreement,
(ii) fails to cure any material breach in the provisions of this Agreement
within thirty (30) days after receipt of written notice of such breach, except
that any breach including the payment of money must be cured within fourteen
(14) days after the due date of any such payment, unless such payment of money
is then being disputed in good faith.
c. On the termination or non-renewal of this Agreement,
howsoever arising, Supplier shall continue to honor CMS's purchase orders for
Products up to the effective date of termination or non-renewal.
d. The rights and duties of each party under this Agreement
and the Schedules hereto in respect of performance prior to termination or
non-renewal shall survive and be enforceable in accordance with the terms of
this Agreement.
e. Upon termination or non-renewal of this Agreement
Supplier shall repurchase from CMS, at CMS's request, and at CMS's cost
therefor, such Products as are then owned by CMS. Delivery of Products
repurchased from CMS hereunder shall be f.o.b. CMS's premises.
7. Right of First Refusal
If Supplier desires to enter into a transaction resulting in
the sale by Supplier of all or substantially all of its stock or assets,
Supplier shall first give written notice of such intention to CMS, which shall
have the option to purchase such interest at a price and on such terms and
conditions as may be mutually worked out between the parties in good faith. If
the parties are unable in good faith to agree on mutually satisfactory terms for
the proposed sale within [*] after the receipt by CMS of such notice or, if
prior to the expiration of [*] period CMS declines to purchase, then
Supplier shall have the right to enter into such a transaction with any third
party upon such terms and conditions as may be agreed by Supplier and any such
third party.
8. Warranties.
a. In addition to the warranties of Supplier set forth in
this Agreement and in the Continuing Guaranty which is attached hereto as
Schedule C, Supplier warrants that each of the Products will conform to
specifications set forth in Product literature prepared by or on behalf of
Supplier and that the Products will comply and be manufactured, assembled,
packaged, sterilized (if applicable), labeled and shipped in compliance with all
applicable Federal, state and local laws, orders, regulations and standards.
b. Supplier and CMS shall extend to customers Supplier's
Warranties for the Instruments and Reagents which are set forth on Schedule D.
Supplier shall not modify any Product Warranty without CMS's prior written
consent, which consent shall not be unreasonably withheld or delayed. Supplier
warrants and represents that the Products will perform in accordance with, and
that Supplier shall strictly comply with, the terms of Supplier's Product
Warranties.
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separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 10
9. Trademarks.
a. Supplier hereby grants to CMS the royalty-free right to
use the Supplier's trademarks on the Products during the term of this Agreement,
it being expressly understood that CMS shall discontinue the use of such
trademarks upon the termination of this Agreement (except in connection with the
distribution and sale of CMS's remaining inventory of Products in the event that
CMS does not elect to exercise its rights under Section 6.e. hereof) and
disclaims any rights in the trademark other than the said license.
b. Supplier recognizes that CMS is the owner of the
trademarks and tradenames denoting CMS or CMS products which it may elect to use
in the promotion and sale of the Products and that Supplier has no right or
interest in such trademarks or tradenames.
10. Confidentiality. Each party acknowledges the confidential
nature of information that may be disclosed hereunder (including, but not
limited to, the names of CMS's customers) and agrees to retain such information
in confidence. This provision shall survive the termination of this Agreement
for a period of two (2) years.
11. Force Majeure. The obligations of either party to perform
under this Agreement shall be excused during each period of delay caused by such
matters as strikes, shortages of power or raw material, government orders or
acts of God, which are reasonably beyond the control of the party obligated to
perform. The affected party shall make best efforts to remedy the effects of
such force majeure. Any force majeure event shall not excuse performance by the
party but shall delay performance, unless such force majeure continues for a
period in excess of ninety (90) days. In such event, the party seeking
performance may cancel its obligations hereunder.
12. Notices. Any notice required by this Agreement shall be deemed
sufficient if sent by facsimile or three (3) days after being sent by certified
mail, postage prepaid, to the party to be notified at the address set forth in
the initial section of this Agreement until notice of a different address is
supplied.
13. Entire Agreement. This Agreement, including the Schedules
hereto, constitutes the entire Agreement between the parties relating to the
subject matter hereof and supersedes all prior agreements and understandings,
whether written or oral, between the parties with respect to such subject
matter. In ordering and delivery of the Products, the parties may employ their
standard forms, but nothing in those forms shall be construed to modify or amend
the terms of this Agreement.
14. Applicable Law. This Agreement shall be governed by the laws
of the state of Texas (excluding its conflict of laws principles) where
jurisdiction and venue shall lie.
15. Assignments. This Agreement shall not be assigned or
transferred by Supplier either voluntarily or by operation by law without the
prior written consent of CMS.
-10-
<PAGE> 11
16. Amendment. No amendment or modification of the terms of this
Agreement shall be binding on either party unless reduced to writing and signed
by an authorized officer of the party to be bound.
17. Existing Obligations. Each party represents and warrants that
the terms of this Agreement do not violate any existing obligations or contracts
of such party. Each party shall defend, indemnify and hold harmless the other
party from and against any and all claims, demands, liabilities and causes of
action which are hereafter made or brought against such other party which allege
any such violation.
18. Relationship of the Parties. Nothing herein contained shall
be deemed to be or be construed as constituting either party as the agent or
partner of the other.
19. Successors and Permitted Assigns. This Agreement shall inure
to the benefit of and be binding upon the parties hereto and their permitted
successors and assigns.
20. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original for all purposes.
21. Attorneys' Fees. If any action is commenced to enforce any of
the terms of this Agreement, the prevailing party will have the right to recover
its reasonable attorneys' fees and costs of suit.
-11-
<PAGE> 12
IN WITNESS WHEREOF, the parties have, by their duly authorized
officers, executed this Agreement on the dates set forth below.
BIOTEK SOLUTIONS, INC.
By: /s/ ELLIOT FRIEDMAN
-------------------------------
Elliot Friedman, President
Date: 1-14-93
-------------------------------
CURTIN MATHESON SCIENTIFIC, INC.
