<PAGE> 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Period Ended September 30, 1996.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition Period From _____________ to _____________
Commission file number 000-20931
VENTANA MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2976937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3865 NORTH BUSINESS CENTER DRIVE
TUCSON, ARIZONA 85705
(Address of principal executive offices) (Zip Code)
(520) 887-2155
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X_ No ___
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes___ No ___
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $0.001 par value --- 10,701,428 shares as of July 26, 1996
<PAGE> 2
VENTANA MEDICAL SYSTEMS, INC.
INDEX TO FORM 10-Q
Part I. Financial Information:
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995
Consolidated Statements of Income
Three months ended September 30, 1995 and 1996
Nine months ended September 30, 1995 and 1996
Consolidated Statement of Cash Flows
Nine months ended September 30, 1995 and 1996
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders - Written
Consent in July 1996.
Item 6. Exhibits and Reports on Form 8-K.
<PAGE> 3
VENTANA MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
( in thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1995 1996
---- ----
(Note) (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,103 $ 17,116
Accounts receivable 1,925 3,534
Inventories (Note 2) 1,767 3,226
Other 24 974
-------- --------
Total current assets 4,819 24,850
Property and equipment,including RP's, net 2,258 3,142
Intangibles, net 301 11,622
-------- --------
Total assets $ 7,378 $ 39,614
-------- --------
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED
STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 1,061 $ 2,412
Other current liabilities 993 4,254
-------- --------
Total current liabilities 2,054 6,666
Long term debt -- 15,937
Convertible redeemable preferred stock at
aggregate mandatory redemption value (Note 4) 35,180 --
Stockholders' equity (deficit):
Preferred stock - $.001 par value; 5,000,000 shares
authorized; no shares issued or outstanding -- --
Common stock - $.001 par value; 50,000,000 shares
authorized; 1,020,164, 4,057,499 shares issued
and outstanding at December 31, 1995 and
September 30, 1996 - amounts paid in (Note 4)
- amount paid in (Note 4) 244 31
Paid in capital -- 50,861
Accumulated deficit (29,980) (33,663)
Cumulative foreign currency translation adjustment (120) (218)
-------- --------
Total stockholders' equity (deficit) (29,856) 17,011
-------- --------
Total liabilities, convertible redeemable preferred stock and
stockholders' equity (deficit) $ 7,378 $ 39,614
-------- --------
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the
audited financial statements at that date but does not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes.
2
<PAGE> 4
VENTANA MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------- ------------------------------
1995 1996 1995 1996
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 2,991 $ 6,208 $ 7,594 $ 15,895
Cost of goods sold 1,106 2,655 3,043 6,513
----------- ------------ ----------- -----------
1,885 3,553 4,551 9,382
Operating expenses:
Research and development 650 809 1,754 2,176
Selling, general and administrative 1,967 3,066 5,317 8,135
Nonrecurring expenses -- 67 -- 10,262
Amortization of intangibles -- 134 -- 315
----------- ------------ ----------- -----------
Loss from operations (732) (523) (2,520) (11,506)
Interest income (expense) 27 38 111 (28)
----------- ------------ ----------- -----------
Net loss $ (705) $ (485) $ (2,409) $ (11,534)
----------- ------------ ----------- -----------
Net loss per share, as adjusted Notes 4 and 5) $ (0.08) $ (0.05) $ (0.28) $ (1.20)
----------- ------------ ----------- -----------
Shares used in computing net loss per share 8,688,741 10,195,633 8,600,323 9,580,593
----------- ------------ ----------- -----------
</TABLE>
See accompanying notes.
3
<PAGE> 5
VENTANA MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
( in thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(11,534) $(2,409)
Adjustments to reconcile net loss to cash used
in operating activities:
Purchase in process research and development
(Note 3) 7,900 --
Depreciation and amortization 1,196 612
Changes in operating assets and liabilities, net (1,735) (39)
-------- -------
Net cash used in operating activities (4,173) (1,836)
INVESTING ACTIVITIES:
Purchase of property and equipment, net (891) (720)
Purchase of intangible assets (3,362) (111)
Acquisition of BioTek Solutions, Inc. (Note 3) (2,500) --
-------- -------
Net cash (used in) investing activities (6,753) (831)
FINANCING ACTIVITIES:
Issuance of debt (including amounts from related
parties) and stock (Note 4) 8,772 2,478
Net proceeds from initial public offering (Note 5) 18,265 --
-------- -------
Net cash provided by financing activities 27,037 2,478
Effect of exchange rate change on cash (99) 2
-------- -------
Net increase in cash and cash equivalents 16,012 (187)
Cash and cash equivalents, beginning of period 1,104 2,511
-------- -------
Cash and cash equivalents, end of period $ 17,116 $ 2,324
-------- -------
</TABLE>
See accompanying notes.
4
<PAGE> 6
VENTANA MEDICAL SYSTEMS, INC.
Notes to Consolidated Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements are unaudited. They have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission and are subject to year-end audit by independent public
accountants. Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. It is suggested that the consolidated financial statements be read
in conjunction with the financial statements and notes included in the Company's
Prospectus dated July 26, 1996, which is a part of the Company's Registration
Statement on Form S-1 ( Commission File No. 333-4461). The information furnished
reflects all adjustments which, in the opinion of management, are necessary for
a fair presentation of results for the interim periods. Such adjustments
consisted only of normal recurring items. It should also be noted that results
for the interim periods are not necessarily indicative of the results expected
for the full year or any future period.
