<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 June 30, 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 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 -- 12,970,391 shares as of July 22, 1997
<PAGE> 2
VENTANA MEDICAL SYSTEMS, INC.
INDEX TO FORM 10-Q
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets June 30, 1997 and
December 31, 1996 (Unaudited)
Condensed Consolidated Statements of Operations
Three months ended June 30, 1997 and 1996 (Unaudited)
Six months ended June 30, 1997 and 1996 (Unaudited)
Condensed Consolidated Statement of Cash Flows
Six months ended June 30, 1997 and 1996 (Unaudited)
Notes to Condensed Consolidated Financial Statements
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K.
Signature
<PAGE> 3
VENTANA MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
---------- ----------
(Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 25,618 $ 11,067
Accounts receivable 4,416 5,145
Inventories (Note 2) 3,782 3,272
Other 1,364 1,044
---------- ----------
Total current assets 35,180 20,528
Property and equipment, net (Note 3) 4,444 3,301
Intangibles, net (Notes 4 and 5) 8,340 8,581
---------- ----------
Total assets $ 47,964 $ 32,410
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,696 $ 1,738
Other current liabilities 3,871 2,902
---------- ----------
Total current liabilities 5,567 4,640
Long term debt (Note 6) 1,234 12,500
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
June 30, 1997, respectively 75,903 48,896
Accumulated deficit (34,579) (33,410)
Cumulative foreign currency translation adjustment (161) (216)
---------- ----------
Total stockholders' equity 41,163 15,270
---------- ----------
Total liabilities and stockholders' equity $ 47,964 $ 32,410
========== ==========
</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 Six Months Ended
June 30 June 30
-------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales:
Instruments $ 1,919 $ 1,706 $ 3,890 $ 3,299
Reagents and other 5,534 3,835 10,521 6,388
---------- ---------- ---------- ----------
Total net sales 7,453 5,541 14,411 9,687
Cost of goods sold 2,780 2,317 5,481 3,858
---------- ---------- ---------- ----------
Gross profit 4,673 3,224 8,930 5,829
Operating expenses:
Research and development 714 754 1,443 1,367
Selling, general and administrative 3,630 2,806 7,008 5,071
Non-recurring expenses 1,656 212 1,656 10,195
Amortization of intangibles 127 135 254 181
---------- ---------- ---------- ----------
Loss from operations (1,454) (683) (1,431) (10,985)
Other income (expense) 76 (60) 262 (64)
---------- ---------- ---------- ----------
Net loss $ (1,378) $ (743) $ (1,169) $ (11,049)
========== ========== ========== ==========
Net loss per share, as adjusted (Note 8) $ (0.11) $ (0.08) $ (0.09) $ (1.23)
========== ========== ========== ==========
Shares used in computing net per share 12,924 9,137 12,428 8,996
========== ========== ========== ==========
</TABLE>
See accompanying notes
3
<PAGE> 5
VENTANA MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
---------------------------
1997 1996
---------- ----------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (1,169) $ (11,049)
Adjustments to reconcile net loss to cash provided
by (used in) operating activities:
Purchase in process research and development (Note 5) -- 7,900
Depreciation and amortization 793 747
Changes in operating assets and liabilities, net 826 (62)
---------- ----------
Net cash provided by (used in) operating activities 450 (2,464)
INVESTING ACTIVITIES:
Purchase of property and equipment, net (1,651) (1,484)
Purchase of intangible assets (Note 4) (44) --
Acquisition of BioTek Solutions, Inc. (Note 5) -- (2,500)
---------- ----------
Net cash provided by investing activities (1,695) (3,984)
FINANCING ACTIVITIES:
Issuance (repayment) of debt (including amounts
from related parties) and stock (Note 6) (10,397) 8,553
Net proceeds from public offering (Note 7) 26,138 --
---------- ----------
Net cash provided by financing activities 15,741 8,553
Effect of exchange rate change on cash 55 (11)
---------- ----------
Net increase in cash and cash equivalents 14,551 2,094
Cash and cash equivalents, beginning of period 11,067 1,103
---------- ----------
Cash and cash equivalents, end of period $ 25,618 $ 3,197
========== ==========
</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>
June 30 December 31
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Raw material and work-in-process $ 2,890 $ 2,379
Finished goods 892 893
-------- --------
$ 3,782 $ 3,272
======== ========
</TABLE>
5
<PAGE> 7
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Diagnostic instruments $ 3,447 $ 2,762
Machinery and equipment 3,071 2,193
Computers and related equipment 812 945
Furniture and fixtures 119 292
Leasehold improvements 389 253
-------- --------
7,838 6,445
Less accumulated depreciation and amortization 3,394 3,144
-------- --------
$ 4,444 $ 3,301
======== ========
</TABLE>
4. INTANGIBLES
Intangibles consist of the following:
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Goodwill $ 1,756 $ 1,756
Developed technology 2,800 2,800
Customer list 4,100 4,100
Patents 488 444
-------- --------
9,144 9,100
Less accumulated amortization 804 519
$ 8,340 $ 8,581
======== ========
</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>
6
<PAGE> 8
The purchase price was allocated as follows:
<TABLE>
<CAPTION>
(in thousands)
<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.
