<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 MARCH 31, 1997
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 ________
------------------------
VENTANA MEDICAL SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-2976937
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3865 NORTH BUSINESS CENTER DRIVE 85705
TUCSON, ARIZONA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
(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 -- 12,907,015 shares as of May 2, 1997
================================================================================
<PAGE> 2
VENTANA MEDICAL SYSTEMS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).......................................... 2
Condensed Consolidated Balance Sheets December 31, 1996 and March 31, 1997
(Unaudited)............................................................... 2
Condensed Consolidated Statements of Operations Three months ended March
31, 1996 and 1997 (Unaudited)............................................. 3
Condensed Consolidated Statement of Cash Flows Three months ended March
31, 1996 and 1997 (Unaudited)............................................. 4
Notes to Condensed Consolidated Financial Statements...................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................ 8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS......................................................... 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................... 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................... 20
Signature
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
VENTANA MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1997
DECEMBER 31, -----------
1996 (UNAUDITED)
-------------
(NOTE)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................ $ 11,067 $ 26,952
Accounts receivable.............................................. 5,145 5,055
Inventories (Note 2)............................................. 3,272 4,044
Other............................................................ 1,044 1,166
------- -------
Total current assets............................................... 20,528 37,217
Property and equipment, net (Note 3)............................... 3,301 3,897
Intangibles, net (Notes 4 and 5)................................... 8,581 8,476
------- -------
Total assets............................................. $ 32,410 $ 49,590
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................................. $ 1,738 $ 1,872
Other current liabilities........................................ 2,902 3,735
------- -------
Total current liabilities.......................................... 4,640 5,607
Long term debt (Note 6)............................................ 12,500 1,434
Stockholders' equity (Note 7):
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;
10,978,238 and 12,883,912 shares issued and outstanding at
December 31, 1996 and March 31, 1997, respectively............ 48,896 76,217
Accumulated deficit.............................................. (33,410) (33,201)
Cumulative foreign currency translation adjustment............... (216) (467)
------- -------
Total stockholders' equity............................... 15,270 42,549
------- -------
Total liabilities and stockholders' equity............... $ 32,410 $ 49,590
======= =======
</TABLE>
- ---------------
Note: The condensed consolidated balance sheet at December 31, 1996 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.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1997
-------- -------
<S> <C> <C>
Sales:
Instruments............................................................ $ 1,594 $ 1,971
Reagents and other..................................................... 2,552 4,987
-------- -------
Total net sales................................................ 4,146 6,958
Cost of goods sold....................................................... 1,541 2,701
-------- -------
Gross profit............................................................. 2,605 4,257
Operating expenses:
Research and development............................................... 613 729
Selling, general and administrative.................................... 2,265 3,378
Nonrecurring expenses.................................................... 9,983 --
Amortization of intangibles.............................................. 46 127
-------- -------
Income (loss) from operations............................................ (10,302) 23
Interest income (expense)................................................ (4) 186
-------- -------
Net income (loss)........................................................ (10,306) $ 209
======== =======
Net income( loss) per share, as adjusted (Note 8)........................ $ (1.16) $ 0.02
======== =======
Shares used in computing net per share................................... 8,895 12,924
======== =======
</TABLE>
See accompanying notes
3
<PAGE> 5
VENTANA MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1996 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)....................................................... $(10,306) $ 209
Adjustments to reconcile net loss to cash provided by operating
activities:
Purchase in process research and development (Note 5)................. 7,900 --
Depreciation and amortization......................................... 298 422
Changes in operating assets and liabilities, net...................... 899 162
-------- --------
Net cash provided by operating activities............................... (1,209) 793
INVESTING ACTIVITIES:
Purchase of property and equipment, net................................. (69) (876)
Purchase of intangible assets (Note 4).................................. -- (37)
Acquisition of BioTek Solutions, Inc. (Note 5).......................... (2,500) --
-------- --------
Net cash provided by investing activities............................... (2,569) (913)
FINANCING ACTIVITIES:
Issuance (repayment) of debt (including amounts from related parties)
and stock (Note 6).................................................... 6,092 (10,408)
Net proceeds from public offering (Note 7).............................. -- 26,664
-------- --------
Net cash provided by financing activities............................... 6,092 16,256
Effect of exchange rate change on cash.................................. 20 (251)
-------- --------
Net increase in cash and cash equivalents............................... 2,334 15,885
Cash and cash equivalents, beginning of period.......................... 1,103 11,067
-------- --------
Cash and cash equivalents, end of period................................ $ 3,437 $ 26,952
======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 6
VENTANA MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The accompanying condensed 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 auditors. 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
Annual Report and Form 10-K for the year ended December 31, 1996.