By: /s/ JOHN M. DANIELS
-------------------------------
John M. Daniels, Vice President
Clinical Marketing
Date: 1-18-93
-------------------------------
-12-
<PAGE> 13
[ * ]
TM -- 1000 Techmate 1000
<TABLE>
<CAPTION>
APPROVAL % OFF
LEVEL LIST PRICE GP% GGP%
- ------------------ ------ ----- ---- ----
<S> <C> <C> <C> <C>
[*] [*] [*] [*]
CMS REPS [*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
- --------------------------------------------------------------------------
[*] [*] [*] [*]
[*] [*] [*] [*]
BIOTEK GM [*] [*] [*] [*]
CMS REGION MGR [*] [*] [*] [*]
CMS AREA VP [*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
</TABLE>
BELOW [*] WILL BE HANDLED ON A CASE BY CASE BASIS
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 14
SDK601 STANDARD SECONDARY DETECTION KIT
(USE FOR ALL REAGENTS/DISPOSALS)
<TABLE>
<CAPTION>
% OFF
APPROVAL LEVEL LIST PRICE GP% GGP%
- --------------------- ----- ----- ---- -----
<S> <C> <C> <C> <C>
[*] [*] [*] [*]
CMS REPS [*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
- -------------------------------------------------------------------------------
[*] [*] [*] [*]
BIOTEK GM [*] [*] [*] [*]
CMS REG MGR [*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
- -------------------------------------------------------------------------------
[*] [*] [*] [*]
BIOTEK GM [*] [*] [*] [*]
CMS AREA VP [*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
- -------------------------------------------------------------------------------
[*] [*] [*] [*]
ELLIOT FREIDMAN [*] [*] [*] [*]
CMS VP SALES [*] [*] [*] [*]
CMS VP MKTNG [*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
</TABLE>
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 15
<TABLE>
<CAPTION>
CATALOGUE SUGGESTED
NUMBER DESCRIPTION CMS COST LIST
- --------- ------------------------------- -------- ---------
<S> <C> <C> <C>
TM1000 TechMate 1000 Immunostainer (1) [*] [*]
</TABLE>
(1) see attached technical specification sheet
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 16
<TABLE>
<CAPTION>
CATALOGUE SUGGESTED
NUMBER DESCRIPTION CMS COST LIST
- --------- ---------------------------------------------- -------- ---------
<S> <C> <C> <C>
REAGANTS
SDK601 Standard Secondary Detection Kit (600 tests) $ [*] $ [*]
SDK602 Overnight Secondary Detection Kit (600 tests) $ [*] $ [*]
SDK603 ER/PR Secondary Detection Kit (600 tests) $ [*] $ [*]
ADB250 Antibody Dilution Buffer (250 ML) $ [*] $ [*]
IPE100 IPENZ Enzyme Kit (3 Bottle Set) $ [*] $ [*]
NEG025 Negative Control (25 ML Bottle) $ [*] $ [*]
PAB101 Actin (Pan Muscle) $ [*] $ [*]
PAB102 Actin (Smooth Muscle) $ [*] $ [*]
PAB103 Chromogranin $ [*] $ [*]
PAB104 Collagen Type IV $ [*] $ [*]
PAB105 Desmin $ [*] $ [*]
PAB106 Epithelial Membrane AG $ [*] $ [*]
PAB107 Factor Viii Related AG $ [*] $ [*]
PAB108 GFAP $ [*] $ [*]
PAB109 HMB 45 $ [*] $ [*]
PAB110 Kappa Light Chain $ [*] $ [*]
</TABLE>
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 17
<TABLE>
<S> <C> <C> <C>
PAB111 Keratin (Pan) $ [*] $ [*]
PAB112 L-26 (CD20) $ [*] $ [*]
PAB113 Lambda Light Chain $ [*] $ [*]
PAB114 LCA (CD45) $ [*] $ [*]
PAB115 Leu7 $ [*] $ [*]
PAB116 Leu M1 (CD15) $ [*] $ [*]
PAB117 Lysozme $ [*] $ [*]
PAB118 Neurofilaments $ [*] $ [*]
PAB119 Neuron Specific Enolase $ [*] $ [*]
PAB120 Prostatic acid Phosphatase $ [*] $ [*]
PAB121 Proliferating Cell Nuclear AG $ [*] $ [*]
PAB122 S-100 $ [*] $ [*]
PAB123 UCHL-1 $ [*] $ [*]
PAB124 Vimentin $ [*] $ [*]
</TABLE>
-2-
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the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 18
DISPOSABLES
<TABLE>
<S> <C> <C> <C>
RWP101 Reagent Wicking Pads (Box of 50) $ [*] $ [*]
CTL100 Control Checkerboard Slides (Box of 100) $ [*] $ [*]
POP075 Probe On Plus Slides (Case of 1440) $ [*] $ [*]
POP130 Double Thick Probe On Slides (Gross) $ [*] $ [*]
</TABLE>
(1) Shelf life of all reagents guaranteed for one year from date of
delivery at CMS when stored according to instructions.
-3-
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 19
Curtin Matheson Scientific, Inc.
CONTINUING GUARANTY
A. BIOTEK SOLUTIONS, INC. referred to as ("Seller"), having its principal
office and place of business at 120 B Cremona Dr., Santa Barbara, CA 93117,
hereby guarantees that all Products (including their packaging, labeling and
shipping) comprising each shipment or other delivery hereinafter made by
Seller (hereinafter referred to as "Products") to or on the order of Curtin
Matheson Scientific, Inc., a Delaware corporation, having its principal
place of business at 9999 Veterans Memorial Drive, Houston, Texas 77032, or
to any of its branches, divisions, subsidiaries or its affiliate, Matheson
Science, Inc., or any of their customers (hereinafter collectively referred
to as "CMS"), are, as of the date of such shipment or delivery, in
compliance with applicable federal, state and local laws, and any
regulations, rules, declarations, interpretations and orders issued
thereunder, and conform to representations and warranties made by Seller in
its advertising, product labeling and literature.
B. Further, with respect to any Product that is privately labeled for CMS,
Seller agrees to make no change in such Products or the CMS artwork on the
labeling or packaging relating thereto without first obtaining the written
consent of CMS. Seller recognizes that CMS is the owner of the trademarks
and trade names connoting CMS which it may elect to use in the promotion and
sale of such private label Products and that Seller has no right or interest
in such trademarks or trade names. Seller shall periodically analyze and
review packaging and labeling for any Products which are private labels for
CMS to ensure conformity with the provisions of paragraph A hereof and the
adequacy of Product warnings and instructions.
C. Seller hereby agrees that it will reimburse CMS for all reasonable
out-of-pocket costs and expenses incurred in connection with any product
corrective action or recall relating to the Products which is requested by
Seller or required by any governmental entity.
D. Seller agrees to procure and maintain on an occurrence form basis product
liability insurance with respect to the Products and contractual liability
coverage relating to this Guaranty, with Insurer(s) having Best's rating(s)
of 8 or better, naming CMS as an additional Insured (Broad Form Vendors
Endorsement), with minimum limits in each case of $1,000,000. Seller shall
promptly furnish to CMS a certificate of insurance and renewal certificates
of insurance evidencing the foregoing coverages and limits. The insurance
shall not be canceled, reduced or otherwise changed without providing CMS
with at least ten (10) days prior written notice.
E. Seller agrees to and shall indemnify and hold harmless CMS (and with respect
to Subparagraph E.(i) below, CMS customers) from any and all claims,
actions, costs, expenses and damages, including attorneys fees and expenses
arising out of: (i) any actual or alleged patent, trademark or copyright
infringement in the design, composition, use, sale, advertising or packaging
of the Products; (ii) any breach of the representations or warranties set
forth in this Guaranty, (iii) the sale or use of the Products where such
liability results from the act of omission of Seller (whether for breach of
warranty, strict liability in tort, negligence or otherwise).
F. Seller agrees to and shall provide to CMS Material Safety Data Sheets and
other information concerning any Product as required by then applicable
federal, state or local law.
G. Seller agrees to and shall accept, at its facility, all of CMS's unsold or
expired Products containing hazardous chemicals, materials or substances for
disposal, recycling or use. CMS shall be responsible for packing and
transportation costs to Seller. Seller shall be responsible for all other
costs, including, without limitation, any costs associated with Seller's
disposal, recycling or use.
H. The representations and obligations set forth herein shall be continuing and
shall be binding upon the Seller and his or its heirs, executors,
administrators, successors and/or assigns, whichever the case may be, and
shall inure to the benefit of CMS, its successors and assigns and to the
benefit of its officers, directors, agents and employees and their heirs,
executors, administrators and assigns.
I. The agreements and obligations of Seller set forth in this Guaranty are in
consideration of purchases made by CMS from Seller and said obligations are
in addition to (and supersede to the extent of any conflict) any obligations
of Seller to CMS or CMS to Seller. The obligations of Seller under this
Guaranty shall survive and be enforceable in accordance with its terms.
SELLER
BIOTEK SOLUTIONS, INC.
