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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 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: 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 85705
Center Drive (Zip Code)
Tucson, AZ
(Address of principal executive offices)
Registrant's telephone number, including area code: (520) 887-2155
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
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 period 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 [_]
Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate value of voting stock held by non-affiliates of the
Registrant was approximately $97,762,245 based upon the average of the high and
low prices of the Registrant's Common Stock reported for such date on the Nasdaq
National Market. Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. The
determination of affiliate status is not necessarily a conclusive determination
for other purposes. As of December 31, 1997, the Registrant had outstanding
13,247,226 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Not applicable.
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VENTANA MEDICAL SYSTEMS, INC.
INDEX
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Page
Number
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PART I....................................................................................................... 1
Item 1. BUSINESS....................................................................................... 1
Item 2. PROPERTIES.....................................................................................23
Item 3. LEGAL PROCEEDINGS..............................................................................24
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................24
PART II......................................................................................................25
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS ..............................................................25
Item 6. SELECTED FINANCIAL DATA........................................................................26
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.....................................................................27
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................33
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................................................34
PART III.....................................................................................................35
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................35
Item 11. EXECUTIVE COMPENSATION.........................................................................38
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ................................41
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................44
PART IV......................................................................................................45
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ..............................45
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PART I
Item 1. BUSINESS
The Company
Ventana was incorporated in California in June 1985 and was reincorporated
in Delaware in December 1993. As used in this Report on Form 10-K, the terms
"Ventana" and the "Company" refer to Ventana Medical Systems, Inc. and its
subsidiaries, Ventana Medical Systems, S.A., Ventana Medical Systems GmbH,
Ventana Medical Systems Japan K.K., and BioTek Solutions, Inc. unless the
context otherwise requires. The Company's principal executive offices are
located at 3865 North Business Center Drive, Tucson, Arizona 85705. Its
telephone number is (520) 887-2155.
Overview
Ventana develops, manufactures and markets proprietary instrument/reagent
systems that automate immunohistochemistry ("IHC") and in situ hybridization
("ISH") tests for the analysis of cells and tissues on microscope slides. These
tests are important tools used in diagnosing and selecting appropriate treatment
for cancer. The Company believes that it is the worldwide leader in the
automated IHC testing market, as the Company estimates that its worldwide
installed base of 1,199 instruments as of December 31, 1997 is approximately
four times as large as the combined installed base of all of the Company's
current competitors. Ventana has placed instruments with 37 of the 42 leading
cancer centers according to U.S. News & World Report and 36 of the 42 cancer
centers identified as principal cancer research centers by the National Cancer
Institute, including the Mayo Clinic, the Dana Farber Cancer Institute, The
Johns Hopkins University, the M.D. Anderson Cancer Center, the Fred Hutchinson
Cancer Center, and Memorial Sloan-Kettering Cancer Center. Each Ventana
proprietary system placed typically provides a recurring revenue stream as
customers consume reagents and supplies with each test conducted. Consequently,
two key elements of the Company's strategy are to increase the number of
instrument placements and to maximize the recurring revenue stream per placement
through increased sales of reagents and supplies.
In late 1991, Ventana began commercial shipment of its first system, the
Ventana 320 instrument and related reagents used for automated IHC tests. Since
then, Ventana has developed and introduced the Ventana ES, the successor to the
320, as well as the Ventana gen II, which is capable of performing ISH tests in
addition to IHC tests. In August 1997, Ventana introduced the NexES as a
successor to the ES. These patient priority systems use Ventana's proprietary
horizontal slide processing technology to perform multiple tests rapidly on a
single patient biopsy. In February 1996, Ventana acquired BioTek which
introduced its first automated IHC system, the TechMate 1000, in 1992, and has
also introduced the successor TechMate 500 instrument as well as the TechMate
250 instrument. BioTek's batch processing systems use proprietary vertical slide
processing technology to reliably and cost effectively process high volumes of
single tests on multiple patient biopsies. These complementary product lines
enable Ventana to serve a broad range of customers. Smaller hospitals, which
generally do not handle a high volume of cancer patients, typically use patient
priority systems to meet their automated testing needs. Reference and research
laboratories which serve numerous institutions typically use batch processing
systems to process large volumes of tests. Large hospitals with a high volume of
patients and a broad range of test requirements may use both patient priority
and batch processing systems.
Cancer is the second leading cause of death in the United States,
accounting for approximately 555,000 deaths per year. Currently, approximately
10 million people in the United States have a history of invasive cancer, and it
is estimated that 1.4 million new cases of invasive cancer will be diagnosed
each year. Recent studies have indicated that the mortality rates of certain
types of cancer have decreased which may be attributed to, among other factors,
earlier detection and selection of appropriate therapies. The vast majority of
IHC testing associated with cancer diagnosis and treatment in the United States
is conducted in an aggregate of approximately 2,200 clinical institutions and
reference and research laboratories which the Company estimates creates the
opportunity for the placement of as many as 2,500 automated IHC testing
instruments. The Company believes that less than 50% of such institutions and
laboratories currently conduct IHC testing on an automated basis. The
international market for automated IHC and ISH testing is estimated by the
Company to be approximately 1.5 times the size of the United States market, with
Europe accounting for the majority of the international market potential. It is
further estimated
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that automated IHC staining systems have penetrated less than 15% of European
labs and less than 5% of the labs in Japan and the rest of the world.
Currently, most IHC testing is performed manually which often yields
inconsistency of test results. As compared to manual IHC testing, Ventana's
automated systems provide improved reliability, reproducibility and consistency
of test results. The systems' economic advantages include faster turnaround
time, increased test throughput and a reduced dependence on skilled laboratory
technicians, thereby reducing costs per test. Additional benefits include the
ability to perform new and emerging diagnostic tests and improved visual
clarity, which aids the interpretation of test results and the ability to obtain
maximum clinical information from minimally sized biopsies. The Company believes
it will play a critical, expanding role in cancer science as researchers will
use Ventana systems to accelerate the identification and development of new
tests and that its installed base of instruments will speed the
commercialization and clinical implementation of such new tests. The Company
anticipates that its reagent test menu will expand due to the major emphasis of
cancer research on the identification of new prognostic IHC and ISH indicators.
Acquisition of BioTek
Ventana acquired BioTek in February 1996 for total consideration of $19.1
million. The acquisition of BioTek enhanced Ventana's competitive position and
enabled the Company to become the worldwide leader in the automated IHC and ISH
testing market. BioTek's product line complements Ventana's and enables the
Company to meet the differing needs of customers requiring patient priority or
batch processing systems, or both.
Historically, BioTek generated lower gross margins than Ventana due to its
employment of a different business strategy which primarily involved the use of
third parties for key activities. BioTek's instruments were produced by
third-party manufacturers which prevented BioTek from capturing manufacturing
margin. BioTek's instruments have an open configuration, enabling the customer
to use reagents purchased from BioTek or others, which impacted both the price
and volume of reagents purchased by customers from BioTek. In contrast,
Ventana's instruments have a closed configuration requiring the customer to use
Ventana's prepackaged detection chemistries. BioTek also realized lower gross
margins on reagents than Ventana due to its utilization of intermediate
materials in the manufacturing process which resulted in the capture of fewer
value-added steps. BioTek used Curtis Matheson Scientific ("CMS") and DAKO A/S
("DAKO") as third-party distributors in the United States and international
markets, respectively, and supported its United States sales efforts with field
sales and technical support personnel. As a result, BioTek experienced both
lower gross margins on its United States sales than if it had sold its products
directly and a higher level of selling expense than typically incurred in
conjunction with third-party distribution arrangements.
Industry Overview
This Report on Form 10-K 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 projected in the 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.
Immunohistochemistry
Cancer is the second leading cause of death in the United States accounting
for approximately 555,000 deaths per year. Currently, approximately 10 million
people in the United States have a history of invasive cancer, and it is
estimated that 1.4 million new cases will be diagnosed each year. In the United
States, the lifetime risk of developing invasive cancer is 47% for males and 38%
for females. The risk of developing cancer increases with age. Among the
principal forms of cancer are prostate, lung, breast, colon, rectal, urinary,
ovarian and cervical cancer, along with leukemia and lymphoma.
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Early detection is one of the primary factors in increasing the long term
survival of cancer patients. It is believed to be at least partially responsible
for decreases in mortality rates that have recently been observed for several
types of cancer. Health care professionals are increasing their emphasis on and
use of screening and early detection programs for cancer because cancer
treatments are generally significantly more effective and less costly the
earlier that cancer is detected. Complementing screening and early detection are
recent advances in less invasive biopsy methods that can obtain tissue samples
from progressively smaller tumors. As a result of these developments, there has
been a steady increase in the initial diagnosis of invasive cancer. However,
smaller tissue samples are often difficult to analyze with traditional
diagnostic tests, increasing the dependence of surgical pathologists on IHC for
accurate diagnosis of early stage cancer.
After preliminary screening of a biopsy to determine the presence of
cancer, IHC is the principal diagnostic test method used for cancer diagnosis
and therapy selection. IHC tests use specific antibodies to identify and detect
antigens (proteins) in cells and tissues which assist pathologists in assessing
various aspects of a patient's cancer. IHC tests, or assays, have two major
components: primary antibodies and detection chemistries. The primary antibody
is the specific antibody used to bind to the antigen in question. Detection
chemistries are composed of multiple reagents including secondary antibodies,
enzyme conjugates/complexes and chromogenic enzyme substrates which allow
visualization of the primary antibody.
IHC tests are performed on cells and tumor tissue to:
o determine the type of cancer
o determine the site of the primary tumor
o determine the degree of malignancy
o determine if the cancer has metastasized
o assist in the selection of the most appropriate therapy
o monitor patient progress
o develop a prognosis
Correct prognosis is essential in selecting the appropriate therapy regimen
and monitoring program for individual cancer patients. IHC assays provide
significant prognostic information such as cell cycle and hormone receptor
status which, in many cases, cannot be obtained from other tests. This
information allows the pathologist to improve risk assessment on an individual
patient basis. IHC testing is therefore instrumental to controlling and reducing
health care costs and improving cancer survival rates because earlier, more
accurate diagnoses and prognoses can lead to earlier, more targeted therapy and
may reduce the risk of use of an incorrect or inappropriate treatment.
Manual IHC assays require skilled technical personnel to perform as many as
60 individual processes and can require several days to complete. For the assay
to be successful, each process must be performed in the proper sequence and for
the proper length of time. In addition, the length of time and the reagents used
for each of the steps varies depending upon the primary antibody used in the
assay. The complexity of manual IHC assays leads to poor reproducibility and
inconsistency of results. Therefore, while IHC has been used routinely in
clinical diagnosis for over 10 years, the requirement of skilled technical
personnel, labor intensity (approximately 40 slides per day per technician) and
lack of standardization has limited the growth of clinical IHC.
The development of new diagnostic systems composed of instruments and
reagents has resulted in the automation of tests in a number of diagnostic
market segments. The trend toward automation of diagnostic testing began in the
1960s with the automation of hematology testing by Coulter Electronics
Corporation and clinical chemistry testing by Technicon Instruments Corporation.
In the 1980s, Abbott Laboratories, Inc. ("Abbott") introduced two instruments
with proprietary prepackaged reagents to automate immunoassay tests performed on
serum or urine. Ventana's systems are fundamental enabling technologies that
overcome major obstacles, including
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the inherent limitations of manual processing, which have historically prevented
both the broader use and growth of IHC.
In Situ Hybridization
ISH tests are advanced tests for infectious disease and cancer diagnosis
and other applications that generate visual signals based on probes used to
detect the presence of specific nucleic acids (DNA/RNA) contained in a cell.
Over the next decade, Ventana believes that ongoing research and development in
the field of molecular analysis will result in the continued introduction of new
IHC and ISH tests.
ISH assays are technically far more challenging and labor intensive than
IHC assays. In addition to requiring a similar number of processes which must be
performed in the proper sequence and for the proper length of time, ISH assays
require multiple wash solutions, or buffers, and the temperature at which each
of the steps must be executed typically ranges from 37 degrees C to 98 degrees
C. Furthermore, the conditions for each of these processes is dependent upon the
specific probe being used. Due to this extreme degree of technical difficulty,
there are very few clinical laboratories capable of performing manual ISH
assays. Ventana's gen II system represents a fundamental enabling technology for
the rapid, accurate and cost effective identification of unique RNA and DNA
(probe diagnostics) and is designed to overcome the inherent limitations of
manual processing.
Ventana Strategy
The Company's strategy is to strengthen its worldwide leadership position
in the automated IHC testing market and to develop and expand the automated ISH
testing market. In order to implement this strategy, the Company intends to:
Maximize Instrument Placements. The Company's strategy is to strengthen its
competitive position in the automation of IHC testing by establishing a larger
installed base of instruments that current or future market entrants must
overcome. The Company estimates that its worldwide installed base of 1,199
instruments is approximately four times as large as the combined installed base
of instruments of all of the Company's current competitors. The Company believes
that its placement of instruments in 36 of the 42 cancer centers identified as
principal cancer research centers by the National Cancer Institute provides a
powerful reference tool for potential new customers. To facilitate instrument
placements, the Company offers customers a wide selection of instruments which
address the patient priority needs of hospital clinical laboratories and the
batch processing needs of large hospitals and reference and research
laboratories. In order to satisfy the broad spectrum of customers' operational
and financial criteria, the Company intends to continue to offer several
instrument procurement options, including leases, direct sales, rentals and the
Qualified Reagent Installed Base program ("QRIB") and to expand the range and
price points of its instrument offerings. In a QRIB, the Company provides the
customer with the use of an instrument for up to six months, provided the
customer purchases a minimum of $3,000 in consumables. At the end of the six
month period, the customer must elect to purchase, rent or return the system.
The Company believes it can accelerate the rate of expansion of its installed
base by increasing its emphasis on the placement of instruments through QRIBs.
Maximize Revenue Stream Per Placement. Each instrument placed typically
provides the Company with a recurring revenue stream through the sale of
reagents and supplies. The Company seeks to increase this revenue stream by
converting all existing manual tests performed by the customer to full
automation and by selling to the customer all reagents required for such tests.
The Company then seeks to have the customer expand its test menu through the
inclusion of all tests that are offered by Ventana as well as new tests as they
are introduced. To meet these objectives, the Company's systems have been
designed as broad enabling platforms which permit customers to easily expand
their test menu. The Company also has a comprehensive customer education program
which includes on-site technical training in instrument use, user group meetings
and Company-sponsored national teleconferences with leading medical experts who
regularly update customers on diagnostic and testing developments.
Develop New and Enhanced Products. Since 1991, the Company has successfully
introduced and commercialized the Ventana NexES, the Ventana ES, the Ventana gen
II, the TechMate 500 and the TechMate 250, as well as systems to support all
these instrument platforms. Ventana is also developing additional instruments to
automate other labor intensive activities in histology labs, particularly
special stains, and a full panel of immunofluorescence assays on the NexES,
targeted at renal and dermatological pathology labs. Ventana is also
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developing next generation ISH instruments. The Company intends to continue to
innovate in the field of automated cellular diagnostics through the development
and introduction of new instruments, software and reagents.
Encourage Standardization of Clinical Diagnostic Practices. The Company
intends to support efforts to standardize clinical practices in the diagnosis
and complete characterization of various types of cancer through professional
education programs for pathologists and research collaborations. Uniform
practice guidelines for the laboratory diagnosis of cancer are just now
beginning to be established and accepted. As an example, the American Society of
Clinical Oncology recently released its recommendations for the use of selected
hormone/protein markers in which it recommended that all breast cancer cases be
tested for estrogen receptor and progesterone receptor in order to select the
optimal course of therapy. The Company's automated systems allow for the
widespread standardization of testing methods that could be clinically relevant
in this effort. In addition, the Company's educational programs will be designed
to disseminate these and other practice recommendations as they are developed
and to assist clinicians and professional organizations in the formulation of
additional guidelines.
Expand Intellectual Property Position. The Company seeks to expand its
intellectual property position by entering into strategic alliances, acquiring
rights of first refusal on future commercial developments and licensing existing
technologies. The Company evaluates and intends to pursue the licensing of
nucleic acid probe technology for ISH applications from biopharmaceutical
companies, research institutions and others. In conjunction with gen II system
placements, the Company has entered into agreements with customers which provide
the Company with a right of first refusal to commercialize new tests developed
by such customers for use on the gen II system. The Company believes customers
have been willing to enter into these arrangements because the gen II is an
enabling platform that facilitates the development and commercialization of new
ISH tests.