The presentation of these consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures 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.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31 September 30
1995 1996
---- ----
(in thousands)
<S> <C> <C>
Raw material and work-in-process $1,265 $2,619
Finished goods 502 607
------ ------
$1,767 $3,226
====== ======
</TABLE>
5
<PAGE> 7
3. ACQUISITION OF BIOTEK SOLUTIONS, INC.
The Company acquired BioTek Solutions, Inc. ("BioTek") for $18.8 million on
February 26, 1996. The acquisition has been accounted for as a purchase. The
composition of the consideration paid for BioTek and the allocation of the
purchase price is presented below:
The purchase price for BioTek consisted of:
<TABLE>
<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 acquired 4,044
-------
Total purchase price $18,763
=======
The purchase price was allocated as follows:
Tangible net assets $ 2,288
In-process research and development 7,900
Goodwill and other intangibles 1,675
Developed technology 2,800
Customer list 4,100
-------
$18,763
=======
</TABLE>
In accordance with Statement of Financial Accounting Standard 2 ("FAS 2"), the
Company charged to expense, at the date of the acquisition, $7.9 million
relating to the portion of the purchase price allocated to those in-process
research and development projects where technological feasibility had not yet
been established and where there are no alternative future uses.
The pro forma unaudited results of operations for the nine months ended
September 30, 1996 and 1995, assuming consummation of the purchase as of January
1, 1995 and as adjusted to reflect the sales of 1,963,975 shares of Common Stock
by the Company and the application of the net proceeds therefrom, are as
follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
1995 1996
---------------------------
( in thousands, except
per share data)
<S> <C> <C>
Net sales $ 14,441 $ 16,977
Net loss 17,623) (1,997)
Net loss per share $ (1.74) $ (.19)
</TABLE>
6
<PAGE> 8
4. INITIAL PUBLIC OFFERING:
On July 26, 1996, the Company sold, through an underwritten initial public
offering, 1,890,907 shares of its Common Stock at $10.00 per share. Upon closing
of the Company's initial public offering, all outstanding shares of its Series
A, C and D Redeemable Convertible Preferred stock were converted into 6,716,997
shares of Common Stock, after giving effect to the Company's 1 for 2.7059046
reverse stock split. On August 25, 1996, the Company's underwriter's exercised a
portion of their overallotment option. The underwriters purchased an additional
73,068 shares of Common Stock from the Company, resulting in net proceeds of
$679,532 to the Company.
5. NET LOSS PER SHARE:
Net loss per share for the three months and nine months ended September 30, 1996
and 1995 is computed based upon the pro forma weighted average number of common
shares outstanding during the period, assuming conversion of all Series of
Redeemable Convertible Preferred Stock into Common Stock. Common equivalent
shares (stock options and warrants) are not included in the per share
calculation because the effect of their inclusion would be antidilutive, except
that for periods prior to the effective date of the Company's initial public
offering, in accordance with Securities and Exchange Commission requirements,
common and common equivalent shares issued during the twelve month period prior
to the filing of the Company's initial public offering have been included in the
calculation as if they were outstanding for the entire period, using the
treasury method and the initial public offering price.
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS:
OVERVIEW:
Ventana Medical Systems, Inc. ("Ventana or the Company") develops, manufactures
and markets instrument/reagent systems that automate immunohistochemistry
("IHC") and in situ hybridization ("ISH") tests for the analysis of cells and
tissues on microscope slides. The Company has two categories of instrument
systems: (i) the "patient priority" systems (the Ventana ES and gen II) which
perform multiple tests rapidly on a single patient biopsy providing a matrix of
diagnostic data to the pathologist; and (ii) the "batch processing" systems (the
TechMate 500 and TechMate 250) which process high volumes of tests on multiple
patient biopsies. Each Ventana proprietary system placed typically provides a
recurring revenue stream as customers consume reagents and supplies sold by the
Company for each test conducted. Reagents consist of two principal components: a
primary antibody and a detection chemistry. The use of these reagents allows the
pathologist to characterize and identify the type of cancer and to visualize it
on a glass slide under a microscope. Therefore, the principal economic drivers
for the Company are the number, type and method of placement of instruments, 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 revenues. 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 placements
represent a smaller percentage of the Company's existing installed base of
instruments and as reagent program ("RP") placements increase as a percentage of
total instrument placements. There can be no assurance that the Company's market
expansion strategy will produce the level of revenues expected, that the Company
will achieve profitability or that these revenues and profitability, if
achieved, will be sustainable.
Ventana is a medical device company and, as such, is regulated by the United
States Food and Drug Administration ("FDA"). As a result, the majority of the
Company's products are regulated by FDA regulations which include the 510(k)
pre-market notification ("510(k)") process, pre-market approval ("PMA") process,
good manufacturing procedures ("GMP") and the Clinical Laboratory Improvement
Amendments of 1988 ("CLIA"). See "Certain Factors Which May Affect Future
Results" elsewhere in this report.
During the first quarter of 1996 the Company acquired BioTek Solutions, Inc.
("BioTek"), its major competitor, for aggregate consideration of $18.8 million,
consisting of cash, promissory notes, common stock, and the assumption of
liabilities. The transaction was accounted for as a purchase. The purchase price
was allocated between tangible net assets and intangible assets consisting of
developed technology, customer list, goodwill and in-process research and
development. In accordance with FAS 2, in-process research and development of
$7.9 million was written-off as of the acquisition date. Additional nonrecurring
charges, which together with the In Process research and development write-off
aggregated $11.0 million, were also recorded in connection with the acquisition.