- --------------------------------------------------------------------------------
Full Corporate Name or Name Under Which Seller's Business is Conducted
/s/ ELLIOT P. FRIEDMAN
- --------------------------------------------------------------------------------
Signature of Authorized Representative
PRESIDENT
- --------------------------------------------------------------------------------
Title
ELLIOT D. FRIEDMAN
- --------------------------------------------------------------------------------
Printed Name
January 9, 1993
- --------------------------------------------------------------------------------
Date
CURTIN MATHESON SCIENTIFIC, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Title
<PAGE> 20
ADDENDUM AND ADVANCE REPAYMENT AGREEMENT
This Addendum and Advance Repayment Agreement (the "Addendum"), made
and entered into by and between Curtin Matheson Scientific, Inc., a Delaware
corporation ("CMS") and BioTek Solutions, Inc., a California corporation
("BioTek"), hereby recites:
WHEREAS, the parties to this Addendum executed that certain
Distribution Agreement dated January 18, 1993, as amended (the "Agreement"); and
WHEREAS, the parties to this Addendum believe that it is in their best
interests to modify and amend the Agreement; and
WHEREAS, on November 3, 1994, CMS made a business advance to BioTek of
the sum of [*], which Biotek promised to pay to CMS by or before December 31,
1994 (the "Advance"); and
WHEREAS, to date, BioTek has failed and/or refused to repay the
Advance; and
WHEREAS, the parties to this Addendum desire to make provision for the
repayment of the Advance.
NOW, THEREFORE, for and in consideration of the premises and the mutual
promises, covenants and agreements herein contained, the parties to this
Addendum agree as follows:
1. Modification to Inventory Provision of Agreement. Paragraph 4(I)(ii)
of the Agreement shall be deleted and the following shall be inserted in its
stead:
Notwithstanding any provision set forth in the Agreement or in this
Addendum to the contrary, CMS shall be required to maintain in its
inventory such number of Instruments as it may deem appropriate to
conduct business as contemplated by the Agreement, as modified by this
Addendum, but in any event not less than [*] Instruments to be used for
demonstration and/or evaluation purposes.
From the date of execution of this Addendum through April 30, 1995, the
maximum number of Instruments which CMS shall be obligated to carry as
its inventory investment in BioTek Instruments for each calendar month
shall be a number equal to [*] the average number of Instruments billed
(for final sale) by CMS to its customers during the immediately
preceding three calendar months.
For the period beginning May 1, 1995 and thereafter during the term of
the Agreement, the maximum number Instruments which CMS shall be
obligated to carry as its inventory investment in BioTek Instruments
for each calendar month shall be a number equal to [*] the
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 21
average number of Instruments billed (for final sale) by CMS to its
customers during the immediately preceding three calendar months.
With respect to any number of Instruments which CMS may have in its
inventory (including new, demonstration and evaluation units) in any
calendar month in excess of the product of the applicable formula
described above, beginning with CMS's second scheduled payment to
BioTek in February, 1995, CMS shall be entitled to deduct from amounts
otherwise payable to BioTek amounts equal to the number of excess
Instruments multiplied by the then-current cost of each.
Notwithstanding any provision set forth herein to the contrary, to the
extent that CMS's anticipated second February 1995 payment to BioTek
for Instruments and Reagents is insufficient to provide for such excess
and/or in the event that any unrecovered excess remains upon
termination or non-renewal of the Agreement, BioTek agrees to make
immediate payment of the net difference to CMS.
Example: Assume that CMS billed (for final sale) to customers 8
Instruments in October, 9 Instruments in November and 11
Instruments in December, for a average (rounded) of 9 units
per calendar month during the period. Applying the formula,
that number would be multiplied by three, for [*]. If on
the next succeeding payment date, CMS's records reflected
that it had a total of 35 Instruments (including new,
demonstration and evaluation units) in its inventory, CMS
would be obligated to carry as its inventory investment
[*], and CMS would be permitted to deduct from payments
otherwise due to BioTek an amount equal to the cost
associated with [*] Instruments, as further described
above.
In any calendar month in which the actual total number of Instruments
which CMS has in its inventory (including new, demonstration and
evaluation units) is less than the product of the applicable formula
described above, Supplier shall, at its expense, drop ship any
Instruments ordered by CMS during the subject calendar month directly
to CMS's customers in accordance with CMS's directions.
For purposes of this Addendum, the calculation of the total actual
Instruments in CMS's inventory for each calendar month shall be made on
each payment date and the determination of CMS with respect to such
calculations shall be final.
2. Modification to Payment Terms of Agreement. Paragraph 5(c) of the
Agreement shall be deleted and the following shall be inserted in its stead:
Except as otherwise set forth in this Addendum, for Instruments and
Reagents billed to CMS from BioTek from the date of execution of this
Agreement through June 30, 1995, CMS will pay BioTek (net of deductions
described above) within fifteen (15) days from the date of invoice. For
Instruments and Reagents billed to CMS from BioTek on and after July 1,
1995, CMS will pay BioTek (net of deductions described above) within
forty-five (45) days from the date of invoice;
-2-
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separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 22
provided, however, that CMS shall not be in breach of this Agreement
unless payment is received by BioTek greater than fourteen (14) days
overdue.
3. BioTek's Advance Repayment Obligations.
BioTek promises to pay to the order to CMS the principal [*] with
interest on the unpaid principal from January 1, 1995 until maturity at
a rate equal to "prime" plus [*]. "Prime" shall mean the prime lending
rate established from time to time by Texas Commerce Bank of Houston,
Texas, adjusted monthly as of the fifteenth day of each month during
which this obligation shall be outstanding and not yet due. Overdue
principal and (to the extent permitted by law) overdue interest shall
bear interest payable at the highest rate permissible by applicable
law. Principal and accrued interest thereon will be payable in
installments as follows:
a. Interest accrued on the principal outstanding from January 1,
1995 to the date of this Agreement plus [*] shall be payable
upon execution of this Agreement and shall be paid by BioTek
to CMS through a credit against invoices from BioTek to CMS
for Instruments and Reagents purchased by CMS under the
Agreement; and
b. [*] hereunder shall be due and payable on each of February 1,
1995 and March 1, 1995. Such amount may be paid by BioTek to
CMS through a credit against invoices from BioTek to CMS for
Instruments and Reagents purchased by CMS under the Agreement,
if then available; provided that the payment described above
shall be due and payable on each of February 1, 1995 and March
1, 1995 in any event, in coin or currency of the United
States.
c. BioTek agrees that this Advance repayment obligation shall be
governed by and construed in accordance with the laws of the
State of Texas (without regard to the conflicts of law
principles thereof).
d. Payment will be made by BioTek to CMS at 9999 Veterans
Memorial Drive, Houston, Texas 77038 or such other place as
CMS may require. BioTek may prepay the foregoing obligation,
without penalty, in whole or in part, with accrued interest to
the date of such prepayment or the amount prepaid.
4. Miscellaneous.
a. The Agreement and this Addendum shall be binding up and inure
to the benefit of the parties and their respective successors
and/or assigns.
b. The agreements and obligations of this Addendum are in
addition to and shall supersede to the extent of any conflict,
any provision in the Agreement.
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been requested with respect to the omitted portions.
<PAGE> 23
c. This Addendum shall be effective as of the date executed by
CMS and, except with respect to BioTek's Advance repayment
obligations, shall terminate or expire concurrently with the
Agreement.
IN WITNESS WHEREOF, the parties hereto have set their hands as of the
dates shown below.
CURTIN MATHESON SCIENTIFIC, INC. BIOTEK SOLUTIONS, INC.