Products
The Company offers proprietary systems composed of instrumentation,
reagents and consumable products which are designed to enable clinical and
research laboratories to perform standardized IHC and ISH testing. The
proprietary nature of the Company's systems is based upon the interrelationship
among the electronics and mechanical and software control of the instrument and
the stabilization, composition, packaging and delivery of reagents. The
Company's broad line of products includes patient priority systems targeted to
hospital clinical laboratories and batch-processing systems targeted to large
hospital clinical laboratories and reference and research laboratories. The
Company's patient priority systems are "closed" in that customers must purchase
detection chemistries from Ventana in order to operate the instruments. Although
the Company's existing batch processing systems are "open," providing the
customer with the ability to purchase reagents from either the Company or other
sources, users of approximately 83% of the Company's United States installed
batch processing systems regularly purchase reagents from the Company. The
following are the principal benefits of automated cellular and tissue analysis
using the Company's integrated systems as compared with manual methods:
o improved reliability, reproducibility and consistency of test results
o faster turnaround time for test results
o increased test throughput for the testing laboratory
o ability to perform new and emerging molecular tests
o reduced dependence on skilled laboratory technicians
o ability to perform special staining applications (batch processing
instruments)
o ability to obtain maximum clinical information from minimally-sized
biopsies
o ability to document processing protocols (patient priority
instruments)
o enhanced cellular differentiation through multiple staining on a
single slide
o standardization of slide preparation among institutions
In addition to these critical clinical and operational advantages, the
Company has determined that its automated approach has cost advantages as well.
To confirm the cost advantages of automated analysis using the
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Company's instruments as compared to manual methods, the Company completed a
cost study involving 11 representative users of the Company's systems. These
users encompass a cross-section of the Company's customers and include hospitals
of varying sizes and a reference laboratory. The cost data compiled in the study
was based on the users' internal allocations of IHC test costs and includes
equipment amortization. The results of the study indicate that automated IHC
analysis using the Company's products results in cost savings per test of
approximately 10% as compared to manual methods.
Instrument Products
Patient Priority Instruments. Ventana currently offers two patient priority
systems, the Ventana NexES and the Ventana gen II. The Ventana patient priority
systems provide a complete automated approach, requiring users to only prepare
specimens and place them on microscope slides. The patient priority systems are
barcode driven and are designed for multiple tests on a single patient biopsy
with rapid turnaround time and walk-away convenience. A barcode label affixed to
each slide positively identifies the slide and the test procedures to be
performed. The instrument scans the barcodes on the slides and the reagent
dispenses and processes each slide with the unique steps necessary to perform
each test. The Company's proprietary software controls all aspects of the test
procedures. The steps of dispensing, incubating (i.e. temperature and time
control) and washing are performed by the instrument using a series of
proprietary chemical/mechanical methods developed by Ventana. These methods are
critical to obtaining precise, sensitive and rapid test results and make the
system reliable and easy to use. Typically, the processing of slides on the
instrument requires less than two hours.
The Ventana NexES is based upon a modular design and an external personal
computer operating under a Windows 95 environment for software control. Each
module holds up to 20 slides in the reaction chamber and 25 reagents on its
reagent carousel. The modular design of the NexES and external personal computer
permits the linkage of up to eight NexES modules together, creating the capacity
to process up to 160 slides. The NexES therefore offers users a significant
degree of flexibility as users can purchase from one to eight modules depending
upon their test volume requirements.
The Ventana gen II uses the same basic architecture as the Ventana ES
instrument and has additional functions enabling it to perform ISH tests. These
functions are (i) an improved heating system which allows for incubation
temperatures of up to 98 degrees C, (ii) rapid incubation temperature cycling
and (iii) additional and improved wash stations which permit the use of multiple
buffers and instrument controlled changes in the concentration of buffers.
Ventana's gen II system represents a fundamental enabling technology for the
rapid, accurate and cost effective identification of unique RNA and DNA (probe
diagnostics) and is designed to overcome the inherent limitations of manual
processing.
Batch Processing Instruments. The Company's line of TechMate batch
processing instruments are designed for large volume testing using a single
antibody on multiple patient biopsies and research applications in which long
incubation times and unique detection chemistries are required. The Company's
batch processing instruments employ capillary action to perform IHC tests.
Patient biopsies are placed on capillary gap slides which maintain a space of
predetermined width between adjacent slides when loaded into TechMate systems.
Reagents are loaded into disposable reagent trays and programmable software
directs the instrument to apply the reagents in the proper sequence. The
instrument immerses the bottoms of the slides in the reagents as programmed and
the reagents are drawn up the slide and over the tissue specimen by capillary
action. After each reagent application and incubation, the instrument removes
the reagent from the specimen by placing the slides onto disposable blotting
pads.
The Company's original batch instrument, the TechMate 1000, has a 300 slide
capacity. This large capacity is suited to large reference laboratories which
run a limited number of antibody tests on vast numbers of patient biopsies. The
Company has ceased production of the TechMate 1000. The successor instrument,
the TechMate 500, has a 120 slide capacity, which is applicable to both large
and moderately-sized reference laboratories and large research laboratories. The
TechMate 250, which has a 40 slide capacity, is targeted primarily for the
European and other international markets.
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Reagent and Consumable Products
Reagent Products
Reagent products are composed of primary antibodies and detection
chemistries, each of which is required for an IHC test. Customers that have
patient priority systems must use Ventana detection chemistries on all tests;
such customers have the option of purchasing primary antibodies from Ventana or
other sources. Customers who have the Company's batch processing systems have
the option of purchasing both antibodies and detection chemistries from Ventana
or other sources. Users of approximately 83% of the Company's United States
installed batch processing systems regularly purchase reagents from the Company.
Primary Antibodies. Ventana sells a line of in excess of 100 primary
antibodies used to detect antigens in combination with detection chemistry kits
on the Company's instruments. Ventana markets all of the antibodies used to
perform the IHC tests that currently account for more than 85% of total IHC test
volume.
Detection Kits. Detection chemistries typically account for approximately
65-70% of the total expenditures for reagents required to perform IHC tests
using the Company's instruments. Ventana produces a line of detection
chemistries for use on both patient priority and batch processing systems which
provide the user with standardized reagents, thereby giving the user convenient
and rapid results. The detection chemistries have been developed by the Company
using proprietary formulations which, when combined with the Company's primary
antibodies and other reagents, optimize the results of tests performed on the
Company's instruments. These kits generate the visual signal in an IHC reaction
at the site where a primary antibody is bound to a specific antigen or molecule
in the cell or tissue. The patient priority system utilizes detection kits which
include (i) a DAB Kit which generates a brown color; (ii) an AEC Kit which
generates a deep red color; (iii) an Alkaline Phosphatase Red Kit which
generates a bright red color; and (iv) an Alkaline Phosphatase Blue Kit which
generates a deep blue color. The Company currently sells DAB and Alkaline
Phosphatase Red for use with its batch processing instruments. The detection
kits are designed to perform tests on a wide variety of specimens, so a
laboratory can, for example, perform tests on tissue preserved in paraffin and
on frozen tissue simultaneously. The Company's detection chemistries have been
formulated to provide long term stability for reproducibility and ease of use as
well as a high signal to noise ratio for optimal sensitivity.
Consumable Products
Ventana offers a line of consumable ancillary products that are necessary
for processing slides on the Company's instruments. These include buffers for
optimizing the IHC reaction and counterstains for staining cell nuclei, which
are used with both patient priority and batch processing instruments. The
buffers ensure good morphology, low backgrounds and high signals. The
counterstains provide additional convenience for the customer by eliminating the
need for additional processing of the slides after staining on the instrument.
For use with patient priority instruments, Ventana also supplies a proprietary
liquid coverslip used to inhibit evaporation during processing in the
instrument, fixatives for maintaining the morphology of cells or tissues,
enzymes for unmasking antigens and slide barcodes for use in identifying the
slide and its specific IHC reaction steps. For use with batch processing
instruments, the Company also provides disposable reagent trays which are used
to hold the reagents during IHC reactions, capillary gap slides and wicking pads
used for reagent removal between applications.
Markets and Customers
There are approximately 4,200 acute care hospitals and clinics in the
United States. Of these, there are approximately 1,900 hospitals with over 200
beds, which perform the vast majority of surgical and other medical procedures
related to cancer diagnosis and treatment. In addition, there are approximately
200 reference and research laboratories and approximately 100 biotechnology and
pharmaceutical companies, which also perform substantial numbers of IHC and ISH
tests. These health care institutions represent a total instrument site
potential of 2,200 locations. Ventana considers this to be its core market
segment for cancer testing and focuses the bulk of its sales and marketing
efforts on these institutions.
The Company estimates there are as many as 2,500 instrument placement
opportunities in the 2,200 potential instrument site locations in the United
States. The international market for instrument placements is
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estimated by the Company to be approximately 1.5 times the size of the United
States market. Europe is estimated to account for the majority of the
international market potential, and Japan, the Pacific Rim and Latin American
markets constitute the balance of the international market opportunity.
As of December 31, 1997, the Company had 746 instrument placements in
approximately 605 of the 2,200 potential United States instrument sites. The
Company believes that less than 50% of such United States potential instrument
sites currently conduct IHC testing on an automated basis. The Company believes
that its worldwide installed base of 1,199 instruments as of December 31, 1997
is approximately four times as large as the combined installed base of
instruments of all of the Company's current competitors.
Ventana has placed instruments with 37 of the top 42 cancer centers
according to U.S. News & World Report and 36 of the 42 cancer centers identified
as principal cancer research centers by the National Cancer Institute, including
the Mayo Clinic, the Dana Farber Cancer Institute, The Johns Hopkins University,
the M.D. Anderson Cancer Center, the Fred Hutchinson Cancer Center, and Memorial
Sloan-Kettering Cancer Center.
The Company believes that the NexES system it introduced in 1997 will have
particular appeal to those hospitals which are currently losing reimbursement
revenue as a result of not performing IHC tests internally. The Company's QRIB
placement program may enhance smaller hospitals' ability to compete with larger
hospitals by providing on-site IHC testing and consultation without an initial
capital expenditure.
Sales, Marketing and Customer Support
Ventana markets and sells its instruments and reagents through a direct
sales force in North America, certain European countries, and Japan. It has also
established distribution relationships in other countries and has a distribution
arrangement with DAKO, a manufacturer and supplier of reagents used in manual
IHC testing. The distribution arrangement with DAKO stemmed from the BioTek
acquisition and only relates to batch processing systems for certain countries
outside the United States.
Ventana's direct sales force in North America now consists of 34 direct
representatives, 5 regional managers, 10 field-based technical marketing
representatives and 7 field service engineers. Ventana's patient priority
systems are sold through its direct sales force. The sales force is organized
around geographic territories, which have been designed to provide each sales
representative with an approximately equal number of sales opportunities. The
sales force is also divided between a national account sales force, which is
focused on large users and an U.S. hospital sales force, which calls on all
other accounts. The Company's sales representatives typically have technical
backgrounds or prior medical capital equipment sales experience. The Company's
sales representatives are incentivized to increase instrument placements. The
sales representatives as well as the technical marketing representatives are
incentivized to maximize recurring reagent sales.
BioTek entered into a distribution agreement with CMS in January 1993.
Under the agreement, CMS had exclusive United States distribution rights for
TechMate instruments and related reagents. The agreement required CMS to make
good-faith commercial efforts to purchase certain specified quantities of
instruments and to maintain a sufficient inventory of reagents to meet customer
requests. The agreement with CMS was set to expire in April 1998 but was
terminated in October 1997.
Ventana's sales force in Europe consists of 15 sales and support personnel
located in France and Germany. This sales force markets and sells Ventana's
patient priority systems direct in France, Germany, Austria, Switzerland, and
the Benelux countries and markets and sells through distributor relationships in
Italy, Spain and Scandinavia. This sales force is geographically organized and
is compensated in a manner similar to the United States sales force. Ventana
expects to significantly expand its direct sales and marketing activities in
Europe in 1998. Ventana's sales force in Japan consists of three sales and
support personnel. Ventana expects to significantly expand its direct sales and
marketing activities in Japan after the Company receives import permits for its
reagents.
BioTek entered into its agreement with DAKO in September 1994. DAKO is a
market leader in Europe in supplying reagents for use in manual IHC tests. The
agreement provides DAKO with exclusive rights to distribute TechMate instruments
and related accessories in Europe and several other territories. The agreement
also permits DAKO to supply customers with its own reagents for the instruments
in return for paying BioTek a fixed dollar
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royalty amount. For each TechMate 500 instrument installed at a customer site,
the royalty is payable over a five year term. For each TechMate 250 shipped to
DAKO, a prepaid royalty amount of $7,000 is paid by DAKO. Under the agreement,
DAKO is subject to certain minimum purchase requirements for instruments.
In connection with BioTek's agreement with DAKO, DAKO made two loans
secured by a pledge of substantially all of BioTek's assets. DAKO also made
prepayments on future instrument sales and reagent royalties to BioTek. These
loans and prepayments were used to fund TechMate 250 instrument development and
working capital requirements. On September 25, 1996, BioTek and DAKO entered
into the Amendment Agreement for the purpose of addressing several matters,
including repayment of the secured loans and prepayments. At December 31, 1997,
the net aggregate outstanding balance of the secured loans and prepayments was
$0.5 million. The secured loans and prepayments are recorded as long-term debt
in the Company's Consolidated Financial Statements.
In connection with 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 in 1996. 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. The Amendment Agreement also establishes certain minimum
purchase and delivery commitments for TechMate 250 instruments, as well as
pricing for certain quantities of TechMate 250 instruments. 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, pursuant to the distribution
agreement, 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 sale would also be reduced.
Furthermore, during the course of ongoing discussions with DAKO since the
acquisition of BioTek, DAKO has, among other things, asserted that BioTek has
not fulfilled its obligations with respect to the development and commercial
introduction of the TechMate 250 instrument. The Company denies this assertion
and believes that it is in substantial compliance with its obligations under
these development milestones. In particular, the Company believes that 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. The Company anticipates
that DAKO is developing an instrument to eliminate its reliance on the TechMate
250; the release of such an instrument could adversely affect the Company's
ability to supply instruments beyond current commitment levels.
Ventana's sales and marketing strategy for its systems is focused on
increasing its penetration of the hospital and laboratory market through several
instrument placement options. The Company places instruments through direct
sales including nonrecourse leases, instrument rentals and the Company's QRIBs.
In a QRIB, the Company provides the customer with the use of an instrument for
up to six months, provided the customer purchases a minimum of $3,000 in
consumables. At the end of the six month period, the customer must elect to
purchase, rent or return the system. As of December 31, 1997, the Company had
placed 105 instruments through QRIBs.
A key component of the Company's business strategy is to increase the sale
of reagents into its installed instrument base through a high level of customer
support. The Company's technical marketing representatives assist in training
customers in the use of the Company's systems and seek to increase customer
reagent utilization by
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facilitating the transfer of workload from manual procedures. Through direct
customer contact, the Company's technical marketing representatives are able to
promote sales of reagents and suggest new IHC test applications to customers.
New customers receive initial training on the systems either in the field or at
Ventana's facilities in Tucson, Arizona. The Company's technical marketing
representatives then visit the customer to provide additional on-site training.
Thereafter, Ventana actively supports customers with periodic product bulletins
and provides 24-hour customer telephone support. Ventana actively markets its
products through participation at industry trade shows, video and audio
presentations by leading pathologists and direct mail.
Manufacturing
The Company manufactures its patient priority instruments at its facilities
in Tucson, Arizona. The Company has recently expanded its patient priority
instrument manufacturing facilities and operations in Tucson and believes that
this expansion will provide the Company with sufficient manufacturing capacity
to meet its anticipated requirements for patient priority instruments for
approximately the next three years. Components for patient priority instruments
are purchased from a variety of vendors, subject to stringent quality
specifications. The components are assembled by Ventana's highly skilled
manufacturing technicians into finished products. A quality assurance group
performs tests at regular intervals in the manufacturing cycle to verify
compliance with the Company's specifications and regulatory requirements,
including Good Manufacturing Practices ("GMP") requirements.
A number of the components used in the NexES and gen II systems are
fabricated on a custom basis to the Company's specifications and are currently
obtained from a limited number of sources. To date, however, the Company has not
experienced any material disruptions in the supply of such components. The
Company believes that additional suppliers, if required, could be obtained and
qualified. To date, the Company has not experienced significant difficulties
with manufacturing yields and has experienced minimal manufacturing waste in the
patient priority instrument manufacturing process.
The Company has relationships with third-party manufacturers for the
manufacture of batch processing instruments. The Company has contracted with
Kollsman Manufacturing Company, Inc. for the manufacture of TechMate 500
instruments and with LJL Biosystems, Inc. for the manufacture of TechMate 250
instruments.
Reagents sold for use with the Company's patient priority instruments are
manufactured by Ventana, which purchases basic raw materials and performs
value-added manufacturing processes, such as formulation and packaging, at its
facilities. Certain components and raw materials, primarily antibodies, used in
the manufacturing of the Company's reagent products are currently provided by
single source vendors. To date, the Company has not experienced any material
disruptions in supply from these vendors and has experienced levels of
manufacturing waste in the reagent manufacturing process that it believes to be
below industry averages.
Reagents sold for use with the Company's batch processing instruments have
been manufactured at Ventana's Tucson facilities since September 1996. Ventana
has converted the manufacturing process for such reagents to the process used by
Ventana in which basic raw materials are used and important value-added
activities are performed internally. As a result of this transition, Ventana is
positioned to capture margin and value added which was lost through payments to
third-party manufacturers, to increase economies of scale in both raw material
purchasing and manufacturing, to standardize procedures and processes, to
increase control over scheduling and to improve manufacturing flexibility.