8
<PAGE> 10
As a result of the merger, the Company assumed certain contractual obligations
and contingent liabilities including contractual arrangements with DAKO A/S
("DAKO"), Curtin Matheson Scientific, Inc. ( a subsidiary of Fisher Scientific,
Inc.) ("CMS"), Kollsman Manufacturing Company, Inc. ("Kollsman") and LJL
BioSystems, Inc. ("LJL"). Consequently, the Company is obliged to perform
according to the provisions of these contracts as they relate to the sales,
marketing, distribution and manufacturing of many of the products acquired in
the BioTek merger. Although these contracts have been, or are, in the process of
renegotiation, they expose the Company to certain legal, operating and marketing
risks which are neither predictable or quantifiable. Consequently, these
potential risks could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company places instruments through direct sales, including nonrecourse
leases, instrument rentals and the Company's reagent programs ("RPs"). Revenue
on direct sale and nonrecourse leases of instruments is recognized upon shipment
to customers. Rental revenues are recognized over their respective contractual
lives. Reagent and other consumables are recognized upon shipment to customers.
Under an RP, the Company provides the customer with the use of an instrument
without their attendant capital investment that creates an opportunity for the
Company to generate reagent revenue. The terms and conditions of RP instrument
placements can vary from formal agreements specifying minimum volumes and unit
pricing for reagent purchases to short term, informal arrangements where
customers purchase reagents on a month to month basis. RP placements require the
Company to incur the costs of manufacturing or procuring instruments and
recognize revenues only as customers purchase reagents rather than at the time
of instrument placement. The manufacturing costs of instruments placed through
RPs is charged to cost of goods sold by depreciating the standard cost of the
instrument over a three to four year period. As a result, gross profit for
instruments placed through RPs is recognized over a three to four year period
rather than at the time of placement. Revenues associated with instruments
placed through RPs are 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 reagents purchased by the customer. The Company typically
recovers the cash cost associated with the placement of instruments through RPs
in less than two years, although the Company's ability to recover such costs may
be affected by the volume and pricing of reagents purchased by the customers.
Due to working capital requirements associated with RPs, the Company has
historically sought to limit the amount of instruments placed through RPs to
approximately 30% of instrument placements. However, the Company anticipates
that the percentage of instruments placed through RPs, in particular RPs without
formal reagent purchase commitments, will increase with the introduction of new
lower cost instruments during 1997 and as the Company obtains the additional
working capital required to support greater RP placements. In the future, this
is likely to result in a decrease in instrument sales both in absolute dollars
and as a percentage of total revenues. Instruments provided to customers under
RPs without formal reagent purchase commitments are only considered placements
if and when certain reagent purchase criteria are met by the customer. The
Company typically only provides an instrument under an RP without a formal
reagent purchase commitment if the Company believes that the customer performs a
minimum number of IHC tests annually. As of September 30, 1996, the Company had
placed 93 instruments through RPs.
9
<PAGE> 11
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 sales of
reagents, which typically begin when the instrument is placed. The Company's
operating results in the near future are likely to fluctuate substantially from
period to period because instrument sales are likely to remain an important part
of revenues. The degree of fluctuation will depend on the timing, level and mix
of instruments placed through direct sales and instruments placed through RPs.
In addition, average daily reagent use by customer may fluctuate from period to
period, which may contribute to future fluctuations in revenues. Sales of
instruments may also fluctuate from period to period because sales to the
Company's international distributors typically provide such distributors with
several months of instrument inventory, which the distributors will subsequently
seek to place with end customers. The Company's instrument installed base
includes instruments shipped to DAKO, the Company's European distributor for
batch processing instruments and related consumables. These shipments to DAKO
are recognized as sales when shipped, and the Company believes that over 85% of
shipments to DAKO have been placed with end customers.
Shipments to CMS, the Company's domestic distributor for batch processing
instruments and related consumables, are included in inventory until such
instruments and related reagents and consumables are shipped to end customers.
The Company recognizes revenue and related costs when products are shipped by
CMS to end users. The agreement provides CMS exclusive distribution rights
within the United States and it expires in April 1998. The Company has entered
discussions with CMS to renegotiate the agreement. On October 14, 1996, the
Company transmitted a Notice of Breach of contract to CMS and its parent
company, Fisher Scientific, Inc., relating to its Distribution Agreement with
the Company's wholly owned subsidiary BioTek Solutions, Inc. As a result of
CMS's breach, the Company implemented a program to allow BioTek customers to
voluntarily elect to use BioTek and Ventana as their direct supplier of BioTek
consumables.
Results of operations for the remainder of 1996 are also expected to be affected
by costs associated with centralizing reagent manufacturing, expanding reagent
product offerings for batch processing instruments and the elimination of
operational redundancies. Other factors that may result in fluctuations in
operating results include the timing of new product announcements and the
introduction of new products and technologies by the Company and its
competitors, market acceptance of the Company's current or new products,
developments with the respect to regulatory matters, availability and cost of
raw materials purchased from suppliers, competitive pricing pressures, increased
sales and marketing expenses associated with the implementation of the Company's
market expansion strategies for its instruments and reagent products and
increased research and development expenditures.