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, MARCH 31,
1996 1997
------------ ---------
(IN THOUSANDS)
<S> <C> <C>
Raw material and work-in-process...................... $2,379 $ 3,038
Finished goods........................................ 893 1,006
------ ------
$3,272 $ 4,044
====== ======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ---------
(IN THOUSANDS)
<S> <C> <C>
Diagnostic instruments................................ $2,762 $ 3,027
Machinery and equipment............................... 2,193 3,119
Computers and related equipment....................... 945 709
Furniture and fixtures................................ 292 142
Leasehold improvements................................ 253 324
------ ------
6,445 7,321
====== ======
Less accumulated depreciation and amortization........ 3,144 3,424
$3,301 $ 3,897
====== ======
</TABLE>
5
<PAGE> 7
VENTANA MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INTANGIBLES
Intangibles consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ---------
(IN THOUSANDS)
<S> <C> <C>
Goodwill.............................................. $1,756 $ 1,756
Developed technology.................................. 2,800 2,800
Customer list......................................... 4,100 4,100
Patents............................................... 444 481
====== ======
Less accumulated amortization......................... 519 661
$8,581 $ 8,476
====== ======
</TABLE>
5. ACQUISITION OF BIOTEK SOLUTIONS, INC.
The Company acquired BioTek Solutions, Inc. ("BioTek") for $19.1 million on
February 26, 1996. The acquisition has been accounted for as a purchase. The
consolidated financial statements include the operations of BioTek from the date
of 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>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Cash consideration............................................. $ 2,500
Stock issued to BioTek noteholders............................. 3,016
Exchange Notes issued.......................................... 8,968
Note payable -- escrow for contingencies....................... 234
Net historical liabilities acquired............................ 4,389
-------
Total purchase price................................. $ 19,107
=======
</TABLE>
The purchase price was allocated as follows:
<TABLE>
<CAPTION>
<S> <C>
Tangible net assets............................................ $ 2,252
In-process research and development............................ 7,900
Goodwill and other intangibles................................. 2,055
Developed technology........................................... 2,800
Customer list.................................................. 4,100
-------
$ 19,107
=======
</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.
6. LONG-TERM DEBT:
On February 19, 1997, the Company repaid the remaining $10.3 million of
outstanding exchange notes and Ventana notes which were issued in connection
with the acquisition of BioTek discussed in Note 5 above out of the proceeds of
its secondary offering completed in the first quarter of 1997. Such repayment
was made in accordance with provisions of the notes to the effect that no
interest would be due and payable thereon if full repayment was made prior to
February 26, 1997.
6
<PAGE> 8
VENTANA MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PUBLIC OFFERING:
On February 12, 1997, the Company sold, through an underwritten secondary
offering, 1,850,000 shares of its Common Stock at $15.00 per share and realized
net proceeds of $26.2 million to the Company. On February 21, 1997, the
Company's underwriters exercised their overallotment option in full. The
underwriters purchased an additional 31,066 shares of Common Stock from the
Company, resulting in net proceeds of $0.4 million to the Company.
8. INCOME (LOSS) PER SHARE:
Income (loss) per share for the three months ended March 31, 1996 and 1997
is computed by dividing net income (loss) by the weighted average number of
shares of common stock outstanding, after giving effect to dilutive stock
options and warrants using the treasury method except that stock options and
warrants are not included in the per share calculation for the three months
ended March 31, 1996 because the effect of their inclusion would be
antidilutive, except further that for periods prior to the effective date of the
Company's initial public offering of July 26, 1996, 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.