The Company's reagent manufacturing process at its Tucson, Arizona facility
is currently semi-automated. The Company anticipates that as production volumes
increase it will increase the level of automation. The Company currently has
sufficient reagent manufacturing capacity to meet its anticipated needs for
approximately the next two years. The Company's long-term plans are to build a
separate reagent manufacturing facility in the Tucson area to increase its
reagent manufacturing capacity and increase the level of automation of the
manufacturing process. The Company anticipates commencing construction of this
facility in 1999.
The Company's manufacturing operations are required to be conducted in
accordance with GMP requirements. GMP requires the Company to maintain
documentation and process control in a prescribed manner with respect to
manufacturing, testing and quality control. In addition, the Company is subject
to FDA inspections to verify compliance with FDA requirements. The Company also
intends to implement manufacturing policies and
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procedures, which will enable the Company to receive ISO 9000 certification. ISO
9000 standards are global standards for manufacturing process control and
quality assurance. The Company will be required to obtain the CE mark for
continued sale of its products in the countries comprising the European Union.
The CE mark is an international symbol of quality assurance and compliance with
applicable European Union medical device directives.
Research & Development and Engineering
The Company has focused its research, development and engineering efforts
on the development of innovative reagent and instrument systems.
As of December 31, 1997, Ventana's Research & Development and Engineering
groups consisted of 27 persons, many of whom have graduate degrees. Ventana's
research and development activities are performed primarily in-house by Ventana
employees. These efforts are supplemented by consulting services and assistance
from Ventana's scientific advisors. The Company is developing reagents for
existing instrument bases and new products. In addition, the Company is
developing new instruments and enhancing existing instruments.
During the fiscal years ended December 31, 1997, 1996 and 1995, Ventana
spent $3.1 million, $2.7 million and $2.2 million, respectively, on research and
development.
Reagent Development Projects
Ventana's reagent development is divided into four principal areas. These
include new antibody development, detection chemistries, special stain
chemistries, and ISH chemistries. Ventana continues to monitor third-party
development of new primary antibodies. Antibodies recognizing new prognostic
markers for monitoring breast cancer patients were introduced in February 1998.
These, in combination with other antibodies currently available from Ventana,
constitute a panel of antibodies useful in determining therapeutic alternatives
and predicting therapy outcomes for breast cancer patients. In addition,
fluorescent-labeled antibodies have been developed which were first sold in
March 1998. These antibodies are useful in determining the renal and
dermatopathological status of patients. Ventana also continues to improve the
sensitivity and specificity of detection chemistries. An amplification kit was
introduced in the third quarter of 1997 which, when used in conjunction with any
of Ventana's existing detection chemistries, allows smaller amounts of
diagnostic markers to be visualized in tissues. In addition, projects are
ongoing that will further improve the sensitivity of the present detection
choices.
Reagent development also supports the development of new instrument
systems. A complete reagent product line was introduced in conjunction with the
August 1997 market launch of the NexES instrument. Projects to provide reagents
for instrument systems continue in two major new instrument system development
areas - special stains and ISH. Development of reagents for the predominant
special stains used in the histology laboratory is proceeding toward a fourth
quarter, 1998 market availability. Development of nucleic acid probe and
detection ISH kits, to detect the causative agents for numerous infectious
diseases, is ongoing. An agreement with Chiron to utilize bDNA technology for
HIV and other infectious disease agents was completed in the first quarter of
1998 and will provide the required sensitivity for ISH tests. The Company is
currently in discussion with various universities, hospitals, and commercial
organizations regarding other potential areas of opportunities for the ISH
system.
Instrumentation Development Projects
Ventana's instrumentation development is focused on continuous product
improvement and new product innovation. The Company believes that the platform
used by the modular IHC system, NexES, will enable it to develop more rapidly
new products which achieve these goals. Specifically, Ventana has two new major
instrument systems in development. The first is a special stains module which,
when introduced in late 1998, will be fully integrated into the NexES platform.
This system will allow Ventana to expand into new markets in our base histology
business. The second is an ISH module, which uses a highly innovative heating
system to achieve the temperature consistency required for the ISH procedures.
When introduced in late 1998, it will also be integrated into the NexES platform
and will have a full complement of reagents, which are used in clinical ISH
applications.
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In addition, the Company will be introducing in the first half of 1998, a
new bar code printing system. This system will use a proprietary label, which
has been developed exclusively for Ventana's instrument system.
Ventana continues to explore new opportunities in instrument systems, which
add value to the customer. Plans are being developed for new systems to further
capitalize on the Company's success with its patient priority and batch
processing systems.
Patents and Proprietary Rights
Ventana has pursued a strategy of patenting key technology as it relates to
both the automation and the chemistry of analyzing cells and tissues on
microscope slides. Ventana holds 16 United States patents and 20 foreign patents
and has filed additional United States and foreign patent applications. Six of
Ventana's United States patents were issued in 1997. Several of Ventana's issued
United States patents relate to reagent formulations and methods, including a
reagent formulation characterized by long-term stability and a method of
inhibiting evaporation of reagents during processing. Other issued United States
patents relate to a reagent dispenser, a tissue fixative and various aspects of
the capillary gap technology and methods and devices for batch processing of
slides. Pending applications relate to mechanical aspects of automated
instruments for performing reactions on slides and processing methods used in
these instruments. In addition, a patent application filed by the Company covers
an evaporation inhibitor liquid that is effective for high temperature
applications. The expiration dates of the Company's issued United States patents
range from September 2005 to November 2013.
There can be no assurance that the Company's patent applications will
result in patents being issued or that any issued patents will provide adequate
protection against competitive technologies or will be held valid if challenged.
Others may independently develop products or processes similar to those of the
Company or design around or otherwise circumvent patents issued to the Company.
Because patent applications in the United States are maintained in secrecy
until patents are issued and since publication of discoveries in scientific
literature tends to lag behind actual discoveries by several months, Ventana
cannot be certain that it was the first creator of inventions covered by its
patents or pending patent applications or that it was the first to file patent
applications for such inventions. Moreover, the Company may have to participate
in interference proceedings declared by the United States Patent and Trademark
Office to determine the priority of inventions, which could result in
substantial cost to the Company. In the event that any relevant claims of
third-party patents are upheld as valid and enforceable, the Company could be
prevented from practicing the subject matter claimed in such patents, or would
be required to obtain licenses from the patent owners of each of such patents or
to redesign its products or processes to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be
available on terms acceptable to the Company or that the Company would be
successful in any attempt to redesign its products or processes to avoid
infringement. If the Company does not obtain necessary licenses, it could be
subject to litigation and encounter delays in product introductions while it
attempts to design around such patents. Alternatively, the development,
manufacture or sale of such products could be prevented. Litigation would result
in significant cost to the Company as well as diversion of management time. The
outcome of any such litigation cannot be predicted with any assurance. Adverse
determinations in any such proceedings could have a material adverse effect on
the Company's business, financial condition and results of operations.
BioTek is a party to litigation initiated by BioGenex Laboratories, Inc.
("BioGenex") relating to past infringements of patent rights of BioGenex. In May
1997, a judgement was rendered against BioTek, which BioTek has appealed. For a
discussion of these proceedings, see Item 3 below entitled "Legal Proceedings."
Ventana also relies upon trade secret protection for its confidential and
proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information or
techniques, gain access to Ventana's trade secrets or disclose such technology,
or that Ventana can effectively protect its trade secrets. Litigation to protect
Ventana's trade secrets would result in significant cost to the Company as well
as diversion of management time. Adverse determinations in any such proceedings
or unauthorized disclosure of Ventana trade secrets could have a material
adverse effect on Ventana's business, financial condition and results of
operations.
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Ventana's policy is to require its employees, consultants and significant
scientific collaborators to execute confidentiality agreements upon the
commencement of an employment or consulting relationship with Ventana. These
agreements generally provide that all confidential information developed or made
known to the individual during the course of the individual's relationship with
Ventana is to be kept confidential and not disclosed to third parties except in
specific circumstances. Agreements with employees provide that all inventions
conceived by the individual in the course of rendering services to Ventana shall
be the exclusive property of Ventana. There can be no assurance, however, that
these agreements will not be breached or that they will provide meaningful
protection or adequate remedies for unauthorized use or disclosure of Ventana's
trade secrets.
Competition
Competition in the diagnostic industry is intense and is expected to
increase. Competition in the diagnostic industry is based on, among other
things, product quality, performance, price and the breadth of a company's
product offerings. Ventana's instrument and reagent systems for IHC tests
compete with products offered by various manufacturers as well as with manual
diagnostic methods. In addition, flow cytometry can be used for cellular testing
and may, in certain markets, be competitive with the Company's products. The
Company's competitors may succeed in developing products that are more reliable
or effective or less costly than those developed by the Company and may be more
successful than the Company in manufacturing and marketing their products.
Although the Company plans to continue to develop new and improved products,
there are other companies engaged in research and development of diagnostic
devices or reagents, and the introduction of such devices or alternative methods
for diagnostic testing could hinder the Company's ability to compete effectively
and could have a material adverse effect on the Company's business, financial
condition and results of operations.
In the instrument market, several companies, including Leica (a division of
Leitz Microscope GmbH), Shandon Scientific Limited (a division of Life Sciences
International PLC), BioGenex and DAKO (U.S.), offer instruments that perform IHC
tests and can be used with any supplier's reagents, which may be attractive to
certain customers. As of December 31, 1997, the Company had an installed base of
1,199 instruments which the Company estimates is more than four times the
combined installed base of instruments of all of the Company's current
competitors. The Company has included semi-automated instruments manufactured by
its competitors in arriving at its estimates of its market share. In addition,
future growth in the market for automated IHC instruments may result in
additional market entrants and increased competition, including more aggressive
price competition. Many of the companies selling or developing diagnostic
devices and instruments and many potential entrants in the automated IHC market
have financial, manufacturing, marketing and distribution resources
significantly greater than those of Ventana. In addition, many of these current
and potential competitors have long-term supplier relationships with Ventana's
existing and potential customers. These competitors may be able to leverage
existing customer relationships to enhance their ability to place new IHC
instruments. Competition in the market for automated IHC instruments, including
the advent of new market entrants and increasing price competition, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In the market for reagents, the Company encounters competition from
suppliers of primary antibodies and detection chemistries. The major suppliers
of primary antibodies in the anatomical pathology market in the United States
are DAKO, BioGenex and Coulter Immunotech. The principal suppliers of detection
chemistries in the United States are Vector Laboratories, BioGenex and DAKO. The
Company's patient priority instruments require the use of the Company's
detection chemistries but can be used with primary antibodies supplied by third
parties, and the Company's batch processing instruments can be used with both
detection chemistries and primary antibodies supplied by third parties.
Accordingly, the Company encounters significant competition in the sale of
reagents for use on those of its instruments that can be used with reagents
supplied by third parties. Lower prices for reagents used in manual IHC tests
could also limit the growth of automation. Certain of the Company's current and
potential competitors in the reagent market have financial, manufacturing,
marketing and distribution resources greater than those of the Company.
Competition in the market for reagents could also increase as a result of new
market entrants providing more favorable reagent supply arrangements than the
Company, including lower reagent prices. In particular, DAKO has introduced a
lower cost semi-automated IHC instrument in the United States and is offering
reagent supply arrangements that have resulted in increased competition for both
instruments and reagents. In addition, new entrants in the instrument market may
seek to enhance their competitive position through reduced reagent pricing or
more favorable supply arrangements; the Company's current instrument customers
may find it attractive to purchase primary antibodies for patient priority
instruments and primary antibodies and detection
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chemistries for batch processing instruments from such competitors. Increased
competition in the reagent market could have a material adverse effect on the
Company's business, financial condition and results of operations.
Government Regulation
The manufacturing, marketing and sale of the Company's products are subject
to regulation by governmental authorities in the United States and other
countries. In the United States, clinical diagnostic devices are subject to
rigorous Food and Drug Administration ("FDA") regulation. The Federal Food, Drug
and Cosmetic Act governs the design, testing, manufacture, safety, efficacy,
labeling, storage, record keeping, approval, advertising and promotion of the
Company's products. Obtaining regulatory approval for new products within this
regulatory framework may take a number of years and involves the expenditure of
substantial resources. In addition, there can be no assurance that this
regulatory framework will not change or that additional regulation will not
arise, which may affect approval of or delay an application or require
additional expenditures by the Company.
The FDA regulates, as medical devices, instruments, diagnostic tests and
reagents that are traditionally manufactured and commercially marketed as
finished test kits or equipment. Some clinical laboratories, however, choose to
purchase individual reagents intended for specific analytes and develop and
prepare their own finished diagnostic tests. Although neither the individual
reagents nor the finished tests prepared from them by the clinical laboratories
have traditionally been regulated by the FDA, the FDA has recently proposed a
rule that, if adopted, would regulate the reagents sold to clinical laboratories
as medical devices. The proposed rule would also restrict sales of these
reagents to clinical laboratories certified under the Clinical Laboratory
Improvement Amendments of 1988 ("CLIA") as high complexity testing laboratories.
The Company intends to market some diagnostic products as finished test kits or
equipment and others as individual reagents; consequently, some or all of these
products will be regulated as medical devices.
The Company's clinical diagnostic systems are regulated by the FDA under a
3-tier classification system -- Class I, II and III. The degree of regulation,
as well as the cost and time required to obtain regulatory approvals, generally
increases from Class I to Class III. Most diagnostic devices are regulated as
Class I or Class II devices, although certain diagnostic tests for particular
diseases may be classified as Class III devices. Prior to entering commercial
distribution, most Class I, II, or III medical devices must undergo FDA review
under one of two basic review schemes depending upon the type of device or
procedure. These review schemes are the 510(k) pre-market notification process
and the pre-market approval ("PMA") process. A 510(k) notification is generally
a filing submitted to demonstrate that the device in question is "substantially
equivalent" to another legally marketed device. Approval under this procedure
may be granted within 90 days, but generally takes longer, and in some cases up
to a year or more. Class I and II devices, as well as certain Class III devices,
for which the FDA has not called for a PMA, are reviewed under the 510(k)
process. For all other Class III products, the manufacturer must file a PMA to
show that the product is safe and effective based on extensive clinical testing
and controlled trials among several diverse testing sites and population groups.
These controlled trials may be conducted under an Investigational Device
Exemption ("IDE") cleared by the FDA, or they may be conducted without FDA
review if exempt from IDE requirements. The PMA process typically involves
significantly more clinical testing than does the 510(k) procedure and could
involve a significantly longer FDA review period after the date of filing. In
responding to a PMA application, the FDA can either accept it for filing or
reject it and require the manufacturer to include additional information in a
resubmitted application. PMA applications that are accepted for filing may be
reviewed by a FDA scientific advisory panel, which issues either a favorable or
unfavorable recommendation regarding the device. The FDA is not bound by the
panel's recommendation, but tends to give it significant weight. By law, the PMA
process is to be completed within 180 days of acceptance of the PMA application
for filing, although this time period can be, and typically is, extended by the
FDA. A PMA application can take from one to several years to complete, and there
can be no assurance that any submitted PMA application will ultimately be
approved. Further, clearance or approval may place substantial restrictions on
to whom and the indications for which the product may be marketed or to whom it
may be marketed. Additionally, there can be no assurance that the FDA will not
request additional data, or request that the Company conduct further clinical
studies.
With respect to automated IHC testing functions, the Company's
instruments have been categorized by the FDA as automated cell staining devices
and have been exempted from the 510(k) notification process. To date, ISH tests
have not received FDA approval and, therefore, use of the gen II for ISH tests
will be restricted to research
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applications. New instrument products that the Company may develop and introduce
could require 510(k) notifications and clearances or PMA applications.
All of the detection chemistries and most of the primary antibody products
being sold by the Company are currently classified as Class II devices. Many of
Ventana's detection chemistries have received 510(k) clearance from the FDA.
Some of the antibodies being marketed by the Company are labeled for in vitro
diagnostic use and have received 510(k) clearance from the FDA. The Company may
wish to market certain antibodies with a label indicating that they can be used
in the diagnosis of particular diseases, including cancer. These devices may be
classified as Class III devices and may therefore require a PMA.
After products have been cleared for marketing by the FDA, the Company will
be subject to continuing FDA obligations. Clearances may be withdrawn or
products may be recalled if compliance with regulatory standards is not
maintained or if problems occur after the product reaches the market. The FDA
may require surveillance programs to monitor the effect of products, which have
been commercialized, and has the power to prevent or limit further marketing of
the product based on the results of these post-marketing programs. The FDA
enforces regulations prohibiting the marketing of products for unapproved uses.
Further, if the Company wanted to make changes on a product after FDA clearance
or approval, including changes in indications or intended use or other
significant modifications to labeling or manufacturing, additional clearances or
approvals would be required. The FDA has broad regulatory and enforcement powers
including the ability to levy fines and civil penalties, suspend or delay
issuance of approvals, seize or recall products, withdraw clearances or
approvals, restrict or enjoin the marketing of products, and impose civil and
criminal penalties, any one or more of which could have a material adverse
effect upon the Company.