Future instrument and reagent sales could also be adversely affected by the
configuration of the Company's patient priority instruments, which require the
use of the Company's detection chemistries, particularly if and to the extent
that competitors are successful in developing and introducing new IHC
instruments or if competitors offer reagent supply arrangements having pricing
or other terms more favorable than those offered by the Company. In particular,
DAKO
10
<PAGE> 12
has recently introduced a lower cost automated IHC instrument in the United
States and is offering reagent supply arrangements that have resulted in
increased price competition. In connection with future introductions of new
products, the Company may be required to incur charges for inventory
obsolescence in connection with unsold inventory of older generation products.
To date, however, the Company has not incurred material charges or expenses
associated with inventory obsolescence in connection with new product
introductions. In addition, a significant portion of the Company's expense
levels is based on its expectation of higher levels of revenues in the future
and is relatively fixed in nature. Therefore, if revenue levels are below
expectations, operating results in a given period are likely to be adversely
affected.
RESULTS OF OPERATIONS:
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995:
Ventana acquired BioTek, under purchase accounting, on February 26, 1996.
Consequently, operating performance for the combined Company reflects BioTek's
results for the months March through September 1996 only.
Net Sales:
Presented below is a summary of revenue for the three and nine months ended
September 30, 1996 and 1995:
REVENUE SUMMARY:
<TABLE>
<CAPTION>
September 30,
Three Months Ended Nine Months Ended
------------------------------- ---------------------------
1995 1996 1995 1996
---------------------------------------------- ---------------------------------------
$ % $ % $ % $ %
---------------------------------------------------------------------------------------------
( $ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Instruments $1,330 44% $1,554 25% $3,365 44% $ 4,853 31%
Reagents and other 1,661 56% 4,654 75% 4,229 56% 11,042 69%
------ ------ ------ -------
Total Revenue $2,991 $6,208 $7,594 $15,895
====== ====== ====== =======
</TABLE>
Net sales for the three and nine months ended September 30, 1996 versus the same
periods ending during 1995 increased 108% and 109% to $6.2 million and $15.9
million compared to $3.0 million and $7.6 million respectively. The increase in
net sales was attributable to a 17% increase for the quarter and 44% increase
for the nine months in instrument sales and a 180% increase for the quarter and
a 161% increase for the nine months in reagent sales. Instruments sales
increased due to increased instrument placements, higher selling prices, the
introduction of the gen II ISH instrument and instrument sales resulting from
the BioTek acquisition of $0.4 million and $1.0 million for the quarter and nine
months ended September 30, 1996, respectively. Reagent sales increased due to
sales of reagents to new customers, increased sales to existing customers and
reagent sales to customers acquired with the acquisition of BioTek of $1.3 and
$3.4 million for the quarter and nine months ended September 30, 1996,
respectively.
11
<PAGE> 13
Gross Margin:
Gross profit for the three and nine months ended September 30, 1996 increased to
$3.6 million and $9.4 million respectively from $1.9 million and $4.6 million
for the same period in 1995. Gross margin for the three and nine months ended
September 30, 1996 decreased to 57% and 59% versus 63% and 59% for the same
periods during 1995. Overall gross margin decreased primarily due to instrument
and reagent sales of lower margin batch processing products to US and European
distributors. Gross margins on instrument sales decreased due to increased sales
of TechMate instruments, offset by manufacturing efficiencies and increased
absorption of manufacturing overhead. Gross margins on reagent sales decreased
due to the sale of lower margin batch processing reagents to US and European
distributors, which was partially offset by increased economies of scale and
manufacturing efficiencies brought about by the integration of batch processing
reagent manufacturing into Ventana's Tucson, Arizona manufacturing operations.
Research and Development:
Research and development expenses were approximately $0.8 million and $2.2
million for the three and nine months ended September 30, 1996 respectively.
This represents an increase of $0.2 million and $0.4 million compared to the
same periods during 1995. Research and development expenses declined as a
percent of sales to approximately 13% for the three and 14% for the nine months
ended September 30, 1996 compared to 22% and 23% for the same periods during
1995. Research and development expenses for the three and nine months ended
September 30, 1996 related primarily to the development of new reagents and
instruments, including the NexES patient priority instrument and new prognostic
markers. Research and development expense for the three and nine months ended
September 30, 1995 related primarily to the gen II instrument and IHC reagent
development.
Selling, General and Administrative ("SG&A"):
Presented below is a summary of SG&A expense for the three and nine months ended
September 30, 1996 and 1995.
SG&A SUMMARY:
<TABLE>
<CAPTION>
September 30,
Three Months Ended Nine Months Ended
---------------------------- ---------------------------
1995 1996 1995 1996
---------------- -------------- ------------ -------
% % % %
$ Sales $ Sales $ Sales $ Sales
----------------- ----------------- -------------- -----------------
( dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and marketing $1,516 51% $2,275 37% $4,074 54% $6,182 39%
Administration 451 15% 791 13% 1,243 16% 1,953 12%
------ -- ------ -- ------ -- ------ --
Total SG&A $1,967 66% $3,066 50% $5,317 70% $8,135 51%
====== == ====== == ====== == ====== ==
</TABLE>
12
<PAGE> 14
SG&A expense for the three and nine months ended September 30, 1996 increased to
$3.1 million and $8.1 million from $2.0 million and $5.3 million for the three
and nine months ended September 30, 1995 respectively. SG&A expense as a percent
of net sales declined to 50% and 51% for the three and nine months ended
September 30, 1996 compared to 66% and 70% for the same periods during 1995. The
fluctuation in SG&A expense from period to period reflects the growth of
Ventana's sales and marketing organization to facilitate its market expansion
strategy and a corresponding increase in infrastructure expenses to support a
larger business base. The growth in sales and marketing expense is the result of
the Company's decision to service the market through its own sales and marketing
staff, expenses necessary to support the growth of the Company and expenses
associated with the ongoing support activities resulting from the BioTek
acquisition. Increases in administrative expenses are associated with the
Company's regulatory strategy and costs associated with supporting an expanding
business base.