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 $26.1 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. Legal and
accounting fees associated with the offering totaled $0.5 million.
8. NET LOSS PER SHARE:
Net loss per share for the three months ended June 30, 1997 and 1996 and the six
months ended June 30, 1997 and 1996 is computed by dividing net loss by the
weighted average number of shares of common stock outstanding, except 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 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. Also, in February
1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share, which is required to be adopted on December 31, 1997. At
that time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. Statement 128 will have no impact on the
Company's loss per share for either the
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<PAGE> 9
quarter ended June 30, 1997 or the quarter ended June 30, 1996, because stock
options and warrants are already excluded from per share calculations in a loss
period under existing rules, due to the potentially antidilutive effect of their
inclusion in such periods.
Statement of Computation of Weighted Average Shares Outstanding
(in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net loss $ (1,378) $ (743) $ (1,169) $ (11,049)
Weighted average common shares
outstanding 12,924 9,137 12,428 8,996
Dilutive stock options and warrants -- -- -- --
Weighted average common shares
outstanding during the period 12,924 9,137 12,428 8,996
Net loss per share $ (0.11) $ (0.08) $ (0.09) $ (1.23)
========== ========== ========== ==========
</TABLE>
8
<PAGE> 10
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 risks associated with the incidence of cancer and cancer screening,
improvements in automated IHC; the ability of the Company to implement its
business strategy; development and introduction of new products by the Company
or other parties; 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.
9
<PAGE> 11
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. The Company does not
intend to renew the United States distribution agreement with CMS which expires
in April 1998, and as of July 8, 1997, ceased shipping products to CMS pending
resolution of contractual disputes. 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 attempts to recover 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 June 30, 1997, the Company had placed 140 instruments through
RPs.
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<PAGE> 12
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 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 AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996:
Net Sales:
Net sales for the three and six months ended June 30, 1997 as compared to the
same periods of 1996 increased 35% and 49% to $7.5 million and $14.4 million
from to $5.5 million and $9.7 million, respectively. The increase in net sales
was attributable to a 12% and 18% increase in instrument sales for the quarter
and six months and a 44% and 65% increase in reagent sales for
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<PAGE> 13
the quarter and six months. Instrument sales increased due to an overall
increase in instrument placements as well as higher sales of the TechMate
instruments, which were only sold by the Company after the February 1996
acquisition of BioTek. 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 and six months ended June 30, 1997 increased to $4.7
million and $8.9 million, respectively, from $3.2 million and $5.8 million for
the same periods in 1996. Gross margin for the three and six months ended June
30, 1997 increased to 63% and 62% from 58% and 60% for the same periods during
1996. The overall gross margin improvement in both periods was directly related
to a higher portion of revenue being derived from reagents, which have
significantly higher margins than instrument sales. However, gross margins on
instrument sales decreased in both periods due to increased sales of lower
margin batch processing instruments, offset by manufacturing efficiencies and
increased absorption of manufacturing overhead. Gross margins on reagent sales
decreased in both periods 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 reagent manufacturing operations.
Research and Development:
Research and development expenses were $0.7 million for the three months ended
June 30, 1997 and $1.4 million for the six months ended June 30, 1997. This
represents a 5% decrease for the three month period and a 6% increase for the
six month period as compared to the respective periods of the prior year. The
decrease in the current quarter was due to the capitalization of $0.1 million in
software development costs. No such costs were capitalized in the comparable
period of 1996. Research and development expenses declined as a percent of sales
to approximately 10% for both the three and six month periods in 1997 compared
to approximately 14% for the same periods during 1996. This decline was
primarily due to increased sales. Research and development expenses for the
three and six months ended June 30, 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 and
six months ended June 30, 1996 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 six months ended
June 30, 1997 and 1996.