The Company is subject to FDA GMP regulations. The Company is in the
process of implementing policies and procedures which are intended to allow the
Company to receive ISO 9000 certification. ISO 9000 standards are worldwide
standards for manufacturing process control, documentation and quality
assurance. There can be no assurance that the Company will be successful in
meeting ISO 9000 certification requirements. Under GMP regulations and ISO 9000
standards, the Company is subject to ongoing FDA and international compliance
inspections.
Laboratories using the Company's diagnostic devices for clinical use in the
United States are regulated under CLIA, which is intended to ensure the quality
and reliability of medical testing. Regulations implementing CLIA establish
requirements for laboratories and laboratory personnel in the areas of
administration, participation and proficiency testing, patient test management,
quality control, personnel, quality assurance and inspection. Under these
regulations, the specific requirements that a laboratory must meet depend on the
complexity of the test being performed by the laboratory. Under CLIA
regulations, all laboratories performing moderately complex or highly complex
tests will be required to obtain either a registration certificate or
certificate of accreditation from the Health Care Financing Administration. CLIA
requirements may prevent some clinical laboratories from using certain of the
Company's diagnostic products. Therefore, there can be no assurance that CLIA
regulations and future administrative interpretations of CLIA will not have a
material adverse impact on the Company by limiting the potential market for the
Company's products.
The Company sells products in certain international markets and plans to
enter additional international markets. International sales of medical devices
are subject to foreign government regulation, the requirements of which vary
substantially from country to country. These range from comprehensive device
approval requirements for some or all of the Company's medical device products
to requests for product data or certifications. FDA approval is required for the
export of Class III devices.
In addition to the foregoing, the Company is subject to numerous federal,
state and local laws and regulations relating to such matters as safe working
conditions, laboratory and manufacturing practices, fire hazard control,
disposal of hazardous or potentially hazardous substances and other
environmental matters. To date, compliance with these laws and regulations has
not had a material effect on the Company's financial position, and the Company
has no plans for material capital expenditures relating to such matters. The
Company currently uses third-party disposal services to remove and dispose of
the hazardous materials used in its processes. The Company could in the future
encounter claims from individuals, governmental authorities or other persons or
entities in connection with exposure to or disposal or handling of such
hazardous materials or violations of environmental laws
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by the Company or its contractors and could also be required to incur additional
expenditures for hazardous materials management or environmental compliance.
Costs associated with environmental claims, violations of environmental laws or
regulations, hazardous materials management and compliance with environmental
laws could have a material adverse effect on the business, financial condition
or results of operations of the Company.
Although the Company believes it will be able to comply with all applicable
regulations regarding the manufacture and sale of diagnostic products, such
regulations are always subject to change and depend heavily upon administrative
interpretations. Delays in or failure to receive clearances or approvals of
products the Company plans to introduce, or changes in the applicable regulatory
climates could have a material adverse effect upon the business, financial
condition or results of operations of the Company.
Third-Party Reimbursement
Third-party payors, such as governmental programs and private insurance
plans, can indirectly affect the pricing or relative attractiveness of the
Company's products by regulating the maximum amount of reimbursement they will
provide to the Company's customers for diagnostic testing services. In recent
years, health care costs have risen substantially, and third-party payors have
come under increasing pressure to reduce such costs. In this regard, legislative
proposals relating to health care reform and cost containment have been
introduced at the state and federal levels. The cost-containment measures that
health care payors are instituting and the impact of any health care reform
could have a material adverse effect on the levels of reimbursement the
Company's customers receive from third-party payors and as a result on the
Company's ability to market and sell its products. Such factors could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Product Liability and Recalls; Product Liability Insurance
The marketing and sale of the Company's diagnostic instruments and reagents
entails risk of product liability claims. The Company has product liability
insurance coverage with a per occurrence maximum of $2.0 million and an
aggregate annual maximum of $5.0 million. There can be no assurance that this
level of insurance coverage will be adequate or that insurance coverage will
continue to be available on acceptable terms or at all. A product liability
claim or recall could have a material adverse effect on the Company's business,
reputation, financial condition and results of operations.
Employees
As of December 31, 1997, Ventana employed 211 persons full time. Of these
employees, 102 were engaged in sales, marketing and service, 27 in research and
development, 56 in manufacturing and 26 in general and administrative functions.
None of Ventana's employees are covered by a collective bargaining agreement.
Ventana considers its relations with its employees to be satisfactory.
Backlog
Ventana typically ships orders for instruments and reagents shortly after
receipt, and accordingly does not maintain a significant backlog.
Additional Risk Factors
Continuing Losses; Uncertainty of Future Profitability
The Company has incurred cumulative losses of $33.8 million from its
inception in 1985 through December 31, 1997. BioTek sustained cumulative losses
of $18.2 million from its inception in October 1990 until its acquisition by
Ventana. The Company's ability to achieve and sustain profitability is dependent
on a variety of factors including the extent to which its instrument and reagent
systems continue to achieve market acceptance, the Company's ability to sell
reagents to its customers, the Company's ability to compete successfully, the
Company's ability to develop, introduce, market and distribute existing and new
diagnostic systems, the level of expenditures incurred by the Company in
investing in product development and sales and marketing, the Company's ability
to expand manufacturing capacity as required and the receipt of required
regulatory approvals for products developed
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by the Company. There can be no assurance that the Company will be successful in
these efforts. Moreover, the level of future profitability, if any, cannot be
accurately predicted and there can be no assurance that profitability will be
sustained on a quarterly or annual basis, or at all, or that the Company will
not incur operating losses in the future.
Future Fluctuations in Operating Results
The Company derives revenues from the sale of reagents and instruments. The
initial placement of an instrument is subject to a longer, less consistent sales
cycle than the sale of reagents, which begin and are typically recurring once an
instrument is placed. The Company's future operating results are likely to
fluctuate substantially from period to period because instrument sales are
likely to remain an important part of revenues in the near future. The degree of
fluctuation will depend on the timing, level and mix of instruments placed
through direct sales and instruments placed through QRIBs and rentals. In
addition, average daily reagent use by customers may fluctuate from period to
period, which may contribute to future fluctuations in revenues.
Sales of instruments may fluctuate from period to period because sales to
the Company's international distributors typically provide such distributors
with several months of instrument inventory, which the distributors will
subsequently seek to place with end-users. The Company's instrument installed
base includes instruments shipped to DAKO A/S ("DAKO") and recognized as sales.
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 from its suppliers, competitive
pricing pressures, increased research and development expenses, and increased
marketing and sales expenses associated with the implementation of the Company's
market expansion strategies for its instrument and reagent products. Future
instrument and reagent sales could also be adversely affected by the
configuration of the Company's patient priority systems, which require the use
of the Company's detection chemistries, particularly if and to the extent that
competitors are successful in developing and introducing new IHC instruments or
if competitors offer reagent supply arrangements having pricing or other terms
more favorable than those offered by the Company. 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 generations of products. To date,
however, the Company has not incurred material charges or expenses associated
with inventory obsolescence in connection with new product introductions. In
addition, a significant portion of the Company's expense levels is based on its
expectation of a higher level of revenues in the future and are relatively fixed
in nature. Therefore, if revenue levels are below expectations, operating
results in a given period are likely to be 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 the Company's and its
competitors' products. The Company's products could also be rendered obsolete or
noncompetitive by virtue of technological innovations in the fields of cellular
or molecular diagnostics. Failure of the Company's products to achieve market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations.
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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 appropriate treatment for cancer and
additional disease states. In particular, the Company must successfully
introduce the NexES on a timely basis and continue the commercialization of the
TechMate 250. These instruments are smaller capacity, lower cost instruments
than the Company's current instruments and are necessary to expand the market
opportunity at smaller hospitals and reference laboratories in the United States
and Europe. The Company depends in part on the success of medical research in
developing new antibodies, nucleic acid probes and clinical diagnostic
procedures that can be adapted for use in the Company's systems. In addition,
the Company will need to obtain licenses on satisfactory terms to certain of
these technologies, for which there can be no assurance. Certain of the
Company's products are currently under development, initial testing or
preclinical or clinical evaluation by the Company. Other products are scheduled
for future development. Products under development or scheduled for future
development may prove to be unreliable from a diagnostic standpoint, may be
difficult to manufacture in an efficient manner, may fail to receive necessary
regulatory clearances, may not achieve market acceptance or may encounter other
unanticipated difficulties. The failure of the Company to develop, introduce and
market new products on a timely basis or at all could have a material adverse
effect on the Company's business, financial condition and results of operations.
Manufacturing Risks
The Company has only manufactured patient priority instruments and reagents
for commercial sale since late 1991, and manufacturing of the Company's batch
processing instruments is performed by third parties. As the Company continues
to increase production of such instruments and reagents and develops and
introduces new products, it may from time to time experience difficulties in
manufacturing. 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 the current good manufacturing practices ("GMPs")
prescribed by the United States Food and Drug Administration ("FDA") and other
standards prescribed by various federal, state and local regulatory agencies in
the United States and other countries, including the International Standards
Organization ("ISO") 9000 Series certifications. There can be no assurance that
manufacturing and quality problems will not arise as the Company increases its
manufacturing operations or that such scale-up can be achieved in a timely
manner or at a commercially reasonable cost. Manufacturing or quality problems
or difficulties or delays in manufacturing scale-up could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence Upon Key Suppliers
The Company's reagent products are formulated from both chemical and
biological materials utilizing proprietary Ventana technology as well as
standard processing techniques. Certain components and raw materials, primarily
antibodies, used in the manufacturing of the Company's reagent products are
currently provided by single-source vendors. There can be no assurance that the
materials or reagents needed by the Company will be available in commercial
quantities or at acceptable prices. Any supply interruption or yield problems
encountered in the use of materials from these vendors could have a material
adverse effect on the Company's ability to manufacture its products until a new
source of supply is obtained. The use of alternative or additional suppliers
could be time consuming and expensive. In addition, a number of the components
used to manufacture the NexES and gen II instruments are fabricated on a custom
basis to the Company's specifications and are currently available from a limited
number of sources. Consequently, in the event the supply of materials or
components from any of these vendors were delayed or interrupted for any reason
or in the event of quality or reliability problems with such components or
suppliers, the Company's ability to supply such instruments could be impaired,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
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Dependence Upon Third-Party Manufacturers for Batch Processing Instruments
The Company relies on two outside parties to manufacture its batch
processing instruments. Kollsman Manufacturing Company, Inc. ("Kollsman")
currently manufactures the TechMate 500 instrument under a contractual
relationship with the Company. The Company has entered into a contract
manufacturing agreement with LJL BioSystems, Inc. ("LJL") for the manufacture of
the TechMate 250 instrument. There can be no assurance that these manufacturers
will be able to meet the Company's product needs in a satisfactory, cost
effective or timely manner. The Company's reliance on third-party manufacturers
involves a number of additional risks, including the absence of guaranteed
capacity and reduced control over delivery schedules, quality assurance and
costs. The amount and timing of resources to be devoted to these activities by
such manufacturers are not within the control of the Company, and there can be
no assurance that manufacturing problems will not occur in the future. Any such
manufacturing or supply problems could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
has committed to future purchases from Kollsman totaling $1.1 million and from
LJL totaling $0.3 million.
Risks Associated with European Distribution Relationship
In Europe, batch processing instruments are sold through DAKO, which also
pays BioTek a royalty for each instrument in exchange for the right to sell its
own reagents for use with such systems. The agreement with DAKO provides DAKO
with exclusive distribution rights for batch processing instruments in Europe
and other territories, subject to certain performance requirements. The
agreement expires in December 1999. Accordingly, the Company is likely to be
dependent upon DAKO for international sales of batch processing instruments
through this date.
In connection with BioTek's agreement with DAKO, DAKO made two loans
secured by a pledge of substantially all of BioTek's assets. DAKO also made
prepayments on future instrument sales and reagent royalties to BioTek. These
loans and prepayments were used to fund TechMate 250 instrument development and
working capital requirements. In 1996, BioTek and DAKO entered into an amendment
to their existing agreement (the "Amendment Agreement") for the purpose of
addressing several matters, including repayment of these secured loans and
prepayments. At December 31, 1997, the net aggregate outstanding balance of the
secured loans and prepayments was $0.5 million
In connection with 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 in 1996. Under the Amendment Agreement, the remaining
$0.5 million of 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. The Amendment Agreement also establishes
certain minimum purchase and delivery commitments for TechMate 250 and TechMate
500 instruments, as well as pricing for certain quantities of TechMate 250
instruments. 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 July 1997, DAKO initiated such arbitration
proceedings. If the determination is adverse 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 sale would also be reduced.
During the course of ongoing discussions with DAKO since the acquisition of
BioTek, DAKO has, among other things, 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
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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 Past and Future Acquisitions
Although the Company has no pending agreements or commitments, the Company
may make additional acquisitions of complementary businesses, products or
technologies in the future. Acquisitions of companies, divisions of companies,
or products entail numerous risks, including (i) the potential inability to
successfully integrate acquired operations and products or to realize
anticipated synergies, economies of scale or other value, (ii) diversion of
management's attention and (iii) loss of key employees of acquired operations.
No assurance can be given that the Company will not incur problems with respect
to any future acquisitions, and there can be no assurance that any future
acquisitions will result in the Company becoming profitable or, if the Company
achieves profitability, that such acquisition will increase the Company's
profitability. Furthermore, there can be no assurance that the Company will
realize value from any such acquisition, which equals or exceeds the
consideration paid. Any such problems could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, any future acquisitions by the Company may result in dilutive
issuances of equity securities, the incurrence of additional debt, large
one-time write-offs and the creation of goodwill or other intangible assets that
could result in amortization expense. These factors could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Risks Relating to Patents and Proprietary Rights
The Company's success depends, in part, on its ability to obtain patents,
maintain trade secret protection and operate without infringing the proprietary
rights of others. There can be no assurance that the Company's patent
applications will result in patents being issued or that any issued patents will
provide adequate protection against competitive technologies or will be held
valid if challenged. Others may independently develop products similar to those
of the Company or design around or otherwise circumvent patents issued to the
Company. In the event that any relevant claims of third-party patents are upheld
as valid and enforceable, the Company could be prevented from practicing the
subject matter claimed in such patents, or would be required to obtain licenses
from the patent owners of each of such patents or to redesign its products or
processes to avoid infringement. There can be no assurance that such licenses
would be available or, if available, would be on terms acceptable to the Company
or that the Company would be successful in any attempt to redesign its products
or processes to avoid infringement. If the Company does not obtain necessary
licenses, it could be subject to litigation and encounter delays in product
introductions while it attempts to design around such patents. Alternatively,
the Company's development, manufacture or sale of such products could be
prevented by the patent holder. Litigation would result in significant cost to
the Company as well as diversion of management time. Adverse determinations in
any such proceedings could have a material adverse effect on the Company's
business, financial condition and results of operations.
Ventana also relies upon trade secret protection for its confidential and
proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information or
techniques, gain access to Ventana's trade secrets or disclose such technology,
or that Ventana can effectively protect its trade secrets. Litigation to protect
Ventana's trade secrets would result in significant cost to the Company as well
as diversion of management time. Adverse determinations in any such proceedings
or unauthorized disclosure of Ventana trade secrets could have a material
adverse effect on Ventana's business, financial condition and results of
operations.
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BioTek is a party to litigation initiated by BioGenex Laboratories, Inc.
("BioGenex") relating to certain alleged past infringements of patent rights of
BioGenex. In May 1997, a judgement was issued against BioTek, which BioTek has
appealed. For a discussion of these proceedings, see Item 3 below entitled
"Legal Proceedings."
Uncertainty of Future Funding of Capital Requirements
The Company anticipates that its existing capital resources, including the
net proceeds of the secondary offering of its Common Stock completed in February
1997 and interest earned thereon, and available borrowing capacity under the
Company's revolving credit line will be adequate to satisfy its 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 through QRIBs, 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, the Company's ability
to sustain profitability and timing of regulatory approvals. The Company may
require additional capital resources and there is no assurance such capital will
be available to the extent required, on terms acceptable to the Company or at
all. Any such future capital requirements could result in the issuance of equity
securities, which would be dilutive to existing stockholders.
Dependence on Key Personnel
The Company is dependent upon the retention of principal members of its
management, Board of Directors, scientific, technical, marketing and sales staff
and the recruitment of additional personnel. With the exception of one
individual, the Company does not have an employment agreement with any of its
executive officers. The Company does not maintain "key person" life insurance on
any of its personnel. The Company competes with other companies, academic
institutions, government entities and other organizations for qualified
personnel in the areas of the Company's activities. The inability to hire or
retain qualified personnel could have a material adverse effect on the Company's
business, financial condition and results of operations.
Uncertainties Related to Government Funding
A portion of the Company's products are sold to universities, research
laboratories, private foundations and other institutions where funding is
dependent upon grants from government agencies, such as the National Institutes
of Health. Research funding by the government, however, may be significantly
reduced under several budget proposals being discussed by the United States
Congress or for other reasons. Any such reduction may materially affect the
ability of many of the Company's research customers to purchase the Company's
products.