By: /s/ J C LEWIS By: /s/ MICHAEL C. MILLER
------------------------------- -------------------------------
Title: VP-Controller Title: President & CEO
---------------------------- ----------------------------
Date: 1-12-95 Date: 1-12-95
----------------------------- -----------------------------
-4-
<PAGE> 1
EXHIBIT 10.17
DISTRIBUTION AGREEMENT
AGREEMENT entered into this 19th day of August, 1992, (the
"Agreement"), between Novocastra Laboratories Ltd., a United Kingdom corporation
("Supplier"), and Ventana Medical Systems, Inc., a California, U.S.A.
corporation ("Distributor").
WITNESSETH:
WHEREAS, Supplier makes and sells certain monoclonal antibodies, and
related products for clinical use and research use which Supplier desires to
have distributed by Distributor within a certain market and under Distributor's
own trademark and tradename.
WHEREAS, Distributor has developed an apparatus that will automate the
immunohistochemical staining process used for research and desires to use
certain of Supplier's monoclonal antibodies with apparatus.
WHEREAS, Distributor has the necessary technical expertise, sales
organization and marketing expertise to distribute said apparatus and monoclonal
antibodies; and
WHEREAS, Supplier and Distributor are desirous of entering into an
arrangement for Distributor to market and distribute such products on the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements, as herein contained, the parties agree as follows:
1. Appointment. Supplier hereby appoints Distributor as the distributor
of monoclonal antibodies and supplies as listed in Exhibit A attached hereto,
hereinafter referred to as ("Product(s)"). Distributor shall buy Products from
Supplier in concentrated format. The Distributor shall purchase from the
Supplier the concentrated monoclonal antibodies on a weight basis. The basis
shall be: dollars per milligram of active antibody protein, as stated in the
attached Exhibit A. Distributor shall repackage Products and sell same under
its own trademark and trade name. Distributor shall be allowed to sell Products
to customers throughout the world (the "Territory") for use with its own
Automated Immunohistochemistry System only, (the "Market"). The distribution
rights granted Distributor by Supplier herein are exclusive within the Market.
Distributor acknkowledges that it has no authority whatsoever to sell Product
outside of the Market. In addition, Distributor further acknowledges that
customers in the Market defined in this Agreement will use Products for
research use only, or investigational use only or for use as an in vitro
diagnostic and distributor will take all actions necessary to label Products in
compliance with applicable law and regulation as promulgated by the United
States Food and Drug Administration, ("FDA"), as may be amended from time to
time. Distributor acknowledges that it does not have authority to sell Products
for non-automated Immunohistochemical applications. The Distributor has the
right to pursue and obtain FDA In Vitro Diagnostic use labeling at the
Distributor's cost. The Supplier will assist the Distributor with any available
data which would be useful for FDA approval. The supplier will verify in
writing that they have the cell lines producing the monoclonal antibodies in
their possession and directly produce the antibodies. The Supplier will make
reasonable efforts to meet the US FDA guidelines for GMP (Good Manufacturing
Practices). The Distributor will assist the Supplier in this effort.
<PAGE> 2
2. Distributor Responsibilities. During the term of this Agreement,
Distributor shall:
a. Use its best efforts at all times to promote and increase
sale of Products within the Territory for the Market through, among other means,
advertising, demonstrations, sales promotion programs, and attendance at
exhibitions, trade shows and congresses;
b. Maintain all times inventories or products at levels
adequate to service customer demand in the Territory for the Market;
c. Maintain a qualified sales organization which actively and
effectively solicits orders for Products;
d. Inform Supplier promptly of any facts which may come to its
attention or opinions likely to be relevant in relation to the manufacture,
sale, use, titration or development of Products within or without the Market;
e. Refer promptly to Supplier all inquiries for Products from
customers outside the Market;
f. Comply with all regulations and laws applicable to a
distributor or Products;
g. Sell products only under its own trademarks and trade
names.
3. Supplier Responsibilities. During the term of this Agreement,
Supplier shall:
a. Fill Distributor orders for Products as soon as
commercially practicable, or within sixty (60) days, after receipt thereof;
b. Absent special circumstances, notify Distributor of changes
to Products specifications at least sixty (60) days prior to such change;
c. Provide Distributor with current technical information to
aid in Distributor's sales activity;
d. Handle any recall, whether required by a government agency
or Supplier.
4. Filling of Orders. Distributor will accept an annual purchase order
of Products. Products will be shipped and invoiced pursuant to such purchase
order on a quarterly basis. Distributor shall submit the first annual purchase
order within fifteen (15) days from the execution of this Agreement by both
Parties. Subsequent purchase orders shall be submitted every twelve (12) months
after the first purchase order for as long as this Agreement remains in effect.
The Supplier will accept changes to the annual purchase order on a quarterly
basis with the changes being made within ninety (90) days of the receipt of the
change request.
5. Purchase Price. (a) Each Product subject to this Agreement shall be
sold by Supplier to Distributor at the price specified in Exhibit A and be
priced in U.S. dollars. Supplier may change prices for Products sold hereunder
at the beginning of each agreement year upon ninety (90) days written notice.
The
-2-
<PAGE> 3
Supplier will limit any annual price increase to no more than ten (10%) percent
per year. The parties may agree from time to time to accelerate implementation
of price changes of Supplier's to Distributor in the case of rapidly changing
market conditions which cause the Supplier to have its cost dramatically
increased. The parties may agree from time to time to accelerate implementation
of price changes of Supplier's prices to Distributor in the case of rapidly
changing market conditions. Distributor shall be entitled to resell in the
Territory and within the Market on a exclusive basis Product on such terms as it
may, in its sole discretion determine, including without limitation, price,
returns, credits and discounts.
6. Term.
(a) This Agreement shall become effective on the date this
Agreement is signed by both parties, and hereinafter referred to as "Effective
Date". This Agreement shall terminate sixty (60) months of Effective Date. Each
twelve month period of this Agreement shall be referred to as an "Agreement
Year".
(b) This Agreement will also terminate in the event either
party is in default under this Agreement and such defaulting party fails to cure
such default, where cure is possible, within sixty (60) days of its receipt of
written notice specifying the reasons for default.
(c) In the event that Distributor demonstrates aggressive
performance in the marketing and sale of Products, the Parties will negotiate in
good faith to extend this Agreement for an Additional sixty (60) months on terms
and conditions similar to those contained in this Agreement.
(d) In the event of contract termination, Supplier will buy
back any Products shipped within the previous ninety (90) days from termination
date, provided such Product has been stored properly and the remaining shelf
life of such Product is at last ninety (90) days.
7. Agency. This Agreement shall not constitute either party as the
agent or legal representative of the other party for any purpose whatsoever.
Distributor is not granted any right or authority to create any obligation or
responsibility, express or implied in the name of Supplier in any manner
whatsoever.
8. Warranty .
(a) Supplier hereby warrants that the Products sold and
delivered hereunder will perform according to Supplier's published
specifications for each particular Product, within the shelf life period
indicated for such Product ("Warranty Period"). Distributor shall notify
Supplier of any defective Product discovered within the Warranty Period
specified herein. Supplier will promptly replace any such defective Product
conditional upon the return of the defective Product to Supplier upon request.
All shipping costs associated with any such replacement or return of defective
Products shall be at Supplier's expense. Supplier shall not be required to
replace Products which have been damaged as a result of negligence, overheating,
freezing, mishandling, or incorrect titration resulting from any party other
than Supplier or its agents.
(b) WARRANTY DISCLAIMER. THE WARRANTY SET FORTH IN PARAGRAPH
8(a) ABOVE IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING
BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF MERCHANTABILITY OR
-3-
<PAGE> 4
FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL SUPPLIER BE LIABLE UNDER ANY
PROVISION OF THIS AGREEMENT FOR ANY PROVISION OF THIS AGREEMENT FOR ANY
INCIDENTAL OR CONSEQUENTIAL DAMAGES WITH RESPECT TO THE PRODUCTS PURCHASED OR
SUPPLIED HEREUNDER.