Amortization of Intangibles:
As a result of the acquisition of BioTek, the Company has recorded certain
intangible assets. These intangible assets include developed technology,
customer list, goodwill and other intangible assets which are amortized to
expense over a period of 15 to 20 years based upon the Company's estimate of the
economic utility of these assets. As a result, the Company will charge to
expense each quarter approximately $0.1 million for the amortization of these
intangible assets. Additionally, the Company will review the utility of these
assets each quarter to ensure their continued value. Should the Company
determine that any of these assets are impaired it will write them down to their
estimated fair market value.
LIQUIDITY AND CAPITAL RESOURCES:
Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in accumulated losses of $33.7 million as of September 30,
1996. The Company has funded its operations primarily through the private
placement of approximately $31.0 million in equity and debt securities and its
July 1996 initial public offering which resulted in net proceeds to the Company
of $18.3 million (after giving effect to the partial exercise of the
underwriter's over-allotment option). As of September 30, 1996 the Company's
principal source of liquidity consisted of cash and cash equivalents of $17.1
million and borrowing capacity under its bank term credit facility and revolving
line of credit. The bank term loan facility of $2.0 million was repaid in full
on July 30, 1996 from the proceeds of the Company's initial public offering. The
Company also has a $2.8 million revolving bank credit facility. As of September
30, 1996 approximately $0.4 million of this revolving line of credit had been
utilized for letters of credit to facilitate certain contract manufacturing
arrangements for the production of TechMate instruments leaving an available
revolving credit facility of approximately $2.4 million. Borrowings under the
Company's bank credit facility are secured by a pledge of substantially all of
the Company's assets and bear interest at the bank's prime rate plus 2.0% per
annum. On September 9, 1996 the Company offered to redeem up to $4.0 million of
an aggregate of $14.2 million of convertible subordinated notes ( the "Notes")
issued in connection with the BioTek acquisition provided that holders of these
Notes agree to an early payment discount of 9.5% of the face value of their
Notes. On October 18, 1996 the Company redeemed approximately $3.7 million of
these Notes at a discounted value of approximately $3.4 million. All Notes
tendered
13
<PAGE> 15
for redemption were redeemed on the foregoing terms. The remaining balance of
the Notes of approximately $10.5 million, which bears interest at 7% per annum,
will remain outstanding until its due date in late February 1998, or will be
repaid sooner if the Company elects to retire all, or a portion, of this debt
early. The Company expects to use approximately $2.8 million of its available
capital resources during the next twelve months for capital expenditures for
manufacturing capacity expansion and enhancements to its business application
computer hardware and software resources. The Company anticipates that its
remaining capital resources will be used for repayment of the remaining Notes
and for working capital and general corporate purposes. Pending such uses, the
Company intends to invest its cash resources in short-term, interest bearing,
investment grade securities.
During the nine months ended September 30, 1996 the Company used for operations
and investing activities approximately $10.9 million in cash versus $2.7 million
for the nine months ended September 30, 1995. The increase in cash usage of
approximately $8.3 million during 1996 compared to 1995 is the result of the
following activities:
<TABLE>
<S> <C>
Improvement in operating results $(9,125)
Write-off of In Process R&D 7,900
BioTek integration and merger costs 2,294
Change in depreciation and amortization 584
Increase in working capital utilization (3,990)
Capital expenditures (including RP's) (171)
Acquisition of intangible assets (3,251)
BioTek acquisition (2,500)
-------
Total $(8,259)
=======
</TABLE>
The Company believes that its existing capital resources and interest earned
thereon, together with available borrowing capacity under bank credit facilities
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 RP's, 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 the timing of regulatory approvals. The Company may be
required to raise additional capital in the future through the issuance of
either debt instruments or equity securities, or both. There is no assurance
that such capital will be available to the extent required or on terms
acceptable to the Company, or at all.
14
<PAGE> 16
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS:
The Company does not provide financial performance forecasts. The forward
looking statements in this Form 10-Q are made under the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The Company's operating
results and financial condition have varied in the past and may vary
significantly in the future depending on a number of factors. Except for the
historical information contained herein, the matters contained in this report
include forward looking statements that involve risk and uncertainties. The
following factors, among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this report and
presented elsewhere by management from time to time. Such factors, among others,
may have a material adverse effect on the Company's business, results of
operations and financial condition.
The following discussion of the Company's risk factors should be read in
conjunction with the foregoing Management Discussion and Analysis of financial
condition and results of operations and the Company's financial statements and
related notes thereto. Because of these and other factors, past financial
performance should not be considered an indication of future performance.
HISTORY OF LOSSES. The Company has incurred substantial losses since inception.
The Company expects such losses to continue for the foreseeable future due to
its planned product development efforts, expansion of its sales and marketing
activities both domestically and internationally, market acceptance of existing
and future instrument and reagent systems, competitive conditions, FDA
regulations and related product approvals, product development efforts and the
integration of BioTek's operations.
FUTURE FLUCTUATIONS IN OPERATING RESULTS. The Company derives revenues from the
sale of instruments and reagents through its direct sales force and certain
domestic and international distributors. There can be no assurances that these
outside distributors will continue to meet their contractual commitments, or
their historical sales rates or that these distributors contracts will remain in
effect.