FDA and Other Government Regulation
The manufacturing, marketing and sale of the Company's products are subject
to extensive and rigorous government regulation in the United States and in
other countries. In the United States and certain other countries, the process
of obtaining and maintaining required regulatory approvals is lengthy, expensive
and uncertain. In the United States, the FDA regulates, as medical devices,
clinical diagnostic tests and reagents, as well as instruments used in the
diagnosis of adverse conditions. The Federal Food, Drug, and Cosmetic Act
governs the design, testing, manufacture, safety, efficacy, labeling, storage,
record keeping, approval, advertising and promotion of the Company's products.
There are two principal FDA regulatory review paths for medical devices: the
510(k) pre-market notification ("510(k)") process and the pre-market approval
("PMA") process. The PMA process typically requires the submission of more
extensive clinical data and is costlier and more time-consuming to complete than
the 510(k) process.
The FDA regulates, as medical devices, instruments, diagnostic tests and
reagents that are traditionally manufactured and commercially marketed as
finished test kits or equipment. Some clinical laboratories, however, choose to
purchase individual reagents intended for specific analyses and develop and
prepare their own finished diagnostic tests. Although neither the individual
reagents nor the finished tests prepared from them by the clinical laboratories
have traditionally been regulated by the FDA, the FDA has recently proposed a
rule that, if adopted, would regulate the reagents sold to clinical laboratories
as medical devices. The proposed rule would also restrict
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sales of these reagents to clinical laboratories certified under the Clinical
Laboratory Improvement Amendments of 1988 ("CLIA") as high complexity testing
laboratories. The Company intends to market some diagnostic products as finished
test kits or equipment and others as individual reagents; consequently, some or
all of these products may be regulated as medical devices.
Medical devices generally require FDA approval or clearance prior to being
marketed in the United States. The process of obtaining FDA clearances or
approvals necessary to market medical devices can be time-consuming, expensive
and uncertain, and there can be no assurance that any clearance or approval
sought by the Company will be granted or that FDA review will not involve delays
adversely affecting the marketing and sale of the Company's products. Further,
clearances or approvals may place substantial restrictions on the indications
for which the product may be marketed or to whom it may be marketed.
Additionally, there can be no assurance that the FDA will not require additional
data, require that the Company conduct further clinical studies or obtain a PMA
causing the Company to incur further cost and delay.
With respect to automated IHC testing functions, the Company's instruments
have been categorized by the FDA as automated cell staining devices and have
been exempted from the 510(k) notification process. To date, ISH tests have not
received FDA approval or clearance and, therefore, use of the gen II for ISH
tests will be restricted to research applications. New instrument products that
the Company may introduce could require future 510(k) clearances. Certain
antibodies that the Company may wish to market with labeling indicating that
they can be used in the diagnosis of particular diseases may require PMA
approval. In addition, the FDA has proposed that some of the antibody products
that Ventana may wish to market be subjected to a pre-filing certification
process. Certain of the Company's products are currently sold for research use
and are labeled as such.
Failure to comply with applicable regulatory requirements can, among other
consequences, result in fines, injunctions, civil penalties, suspensions or loss
of regulatory approvals, recalls or seizures of products, operating restrictions
and criminal prosecutions. In particular, the FDA enforces regulations
prohibiting the marketing of products for nonindicated uses. In addition,
governmental regulations may be established that could prevent or delay
regulatory approval of the Company's products. Delays in or failure to receive
approval of products the Company plans to introduce, loss of or additional
restrictions or limitations relating to previously received approvals, other
regulatory action against the Company or changes in the applicable regulatory
climate could individually or in the aggregate have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company is also required to register as a medical device manufacturer
with the FDA and is inspected on a routine basis by the FDA for compliance with
its regulations. The Company's clinical laboratory customers are subject to
CLIA, which is intended to ensure the quality and reliability of medical
testing.
In addition to these regulations, the Company is subject to numerous
federal, state and local laws and regulations relating to such matters as safe
working conditions and environmental matters. There can be no assurance that
such laws or regulations will not in the future have a material adverse effect
on the Company's business, financial condition and results of operations.
Risks Relating to Availability of Third-Party Reimbursement and Potential
Adverse Effects of Health Care Reform
The Company's ability to sustain revenue growth and profitability may
depend on the ability of the Company's customers to obtain adequate levels of
third-party reimbursement for use of certain diagnostic tests in the United
States, Europe and other countries. Currently, the availability of third-party
reimbursement is limited and uncertain for some IHC tests.
In the United States, the Company's products are purchased primarily by
medical institutions and laboratories which bill various third-party payors,
such as Medicare, Medicaid, other government programs and private insurance
plans, for the health care services provided to their patients. Third-party
payors may deny reimbursement to the Company's customers if they determine that
a prescribed device or diagnostic test has not received appropriate FDA or other
governmental regulatory clearances or approvals, is not used in accordance with
cost-effective treatment methods as determined by the payor, or is experimental,
unnecessary or inappropriate. The success of the Company's products may depend
on the extent to which appropriate reimbursement levels for the costs of such
products and related treatment are obtained by the Company's customers from
government authorities,
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private health insurers and other organizations, such as health maintenance
organizations ("HMOs"). Third-party payors are increasingly challenging the
prices charged for medical products and services. The trend towards managed
health care in the United States and the concurrent growth of organizations such
as HMOs could significantly influence the purchase of health care services and
products. In addition, the federal government and certain members of Congress
have proposed, and various state governments have adopted or are considering,
programs to reform the health care system. These proposals are focused, in large
part, on controlling the escalation of health care expenditures. The cost
containment measures that health care payors are instituting and the impact of
any health care reform could have a material adverse effect on the levels of
reimbursement the Company's customers receive from third-party payors and the
Company's ability to market and sell its products and consequently could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Environmental Matters
Certain of the Company's manufacturing processes, primarily processes
involved in manufacturing certain of the Company's reagent products, require the
use of potentially hazardous and carcinogenic chemicals. The Company is required
to comply with applicable federal, state and local laws regarding the use,
storage and disposal of such materials. The Company currently uses third-party
disposal services to remove and dispose of the hazardous materials used in its
processes. The Company could in the future encounter claims from individuals,
governmental authorities or other persons or entities in connection with
exposure to or disposal or handling of such hazardous materials or violations of
environmental laws by the Company or its contractors and could also be required
to incur additional expenditures for hazardous materials management or
environmental compliance. Costs associated with environmental claims, violations
of environmental laws or regulations, hazardous materials management and
compliance with environmental laws could have a material adverse effect on the
Company's business, financial condition and results of operations.
Potential Volatility of Stock Price
The Company's Common Stock, like the securities of other medical device and
life sciences companies, has exhibited price volatility, and such volatility may
occur in the future. In addition, the stock market has from time to time
experienced extreme price and volume fluctuations that have affected the market
price of many companies and have often been unrelated to the operating
performance of particular companies. Factors such as fluctuations in the
Company's operating results, announcements of technological innovations or new
products by the Company or its competitors, FDA and other government regulation,
developments with respect to patents or proprietary rights, public concern as to
the safety of products developed by the Company or others, changes in financial
analysts' estimates or recommendations regarding the Company and general market
conditions may have a material adverse effect on the market price of the
Company's Common Stock. The Company's results of operations may, in future
periods, fall below the expectations of public market analysts and investors
and, in such event, the market price of the Company's Common Stock could be
materially adversely affected.
Item 2. PROPERTIES
Ventana's research laboratories, instrument and reagent manufacturing
facilities and administrative offices are located in approximately 45,000 square
feet of leased space in Tucson, Arizona. The leases for these facilities expire
at various times between November 1999 and March 2001, subject to renewal terms.
The Company believes its facilities are adequate to meet its current
requirements and facilities for anticipated future requirements will be
available on commercially reasonable terms.
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Item 3. LEGAL PROCEEDINGS
In March 1995, BioGenex sued BioTek in the U.S. 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.
BioGenex's claims include claims of both direct, indirect and contributory
infringement. BioTek denied infringement and asserted several defenses,
including invalidity of the patent that is the subject of the litigation. In
April 1995, BioTek ceased offering the products that were the subject of the
alleged infringements. A court-mandated judicial settlement conference was held
in January 1997 and no settlement was reached. In May 1997, a judgement for
approximately $850,000 was rendered against BioTek, which BioTek has appealed.
There can, however, be no assurance that BioTek will be successful on appeal. In
June 1997, the Company obtained a letter of credit for approximately $900,000 to
cover the judgement and interest.
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. On April 25, 1997, plaintiffs filed an Amended Complaint. The Amended
Complaint makes the same allegations as the original Complaint, and adds a claim
under North Carolina securities laws. In May of 1997, the Company made a motion
to transfer the action to the district of Arizona, or alternatively to the
Central District of California, which was denied by the court. On December 16,
1997, the Company filed a motion to dismiss the Amended Complaint, which is
pending in the Court. There is currently a stay of discovery while the motion to
dismiss is pending. 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.
On July 16, 1997, a shareholder demand to review and copy corporate
documents pursuant to Section 220 of the Delaware General Corporation Law was
denied by the Company. As a result, an action entitled, Leung v. Ventana Medical
Systems, Inc., CA. No. 15812, was filed in the Court of Chancery for the State
of Delaware. The plaintiff, who is related to the plaintiffs in the securities
action, discussed in the preceding paragraph, seeks inspection of certain books
and record of the Company. Defendants believe the plaintiff seeks the documents
for an improper purpose and intend to defend this case vigorously. A trial on
March 3, 1998 resulted in the judge ordering the parties to reach an agreement
without a court order. The agreement provides for the plaintiff's attorney only
to review the corporate documents supplied.
In connection with the disagreement as to the price to be charged by BioTek
to DAKO for the sale of TechMate 250 instruments, DAKO filed an arbitration
request with the International Chamber of Commerce in July 1997. The arbitration
is currently scheduled for October 1998. The Company believes its position is
strong; however, the results of the proceedings are uncertain.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
24
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market (ticker
symbol VMSI). The number of record holders of the Company's Common Stock at
December 31, 1997 was 336. The Company has not paid any dividends since its
inception and does not intend to pay any dividends in the foreseeable future.
The Company completed an initial public offering of 1,963,975 shares of
Common Stock in July 1996 and a secondary public offering of 1,881,066 shares of
Common Stock in February, 1997. Prior to the initial public offering, the
Company's Common Stock was not publicly traded.
Quarterly high and low stock prices are as follows:
Quarter Ended High Low
------------- ---- ---
December 31, 1997 $ 17 $ 13 1/8
September 30, 1997 17 1/8 13
June 30, 1997 14 1/2 9
March 31, 1997 19 13 1/2
25
<PAGE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data set forth below for
the years ended December 31, 1997, 1996 and 1995, except for the components of
net sales as well as the balance sheet data as of December 31, 1997, are derived
from the Company's audited Consolidated Financial Statements included elsewhere
in this Report on Form 10-K. The selected consolidated statement of operations
data set forth below for the years ended December 31, 1994 and 1993, except for
the components of net sales, are derived from audited financial statements of
the Company not included in this Report on Form 10-K. The historical financial
information for the periods presented are not necessarily indicative of the
results which may be realized in the future. The selected consolidated financial
data set forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Report on Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
________________________________________________________
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data(1):
Sales:
Instruments ............................. $ 1,162 $ 2,588 $ 4,644 $ 8,591 $ 9,248
Reagents and other ................... 1,519 3,339 5,969 15,538 22,905
-------- -------- -------- -------- ---------
Total net sales ....................... 2,681 5,927 10,613 24,129 32,153
Cost of goods sold .................... 1,722 2,531 4,282 10,632 11,138
-------- -------- -------- -------- ---------
Gross profit ........................... 959 3,396 6,331 13,497 21,015
Operating expenses:
Selling, general and administrative .. 4,067 6,899 7,435 11,206 16,953
Research and development ............... 2,100 1,926 2,239 2,749 3,050
Nonrecurring expenses ................. -- -- -- 10,262 1,656
Amortization of acquisition costs .... -- -- -- 424 509
-------- -------- -------- -------- ---------
Loss from operations .................... (5,208) (5,429) (3,343) (11,144) (1,153)
Other income (expense) ................. 229 59 74 (137) 781
-------- -------- -------- -------- ---------
Net loss ................................ $ (4,979) $ (5,370) $ (3,269) $(11,281) $ (372)
======== ======== ======== ======== ========
Per share data(2):
Net loss per share, as adjusted,
basic and diluted ..................... $ (.79) $ (.80) $ (.43) $ (1.22) $ (.03)
======== ======== ======== ======== ========
Shares used in computing net loss per
share, as adjusted .................... 6,308 6,725 7,571 9,243 12,778
======== ======== ======== ======== ========
</TABLE>
December 31, 1997
-------------------------
(in thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term investments . $ 18,902
Long-term debt . . . . . . . . . . . . . . . . . . 471
Working capital . . . . . . . . . . . . . . . . . . 28,714
Total assets . . . . . . . . . . . . . . . . . . . 48,352
Accumulated deficit . . . . . . . . . . . . . . . ( 33,782)
Total stockholders' equity . . . . . . . . . . . . 42,403
(1) See Note 12 to Consolidated Financial Statements in Form 10-K attached for
information regarding the Acquistion of BioTek Solutions, Inc.
(2) See Note 1 to Consolidated Financial Statements in Form 10-K attached for
information concerning the computation of net loss per share, as adjusted.
26
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of Ventana should be read in conjunction with the Consolidated
Financial Statements and related Notes thereto included elsewhere in this Form
10-K. This Report on Form 10-K 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 projected in the 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 develops, manufactures and markets proprietary instrument/reagent
systems that automate IHC and ISH tests for the analysis of cells and tissues on
microscope slides. Each Ventana proprietary system placed typically provides a
recurring revenue stream as customers consume reagents and supplies sold by the
Company with each test conducted. Reagents consist of two components: a primary
antibody and a detection chemistry which is used to visualize the primary
antibody. Therefore, the principal economic drivers for the Company are the
number, type and method of placement of instruments 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.
In February 1996, Ventana acquired BioTek for aggregate consideration of
$19.1 million, consisting of cash, promissory notes and the assumption of
liabilities. BioTek, founded in 1990, markets and sells automated diagnostic
systems that perform reliable, high volume batch processing of a single IHC test
on multiple patient biopsies. Ventana acquired BioTek for several strategic
reasons including its installed instrument base and complementary product line.
Historically, BioTek generated lower gross and operating margins than Ventana
due to its employment of a different business strategy which primarily involved
the use of third parties for key components of its business operations. BioTek's
instruments were produced by third-party manufacturers which prevented BioTek
from capturing manufacturing margin. BioTek's instruments have an open
configuration, enabling the customer to use reagents purchased from BioTek or
others which impacted both the price and volume of reagents purchased by
customers from BioTek. In contrast, patient priority instruments have a closed
configuration requiring the customer to use Ventana's prepackaged detection
chemistries. BioTek also realized lower gross margins on reagents than Ventana
due to its utilization of intermediate materials in the manufacturing process
which resulted in the capture of fewer value-added steps. BioTek used CMS and
DAKO as third-party distributors in the United States and international markets,
respectively, and supported its United States sales efforts with field sales and
technical support personnel. As a result, BioTek experienced 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
completed in 1997 the conversion of BioTek's reagent manufacturing activities to
the process used by Ventana in which basic raw materials are used and important
value-added steps are performed internally. The Company believes that in the
near term it will be more cost effective to continue sourcing batch processing
instruments from third-party manufacturers. The Company has manufacturing
agreements with Kollsman for production of the TechMate 500 instrument and with
LJL for production the TechMate 250 instrument. The Company and CMS agreed to
terminate in October 1997 the United States distribution agreement between
BioTek and CMS. The international distribution agreement with DAKO expires in
December 1999.
27
<PAGE>
The Company places instruments through direct sales, including nonrecourse
leases, instrument rentals and the Company's qualified reagent installed base
program ("QRIB"). In a QRIB, the Company provides the customer with the use of
an instrument for a period up to six months provided the customer purchases a
minimum of $3,000 in consumables. At the end of the six month period, the
customer must elect to purchase, rent or return the system. For QRIB placements,
the Company incurs the cost of manufacturing or procuring instruments and
recognizes revenues only at the time of the instrument is either sold or rented
rather than at the time of instrument placement. The manufacturing cost of
instruments placed through QRIBs or rentals is charged to cost of goods sold by
depreciating standard costs over a period of four years.
From its inception in 1985 through December 31, 1997, Ventana incurred
aggregate net losses of $33.8 million, including $10.3 million related to the
expensing of in-process research and development and integration costs
associated with the acquisition of BioTek. Similarly, BioTek incurred $18.2
million in losses from operations from its inception in October 1990 through
acquisition by Ventana. Although the Company achieved an operating profit in
three quarters of 1997, the level of future profitability, if any, cannot be
accurately predicted and there can be no assurance that profitability will be
sustained on a quarterly or annual basis, or at all, or that the Company will
not incur operating losses in the future.
The Company's future results of operations may fluctuate significantly from
period to period due to a variety of factors. The initial placement of an
instrument is subject to a longer, less consistent sales cycle than the sale of
reagents which begin and typically are recurring once an instrument is placed.