STATEMENT OF COMPUTATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1997
-------- -------
(UNAUDITED)
<S> <C> <C>
Net income (loss)............................................... $(10,306) $ 209
Weighted average common shares outstanding...................... 8,895 11,931
Dilutive stock options and warrants............................. -- 993
Weighted average common shares outstanding during the period.... 8,895 12,924
Net income (loss) per share..................................... $ (1.16) $ 0.02
======== =======
</TABLE>
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS:
The following discussion of the financial condition and results of
operations of Ventana should be read in conjunction with the Condensed
Consolidated Financial Statements and related Notes thereto included elsewhere
in this Form 10-Q. This Report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Actual events or results may
differ materially from those anticipated by such forward-looking statements as a
result of the factors described herein and in the documents incorporated herein
by reference. Such forward-looking statements include, but are not limited to,
statements concerning the risk of cancer/cancer screening/improvements in
automated IHC; business strategy; development and introduction of new products;
research and development; marketing, sales and distribution; manufacturing;
competition; third-party reimbursement; government regulation; and operating and
capital requirements.
OVERVIEW:
Ventana Medical Systems, Inc. ("Ventana or the Company") 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. 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 which is used to visualize the primary antibody. Therefore, the
principal economic drivers for the Company are the number, type and method of
placement of instruments, 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 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.
In February 1996, Ventana acquired BioTek Solutions, Inc. ("BioTek"), for
an aggregate consideration of $19.1 million, consisting of cash, promissory
notes, 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.
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. 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 lower gross margins on United States sales than if it
had sold its products directly as well as a higher level of selling expense than
typically incurred in conjunction with third-party distribution arrangements.
Ventana's strategy regarding BioTek is to continue 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
8
<PAGE> 10
intend to renew the United States distribution agreement with CMS which expires
in April 1998. The international distribution agreement with DAKO expires in
December 1999.
The Company places instruments through direct sales, including nonrecourse
leases, instrument rentals and RPs. In an RP, the Company provides the customer
with the use of an instrument with no capital investment with the objective of
creating reagent revenue. The terms and conditions of RP instrument placements
can vary from formal agreements specifying minimum volumes and unit pricing for
reagent purchases to short term, informal arrangements where customers purchase
reagents on a month to month basis. For RP placements, the Company incurs the
cost of manufacturing or procuring instruments and recognizes revenues only as
customers purchase reagents rather than at the time of instrument placement. The
manufacturing cost of instruments placed through RPs is charged to cost of goods
sold by depreciating standard costs over a period of three or four years. As a
result, gross profit for instruments placed through RPs is recognized over a
three or four year period rather than at the time of placement, as is the case
in direct sales. Revenue associated with instruments placed through RPs is based
on a volume pricing matrix which is designed to enable the Company to recover
the sales value of the instrument through an increased price on the reagents
purchased by the user. The Company typically recovers the cash costs associated
with the placement of instruments through RPs in less than two years, although
the Company's ability to recover such costs may be affected by the volume and
pricing of reagents purchased by the customers. Due to working capital
requirements associated with RPs, the Company has historically sought to limit
the amount of instruments placed through RPs. 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 the
NexES and as the Company obtains the additional working capital required to
support additional RP placements. This is likely in the future to result in a
decrease in instrument sales both in absolute dollars and as a percentage of
total revenues. Instruments provided to customers under RPs without formal
reagent purchase commitments are only considered placements if and when certain
reagent purchase criteria are met by the customer. The Company typically only
provides an instrument under an RP without a formal reagent purchase commitment
if the Company believes that the customer performs a minimum number of IHC tests
annually. As of March 31, 1997, the Company had placed 117 instruments through
RPs.
The Company's future results of operations may fluctuate significantly from
period to period due to a variety of factors. The initial placement of an
instrument is subject to a longer, less consistent sales cycle than the sales of
reagents, which begin and typically are recurring once an instrument is placed.