The initial placement of an instrument is subject to a longer, less consistent
sales cycle than the sale of reagents, which begin and are typically recurring
once the 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 sale versus RPs. The Company anticipates that
the percentage of instruments placed through RPs, particularly RPs without
formal reagent agreements, will increase in the future which is likely to result
in a decrease in instrument sales. In addition, average daily reagent use by
customers may fluctuate from period to period, which may contribute to future
fluctuations in revenues. In particular, customers who have received instruments
under RP arrangements that do not provide for specified reagent purchase
commitments are not contractually obligated to purchase reagents from the
Company and there can be no assurance regarding the timing or volume of reagent
purchases by such customers. Furthermore, customers that have entered into
contractual RP agreements may also attempt to cancel all or a portion of their
reagent purchase commitments. Accordingly, there can be no
15
<PAGE> 17
assurance regarding the level of revenues that will be generated by customers
procuring instruments through RP arrangements, particularly from those customers
who obtain instruments without reagent purchase commitments. In the event that
RP customers do not purchase anticipated quantities of reagents the Company will
have incurred substantial costs in supplying instruments to RP customers without
the receipt of an adequate reagent revenue stream; therefore, the Company's
business, financial condition and results of operations would be materially and
adversely affected.
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 its products. The Company's products could also be
rendered obsolete or noncompetitive by virtue of technological innovations in
the fields of cellular or molecular diagnostics.
RISKS ASSOCIATED WITH DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS. The
Company's future growth and profitability will be dependent, in large part, on
its ability to develop, introduce and market new instruments and reagents used
in diagnosing and selecting treatment for cancer and other disease states. In
particular, the Company must timely and successfully introduce its new smaller
instruments to the market place. These instruments are smaller capacity, lower
priced instruments than the Company's current instruments and are necessary to
expand the market opportunity at smaller hospitals and reference laboratories in
the United States and Europe. The Company depends, in part, on the success of
medical research in developing new antibodies, nucleic acid probes and clinical
diagnostic procedures that can be adapted for use in the Company's systems. In
addition, the Company will need to obtain licenses, on satisfactory terms, for
certain technologies, which cannot be assured. Certain of the Company's products
are currently under development, initial testing or preclinical or clinical
evaluation by the Company. Other products are scheduled for future development.
Products under development or scheduled for future development may prove to be
unreliable from a diagnostic standpoint, may be difficult to manufacture in an
efficient manner, may fail to receive necessary regulatory clearances may not
achieve market acceptance or may encounter other unanticipated difficulties.
COMPETITION. Competition in the diagnostic industry is intense and is expected
to increase. Competition in the diagnostic industry is based on, among other
things, product quality, price and the breadth of a company's product offerings.
The Company's systems compete both with products manufactured by competitors and
with traditional manual diagnostic procedures. The Company's competitors may
succeed in developing products that are more reliable or effectively less costly
than those developed by the Company and may be more successful than the Company
in manufacturing and marketing their products.
16
<PAGE> 18
On October 14, 1996, the Company transmitted a Notice of Breach of contract to
CMS and its parent company, Fisher Scientific, Inc., relating to its
Distribution Agreement with the Company's wholly owned subsidiary BioTek
Solutions, Inc. As a result of CMS's breach, the Company has implemented a
program to allow BioTek customers to voluntarily elect to use BioTek and Ventana
as their direct supplier of BioTek consumables.
MANUFACTURING RISK. The Company has only manufactured patient priority
instruments and reagents for commercial sale since late 1991. 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. The Company completed the consolidation of the
former BioTek reagent manufacturing into its Tucson facility during July 1996.
The Company must continue to 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 current GMP regulations prescribed by the 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.
DEPENDENCE ON KEY SUPPLIERS. The Company's instruments and reagent products are
formulated from chemicals, biological materials and parts utilizing proprietary
Ventana technology as well as standard processing techniques. Certain
components, raw materials and primary 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 parts or needed by the Company
will be available in commercial quantities, at acceptable prices, or at all. Any
supply interruption or related 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, or if, a new source of
supply is obtained.
DEPENDENCE UPON THIRD PARTY MANUFACTURERS FOR BATCH PROCESSING INSTRUMENTS. The
Company relies on two outside parties to manufacture its batch processing
instruments. There can be no assurance that these manufacturers will be able to
meet the Company's product needs in a satisfactory, cost effective or timely
manner. The Company's reliance on third-party manufacturers involves a number of
risks, including the absence of guaranteed capacity, reduced control over
delivery schedules, quality assurance issues and costs. The amount and timing of
resources to be devoted to these activities by such manufacturers are not within
the control of the Company, and there can be no assurance that manufacturing
problems will not occur in the future.
RISKS ASSOCIATED WITH PAST 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 technologies or
products in the future. Acquisitions of companies, divisions of companies, or
products entail 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,
(iii) loss of key employees of acquired operations and (iv) large one-time
write-off and similar accounting
17
<PAGE> 19
changes including amortization of acquired goodwill. No assurance can be given
that the Company will not incur problems in integrating BioTek's operations or
any future acquisition and there can be no assurance that the acquisition of
BioTek, or any 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.
RISKS RELATING TO PATENTS AND PROPRIETARY RIGHTS. The Company's success depends,
in part, on its ability to obtain patents, maintain trade secret protection and
operate without infringing on 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 by 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 which could result would result in
significant cost to the Company as well as diversion of management time.
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.