The Company's operating results 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
rented. In addition, average daily reagent use by customers may fluctuate from
period to period, which may contribute to future fluctuations in revenues. Sales
of instruments may also fluctuate from period to period because sales to the
Company's international distributors typically provide such distributors with
several months of instrument inventory, which the distributors will subsequently
seek to place with end-users. The Company's instrument installed base includes
instruments shipped to DAKO and recognized as sales. 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 generations of products. To date, however, the Company
has not incurred material charges or expenses associated with inventory
obsolescence in connection with new product introductions. In addition, a
significant portion of the Company's expense levels is based on its expectation
of a higher level of revenues in the future and is relatively fixed in nature.
Therefore, if revenue levels are below expectations, operating results in a
given period are likely to be adversely affected.
Total net sales grew from $2.7 million in 1993 to $32.2 million in 1997, a
compound annual growth rate of 86%. Instrument sales grew from $1.2 million in
1993 to $9.2 million in 1997, a compound annual growth rate of 68%. Reagent
sales increased from $1.5 million in 1993 to $22.9 million in 1997, a compound
annual growth rate of 97%. The growth in revenues is primarily attributable to
the growth in (i) instrument placements and (ii) the instrument installed base
and the associated corresponding increase in the aggregate recurring reagent
revenue stream. The Company's installed base of instruments increased from 74 at
December 31, 1993 to 801 at December 31, 1996 and to 1,199 at December 31, 1997.
Instrument placements have increased in every year, from 56 in 1993 to 265 in
1996 and 398 in 1997.
28
<PAGE>
Gross margin increased from 36% in 1993 to 56% in 1996 and 65% in 1997 as
both instrument and reagent gross margins increased. Gross margin increased due
to higher level of revenues available to cover fixed costs and to economies of
scale and efficiencies in purchasing and manufacturing activities. Research and
development and selling, general and administrative expenses were maintained at
levels that anticipated a higher level of revenues in the future, which resulted
in operating losses in each year between 1993 and 1996. The nonrecurring
expenses related to the litigation against BioTek of $1.7 million was the
primary reason for the Company experiencing an operating loss in 1997.
Results of Operations
Years Ended December 31, 1997, 1996 and 1995
Ventana acquired BioTek on February 26, 1996. Consequently, approximately
10 months of BioTek operations are included in the results of operations for the
year ended December 31, 1996.
Net Sales. Presented below is a summary of net sales for each of the three
years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1995 1996 1997
------------------- ------------------- -------------------
$ % of Sales $ % of Sales $ % of Sales
------- ---------- ------- ---------- ------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Sales Summary:
Instruments $ 4,644 44% $ 8,591 36% $ 9,248 29%
Reagents and other 5,969 56% 15,538 64% 22,905 71%
------- ----- ------- ----- ------- ------
Total net sales $10,613 100% $24,129 100% $32,153 100%
======= ===== ======= ===== ======= ======
</TABLE>
Net sales for the year ended December 31, 1997 increased by 33% to $32.2
million from $24.1 million for the year ended December 31, 1996. Net sales for
the year ended December 31, 1996 increased by 127% to $24.1 million from $10.6
million for the year ended December 31, 1995. The increases in net sales were
attributable to increases in instrument sales as well as increases in reagent
sales. Instrument sales increased over the prior year by 8% in 1997 and 85% in
1996, respectively. Reagent sales increased over the prior year by 47% in 1997
and 160% in 1996, respectively.
Instrument sales in 1997 increased due to a 40% increase in unit volume,
which was partly attributable to the fact that BioTek's TechMate instruments
were sold throughout 1997, but only for 10 months in 1996. In fact, sales of
TechMate 250's to DAKO increased more than 100% year-to-year. However, this
volume increase was partially offset by the relatively low unit prices received
from DAKO and slightly lower prices for patient priority systems. Instrument
sales in 1996 increased due to increased unit volume and the introduction of the
gen II ISH instrument and $3.2 million of instrument sales resulting from the
acquisition of BioTek. Instrument sales in 1995 were positively impacted by the
high selling prices associated with the gen II instrument placements.
Reagent and other sales in 1997 increased due to sales of reagents to new
customers from new instruments placed during the year, increased sales to
existing customers and increased reagent sales and royalties generated from
BioTek products. In 1996, reagent and other sales increased for much the same
reasons but also as a result of higher average unit prices. In 1995, reagent
sales increased from the prior year, but at a lesser rate, since BioTek revenue
did not benefit the Company until March 1996. There was no royalty revenue in
1995.
The portion of the Company's sales generated by its European subsidiaries
increased to about 10% in the year ended December 31, 1997 from about 8% in the
year ended December 31, 1996, which was, in turn, a decrease from about 9% in
the year ended December 31, 1995. The increase in the proportion of sales
generated in Europe in 1997 was attributable to major investments in European
infrastructure. See discussion on selling, general and administrative expenses
below. The decrease in this percentage in 1996 was caused by high growth in
North
29
<PAGE>
America at the same time the Company was financially unable to invest rapidly in
Europe until completion of its initial public offering in July 1996. The Company
has also begun to build an infrastructure in Japan, but had no direct sales in
that country through December 31, 1997.
Gross Margin. Gross profit for the year ended December 31, 1997 increased
to $21.0 million from $13.5 million in the year ended December 31, 1996 and $6.3
million in the year ended December 31, 1995. Gross margin was 65% in 1997 as
compared to 56% in 1996 and 60% in 1995. The increase in gross margin from 1996
to 1997 was primarily due to the introduction in August 1997 of the NexES
instrument, which has a lower manufacturing cost than the ES and due to higher
margins on reagents due to the implementation of aggressive cost reduction
programs and the integration of BioTek reagent manufacturing process into the
Ventana model. The decline in gross margins from 1995 to 1996 was primarily due
to the inclusion of 10 months of BioTek's operations which had lower overall
margins. BioTek experienced lower gross margins than Ventana on a stand-alone
basis because of BioTek's (i) use of third-party distributors, (ii) lower
value-added reagent manufacturing strategy and (iii) lower reagent volumes and
pricing due to the open configuration of BioTek's instruments. The decline in
gross margin caused by these factors was partially offset by increased economies
of scale and manufacturing efficiencies brought about by the integration of
batch processing and reagent manufacturing into Ventana's Tucson, Arizona
manufacturing operations. Instrument gross margins declined slightly during 1996
as a result of the addition of the lower gross margin sales of TechMate
instruments. Reagent gross margins in 1995 increased compared to 1994 because
the Company (i) discontinued its primary antibody promotional programs, (ii)
obtained lower material prices from higher purchasing volumes and (iii) achieved
improvements in manufacturing efficiencies. Reagent gross margins for 1996
declined slightly.
Research and Development. Research and development expense in the year
ended December 31, 1997 increased to $3.1 million from $2.7 million in the year
ended December 31, 1996 and $2.2 million in the year ended December 31, 1995.
Research and development expenses for 1997 related primarily to the development
of new reagents and instruments, including the NexES instrument and new
prognostic markers. Research and development expense in 1996 and 1995 related
primarily to the development of new reagents and instruments, including the
NexES instrument, the new gen II instrument and development of additional
primary antibodies.
Selling, General and Administrative. Presented below is a summary of the
components of SG&A expense and their respective percentages of net sales during
the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1995 1996 1997
------------------- ------------------- -------------------
$ % of Sales $ % of Sales $ % of Sales
------- ---------- ------- ---------- ------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
SG&A Summary:
Sales and marketing $ 5,674 53% $ 8,387 35% $12,409 39%
Administration 1,761 17% 2,819 11% 4,544 14%
------- ----- ------- ----- ------- -----
Total SG&A $ 7,435 70% $11,206 46% $16,953 53%
======= ===== ======= ===== ======= =====
</TABLE>
SG&A expense in the year ended December 31, 1997 increased to $17.0 million
from $11.2 million in the year ended December 31, 1996 and $7.4 million in the
year ended December 31, 1995. SG&A expense as a percentage of net sales was 53%
of net sales in 1997, which was an increase from 46% of net sales in 1996 and a
decrease from 70% of net sales in 1995. The fluctuation in SG&A expense from
period to period reflects the growth of Ventana's internal sales and marketing
organization to facilitate its market expansion strategy and a corresponding
increase in infrastructure expenses to support a larger business base and
ongoing clinical practice standardization programs. The growth in sales and
marketing expense is the result of the decision by the Company to service the
market through its own sales and marketing staff, expenses necessary to support
the growth of the Company and in 1996 expenses associated with ongoing support
activities resulting from the BioTek acquisition. The increase in administrative
expense is associated with the Company's regulatory strategy and costs
associated with supporting an expanding business base, particularly in Europe
and Japan.
30
<PAGE>
Income Taxes
Ventana and BioTek have neither provided for nor paid any federal income
taxes since their respective inceptions because neither company generated
taxable income in any fiscal year. At December 31, 1997, Ventana had net
operating loss carryforwards for federal and state purposes of approximately
$13.6 and $9.8 million, respectively. These federal and state carryforwards will
begin to expire in 1998, if not previously utilized. The Company also has
research and development tax credit carryforwards of approximately $1.0 million
which will begin to expire in 2005, if not previously utilized. Utilization of
Ventana's net operating loss carryforwards will be subject to limitations due to
the "change in ownership" provisions of the Internal Revenue Code of 1986, as
amended (the "Code") as a result of the Company's prior issuances of equity
securities. These carryforwards, therefore, may expire prior to being fully
utilized. Future financings may cause additional changes in ownership and
further limitations on the use of federal net operating loss carryforwards. Due
to the losses incurred by Ventana since inception, deferred tax assets of
approximately $10.3 million at December 31, 1997, related to these
carryforwards, credits and temporary differences, have been fully reserved in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("FAS 109").
Quarterly Consolidated Results of Operations
The following table contains summary unaudited quarterly consolidated
statements of operations data for the four quarters ended December 31, 1997.
Management has prepared the quarterly consolidated statements of operations data
on the same basis as the Consolidated Statements of Operations contained in this
Report on Form 10-K. The Company's results of operations have varied and may
continue to fluctuate significantly from quarter to quarter. Results of
operations in any period should not be considered indicative of the results to
be expected for any future period.
Summary Quarterly Condensed Consolidated
Financial Data
<TABLE>
<CAPTION>
1997
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- --------- --------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Sales
Instruments ......................... $ 1,971 $ 1,919 2,142 3,216
Reagents and other .................. 4,987 5,534 5,872 6,512
-------- -------- -------- --------
Total net sales ..................... 6,958 7,453 8,014 9,728
Cost of goods sold ..................... 2,701 2,780 2,511 3,146
-------- -------- -------- --------
Gross profit ........................... 4,257 4,673 5,503 6,582
Operating expenses:
Selling, general and administrative 3,378 3,630 4,555 5,390
Research and development ............ 729 714 702 905
Nonrecurring expenses .................. -- 1,656 -- --
Amortization of intangibles ............ 127 127 128 127
-------- -------- -------- --------
Income (loss) from operations .......... 23 (1,454) 118 160
Interest income (expense) .............. 186 76 (5) 524
Net income (loss) $ 209 $ (1,378) $ 113 $ 684
======== ======== ======== ========
Net income (loss) per share (1), as
adjusted,
Basic and diluted .................. $ .02 $ (.11) $ .01 $ .05
======== ======== ======== ========
Shares used in computing net income
(loss) per share, as adjusted, (1) ..... 12,924 12,924 13,989 14,176
======== ======== ======== ========
</TABLE>
(1) See Note to Consolidated Financial Statements in Form 10-K attached for
information concerning the computation of net income (loss) per shares, as
adjusted.
31
<PAGE>
Liquidity and Capital Resources
Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in accumulated losses of $33.8 million as of December 31,
1997. The Company has funded its operations primarily through the private
placement of approximately $31.6 million in equity and debt securities, its July
1996 initial public offering which resulted in net proceeds to the Company of
$17.0 million (after giving effect to the partial exercise of the underwriter's
over-allotment option) and its February 1997 follow-on offering which resulted
in net proceeds to the Company of $26.1 million (after giving effect to the
partial exercise of the underwriter's over-allotment option). As of December 31,
1997 the Company's principal source of liquidity consisted of cash and cash
equivalents of $18.9 million and borrowing capacity under its $2.75 million bank
revolving line of credit. As of December 31, 1997, approximately $1.4 million of
this revolving line of credit had been utilized for letters of credit to
facilitate certain contract manufacturing arrangements for the production of
TechMate 500 instruments and to secure the judgement against BioTek, pending
appeal, leaving a revolving credit availability of approximately $1.3 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. The Company is currently negotiating a new revolving line of credit in the
amount of $5 million with sublimits available to its foreign subsidiaries.
During the period from March through May 1996, the Company raised $5.1
million through the private placement of subordinated notes ("Ventana Notes").
In connection with the issuance of the Ventana Notes, the Company issued
warrants to purchase an aggregate of 887,740 shares of Common Stock of the
Company at an exercise price of $5.82 per share. The proceeds of the Ventana
Notes were used to fund the cash portion of the BioTek acquisition consideration
and to provide working capital. Additionally, in connection with the acquisition
of BioTek, Ventana issued an aggregate of $12.0 million in exchange notes
(collectively, the "Exchange Notes") to the holders of outstanding indebtedness
of BioTek. The Exchange Notes bore interest at the rate of 7% per annum, with
interest forgiven if the Exchange Notes were repaid in full prior to February
26, 1997. The Exchange Notes provided each holder with the opportunity, during a
30-day period, to convert Exchange Notes into shares of Ventana Common Stock at
a conversion price of $13.53 per share. Upon expiration of the conversion
period, an aggregate of $3.0 million in principal amount of Exchange Notes were
converted into 222,973 shares of Common Stock and an aggregate of $9.0 million
of Exchange Notes remained outstanding. In September 1996, the Company offered
to pay an aggregate of $4.0 million of Exchange Notes and Ventana Notes at 90.5%
of the principal amount of such notes. On October 18, 1996, the Company repaid
$3.7 million of Exchange Notes and Ventana Notes at a discounted amount of $3.4
million. All notes tendered for repayment were repaid on the foregoing terms.
Following such repayment, the aggregate outstanding principal amount of Exchange
Notes and Ventana Notes was $10.3 million.
On February 18, 1997, the Company closed a secondary 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 received by the Company. On February 19, 1997, the
Company repaid $10.3 million in principal 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 its acquisition of BioTek
on February 26, 1996 were thereby repaid in accordance with the provisions of
the Note Agreements which provided that repayment could be made prior to
February 26, 1997 with no interest due and payable thereon. Accrued interest of
$0.6 million was reversed into income in February 1997.
During the year ended December 31, 1997, the Company used for operations
and investing activities approximately $4.5 million in cash versus $16.1 million
for the year ended December 31, 1996.
In connection with BioTek's agreement with DAKO, DAKO made two loans
secured by a pledge of substantially all of BioTek's assets. DAKO also made
prepayments on future instrument sales and reagent royalties to BioTek. These
loans and prepayments were used to fund TechMate 250 instrument development and
working capital requirements. In September 1996, BioTek and DAKO entered into
the Amendment Agreement for the purpose of addressing several matters, including
repayment of the secured loans and prepayments. The prepayments do not bear
interest. The secured loans and prepayments are recorded as long term debt in
the Company's 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 December 31, 1997, the
net aggregate outstanding balance of the secured loans and prepayments was $0.5
million.
32
<PAGE>
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 the proceeds of its secondary offering, together
with its existing capital resources, cash generated from product sales and
available borrowing capacity under 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, QRIBs or Rentals, 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.
Foreign Exchange Risk
The Company does not currently hedge against foreign currency fluctuations.
As a result, to the extent local currency revenues and expenses in the Company's
foreign subsidiaries are translated into U.S. dollars at differing rates over
time, the Company may experience fluctuations in its operating results. In
addition, to the extent that the Company's European subsidiaries have
receivables and liabilities in non-local currencies, unrealized gains and losses
may be recorded in other income (expense) as a result of currency rate
fluctuations.
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in the financial
statements. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. The Company is in the process of
determining its preferred format. The adoption of SFAS No. 130 will have no
impact on the Company's consolidated results of operations, financial position
or cash flows.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which is
effective for years beginning after December 15, 1997. SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for fiscal years beginning after December 15,
1997, and therefore the company will adopt the new requirements retroactively in
1998. Management has not completed its review of SFAS No. 131, but does not
anticipate that the adoption of this statement will have significant effect on
the Company's reported segments.
Readiness for the Year 2000
The Company has developed a plan to modify its information technology to
recognize the year 2000 and has begun converting critical data processing
systems. The Company currently expects the project to be substantially complete
by the second quarter of 1998. The cost of this project will be immaterial and
the Company does not expect it to have a significant effect on operations. In
addition, the Company will continue to implement systems with strategic value
and expects to implement a major upgrade of all management information systems
by early 1999.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Independent Auditors' Report, Consolidated Financial Statements and
Notes to Consolidated Financial Statements begin on page F-1.