The Company's operating results in the future are likely to fluctuate
substantially from period to period because instrument sales are likely to
remain an important part of revenues in the near future. The degree of
fluctuation will depend on the timing, level and mix of instruments placed
through direct sales and instruments placed through RPs. In addition, average
daily reagent use by customers may also fluctuate from period to period, which
may contribute to future fluctuations in revenues. Sales of instruments may also
fluctuate from period to period because sales to the Company's international
distributors typically provide such distributors with several months of
instrument inventory, which the distributors will subsequently seek to place
with end-users. The Company's instrument installed base includes instruments
shipped to DAKO and recognized as sales. Furthermore, due both to the Company's
increased sales focus on smaller hospitals and laboratories and the relatively
high reagent sales growth rates in recent fiscal periods, the rate of growth in
reagent sales in future periods is likely to be below that experienced during
the past several fiscal periods. Other factors that may result in fluctuations
in operating results include the timing of new product announcements and the
introduction of new products and new technologies by the Company and its
competitors, market acceptance of the Company's current or new products,
developments with respect to regulatory matters, availability and cost of raw
materials purchased from suppliers, competitive pricing pressures, increased
sales and marketing expenses associated with the implementation of the Company's
market expansion strategies for its instruments and reagent products, and
increased research and development expenditures. Future instrument and reagent
sales could also be adversely affected by the configuration of the Company's
patient priority systems, which require the use of the Company's detection
chemistries, particularly if and to the extent that competitors are successful
in developing and introducing new IHC instruments or if competitors offer
reagent supply arrangements having pricing or other terms more favorable than
those offered by the Company. Such increased competition in reagent supply could
also adversely affect sales of reagents to batch processing
9
<PAGE> 11
instrument customers since those instruments do not require the use of the
Company's reagents. 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 MONTHS ENDED MARCH 31, 1996 AND 1997:
Ventana acquired BioTek on February 26, 1996 in a transaction accounted for
as a purchase. Consequently, operating performance for the combined Company
reflects BioTek's results for the month of March only.
Net Sales:
Net sales for the three months ended March 31, 1997 versus the same period
ended during 1996 increased 68% to $7.0 million from $4.1 million. The increase
in net sales was attributable to a 24% increase in instrument sales and a 95%
increase in reagent sales. Instrument sales increased due to increased
instrument placements as well as higher sales of the gen II and TechMate
instruments. Reagent sales increased due to sales of reagents to new customers,
increased sales to existing customers and sales to new customers resulting from
the acquisition of BioTek.
Gross Margin:
Gross profit for the three months ended March 31, 1997 increased to $4.3
million from $2.6 million for the same period in 1996. Gross margin for the
three months ended March 31, 1997 decreased to 61% from 63% for the same period
during 1996. 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 $0.7 million for the three months
ended March 31, 1997. This represents an increase of $0.1 million compared to
the same period during 1996. Research and development expenses declined as a
percent of sales to approximately 10% for the three months ended March 31, 1997
compared to 15% for the same period during 1996. Research and development
expenses for the three months ended March 31, 1997 related primarily to the
development of new reagents and instruments, including the NexES patient
priority instrument and new prognostic markers. Research and development
expenses for the three months ended March 31, 1996 related primarily to the gen
II instrument and IHC reagent development.
10
<PAGE> 12
Selling, General and Administrative ("SG&A"):
Presented below is a summary of SG&A expense for the three months ended
March 31, 1996 and 1997.
SG&A SUMMARY:
<TABLE>
<CAPTION>
MARCH 31,
THREE MONTHS ENDED
-------------------------------------
1996 1997
---------------- ----------------
% %
$ SALES $ SALES
------ ----- ------ -----
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Sales and marketing........................ $1,687 41% $2,450 35%
Administration............................. 578 14% 928 14%
-- --
------ ------
Total SG&A....................... $2,265 55% $3,378 49%
====== == ====== ==
</TABLE>
SG&A expense for the three months ended March 31, 1997 increased to $3.4
million from $2.3 million for the three months ended March 31, 1996. SG&A
expense as a percent of net sales declined to 49% for the three months ended
March 31, 1997 compared to 55% for the same period during 1996. The percentage
decline in SG&A expenses was due primarily to increased net sales. 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 costs associated with supporting an expanding business base and legal
expenses associated with certain pending litigation matters
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 $33.2 million as of March 31, 1997.