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 1997. The Company's future capital requirements
will depend on many factors, including the extent to which the Company's
products gain market acceptance, the mix of instruments placed through direct
sales or through RPs, progress of the Company's product development programs,
competing technological and market developments, expansion of the Company's
sales and marketing activities, the cost of manufacturing scale up activities,
possible acquisitions of complementary businesses, products or technologies, the
extent and duration of operating losses and timing of regulatory approvals. The
Company may require additional capital resources and there is no assurance such
capital will be available to the extent required, on terms acceptable to the
Company, or at all. Any such future capital requirements would result in the
issuance of equity securities which could be dilutive to existing stockholders.
18
<PAGE> 20
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 material adverse
effect on the Company's business, financial condition and results of operations.
UNCERTAINTY 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. However, research funding by the
government may be significantly reduced under several budget proposals under
consideration in 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 REGULATIONS. The manufacturing, marketing and sale of
the Company's products are subject to extensive and rigorous government
regulations in the United States and 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: 510(k) process and the 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.
Regulator's of medical devices in foreign countries where the Company operates
have regulations similar to the United States in most cases. Additionally, the
Company is required to comply with the FDA's GMP regulations. These regulations
mandate certain operating, control and documentation procedures when
manufacturing medical products, instruments and devices.
The Company is also required to comply with the FDA's Clinical Laboratory CLIA
regulations. These rules restrict the sale of reagents to clinical laboratories
certified under CLIA. The full implementation of CLIA rules could limit the
clinical customers to which the Company could sell reagents in the future.
In addition to these regulations, the Company is subject to numerous federal,
state and local laws and regulations relating to such matters as safe working
conditions and environmental matters. There can be no assurance that such laws
and regulations will not in the future have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS RELATING TO AVAILABILITY OF THIRD-PARTY REIMBURSEMENT AND POTENTIAL
ADVERSE EFFECTS OF HEALTH CARE Reform. The Company's ability to achieve revenue
growth and profitability may depend on the ability of the Company's customers to
obtain adequate levels of third-party reimbursement for the 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.
19
<PAGE> 21
PRODUCT LIABILITY AND RECALL; PRODUCT LIABILITY INSURANCE. The marketing and
sales of the Company's diagnostic instruments and reagents entails risk of
product liability claims. The Company has product liability insurance coverage
with a per occurrence maximum of $2.0 million and an aggregate annual maximum of
$5.0 million. There can be no assurance that this level of insurance coverage
will be adequate or that insurance coverage will continue to be available on
acceptable terms, or at all. A product liability claim or recall could have a
material adverse effect on the Company's business, reputation, financial
condition and results of operations.
ENVIRONMENTAL MATTERS. Certain of the Company's manufacturing processes,
primarily processes involved in manufacturing certain of the Company's reagent
products, require the use of potentially hazardous and carcinogenic chemicals.
The Company is required to comply with applicable federal, state and local laws
regarding the use, storage and disposal of such materials. The Company currently
uses third-party disposal services to remove and dispose of the hazardous
materials used in the processes. The Company could, in the future, encounter
claims from individuals, governmental authorities or other persons or entities
in connection with exposure to, disposal or handling of such hazardous materials
or violations of environmental laws by the Company or its contractors and could
also be required to incur additional expenditures for hazardous materials
management or environmental compliance. Costs associated with environmental
claims, violations of environmental laws or regulations, hazardous materials
management and compliance with environmental laws could have a material adverse
effect on the business, financial condition and results of operations of the
Company.
BROAD DISCRETION OF MANAGEMENT TO CAPITAL RESOURCES. The Company used
approximately $3.4 million of the net proceeds from of its initial public
offering to repay Notes prior to its due date at the end of February 1998. The
Company received a 9.5% discount on the portion of the Notes which were retired
early. The Company anticipates that its remaining capital resources will be used
for capital expenditures, working capital and general corporate purposes. The
Company's management has broad discretion in determining the amount and timing
of expenditures.
CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER PROVISIONS. The Company's
stockholders prior to the initial public offering beneficially owned after such
offering 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 could be
dilutive to existing stockholders. In addition, provisions in the Company's
Certificate of Incorporation and Bylaws: (i) prohibit stockholders from acting
by written consent without a meeting or calling a special meeting of
stockholders, (ii) require advance notice of business proposed to be brought
before an annual or special meeting of stockholders and (iii) provide for a
classified board of directors. The amendment or modification of these provisions
will require the affirmative vote of the holders of 66 2/3% of the outstanding
shares of Common Stock.
20
<PAGE> 22
POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the Company's initial public
offering on July 26, 1996, there was no public market for the Company's Common
Stock or any other securities of the Company. There can be no assurance that an
active trading market for the Company's Common Stock will continue to develop
or, if developed, will be sustained. 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 governmental
regulations, 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' estimated earnings 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 and adversely affected.
ABSENCE OF DIVIDENDS. 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.