33
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
[Not Applicable]
34
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the directors
and executive officers of the Company as of December 31, 1997:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Jack W. Schuler (1) (III) 57 Chairman of the Board of Directors
Henry T. Pietraszek (I) 51 President, Chief Executive Officer and Director
Michael K. Cusack 40 Vice President, International
Carl Kunkleman 38 Vice President, Sales
Brian J. McGraw 37 Vice President, Engineering
Johnny D. Powers, Ph.D. 36 Vice President, Operations
Bernard O. C. Questier 44 Vice President, European Operations
Russell Richerson, Ph.D. 46 Vice President, Research & Development
Pierre H. Sice 54 Vice President, Chief Financial &
Administrative Officer and Secretary
Tamaki Tateiwa 58 Vice President, Japan Operations
Stephen A. Tillson, Ph.D. 57 Vice President, Scientific Affairs and Quality Assurance
Rex J. Bates (2) (II) 74 Director
R. James Danehy (3) (III) 52 Director
Edward M. Giles (1) (II) 62 Director
Thomas M. Grogan, M.D. (III) 52 Director
John Patience (2)(III) 50 Director
James R. Weersing(1)(2) (I) 58 Director
</TABLE>
- ----------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Resigned on January 26, 1998
(I) Class I director.
(II) Class II director.
(III)Class III director.
Mr. Schuler has served as a director of Ventana since April 1991 and as
Chairman of the Board of Directors since November 1995. Mr. Schuler has been
Chairman of the Board of Directors of Stericycle, Inc., a specialized medical
waste management company, since March 1990. Mr. Schuler is also a partner in
Crabtree Partners, a Chicago based venture capital firm. Prior to joining
Stericycle, Mr. Schuler held various executive positions at Abbott from December
1972 through August 1989, serving most recently as President and Chief Operating
Officer. He is currently a director of Medtronic, Inc., Somatogen, Inc. and
Chiron Corporation. Mr. Schuler received a B.S. in Mechanical Engineering from
Tufts University and an M.B.A. from Stanford University.
Mr. Pietraszek became President, Chief Executive Officer and a director in
March 1997. Prior to joining the Company, Mr. Pietraszek served as President and
Chief Executive Officer of Biostar, Inc., a medical diagnostic company. From
1975 to 1994, Mr. Pietraszek held a variety of executive positions at Abbott
Laboratories and Takeda Chemical Industries. From 1982 to 1986, he served as
President of Dainabot K.K., a joint venture between
35
<PAGE>
Abbott and Dainippon Pharmaceutical Company of Japan and from 1980 to 1982 he
was Vice President of Field Service Operations for Abbott's Diagnostic Division.
He is a director of Specialty Laboratories. Mr. Pietraszek received a B.S. in
Marketing from Gannon University.
Mr. Cusack joined Ventana as Vice President of Marketing in September 1994
and assumed responsibility as Vice President, International in June 1996. Mr.
Cusack has also served as President Directeur General of Ventana Medical
Systems, S.A., a wholly-owned subsidiary of Ventana, since September 1995. From
November 1992 until joining Ventana, Mr. Cusack acted as General Manager, Europe
and Mideast for CYTYC S.A.R.L., a medical diagnostics company with operations in
the United States and abroad. Prior to CYTYC, Mr. Cusack held various marketing
and managerial positions with Abbott's Diagnostics Division. Mr. Cusack received
a B.S. from the University of Delaware and an M.B.A. from Temple University.
Mr. Kunkleman joined Ventana as Vice President of Sales in June 1997. From
April 1990 to June 1997 Mr. Kunkleman held various sales and marketing positions
at TAP Pharmaceuticals, a joint venture between Abbott Laboratories and Takeda
Chemical. Mr. Kunkleman received a B.S. in Marketing from the University of
Maryland.
Mr. McGraw has served as Vice President of Engineering since April 1997.
Prior to that, Mr. McGraw had been Director of Engineering since December 1994
and a Senior Engineer when he joined Ventana in 1991. From July 1997 until
August 1991, Mr. McGraw held various management and system design positions in
Abbott Laboratories' Diagnostics Division. Mr. McGraw received a B.S. in
Mechanical Engineering from West Virginia University.
Dr. Powers joined Ventana as Vice President of Operations in November 1996.
From June 1990 until joining Ventana, Dr. Powers held various management
positions with Organon Teknika Corporation, a medical diagnostic company,
serving most recently as Director of Manufacturing Technologies. Dr. Powers
holds a Ph.D. in Chemical Engineering from North Carolina State University, an
M.S. in Chemical Engineering from Clemson University, an M.B.A. from Duke
University and a B.A. in Chemistry from Wake Forest University.
Mr. Questier has served as Vice President of European Operations of Ventana
since February 1996. From October 1990 until joining Ventana in October 1995,
Mr. Questier held a number of management positions in E.I. DuPont de Nemours,
most recently as Business Manager for NEN Life Science Products in Europe. Mr.
Questier received a degree in Chemical Engineering from the Technical Institute
in Oostende, Belgium.
Dr. Richerson joined Ventana as Vice President, Research and Development in
June 1997. From 1986 until joining Ventana, Dr. Richerson held various research
and management positions with Abbott Laboratories' Diagnostics Division, most
recently as the Director of the AxSym Product Development and as the Director of
Probe Development. Dr. Richerson holds a Ph.D. in Biochemistry from the
University of Texas at Austin and a B.S. in Medical Technology from Louisiana
State University.
Mr. Sice joined Ventana as Vice President, Chief Financial Officer and
Chief Administrative Officer in March 1997. Mr. Sice was Executive Vice
President and Chief Financial Officer from 1994 until 1997, and Vice President
and Chief Financial Officer from 1988 until 1994 at SensorMedics Corporation, a
medical device company. From 1986 until 1988 Mr. Sice served as Senior Vice
President and Chief Financial Officer of Dataline Service Company. From 1978
until 1986 Mr. Sice was employed at MAI Basic Four Inc. in various financial
management capacities. Mr. Sice received a B.S. in Mechanical Engineering from
Illinois Institute of Technology and a M.B.A. from the University of Michigan.
Mr. Tateiwa has served as President of Ventana's wholly owned subsidiary in
Japan. Ventana Medical Systems Japan K.K. in Tokyo, since August 1997. From 1977
to 1997, Mr. Tateiwa held various management positions with Dainabot K.K. Mr.
Tateiwa received a B.S. in Engineering from the University of
Electro-Communications in Japan.
Dr. Tillson has served as Vice President of Scientific Affairs and Quality
Assurance since August 1995. From the time of his joining Ventana in May 1992
until July 1995, Dr. Tillson served as Director of Scientific
36
<PAGE>
Affairs and Quality Assurance. From January 1990 to May 1992, Dr. Tillson served
as a principal of Ticon Company Consulting. He has 25 years experience in the
diagnostic and pharmaceutical industry. Dr. Tillson holds a Ph.D. from Purdue
University and received a B.S. from California State Polytechnic University and
an M.B.A. from St. Mary's College of California.
Mr. Bates has served as a director of Ventana since April of 1996. From
August 1991 to May 1995, Mr. Bates served on the Board of Directors of Twentieth
Century Industries and was a member of its compensation committee. Prior to
Twentieth Century Industries, Mr. Bates served as the Vice-Chairman of the Board
of Directors of the State Farm Mutual Automobile Insurance Company. Mr. Bates
also served as State Farm's Chief Investment Officer. In March of 1991, Mr.
Bates retired from State Farm. Prior to Mr. Bates' employment with State Farm,
he was a partner in the investment firm of Stein, Roe & Farnham in Chicago. Mr.
Bates received a B.S. and an M.S. from the University of Chicago.
Mr. Danehy served as President and Chief Executive Officer of Ventana from
September 1994 until February 1997 and served as a director of Ventana from
September 1994 until his resignation on January 26, 1998. From June 1994 to
September 1994, Mr. Danehy served as a consultant to the Company. From November
1993 to June 1994, Mr. Danehy served as an interim Chief Executive Officer and
consultant for BioStar Diagnostics, where he also served as a director from
January 1994 to March 1995. Mr. Danehy received a B.S. in Chemistry from St.
Joseph's College and an M.B.A. from Loyola University of Chicago.
Mr. Giles has served as a director of Ventana since September 1992. Mr.
Giles has served as Chairman of The Vertical Group, Inc., a venture capital
investment firm, since January 1989. Mr. Giles was previously President of F.
Eberstadt & Co., Inc., a securities firm, and Vice Chairman of Peter B. Cannell
& Co., Inc., an investment management firm. He is currently a director of
McWhorter Technologies, Inc. and Synthetech, Inc. Mr. Giles received a B.S.Ch.E.
in Chemical Engineering from Princeton University and an M.S. in Industrial
Management from the Massachusetts Institute of Technology.
Dr. Grogan is a founder, a director and Chairman Emeritus of Ventana. He
has served as a director since the founding of the Company in June 1985 and as
Chairman of the Board of Ventana from June 1985 to November 1995. He is
currently a professor of pathology at the University of Arizona, College of
Medicine, where he has taught since 1979. He received a B.A. in Biology from the
University of Virginia and an M.D. from George Washington School of Medicine.
Dr. Grogan completed a post-doctorate fellowship at Stanford University.
Mr. Patience has served as a director of Ventana since July 1989. Mr.
Patience was a co-founder and served as a General Partner of Marquette Venture
Partners, a venture capital investment firm, from January 1988 until March 1995.
Since April 1995, Mr. Patience has been a partner in Crabtree Partners, a
Chicago-based venture capital firm. Mr. Patience was previously a partner in the
consulting firm of McKinsey & Co., specializing in health care. He is currently
a director of TRO Learning, Inc. and Stericycle, Inc. Mr. Patience received a
B.A. in Liberal Arts and an L.L.B. from the University of Sydney, Australia and
an M.B.A. from the University of Pennsylvania Wharton School of Business.
Mr. Weersing has served as a director of Ventana since October 1994. Since
1984, Mr. Weersing has been a Managing Director of MBW Venture Partners, a
venture capital investment firm. Mr. Weersing has also served as President of
JRW Technology, Inc., a consulting firm. Mr. Weersing served as a director of
Circadian, Inc., an asthma dosage management company, from December 1993 until
January 1996. Circadian filed a petition under Chapter 7 of the federal
bankruptcy laws in January 1996. Mr. Weersing received an B.S.M.E. and an M.B.A.
from Stanford University.
37
<PAGE>
Board of Directors
As of December 31, 1997, the Company had eight directors. The Company's
Bylaws authorize the Company to have a board of 10 directors. All directors hold
office until the next annual meeting of stockholders or until their successors
have been elected. The Company's certificate of incorporation and Bylaws,
however, provide that the Board of Directors is divided into three classes. Each
class consists of three or four directors. The terms of office of class I, class
II and class IIII directors expire at the Company's 2000, 1998 and 1999 annual
meetings of stockholders, respectively. At each annual meeting of stockholders
at which the term of office of a particular class of directors first expires,
the persons elected to the board positions represented by such class of
directors will be elected to serve from the time of election until the third
annual meeting following election. Any additional directorships resulting from
an increase in the number of directors will be distributed among the three
classes of directors so that, as nearly as possible, each class will consist of
one-third of the directors. This classification of the Board of Directors may
have the effect of delaying or preventing changes in control or management of
the Company. Officers serve at the discretion of the Board of Directors. There
are no family relationships among any of the directors or executive officers of
the Company. The Company does not pay cash compensation to directors for serving
in that capacity, although the Company does reimburse directors for expenses
incurred in attending Board of Directors meetings. The Board of Directors has,
among other committees, a Compensation Committee that makes recommendations
concerning salaries and incentive compensation for employees of and consultants
to the Company and an Audit Committee that reviews the results and scope of the
audit and other services provided by the Company's independent auditors.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation of the Company's Chief Executive Officer and each of the other four
most highly compensated executive officers paid for services rendered in all
capacities to the Company during the years ended December 31, 1995, December 31,
1996 and December 31, 1997 (collectively, the "Named Executive Officers").
38
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
-----------------------------
Annual Compensation Restricted Securities All Other
------------------- Stock Underlying Annual
Name and Principal Position Year Salary($) Bonus($) Awards($) Options Compensation($)
- --------------------------- ---- --------- -------- --------- ------- ---------------
<S> <C> <C> <C> <C>
Henry T. Pietraszek 1997 167,942 -- -- 350,000 707(1)
President and Chief Executive 1996 -- -- -- -- --
Officer 1995 -- -- -- -- --
Bernard O. C. Questier(3) 1997 150,000 -- -- 10,000 8,800(2)
Vice President, European 1996 137,500 7,500(4) -- -- 8,067(2)
Operations 1995 -- -- 36,956 57,200(5)
Pierre H. Sice 1997 122,963 -- 55,000 8,264(1)
Vice President, Finance and Chief 1996 -- -- -- -- --
Financial Officer and Secretary 1995 -- -- -- -- --
Johnny D. Powers, Ph.D 1997 118,375 -- -- 15,000 --
Vice President, Operations 1996 16,154 15,000(6) -- 35,000 23,872(1)
1995 -- -- -- -- --
Michael K. Cusack 1997 102,268 -- -- 7,000 --
Vice President, International 1996 100,130 -- -- -- --
1995 100,054
</TABLE>
- ----------------
(1) Relocation Expense
(2) Automobile allowance
(3) Mr. Questier signed an employment contract with the Company in October of
1995 and began working at the Company in February 1996. His annual
compensation is set at $150,000 and his salary is fixed to the French Franc
to protect against currency fluctuations should the United States Dollar
depreciate relative to the French Franc; however, if the United States
Dollar appreciates relative to the French Franc, Mr. Questier's salary
shall remain unchanged.
(4) Mr. Questier received a one-time nonrecurring $7,500 bonus in 1996 for
signing his employment contract in October of 1995 and meeting certain
other conditions.
(5) Consists of relocation expenses of $55,000 associated with Mr. Questier's
move from Germany to France, and a $2,200 automobile allowance.
(6) Mr. Powers was offered a sign-on bonus of $15,000 in connection with his
joining the company.
39
<PAGE>
Stock Option Information
The following table contains information concerning the stock option
grants made to each of the Named Executive Officers for the year ended December
31, 1997.
Option Grants in Last Year
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------- Potential Realizable
Value at Assumed
Number of Annual Rates of Stock
Securities % of Total Exercise Price Appreciation
Underlying Options or Base for Option Term(4)
Options Granted Price Expiration -------------------------
Name Granted(1) In 1997(2) ($/Sh)(3) Date 5%($) 10%($)
- ---- ---------- ---------- --------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Henry T. Pietraszek 350,000 24.4% $12.25 4/18/07 $2,696,386 $6,833,171
Bernard O. C. Questier 10,000 0.7% $12.25 4/18/07 $ 77,040 $ 195,233
Pierre H. Sice 55,000 3.8% $12.25 4/18/07 $ 423,718 $1,073,784
Johnny D. Powers, Ph.D. 15,000 1.0% $12.25 4/18/07 $ 115,559 $ 292,850
Michael K. Cusack 7,000 0.5% $12.25 4/18/07 $ 53,928 $ 136,663
</TABLE>
- -----------------
(1) Options were granted under the Company's 1988 Stock Option Plan and under
the Company's 1996 Stock Option Plan. These generally vest over four years
from the date of grant, except the options granted to Mr. Pietraszek which
vest over seven years.
(2) Based on an aggregate of 1,436,460 options granted by the Company in the
year ended December 31, 1997 under the Company's stock option plans to all
employees of and consultants to the Company, including the Named Executive
Officers.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of
the Company's securities that the actual stock price appreciation over the
10-year option term will be at the assumed 5% and 10% levels or at any
other defined level. Unless the market price of the Common Stock
appreciates over the option term, no value will be realized from the option
grants made to the executive officers.
40
<PAGE>
Aggregated Option Exercises in Last Year and Year-End Option Values
The following table sets forth, for each of the Named Executive
Officers, the shares acquired and the value realized on exercises of stock
options during the year ended December 31, 1997 and the year-end number and
value of exercisable and unexercisable options.
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Shares Unexercised Options In-the-Money Options
Acquired at December 31, 1997 at December 31, 1997(1)
on Value --------------------------------------------------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ---------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Henry T. Pietraszek -- -- -- 350,000 -- 1,050,000
Bernard O.C. Questier -- -- 20,019 26,938 288,498 274,097
Pierre H. Sice -- -- -- 55,000 -- 165,000
Johnny D. Powers, Ph.D. -- -- 10,209 39,791 -- 45,000
Michael K. Cusack -- -- 10,471 13,159 150,900 109,759
- -----------------
</TABLE>
(1) The value of "in-the-money" stock options represents the positive spread
between the exercise price of stock options, which ranges from $0.84 per
share to $17.00 per share, and the fair market value for the Company's
Common Stock of $15.25 per share as of December 31, 1997, which was the
closing price of the Company's Common Stock on December 31, 1997.
Employment Agreements
The Company has an employment agreement with Bernard O.C. Questier, its
Vice President of European Operations. The agreement provides for annual
compensation of $150,000, which is fixed to the French Franc to protect against
currency fluctuations should the United States Dollar depreciate relative to the
French Franc; however, if the United States Dollar appreciates relative to the
French Franc, Mr. Questier's salary shall remain unchanged. The agreement also
provides for, in the event of Mr. Questier's termination, continued compensation
through the quarter in which notice of termination is given plus one additional
full quarter. The agreement does not provide for any specified term of
employment. The Company currently has no employment contracts or agreements with
any of the other Named Executive Officers or with any other person.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors consists of Jack W.