The Company has funded its operations primarily through the private placement of
approximately $31.0 million in equity and debt securities, 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) and its secondary offering completed in February 1997 which resulted in
net proceeds of $26.7 million (after giving effect to the exercise of the
underwriter's overallotment option). As of March 31, 1997 the Company's
principal source of liquidity consisted of cash and cash equivalents of $27.0
million and borrowing capacity under its bank term credit facility and revolving
line of credit. As of March 31, 1997, the bank term loan facility of $2.0
million was fully available to the Company and no borrowings were outstanding
thereunder. The Company also has a $2.7 million revolving bank credit facility.
In March 1997, this line of credit was extended for sixty days during which time
the Company intends to renegotiate the line. As of March 31, 1997 approximately
$0.5 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 $2.2 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.
11
<PAGE> 13
On February 18, 1997, the Company completed a follow-on offering of its
Common Stock in which it sold 1,881,066 shares of its Common Stock to the public
with net proceeds of $26.1 million to the Company. On February 19, 1997, the
Company repaid the $10.3 million of outstanding Exchange Notes and Ventana Notes
out of the proceeds of its secondary offering. All of the outstanding Promissory
Notes issued in connection with the Company's acquisition of BioTek were thereby
repaid. Such repayment was made in accordance with the provisions of the Notes
which provided that no interest would be due and payable thereon if full
repayment was made prior to February 27, 1997.
The Company expects to use approximately $2.3 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 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 three months ended March 31, 1997 the Company used for
operations and investing activities approximately $.1 million in cash versus
$3.8 million for the three months ended March 31, 1996.
In connection with BioTek's agreement with DAKO, DAKO made two loans to
BioTek secured by a pledge of substantially all of BioTek's assets. DAKO also
made prepayments to BioTek for future instrument purchases and reagent
royalties. These loans and prepayments were used to fund TechMate 250 instrument
development and working capital requirements. On September 25, 1996, BioTek and
DAKO entered in to the Amendment Agreement for the purpose of addressing several
matters, including repayment of the secured loans and prepayments. The aggregate
balance of the secured loans and prepayments was $1.4 million and $0.9 million,
respectively, at the time of the Amendment Agreement. Of the secured loans, $0.3
million bears interest at 5% per annum and the remaining $1.1 million does not
bear interest. The prepayments do not bear interest. The secured loans and
prepayments are recorded as long term debt in the Company's Condensed
Consolidated Financial Statements. Pursuant to the Amendment Agreement, DAKO
paid the Company a royalty of $0.5 million and the Company paid DAKO $0.5
million as a reduction of the balance of the prepayments. Under the Amendment
Agreement, the remaining secured loans and prepayments will be repaid through
discounts on DAKO purchases of TechMate instruments from BioTek at recoupment
rates specified in the Amendment Agreement. At March 31, 1997, the outstanding
balance of the secured loans and prepayments was $1.0 million and $0.4 million,
respectively. Upon termination of the distribution agreement or in the event of
a default by BioTek under the distribution agreement, these loans may be
converted to fixed term loans that will be due and payable in 12 equal quarterly
installments commencing upon such event.
The Company believes that its existing capital resources, together with
cash generated from product sales and available borrowing capacity under its
bank credit facilities will be sufficient to satisfy its working capital
requirements for at least the next 18 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 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.
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<PAGE> 14
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS:
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
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
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<PAGE> 15
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.
MANUFACTURING RISKS. 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 DISTRIBUTION RELATIONSHIPS. 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
Fisher Scientific, Inc. ("CMS"), under an exclusive agreement that expires in
April 1998. United States sales through CMS are subject to several operating
conditions and risks. In particular, it has historically been necessary for
BioTek to support, and the Company anticipates that it will need to continue to
support, the efforts of CMS with direct field sales and support personnel. As a
result, the Company generates lower gross margins on sales through CMS that it
would generate were it to sell directly to end-users and incurs higher selling
expenses that typically associated with third-party distribution arrangements.