9. Quality Assurance/Quality Control. Products sold by Supplier to
Distributor pursuant to this Agreement will have undergone the same quality
assurance/quality control procedures that Supplier undertakes for Products sold
in other markets. In addition, Distributor will perform its own quality control
procedure on Products. Such quality control procedures shall be of the same
format and depth as applied to Supplier manufactured products. At the time
Supplier and Distributor agree to the distribution of an antibody, both supplier
and Distributor will make available to each other their quality control
procedures and specifications for that particular antibody. Any future changes
to the specifications or testing procedures will be communicated to the other
party thirty (30) days in advance of implementing a change.
10. Payment by Distributor. Distributor shall pay Supplier for Products
purchased pursuant to this Agreement on net thirty (30) day terms. Shipments by
Supplier to Distributor's facilities are F.O.B. shipping point, and cost of
shipping shall be added to the invoice for Products so shipped. Title shall pass
to the Distributor at the time and place of shipment. Payment will be made in
U.S. dollars.
11. Indemnity.
(a) Supplier shall, at its sole cost and expense, protect,
defend and indemnity Distributor and hold it harmless from and against any and
all claims, lawsuits, losses, liabilities and damages of any nature (including
all costs associated with the defense thereof) arising out of or relating to any
patent infringement of a Product subject to this Agreement. With regard to
claims of patent infringement resulting sale of Product, Distributor agrees to
promptly notify Supplier in writing of the receipt of a Notice of Infringement,
or threat thereof. In addition, Distributor shall cooperate with Supplier in all
necessary and reasonable ways in the defense of any such suit or proceeding.
Supplier shall have the full control of any suit proceeding against Distributor.
(b) Distributor shall, at its sole cost and expense protect,
defend and indemnify Supplier and hold it harmless from and against any and
all claims, lawsuits, losses, liabilities and damages of any nature (including
all costs associated with the defense thereof) arising out of or relating to
any product liability claim or any other claim relating to a defect of a
Product subject to this Agreement which is caused by Distributor's negligence
or willful acts.
(c) The Distributor and Supplier each agree to give the other
prompt notice of the bringing of any action against either or upon obtaining
knowledge of any threatened action which either is based on a claim of product
liability or defect in a Product subject to this Agreement or of an event which
would make it difficult or impossible for one or the other party to perform
hereunder. Each party agrees to keep the other informed as to the progress of
any such action or threatened action and to cooperate in its defense.
12. Confidentiality. Each of Distributor and Supplier agree to treat as
confidential information and to hold in confidence and all information and data
pertaining to and/or relating to trade secrets or other information designated
in writing as confidential information which is divulged to it by the other,
except if it (a) was known to the industry or the public at the time of
disclosure to the receiving party or subsequently
-4-
<PAGE> 5
becomes known to the industry or the public through no fault of the receiving
party, or (b) was rightfully obtained by receiving party from a third party who
is, at the time such information is divulged to receiving party, under no
obligation to disclosing party to hold the same in confidence. In any such
instance, only the portion of the information which falls within subsections (a)
and (b) above shall be free from the restrictions of confidentiality.
13. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties thereto and their respective successors and permitted
assigns, but neither this Agreement nor any of the rights, interest or
obligations hereunder shall be assigned by either party without the prior
written consent of the other. Each party acknowledges that certain Products to
be distributed pursuant to this Agreement may from time to time be manufactured
and/or offered for sale by subsidiaries or other entitles controlling,
controlled by or under common control of Supplier or Distributor. Supplier and
Distributor covenant and agree that they will take all such action as may be
necessary to cause such persons other than themselves (including parents,
subsidiaries, affiliate companies or entities) to comply with the terms of this
Agreement as if such other person were substituted as a party hereto.
14. Force Majeure. In the event that any party is prevented,
interrupted or delayed in the performance of its obligations hereunder by riots,
wars, acts of war, acts of God, fires, floods, accidents, strikes, labor
disputes, embargoes, governmental orders or regulations, delays of carriers,
lack of transportation facilities, inability to obtain raw materials,
curtailment of or failure in obtaining fuel or electrical power, or by any
similar occurrence beyond the reasonable control of such party, the said party
shall be excused from the performance of its obligations hereunder but only
while and to the extent that it is actually so prevented, interrupted and/or
delayed.
15. Modification-Waiver. No cancellation, modification amendment,
deletion or other change in this Agreement or any provision hereof, or waiver of
any right or remedy herein provided, shall be effective for any purpose unless
specifically set forth in writing signed by the party to be bound thereby. No
waiver of any right in respect of any occurrence or event on one occasion shall
be deemed a waiver of such right or remedy in respect of such occurrence or
event on any other occasion.
16. Entire Agreement. This Agreement supersedes all other agreements,
oral or written, heretofore made with respect to the subject matter hereof and
the transactions contemplated hereby and contains the entire agreement of the
parties with respect thereto.
17. Controlling Law. All questions concerning the validity and
operation of this Agreement and the performance of the obligations imposed upon
the parties hereunder will be governed by the laws of the State of Arizona.
18. Notices. All notices, elections and communications required or
permitted to be given under this Agreement shall be in writing and will be
deemed given five (5) days after deposit in the U.S. mail, as registered or
certified mail, return receipt requested, postage prepaid and addressed to the
party or by personal delivery at the following address:
-5-
<PAGE> 6
To Supplier: Novocastra Laboratories Ltd.
24 Claremont Place
Newcastle Upon Tyne, NE2 4AA
United Kingdom
Attn: President
To Distributor: Ventana Medical Systems, Inc.
3865 North Business Center Drive
Tucson, Arizona 85705
Attn: President
19. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original hereof.
20. Arbitration. Any controversy, dispute, or questions arising out of
or in connection with this Agreement or the underlying relationship of the
parties, or the interpretation, performance or non-performance of this Agreement
of any breach hereof, shall be determined by arbitration held in Tucson,
Arizona, in accordance with the then existing rules of the American Arbitration
Association. Any decision or award of such arbitration shall be final,
conclusive and binding on the parties hereto. Nothing contained herein shall in
any way deprive either party of its right to obtain injunctions or other
equitable relief, including preliminary relief pending arbitration. All costs
and expenses (including counsel and expert witness fees) associated with any
such arbitration shall be paid by the party adjudged by the Arbitrator to be
responsible for the costs. Any award rendered by an Arbitrator shall be
enforceable in any court of competent jurisdiction.
21. Headings. The Section headings used in this Agreement are for
convenience of reference only and shall not affect the construction of this
Agreement.
IN WITNESS WHEREOF, the parties have executed and delivered this
Distribution Agreement as of the day and year first above written.
NOVOCASTRA LABORATORIES LTD.
By /s/C.H.W. HORNE
-------------------------------
Title Managing Director 19/8/92
----------------------------
VENTANA MEDICAL SYSTEMS, INC.
By /s/VICTORIA BANNISTER
-------------------------------
Title President 8/11/92
----------------------------
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<PAGE> 7
AGREEMENT made the 9th day of July 1993
BETWEEN
NOVOCASTRA LABORATORIES
24 CLAREMONT PLACE, NEWCASTLE UPON TYNE
and
VENTANA MEDICAL SYSTEMS INC.
3865 NORTH BUSINESS CENTER DRIVE
TUCSON, ARIZONA USA
whereby it is agreed that
(1) VENTANA will grant to NOVOCASTRA the right to market in respect of
monoclonal antibody to Leucocyte Common Antigen ( [*] ) for use in
the manual immunohistochemistry market.