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<PAGE> 14
SG&A SUMMARY:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ----------- -----------
% % % %
$ Sales $ Sales $ Sales $ Sales
------------ ------------ ----------- -----------
($ in thousands)
<S> <C> <C> <C> <C>
Sales and marketing $ 2,747 37% $ 2,222 40% $ 5,197 36% $ 3,910 40%
Administration 883 12% 584 11% 1,811 13% 1,161 12%
------------ ------------ ----------- -----------
Total SG&A $ 3,630 49% $ 2,806 51% $ 7,008 49% $ 5,071 52%
============ ============ =========== ===========
</TABLE>
SG&A expense for the three and six months ended June 30, 1997 increased to $3.6
million and $7.0 million from $2.8 million and $5.1 million for the three and
six months ended June 30, 1996, respectively. SG&A expense as a percentage of
net sales decreased to 49% for the three months ended June 30, 1997 compared to
51% and 52% for the same period during 1996. The percentage decrease in SG&A
expense was due primarily to increased 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 were necessitated by an expanding business base,
especially in Europe, and legal expenses associated with certain pending
litigation matters not related to the BioGenex litigation.
Non-recurring Expenses:
The $1.6 million in non-recurring expenses for the three and six months ended
June 30, 1997 is primarily related to a previously announced legal judgment
against the Company's BioTek subsidiary, relating to a patent infringement suit
filed against BioTek by BioGenex. The expenses included the original judgment of
$404,150, $303,113 in enhanced damages (per a June 30, 1997 court judgment),
interest and Ventana's legal expenses.
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 assess 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.
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<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES:
Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in accumulated losses of $34.6 million as of June 30, 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 $26.1 million (after giving effect to the exercise of the
underwriter's overallotment option). As of June 30, 1997 the Company's principal
source of liquidity consisted of cash and cash equivalents of $25.6 million and
borrowing capacity under its bank term credit facility and revolving line of
credit. As of June 30, 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 June,
1997, this line of credit was extended for 60 days during which time the Company
intends to renegotiate the line. As of June 30, 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.
On February 18, 1997, the Company completed a follow-on public offering of its
Common Stock resulting in net proceeds of $26.1 million to the Company. During
February 1997, the Company repaid the $10.3 million of outstanding notes issued
in connection with the acquisition of BioTek. 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
26, 1997.
The Company expects to use approximately $2.6 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 six months ended June 30, 1997 the Company used for operations and
investing activities approximately $1.2 million in cash versus $6.4 million for
the three months ended June 30, 1996. In July, the Company established a standby
letter of credit in favor of BioGenex in the amount of $915,000 to secure the
judgment and post judgment interest in connection with the Company's appeal
process.
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,
14
<PAGE> 16
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 June 30, 1997, the outstanding
balance of the secured loans and prepayments was $0.8 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.
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 does not expect such losses to continue in the foreseeable future.
However, consistent earnings may be difficult to achieve due to planned product
development efforts, expansion of 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.
15
<PAGE> 17
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
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
16
<PAGE> 18
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
17
<PAGE> 19
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 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. 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, especially in light of the fact that the Company ceased
shipping products to CMS pending resolution of contractual disputes and that
difficulties in the relationship between the Company and CMS have continued, 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, DAKO has initiated binding arbitration
proceedings to resolve such pricing. In the event such arbitration proceedings
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
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<PAGE> 20
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.
RISKS ASSOCIATED WITH 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
19
<PAGE> 21
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.
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.
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<PAGE> 22
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 Company or its competitors, FDA and other governmental
regulations, developments with respect to
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<PAGE> 23
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> 24
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 judge increased the award by
$303,112 and allowed pre-judgment interest of $102,470.
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 with 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. The
Company 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. On August 12, 1997 the
parties resolved their differences with the Company agreeing to market certain
Cell Marque products and Cell Marque discontinuing its operation of refilling
the Company's dispensers. Dismissal of the suit and counterclaims is expected
within a few days.
The Company has received notices of various claims from certain former employees
of BioTek. Two of such former employees filed lawsuits against the Company and
certain former BioTek employees alleging that certain commitments made to them
in connection with their employment by BioTek were breached. One case was
resolved during the quarter and the lawsuit dismissed. Based on its review of
the remaining matter, the Company does not believe that its 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.
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<PAGE> 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports were filed on Form 8-K during the quarter ended
June 30, 1997.
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<PAGE> 26
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: August 14, 1997 By: /s/ Pierre Sice
-------------------------------------
Pierre Sice
Vice President, Chief Financial Officer,
Treasurer and Secretary.
(Principal Financial and Accounting
Officer)
25
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibits
- -------- --------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 25,618
<SECURITIES> 0
<RECEIVABLES> 4,446
<ALLOWANCES> 30
<INVENTORY> 3,782
<CURRENT-ASSETS> 35,180
<PP&E> 7,838
<DEPRECIATION> 3,394
<TOTAL-ASSETS> 47,964
<CURRENT-LIABILITIES> 5,567
<BONDS> 0
0
0
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</TABLE>