In addition, the Company has notified CMS that CMS has not fulfilled its
obligations under the agreement, both with respect to purchases of units and
support and promotion of batch processing instruments in the United States. CMS
has responded to the
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<PAGE> 16
Company's notice, denied breach of the agreement, suggested that certain
activities undertaken by the Company may constitute a breach of the agreement by
the Company or may otherwise be actionable, and suggested that the Company and
CMS attempt to reach a negotiated settlement. There can be no assurance that the
Company and CMS will be able to reach a negotiated settlement or that the
Company will not become involved in litigation or other disputes with CMS which
could involve substantial costs and diversion of management time. 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 April 1998 expiration. In the event that CMS does not adequately promote and
market batch processing instruments and reagents or manage customer
relationships during the remaining term of the agreement or in the event that
difficulties continue in the relationship between the Company and CMS, the
Company's sales of batch processing instruments and reagents in the United
States could be adversely affected and the Company could also experience
disruptions in the supply of batch processing instruments and reagents to
customers in the United States. These developments could have a material adverse
effect on the Company's business, financial condition and results of operations.
In Europe, batch processing instruments are sold through DAKO which also
pays BioTek a fixed dollar royalty for each instrument in service in exchange
for the right to sell its own reagents for use with such systems. The agreement
with DAKO provides DAKO with exclusive distribution rights for batch processing
instruments in Europe and other territories, subject to certain performance
requirements. The agreement expires in December 1999. Accordingly, the Company
is likely to be dependent upon DAKO for international sales of batch processing
instruments through this date.
In connection with an amendment (the "Amendment Agreement") entered into
between DAKO and the Company in November 1996, certain minimum purchase and
delivery commitments for TechMate 250 and TechMate 500 instruments, as well as
pricing for certain quantities of TechMate 250 instruments, were established.
Pricing for additional quantities of TechMate 250 instruments was not resolved
in the Amendment Agreement and the parties are currently in disagreement as to
such pricing. Currently, DAKO is purchasing such instruments at the price levels
established by the Company. However, the parties may, pursuant to the
distribution agreement, initiate binding arbitration proceedings to resolve such
pricing. In the event such arbitration proceedings are initiated and are
determined adversely to the Company, the pricing of TechMate 250 instruments to
DAKO would be on terms less favorable to the Company than the current pricing
terms and the amount of secured loans and prepayments recouped per instrument
sales would also be reduced.
Additionally, during the course of ongoing discussions with DAKO since the
acquisition of BioTek, 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 and has asserted that DAKO has not met certain obligations under such
agreement. In particular, the Company believes that its 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, which remedies
include (i) requiring repayment of the secured loans in 12 equal quarterly
installments commencing upon a default by BioTek and (ii) an irrevocable license
to manufacture TechMate instruments for resale internationally and a related
reduction in the fixed dollar royalty rate paid by DAKO to BioTek for each
instrument included in the royalty base. The Company could also experience an
interruption in the distribution of batch processing instruments outside the
United States or become involved in litigation with DAKO with respect to the
current distribution agreement, which would involve significant costs as well as
diversion of management time. There can be no assurance that the Company would
prevail in any litigation involving the agreement. Furthermore, 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.
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<PAGE> 17
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 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.
UNCERTAINTY OF FUTURE FUNDING OF CAPITAL REQUIREMENTS. The Company
anticipates that its existing capital resources will be adequate to satisfy its
capital requirements through at least the next 18 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 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.
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.
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<PAGE> 18
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.
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.
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
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<PAGE> 19
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.
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<PAGE> 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In March 1995, BioGenex sued BioTek in the United States District Court for
the Northern District of California for infringement of certain patent rights
held by BioGenex relating to an antigen retrieval method used in IHC tests.
Following several unsuccessful attempts to settle the claims, a trial commenced
in April 1997. Early in May 1997, the jury determined that the BioGenex patent
was valid, that BioTek had willfully infringed and assessed a damage award of
$404,150. As a result of the willful infringement finding, the award could be
doubled or tripled and the defendant's legal expenses subject to reimbursement.
A judicial decision on the announcement of the award is due June 30, 1997.
In January 1997, four individuals who are former BioTek noteholders who
held in the aggregate approximately $1.1 million in principal amount of BioTek
notes filed an action, Tse, et al v. Ventana Medical Systems, Inc., et al. No.