(2) VENTANA retains all rights to the [*] but agrees to
license NOVOCASTRA exclusively for use in the manual immunohistochemistry
market. These rights shall not be transferable.
(3) Payment to VENTANA by NOVOCASTRA will be made as a royalty on the
value of sales calculated as the amount paid to NOVOCASTRA by companies,
research institutions, hospitals, individuals or any person or persons.
(4) The royalty will be set at [*] of the amount paid to NOVOCASTRA [*]
value added tax and [*] carriage or other cost associated with delivery.
(5) NOVOCASTRA will supply on request details of their accounts
relating to [*] and [*] at any time on request to VENTANA or their
authorized representative.
(6) Royalties will be paid by NOVOCASTRA to VENTANA twice yearly.
(7) VENTANA and NOVOCASTRA will at all times keep all information
relating to this contract strictly confidential and will impose the same
obligation of confidentiality on their employees.
(8) NOVOCASTRA will undertake to retain the cell lines in their sole
possession and will under no circumstances, distribute the cells to any other
person, hospital, research institution or company.
(9) NOVOCASTRA will also supply at intervals designated by VENTANA [*].
(10) The agreement will commence on the date of signing by authorized
representatives of NOVOCASTRA and VENTANA and remain in effect for 10 years from
that date.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 8
(11) In the event of any change in the corporate structure of
shareholding of NOVOCASTRA, for example, partial or complete take-over by
another company, then VENTANA will be informed in writing and will have the
right to void this agreement with return or destruction of the cell lines,
[*] at their discretion.
(12) In the event that NOVOCASTRA no longer wish to pursue initiation
of marketing, or continue marketing of the [*] then all rights
concerning the antibodies will refer to VENTANA and VENTANA will have the right
to approach any other company regarding exploitation of the antibodies.
(13) VENTANA agrees that during the term of this agreement, licensing
will not be granted to any other party at a lower royalty rate than applies to
this agreement.
(14) Any of the provisions of this Agreement may be varied by agreement
in writing between both parties.
(15) The intellectual property rights regarding the monoclonal
antibodies which are subject to this agreement rest with the originator.
As witness the hands of the duly authorized representatives of the
parties hereto the day and year first written above.
Professor C.H. W. Horne Victoria Bannister, President
for: /s/C.H.W. HORNE for: /s/VICTORIA BANNISTER
------------------ ------------------------
NOVOCASTRA LABORATORIES VENTANA MEDICAL SYSTEMS, INC.
-2-
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 1
Exhibit 10.18
BioTek Solutions, Inc.
3865 North Business Center Drive
Tucson, AZ 85705
May 1, 1996
Lev J. Leytes
President and CEO
LJL BioSystems, Inc.
404 Tasman Dr.
Sunnyvale, CA 94089
RE: TECHMATE 250/HORIZON
Dear Lev:
This letter outlines the basis on which BioTek Solutions, Inc. (together
with its successor and assigns, "BioTek") will work with LJL in moving the
Techmate 250 into volume production. It is intended to replace any prior
agreements between the parties. However, in addition to this letter, the
paragraphs set forth on attached Exhibit 1 are incorporated herein by reference
and made a part hereof. Topics covered include (1) accounting for previous
transactions, (2) the basis on which the first 100 Techmate 250 units will be
procured, (3) payment terms for those 100 units, (4) engineering changes, (5)
pricing for subsequent orders of 100 or 200 Techmate 250 units, (6)
manufacturing exclusivity for LJL, and (7) restrictions on LJL.
Accounting for Prior Transactions
We accept the accounting attached to your March 20, 1996 letter which shows
BioTek [*] (the "Settlement Amount") to LJL and LJL [*] in Techmate 250 parts
on BioTek's behalf, specifically as follows:
Unpaid Phase IV - prior to manufacture $ [*]
Unpaid Phase IV - manufacturing transfer $ [*]
Parts procured $ [*]
Payment already received on first order $ [*]
----------
Total amount due $ [*]
===========
This amount will be paid when we issue our purchase order for the first 100
Techmate 250 units. [*]
We agree that our auditors (Ernst & Young, Tucson) will talk with your
auditors (Price Waterhouse, San Jose) to confirm that LJL has made [*] to LJL
vendors for Techmate 250 parts inventory valued by LJL at [*]. LJL will pay
the outstanding amounts owed to such vendors for such parts promptly after
receiving the invoices for such parts and after the [*] balance referred to
above is paid by BioTek to LJL. At the time this letter is executed by the
parties, LJL will supply to BioTek a true and correct list of such parts.
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE> 2
Lev. J. Leytes
LJL BioSystems, Inc.
May 1, 1996
Page 2
Order for the First 100 Units
This letter agreement will become effective upon LJL's acceptance in
writing of the following items:
(1) payment in full of the Settlement Amount;
(2) the letter of credit as specified in the Payment Terms section of
this letter, and
(3) BioTek's [*] Techmate 250's to be manufactured on the following
terms and conditions (the "Initial Order"):
Construction. The construction of the units will be similar to
the [*] recently delivered by LJL to BioTek;
i.e., resin cast skins with no clear plastic
cover. The units will pass the CE tests listed in
Attachment A to this letter and will be
manufactured in accordance with Good
Manufacturing Practices for medical products as
prescribed from time to time by the United States
Food and Drug Administration.
Pricing. The purchase price for the units will be [*]
per unit, less a credit of $380.34 per unit for
parts already procured and paid for by BioTek
[*].
Shipments. Shipments of the units will commence [*] after we
issue a purchase order. The shipping rate for the
[*]. Delivery schedule will provide for delivery
of all units [*] after receipt of Initial Order.
We will advise LJL of the monthly shipping rate
for the [*] at the time of the first shipment and
provide a firm forecast [*] thereafter. The
shipping rate will not fall below [*].
Cover Option. BioTek will have the option of adding a clear
plastic injection molded cover, or an opaque
cover using an alternative fabrication
technology, at anytime. If BioTek, elects to
proceed with a clear plastic cover, at the option
of BioTek, either LJL and BioTek will work
together, or BioTek will work alone, to procure
the tool necessary to produce that cover. That
tool which the parties estimate will cost an
estimated [*] (including applicable LJL fees),
will be paid for by BioTek and will be the sole
property of BioTek. LJL will add the cover to
instruments assembled after the cover becomes
available and will charge BioTek for this
addition based on reasonable agreed upon pricing.
If BioTek elects to add a cover using a different
fabrication technology, the parties will work
together, in good faith, to procure parts on a
cost effective basis.
Spare Parts. BioTek, will place an order for spare parts on
LJL within 30 days of issuing a purchase order.
LJL will supply parts already in inventory and
paid for by BioTek without additional charge.
Other spare parts will be supplied by LJL to
BioTek at LJL's normal parts rates. LJL will
cooperate with BioTek in identifying the spare
parts necessary. BioTek acknowledges that LJL
will start ordering production parts within 24
hours after the receipt of the BioTek's purchase
order for the [*] Techmate 250, and that any
spare parts which are ordered separate from an
order for Techmate 250's, may have to be
processed individually, at additional cost to
BioTek. LJL will work together with BioTek,
however, to minimize the cost of parts orders
processed individually.
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE> 3
Lev. J. Leytes
LJL BioSystems, Inc.