21
<PAGE> 23
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
In July 1996, a majority of the then outstanding shares of Common Stock and
Preferred Stock of the Company approved by written consent, in lieu of a meeting
of stockholders, the following: (i) the approval of the amendment and
restatement of the Company's Certificate of Incorporation to effect a reverse
stock split, authorize a class of undesignated preferred stock, change certain
rights and preferences of the Company's Series A, C and D Preferred Stock and
eliminate the right of stockholders to act by written consent following an
initial public offering, (ii) the approval of a further restatement of the
Company's Certificate of Incorporation to eliminate reference to the Company's
Series A, C and D Preferred Stock following the completion of an initial public
offering, (iii) the approval to restate the Company's Bylaws to change the
persons authorized to call special stockholders, eliminate the right of
stockholders to act by written consent following the completion of an initial
public offering, establish an advance notice requirement for business to be
conducted at meetings of shareholders, establish a classified board of directors
effective upon the completion of an initial public offering and make certain
other changes; (iv) the approval, effective upon the completion of an initial
public offering, dividing the directors into three classes: Class I consisting
of directors C. Anthony Stellar, James M. Strickland and James R. Weersing,
Class II consisting of directors Rex J. Bates, Michael R. Danzi and Edward M.
Giles and Class III consisting of directors Jack W. Schuler, R. James Danehy,
Thomas M. Grogan and John Patience, with terms of office of Class I, II and III
directors to expire upon the Company's 1997, 1998 and 1999 annual meeting of
stockholders, respectively; (v) the approval to adopt the 1996 Stock Option Plan
and reservation of 1,000,000 post split shares of Common Stock of the Company
for issuance under the Plan; (vi) the approval to adopt the 1996 Employee Stock
Purchase Plan and reservation of 200,000 post split shares of the Company's
Common Stock for issuance under the Plan; (vii) the approval to adopt the 1996
Director Stock Option Plan and reservation of 250,000 post split shares of the
Company's Common Stock for issuance under the Plan; and (viii) the approval to
reserve an additional 34,167 shares of pre-split Series D Preferred Stock for
issuance to the Company's 1991 Employee Stock Purchase Plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
11.1 Statements of Computation of Weighted Average Shares
Outstanding ( Actual and Pro Forma).
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the Company for
the quarter ended September 30, 1996.
22
<PAGE> 24
SIGNATURE
Pursuant to the requirements of the securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ventana Medical Systems, Inc.
Date: November 7, 1996. By: /s/ R. Michael Rodgers
--------------------------------
R. Michael Rodgers
Vice President, Chief Financial Officer,
Treasurer and Secretary.
( Principal Financial and Accounting
Officer)
26
<PAGE> 1
VENTANA MEDICAL SYSTEMS, INC.
EXHIBIT 11.1
Statement of Computation of Weighted Average Shares Outstanding
<TABLE>
<CAPTION>
Split Ratio: 2.7059046
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1995 1996 1995 1996
----------- ------------ ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net loss $ (705,000) $ (485,000) $(2,409,000) $(11,534,000)
----------- ------------ ----------- ------------
Weighted average common shares outstanding (1) 7,595,962 10,195,633 7,507,544 8,852,074
Common stock equivalents pursuant to SAB 83:
Stock, option and warrants issued within one
year of initial filing (2) 1,092,779 -- 1,092,779 728,519
-- -- -- --
----------- ------------ ----------- ------------
Weighted average common shares outstanding 8,688,741 10,195,633 8,600,323 9,580,593
during the period ----------- ------------ ----------- ------------
Net loss per share $ (0.08) $ (0.05) $ (0.28) $ (1.20)
----------- ------------ ----------- ------------
</TABLE>
(1)Includes conversion of Series A, C and D Preferred Shares, which
occurred upon completion of the Company's initial public offering on
July 26, 1996.
(2)Treated as outstanding for the quarters prior to the effective date of
the Company's initial public offering on July 26, 1996.
23
<PAGE> 2
VENTANA MEDICAL SYSTEMS, INC.
EXHIBIT 11.1
Statement of Calculation of Pro Forma Net Loss Per Common Share
Condensed Consolidated Pro Forma Statements
<TABLE>
<CAPTION>
Split Ratio: 2.7059046
Nine Months Ended
September 30
------------
1995 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Pro forma net loss $(17,623,000) $ (1,997,000)
------------ ------------
Weighted average common shares outstanding (1) 7,507,544 8,396,600
Common stock equivalents pursuant to SAB 83:
Stock, option and warrants issued within one
year of initial filing (2) 1,092,779 728,519
Shares of common stock issued in connection
with the initial public offering assumed to be
used to partially retire acquisition debt 1,503,000 1,503,000
------------ ------------
Weighted average common shares outstanding 10,103,323 10,628,119
during the period ------------ ------------
Pro forma net loss per share $ (1.74) $ (0.19)
------------ ------------
</TABLE>
(1)Includes conversion of Series A, C and D Preferred Shares, which
occurred upon completion of the Company's initial public offering on
July 26, 1996. Excludes shares issued in the initial public offering.
(2)Treated as outstanding for the quarters prior to the effective date of
the Company's initial public offering on July 26, 1996.
24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 17,116
<SECURITIES> 0
<RECEIVABLES> 3,534
<ALLOWANCES> 0
<INVENTORY> 3,226
<CURRENT-ASSETS> 24,850
<PP&E> 5,991
<DEPRECIATION> (2,849)
<TOTAL-ASSETS> 39,614
<CURRENT-LIABILITIES> 2,412
<BONDS> 15,937
0
0
<COMMON> 31
<OTHER-SE> 16,980
<TOTAL-LIABILITY-AND-EQUITY> 39,614
<SALES> 15,895
<TOTAL-REVENUES> 15,895
<CGS> 6,513
<TOTAL-COSTS> 6,513
<OTHER-EXPENSES> 20,888
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28
<INCOME-PRETAX> (11,534)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,534)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,534)
<EPS-PRIMARY> (1.20)
<EPS-DILUTED> (1.20)
</TABLE>