97-37, against the Company and certain of its directors and stockholders in the
United States District Court for the District of Delaware. The complaint
alleges, among other things, that the Company violated federal and California
securities laws and engaged in common law fraud in connection wit the BioTek
shareholders' consent to the February 1996 merger of BioTek into Ventana and the
related conversion of BioTek notes into Ventana notes. Plaintiffs seek
substantial compensatory damages several times in excess of the principal amount
of their BioTek notes, as well as substantial punitive damages, and fees and
costs. Based on the facts known to date, the Company believes that the claims
are without merit and intends to vigorously contest this suit. After
consideration of the nature of the claims and the facts relating to the merger
and the BioTek note exchange, the Company believes that it has meritorious
defenses to the claims and that resolution of this matter will not have a
material adverse effect on the Company's business, financial condition and
results of operations; however, the results of the proceedings are uncertain and
there can be no assurance to that effect.
In February 1997, the Company filed suit against Cell Marque Corporation
for patent and trademark infringement and associated other claims in connection
with the filling by Cell Marque Corporation of spent Ventana reagent dispensers
with unapproved reagents. In March 1997, Cell Marque filed counterclaims against
the Company alleging antitrust and Lanham Act violations. 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.
The Company has received notices of various claims from certain current and
former employees of BioTek. Two of such former employees have filed lawsuits
against the Company, a former director, and certain former BioTek employees
alleging that certain commitments made to them in connection with their
employment by BioTek were breached. 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 proceedings, the Company is not a party to any
material pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of stockholders of the Company was held on April 29,
1997, for the purpose of electing two Class I directors, Henry T. Pietraszek and
James R. Weersing, approving the appointment of auditors and transacting any
other business that might be brought forth. Proxies for the meeting were
solicited pursuant to section 14(a) of the Securities and Exchange Act of 1934
and there was no solicitation in opposition to management's solicitations.
Management's nominees for Class I directors, as listed in the proxy
statement were elected with the following vote:
<TABLE>
<CAPTION>
SHARES SHARES SHARES
VOTED "FOR" "WITHHELD" NOT VOTED
----------- ---------- ----------
<S> <C> <C> <C>
Henry T. Pietraszek........................ 8,988,179 59,409 3,836,324
James R. Weersing.......................... 8,988,179 59,409 3,836,324
</TABLE>
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<PAGE> 21
The appointment of Ernst & Young, LLP as independent auditors was approved
by the following vote:
<TABLE>
<CAPTION>
SHARES SHARES SHARES SHARES
VOTED "FOR" VOTED "AGAINST" "ABSTAINING" NOT VOTED
- ----------- --------------- ------------ ----------
<S> <C> <C> <C>
9,040,976 2,800 3,812 3,836,324
</TABLE>
No other matters were submitted for vote.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K.
On February 10, 1997, the Company filed a report on Form 8-K relating
to certain litigation initiated against the Company.
No other reports were filed on Form 8-K during the quarter ended March
31, 1997.
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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: May 9, 1997 By:
Pierre Sice
------------------------------------
Pierre Sice
Vice President, Chief Financial
Officer,Treasurer and Secretary
(Principal Financial and Accounting
Officer)
21
<PAGE> 23
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS CONDENSED CONSOLIDATED BALANCE SHEETS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 11,672
<SECURITIES> 15,280
<RECEIVABLES> 5,102
<ALLOWANCES> (47)
<INVENTORY> 4,044
<CURRENT-ASSETS> 37,217
<PP&E> 7,321
<DEPRECIATION> 3,424
<TOTAL-ASSETS> 49,590
<CURRENT-LIABILITIES> 5,607
<BONDS> 0
0
0
<COMMON> 76,217
<OTHER-SE> (33,668)
<TOTAL-LIABILITY-AND-EQUITY> 49,590
<SALES> 6,958
<TOTAL-REVENUES> 6,958
<CGS> 2,701
<TOTAL-COSTS> 2,701
<OTHER-EXPENSES> 4,234
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 186
<INCOME-PRETAX> 209
<INCOME-TAX> 0
<INCOME-CONTINUING> 209
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 209
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