May 1, 1996
Page 3
Software
Provided this letter becomes effective, BioTek will have an option to
acquire a non-exclusive license to modify (as set forth under Engineering
Changes), use in the Techmate 250, reproduce and sublicense to purchasers of the
Techmate 250 the then current version of the software code for the Techmate 250,
for a [*]. BioTek can exercise this option by sending a written request to LJL
and [*]. LJL shall ship the then current version of the software code for the
Techmate 250, together with the source code therefor and then current relevant
documentation within 15 business days of receiving of BioTek's such request and
payment. All materials hereunder will be supplied on an "as is" basis and the
form then existing at LJL. Any subsequent software engineering support may be
requested by BioTek, and may be provided by LJL upon mutually agreed upon terms.
Payment Terms for the Initial Order
[*] payable under the Initial Order ([*] calculated by dividing the total
purchase order price [*]) will be paid by BioTek over the first 5 months after
the issuance of the Initial Order as follows:
(1) The amount of [*] from the prior transactions will be paid by
BioTek at the time the Initial Order is delivered to LJL; and
(2) The amount of [*] in the amount of [*], payable on the 30th, 60th,
90th, 120th, and 150th days after the initial payment under the
previous paragraph.
Prior to LJL's acceptance of the Initial Order, BioTek will deliver to LJL an
irrevocable letter of credit in the form attached hereto as Exhibit 2 issued by
Silicon Valley Bank for the benefit of LJL in the amount of [*] to secure the
payments referred to in subparagraph (2), above.
These progress payments will be credited against invoices on a pro rata
basis [*]. Payments for shipped units will be due net 15 days after invoice
therefor to BioTek; however, if any of the payments are not received when due,
and such failure shall continue for 15 days after written notice to BioTek, at
the option of LJL. LJL may require that shipments thereafter be made on a
pre-paid basis only. If any invoice is past due for more than 180 days, LJL
shall be free to sell to any third party the parts and/or units for which LJL
has made non-cancelable purchasing commitments to LJL vendors or that are in
LJL's inventory, without notice and without any further obligation to BioTek,
and LJL shall have a royalty-free non-exclusive license with the right to grant
sublicenses, to use, sell and incorporate into such parts and/or units the
BioTek's patented capillary gap technology. This royalty-free license as
described above shall extend only to those instruments and/or parts that are
either in LJL inventory or for which LJL has made non-cancelable purchasing
commitments at the time of BioTek's payment default. Interest on all invoices
that are more than [*].
Engineering Changes
LJL acknowledges that market considerations may require (a) design changes
to the Techmate 250 and/or (b) a shift to an alternative fabrication technology
for the skins. LJL further acknowledges that BioTek has significant in-house
capability to make engineering changes. Accordingly, LJL agrees that it will:
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE> 4
Lev. J. Leytes
LJL BioSystems, Inc.
May 1, 1996
Page 4
(1) Work with BioTek, in good faith, to investigate and develop cost
estimates for engineer changes. Upon BioTek's written request, LJL
will provide BioTek with an investigative quote (an "Investigative
Quote") prior to any such work and will only perform such work
after BioTek's written approval of the Investigative Quote; and
(2) Permit BioTek to make software changes if BioTek determines it is
more cost effective to use its own engineering resources rather
than LJL'S. In the event BioTek chooses to make any software
changes using its own engineering resources, BioTek will then
become fully responsible for all regulatory compliance,
validation, maintenance and revision control of all Techmate 250
software and for supplying to LJL the latest such revisions to be
installed on the Techmate 250 units shipped by LJL. All units
supplied by LJL after BioTek makes any such changes shall be
supplied on "as is" basis with respect to the software components
of such units.
BioTek recognizes that any engineering changes it makes may require
manufacturing engineering changes. LJL will be responsible for manufacturing
engineering changes, but BioTek will be responsible for the cost of such changes
at LJL normal rates. Such costs will be reasonable. There will be no changes of
any kind unless both parties agree, in writing, on the impact of such changes on
budgets for non-recurring engineering costs connected therewith, and for
implementing ECN documentation, manufacturing unit costs, inventory scrap and
rework costs, shipment schedules and any other implications of such changes.
Subsequent Orders
Orders will be in [*]. Prices for subsequent orders, provided the same
construction methods are used as were employed in the production of the units
covered by the Initial Order, without cover, will be as follows:
(1) The purchase price per unit for [*].
(2) The purchase price per unit for [*].
This ceiling price may be adjusted upwards at the time each new order is placed
based on changes in the Bay Area Cost of Living Index (or other mutually agreed
upon published index) since the date of the last order. [*] Notwithstanding the
foregoing to the contrary, if a purchase order for Techmate 250 units (a
"Additional Cost Order") is placed after the 130th day prior to the last
scheduled shipment date under the next prior purchase order for Techmate 250
units, in addition to the foregoing per unit price as part of the pricing for
the units supplied under such Additional Cost Order. BioTek will pay LJL for the
reasonable set-up costs, if any, incurred by LJL as a result of restarting
production of Techmate 250 units.
These price ceilings may be moved up or down based on engineering and
production changes mutually agreed to by the parties.
Payment terms of [*], or multiples thereof, shall be no less favorable to
LJL than the Payment Terms for the Initial order.
Manufacturing Exclusivity
LJL shall continue to have exclusive manufacturing rights for the Techmate
250 for so long as (1) it accepts orders for Techmate 250 units in [*], or
multiples thereof, at or below the then applicable price ceiling as described
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE> 5
Lev. J. Leytes
LJL BioSystems, Inc.
May 1, 1996
Page 5
in the preceding section, (2) it meets the delivery schedules mutually agreed to
at the time each order is placed, and (3) the units produced by LJL routinely
meet the final test specifications mutually agreed to by the parties. If at any
time LJL, through a writing signed by its President, requires BioTek to place an
order for Techmate 250 units in quantities of [*], or multiples thereof, or at
the price above the then applicable price ceiling as described in the preceding
section. LJL's manufacturing exclusivity shall terminate immediately upon
receipt by BioTek of LJL's written notification. If LJL does not send to BioTek
a notice rejecting any BioTek's purchase order within 15 business days of
receipt of such order at LJL such purchase order shall be deemed accepted by
LJL, provided the order confirms to all the terms of this letter agreement.
Notwithstanding anything to the contrary contained herein, LJL shall be entitled
to reject any purchase order whose payment terms are less favorable to LJL than
the Payment Terms for the Initial Order without losing LJL's manufacturing
exclusivity. If at any time LJL shall fail to comply with the requirements under
clauses (2) or (3) above, and such failure shall continue for a period of 180
days after LJL is notified in writing by BioTek of such failure. LJL's
exclusivity will terminate immediately after expiration of the above 180 days
period.
If LJL loses its exclusive manufacturing right, BioTek can either
manufacture the instrument itself or move production to a third party. If there
is a dispute over the loss of manufacturing rights. the parties agree to have
the dispute resolved by an independent arbitrator according to the rules of
American Arbitration Association.
Restriction on LJL
LJL hereby agrees that it will not, at any time during the Restrictive
Period (as defined below), manufacture or sell to any party other than BioTek,
or an affiliate thereof, immunohistochemistry automated tissue microscope slide
stainers, whether or nor similar in design. construction, appearance,
specifications, application or performance to the Techmate 250. For purposes
hereof, the "Restrictive Period" means the period commencing on the date this
letter agreement becomes effective and ending when 12 consecutive calendar
months have passed during which BioTek [*] 250 units from LJL (other than as a
result of LJL's failure to meet BioTek's purchase orders to LJL), if as of the
end of that 12-month period a non-cancelable [*] or more Techmate 250 units
calling for delivery over the next 12 months has not then been accepted by LJL.
Notwithstanding the foregoing, nothing contained herein shall restrict LJL in
any way from incorporating the technology embodied in the Techmate 250 into
products other than immunohistochemistry automated tissue microscope slide
stainers, including but not limited to nucleic acid - based hybridization slide
processors of any kind, and from developing, using, making, having made and
selling such products. Nothing contained herein shall be construed to have
granted LJL a license under any of BioTek's issued patents, except as contained
in the section above titled Payment Terms for the Initial Order.
Confidentiality
The parties hereto acknowledge that in connection with the supply agreement
described in this letter, the parties may furnish to each other in the future,
information which is Confidential Information (as defined below). Each party
hereby agrees that for a period of three (3) years from the date this letter
agreement becomes effective, it will keep confidential, and will cause its
employees and agents to keep confidential, all of the Confidential Information
of the other party. For purposes hereof, "Confidential Information" of a party
means any and all information of that party concerning the Techmate 250 or its
business which that party or any of its employees, agents or representatives may
furnish to the other party or any of its agents or representatives after the
date this letter agreement becomes effective, whether in written or oral form,
provided that such information, if oral, is summarized by the disclosing party
in writing, marked as Confidential and delivered to the receiving party within
ten (10) business days following such oral disclosure, and if written, is marked
as Confidential at the time it is disclosed. The term "Confidential Information"
of a party does not include, however, information which: (i) becomes generally
available to the public other than as a result of a disclosure by the other
party, (ii) was rightfully available to the other party on a non-confidential
basis prior to disclosure by the party which owns the information or its
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE> 6
Lev. J. Leytes
LJL BioSystems, Inc.
May 1, 1996
Page 6
employees or agents, or (iii) becomes rightfully available to the other party
from a source other than the party which owns the information or its employees
or agents.
Please indicate LJL's acceptance of this letter agreement by signing and
returning the attached copy to me. The term of this letter will be reflected in
a manufacturing and supply agreement to be subsequently negotiated and signed by
the parties. Until a manufacturing and supply agreement is signed, this letter
agreement together with the Attachments and Exhibits hereto, reflects the
agreement between the parties.
Sincerely.
BIOTEK SOLUTIONS, INC.
By: /s/ JOHN PATIENCE
------------------------------------
John Patience, as authorized agent
Agreed to by LJL BioSystems, Inc.
as of this 1st day of May, 1996
By: /s/ LEV J. LEYTES
-------------------------
Lev J. Leytes, President
<PAGE> 7
MANUFACTURING AND SUPPLY AGREEMENT
TERM SHEET
1. FINAL TEST SPECIFICATIONS.
1.1 BioTek has approved the specifications and the Phase III
prototype units and has authorized manufacturing.
1.2 Final Test Specifications shall be mutually agreed on based on
the test results achieved by the first 10 Pilot Units. In the
event that the Pilot Units' performance is substantially
equivalent to the Phase III prototypes, all costs associated
with requests to modify the Pilot Units or the product design,
based on the Pilot Units' testing, shall be borne by BioTek.
1.3 Any subsequent changes in final specifications will be handled
by LJL on time and material basis, in a two-step process:
investigational quote, then execution quote will be done upon
BioTek's approval (follow the LJL Standard Manufacturing and
Supply Agreement).
2. DELIVERY AND ACCEPTANCE
2.1 All LJL Products ordered under this Agreement will be shipped
F.O.B. Sunnyvale. LJL shall deliver the units to BioTek at the
address specified in each order.
2.2 Drop shipment arrangements may be agreed for an additional
charge.
2.3 LJL will bill BioTek for shipping, handling. insurance, duties
and customs charges incurred in shipping products.
2.4 BioTek shall have the right to inspect and accept or reject
any units tendered for delivery within 60 days of delivery if
units do not meet Final Test Specifications at initial out of
box power-up and fail to be put in service. LJL shall respond
(i) with replacement units or replacements parts, at BioTek's
sole discretion, within 30 days or (ii) with written
notification, if LJL disputes the nonconformance. Disputes
unresolved after 30 days will be resolved by an independent
testing organization.
3. WARRANTY
3.1 LJL warrants that each unit after the initial shipment of 10
pilot units supplied by LJL to BioTek shall conform to the
Final Test Specifications prior to shipment.
<PAGE> 8
3.2 Inclusion of warranty can be negotiated on future orders for a
corresponding increase in transfer price.
4. RIGHT OF ACCESS.
4.1 BioTek shall have the right, upon reasonable notice and during
regular business hours, to observe any manufacturing activity
hereunder in progress at LJL's facility.
5. REGULATORY REQUIREMENTS.
5.1 LJL will cooperate with BioTek at BioTek's expense to obtain
any applicable regulatory or safety certifications.
6. SERVICE CONTRACTS.
6.1 Service at LJL factory available on time and materials basis.
6.2 Parts for servicing can be made available for purchase.
Purchase of service spares is recommended at the time
manufacturing orders are placed as some parts have long lead
times and including with production volume order will result
in lower parts prices (as compared to ordering in low volume
separate from a manufacturing order).
6.3 Service contracts can be offered at negotiated price.
6.4 Service training, manuals and documentation can be developed
on a project basis with an approved order, budget and down
payment
7. CHANGE ORDERS.
7.1 LJL will manufacture the product to meet the Final Test
Specifications (subject to section 2). However, the ability of
product to perform required functions is the result of BioTek
specifications, and accordingly is the responsibility of
BioTek and not LJL.
8. PUBLICITY.
8.1 A nameplate with LJL's logo and the words "Manufactured by LJL
BioSystems, Inc." will be put on the front of each instrument
at the time of manufacture at a mutually agreed, appropriate
place and size.
9. GOVERNING LAWS.
9.1 State of California, in the county of residence of party not
initiating the action.
-2-
<PAGE> 9
10. GENERAL.
10.1 None of the provisions may be waived, varied or extended
except expressly in writing, and signed by all parties, LJL
and BioTek.
10.2 Units being returned to LJL by BioTek must be decontaminated
at the expense of BioTek, and certified as such.
11. SALES TAXES.
11.1 BioTek is responsible for all applicable sales taxes. LJL will
collect and remit California sales tax, unless a resale card
is on file prior to shipment. Sales tax in any other areas
will be the responsibility of BioTek to report and pay
directly.
11.2 BioTek agrees to pay in a timely manner, any additional
California sales and use tax that may be billed at a later
date by the State of California. BioTek also agrees to pay all
interest charges and penalties. If BioTek and LJL agree that
LJL should defend against or appeal such additional state
sales and use taxes, BioTek agrees to pay all LJL's expenses
associated with such defense or appeal.
12. INDEMNIFICATION.
12.1 Mutual hold harmless clauses for actions of each company's
employees or consultants.
12.2 No consequential damages liability.
-3-
<PAGE> 10
Report No.: 51213-LJL089-CE Attachment A
<TABLE>
<S> <C> <C> <C>
Generic Standard: EN 50081-1:1992
Test Standard: EN 55022:1991 (Class A)
Radiated Emissions
Results Modifications
PASSED None
Line Conducted Emissions
Results Modifications
PASSED None
Generic Standard: EN 50082-1:1992
Test Standard IEC 801-2:1984, IEC 801-2:1993
Electrostatic Discharge
Results Modifications
PASSED -4kV contact, 8kV air discharge None
Generic Standard: EN 50082-1:1992
Test Standard: IEC 801-3:1984, pr(pound)N 50140:1993
Radiated RF Immunity
Results Modifications
PASSED - 3V/M None
Generic Standard: EN 50082-1:1992
Test Standard: IEC 801-4:1988, IEC 1000-4-4:1995
Electrical Fast Transient (EFT) Burst
Immunity
Results Modifications
PASSED - 2kV mains None
</TABLE>
TABLE 1.3-1: Results Summary/Modification List
-4-