Schuler, Edward M. Giles and James R. Weersing. The Compensation Committee makes
recommendations to the Board of Directors concerning salaries and incentive
compensation for employees of and consultants to the Company, except that the
Compensation Committee has full power and authority to grant stock options to
the Company's executive officers under the Company's 1988 Stock Option Plan and
the Company's 1996 Stock Option Plan.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to the Company with
respect to the beneficial ownership of its Common Stock as of December 31, 1997
for (i) each person who is known by the Company to own beneficially more than 5%
of the Company's Common Stock, (ii) each of the Company's directors, (iii) each
Named Executive Officer and (iv) all directors and executive officers as a
group.
41
<PAGE>
Shares Beneficially
Certain Executive Officers, Owned as of
Directors and 5% Stockholders December 31, 1997(1)(2)
------------------------------- -----------------------
Number Percent
------ -------
J. P. Morgan & Co. Inc.
60 Wall Street
New York, NY 10015 .............................. 1,790,300 13.5%
Entities affiliated with Marquette
Venture Partners(3)
520 Lake Cook Rd., Suite 450 ..................... 1,251,903 9.5%
MBW Venture Partners, L.P.(4)
James R. Weersing
365 South Street
Morristown, NJ 07960 ............................ 1,442,349 10.8%
State Farm Mutual Automobile
Insurance Company(5)
One State Farm Plaza
Bloomington, IL 61701 ............................ 887,173 6.6%
Jack W. Schuler(6) ................................. 972,440 7.3%
Henry T. Pietraszek ................................ 71,500 *
Michael K. Cusack(7) ............................... 28,810 *
Johnny D. Powers, Ph.D.(8) ......................... 11,667 *
Bernard O.C. Questier(9) ........................... 23,153 *
Pierre Sice ........................................ 0 *
Rex J. Bates(10) ................................... 36,735 *
R. James Danehy .................................... 151,224 1.1%
Edward M. Giles(11) ................................ 260,014 2.0%
Thomas M. Grogan, M.D.(12) ......................... 170,063 1.3%
John Patience(13) ................................. 297,589 2.2%
James R. Weersing(4)(14) ........................... 1,458,439 10.9%
All directors and executive officers as
a group (17 persons) ............................... 3,527,531 25.6%
- -----------------
* Less than 1%.
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.
(2) Applicable percentage of ownership is based on 13,247,226 shares of Common
Stock outstanding as of December 31, 1997 together with shares issuable
pursuant to applicable options and warrants of such stockholder which may
be exercised within 60 days after December 31, 1997. Shares of Common Stock
subject to options and/or warrants currently exercisable or exercisable
within 60 days after December 31, 1997 are deemed outstanding for computing
the percentage ownership of the person holding such options and/or
warrants, but are not deemed outstanding for computing the percentage of
any other person.
(3) Includes 872,795 shares beneficially owned by Marquette Venture Partners,
L.P.; 247,218 shares beneficially owned by Marquette Venture Partners II,
L.P.; and 131,890 shares beneficially owned by MVP II Affiliate Fund, L.P.
42
<PAGE>
(4) Includes 162,059 shares issuable upon the exercise of warrants held by MBW
Venture Partners, L.P. Mr. Weersing, a director of the Company, is Managing
Director of MBW Venture Partners Limited. Mr. Weersing disclaims beneficial
ownership of the shares beneficially owned by MBW Venture Partners, L.P.
except to the extent of his proportional partnership interest therein.
(5) Includes 108,893 shares issuable upon the exercise of warrants held by
State Farm Mutual Automobile Insurance Company.
(6) Includes 118,917 shares issuable upon the exercise of warrants and 5,583
shares issuable upon the exercise of options exercisable within 60 days of
December 31, 1997 held by Mr. Schuler; 73,512 shares beneficially owned by
Mr. Schuler, as custodian for Tanya Eva Schuler; 73,513 shares beneficially
owned by Mr. Schuler, as custodian for Therese Heidi Schuler; and 73,512
shares beneficially owned by Mr. Schuler, as custodian for Tino Hans
Schuler; 10,000 shares beneficially owned by The Schuler Family Foundation;
and 1,250 shares owned by Mrs. Schuler.
(7) Includes 11,703 shares issuable upon the exercise of options exercisable
within 60 days of December 31, 1997 held by Mr. Cusack.
(8) Includes 11,667 shares issuable upon the exercise of options exercisable
within 60 days of December 31, 1997 held by Dr. Powers.
(9) Includes 21,559 shares issuable upon the exercise of options exercisable
within 60 days of December 31, 1997 held by Mr. Questier.
(10) Includes 11,173 shares issuable upon the exercise of warrants and 5,583
shares issuable upon the exercise of options exercisable within 60 days of
December 31, 1997 held by Mr. Bates.
(11) Includes 230,903 shares beneficially owned by Vertical Fund Associates,
L.P. Also includes 5,583 shares issuable upon the exercise of options
exercisable within 60 days of December 31, 1997, held by Edward M. Giles.
Also includes 18,372 shares beneficially owned by Edward M. Giles IRA plus
5,156 shares issuable upon the exercise of warrants held by Edward M. Giles
IRA. Mr. Giles, a director of the Company, is Chairman of The Vertical
Group, Inc. Mr. Giles disclaims beneficial ownership of the shares
beneficially owned by such entities affiliated with The Vertical Group,
Inc., except to the extent of his partnership interest therein.
(12) Includes 9,612 shares beneficially owned by Andrew Grogan and 10,612 shares
beneficially owned by Emily Grogan including 7,710 shares beneficially
owned by C. Ovens, Inc. (of which 459 shares are issuable upon the exercise
of warrants held by C. Ovens, Inc.); and 26,008 shares issuable upon
exercise of options exercisable within 60 days of December 31, 1997 held by
Dr. Grogan.
(13) Includes 96,689 shares issuable upon the exercise of warrants and 5,583
shares issuable upon the exercise of options exercisable within 60 days of
December 31, 1997, held by Mr. Patience as well as 4,800 shares held in the
name of Mrs. Patience.
(14) Includes 6,209 shares beneficially owned by James R. Weersing and Mary H.
Weersing, Trustees of the Weersing Family Trust U/D/T dated April 24, 1991.
Also includes 4,298 shares issuable upon the exercise of warrants and 5,583
shares issuable upon the exercise of options exercisable within 60 days of
December 31, 1997, held by Mr. Weersing.
43
<PAGE>
Item 13. CERTAIN TRANSACTIONS
In April and May 1996, the Company sold an aggregate of 646,664 shares of
Common Stock to Jack Schuler, the Company's Chairman, John Patience, a director
of the Company, and venture capital funds affiliated with Marquette Venture
Partners ("Marquette"), a principal stockholder of the Company, at a purchase
price of $1.62 per share. Messrs. Schuler and Patience paid the purchase price
for their shares 10% in cash and 90% through a full recourse promissory note
secured by the underlying shares of Common Stock. Marquette paid the purchase
price for their shares in cash. These stock purchases were approved by the
Company's Board of Directors in principle in January 1996 and the specific terms
of the stock purchases were approved by the Board of Directors on February 23,
1996. The purchase price of $1.62 per share was determined by the Board of
Directors of the Company in January 1996 and equals the fair market value of
Company's Common Stock as of such date, as determined by the board. Messrs.
Schuler and Patience were provided with the opportunity to purchase these shares
in connection with (i) their efforts and assistance in completing the
acquisition of BioTek Solutions, Inc. and assisting management with the
integration of the companies, (ii) Mr. Schuler's decision to serve as Chairman
of the Board of Directors and (iii) Mr. Schuler's and Mr. Patience's devotion of
a significant portion of their work time to the Company's business. In February
1998, Messrs. Schuler and Patience each fully paid the promissory notes issued
in connection with their purchase of the shares.
On November 13, 1997, the Company's Board of Directors unanimously
approved, with Messrs. Patience and Schuler abstaining, a renewal of the
foregoing arrangement. Under this arrangement, Messrs. Schuler and Patience each
received options for 150,000 shares of Company Common Stock. These options were
issued on the basis that Messrs. Patience and Schuler would devote a significant
percentage of their work time to the Company's business and that Mr. Schuler
would serve as Chairman of the Company's Board of Directors. The options vest on
a cumulative monthly basis over 24 months commencing February 26, 1998 and have
an exercise price of $12.625 per share, which is equal to the fair market value
of the Company's Common Stock on the date of grant.
In February 1997, the Company repaid certain outstanding notes issued in
connection with the acquisition of BioTek Solutions, Inc. and a related
financing transaction. These notes were originally issued between February and
May 1996. Under the terms of the notes, no interest would be payable if the
principal of the notes was repaid in full on or prior to February 26, 1997. The
notes were repaid prior to such date, and, accordingly, no interest was paid on
the notes. Holders of the notes included the following 5% stockholders,
directors and entities affiliated with directors: MBW Venture Partners, L.P.,
Jack W. Schuler, certain entities with whom Edward M. Giles was affiliated,
State Farm Mutual Automobile Insurance Company, John Patience, Rex Bates, James
R. Weersing, and Thomas M. Grogan, M.D.
44
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10K
1. Financial Statements
The following Financial Statements of Ventana Medical Systems, Inc. and
Report of Ernst & Young LLP, Independent Auditors, are in this Form 10-K.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Ventana Medical Systems, Inc.
Report of Ernst & Young LLP, Independent Auditors F-1
Audited Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and 1997 F-2
Consolidated Statements of Operations for the years ended December 31, 1995, 1996
and 1997 F-3
Consolidated Statements of Convertible Redeemable Preferred Stock and Stockholders'
Equity (Deficit) for the years ended December 31, 1995, 1996 and 1997 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996
and 1997 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
2. Financial Statement Schedules
No schedules have been filed herein, because the information required to be
set forth therein is not applicable or is shown in the Financial Statements or
notes thereto.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibits
------ --------
<S> <C>
3.1(i)(b)(1) Restated Certificate of Incorporation of Registrant.
3.1(ii)(b)(1) Bylaws of Registrant.
4.1(1) Specimen Common Stock Certificate.
10.1(a)(1)+ DAKO Distribution Agreement dated September 27, 1994.
10.1(b)(1)+ First Amendment to DAKO Distribution Agreement dated March 24, 1995.
10.1(c)(1)+ Further amendments to First Amendment to DAKO Distribution Agreement dated March 24, 1995.
10.1(d)(2)++ Second amendment to DAKO Distribution Agreement dated September 25, 1996
10.2(a)(1) Kollsman Secured Promissory Note dated December 4, 1994.
10.2(b)(1) Development Secured Promissory Note dated March 24, 1995.
10.3(1)+ Curtin Matheson Scientific, Inc. Distribution Agreement dated January 18, 1993.
10.4(a)(1) Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19, 1996--Tranche 1.
10.4(b)(1) Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19, 1996--Tranche 2.
10.4(c)(1) Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19, 1996 Tranche 3.
10.5(a)(1) Restricted Stock Purchase Agreement with John Patience dated April 19, 1996 Tranche 1.
10.5(b)(1) Restricted Stock Purchase Agreement with John Patience dated April 19, 1996 Tranche 2.
10.6(1) Form of Indemnification Agreement for directors and officers.
10.7(a)(1) 1988 Stock Option Plan and forms of agreements thereunder.
10.7(b)(1) 1996 Stock Option Plan and forms of agreements thereunder.
10.8(a)(1) 1991 Employee Stock Purchase Plan.
10.8(b)(1) 1996 Employee Stock Purchase Plan.
10.8(c)(1) 1996 Directors Option Plan.
10.9(1) Questier Employment Agreement dated October 20, 1995.
10.10(1) Restated Investors Rights Agreement dated February 20, 1996.
10.11(1) Sublease of Premises between the Registrant and Jerry R. Jones &Associates, Inc., dated February 29,
1996, with attached Master Lease, dated October 26, 1988.
10.12(1) Master Lease Purchase Agreement between the Registrant and Copelco Leasing Corporation dated
April 13, 1994.
10.13(a)(1) Agreement and Plan of Reorganization dated January 19, 1996.
10.13(b)(1) Agreement and Plan of Merger dated February 26, 1996.
45
<PAGE>
10.13(c)(1) Escrow Agreement dated February 26, 1996.
10.14(a)(1) Form of Stock Purchase Warrant to Purchase shares of Series D Preferred Stock.
10.14(b)(1) Form of Preferred Stock Purchase Warrant.
10.14(c)(1) MBW and Marquette Warrants dated August 21, 1992.
10.15(a)(1) Form of Convertible Unsecured Promissory Note.
10.15(b)(1) Form of Convertible Unsecured Promissory Note.
10.17(1)+ Novocastra Laboratories Ltd. Distribution Agreement dated August 19, 1992.
10.18(1)+ LJL BioSystems, Inc. Techmate 250 Production Agreement dated May 1, 1996.
10.19(a)(1) Silicon Valley Bank Loan and Security Agreement dated February 20, 1995.
10.19(b)(1) Amendment to Silicon Valley Bank Loan and Security Agreement dated March 28, 1996
10.19(c) Amendment to Silicon Valley Bank Loan and Security Agreement dated August 15, 1997
11.1 Statement regarding computation of Per Share Earnings.
13.1 The Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1997.
21.1(1) Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
</TABLE>
(1) Incorporated by reference to the like-numbered exhibit to Registrant's
Registration Statement on Form S-1 (Commission File No. 333-4461), declared
effective by the Commission July 26, 1996.
(2) Incorporated by reference to the like-numbered exhibit to Registrant's
Registration Statement on Form S-1 (Commission File No. 333-18471),
declared effective by the Commission February 11, 1997.
+ Confidential Treatment has been granted for certain portions of this
Exhibit.
++ Confidential Treatment has been requested for certain portions of this
Exhibit.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form 10-K and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tucson, State of Arizona, on this 30th day of March,
1998.
VENTANA MEDICAL SYSTEMS, INC.
By: /s/ Pierre H. Sice
-------------------------
Pierre H. Sice
Vice President and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Pierre H. Sice and Christopher D.
Mitchell, and each of them acting individually, as his attorney-in-fact, each
with full power of substitution, for him in any and all capacities, to sign any
and all amendments to this Annual Report on 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Henry Pietraszek President and Chief Executive Officer (Principal March 30, 1998
----------------------- Executive Officer)
(Henry Pietraszek)
/s/ Pierre H. Sice Vice President and Chief Financial Officer March 30, 1998
----------------------- (Principal Financial and Accounting Officer)
(Pierre H. Sice)
/s/ Edward M. Giles Director March 30, 1998
-----------------------
(Edward M. Giles)
/s/ Thomas M. Grogan Director March 30, 1998
-----------------------
(Thomas M. Grogan)
/s/ John Patience Director March 30, 1998
-----------------------
(John Patience)
/s/ Jack W. Schuler Director March 30, 1998
-----------------------
(Jack W. Schuler)
/s/ James M. Weersing Director March 30, 1998
----------------------- -------- --------------
(James M. Weersing)
/s/ Rex J. Bates Director March 30, 1998
-----------------------
(Rex J. Bates)
</TABLE>
47
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
10.19(c) Amendment to Silicon Valley Bank Loan and Security Agreement dated August 15, 1997
11.1 Statement regarding computation of Per Share Earnings.
13.1 The Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1997
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule
</TABLE>
48
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
Ventana Medical Systems, Inc.
We have audited the accompanying consolidated balance sheets of Ventana Medical
Systems, Inc., at December 31, 1997 and 1996, and the related consolidated
statements of operations, convertible redeemable preferred stock and
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Ventana
Medical Systems, Inc., at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
Tucson, Arizona
January 23, 1998
F-1
<PAGE>
Ventana Medical Systems, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
December 31,
--------------------
1997 1996
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 18,902 $ 6,190
Short-term investments -- 4,877
Accounts receivable 8,047 5,145
Inventories (Note 2) 5,134 3,272
Prepaid expenses 846 799
Other current assets 1,263 245
-------- --------
Total current assets 34,192 20,528
Property and equipment, net (Note 3) 6,105 3,301
Intangibles, net (Note 4) 8,055 8,581
-------- --------
Total assets $ 48,352 $ 32,410
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,584 $ 1,738
Other current liabilities (Note 5) 2,894 2,902
-------- --------
Total current liabilities 5,478 4,640
Long-term debt (Note 7) 471 12,500
Commitments and Contingencies (Notes 8, 10 and 12)
Stockholders' equity (Notes 8, 9 and 12):
Common stock - $.001 par value;
50,000,000 shares authorized, 13,247,226 and
10,978,238 shares issued and outstanding
at December 31, 1997 and 1996, respectively 13 11
Additional paid-in-capital 76,313 48,885
Accumulated deficit (33,782) (33,410)
Cumulative foreign currency translation adjustment (141) (216)
-------- --------
Total stockholders' equity 42,403 15,270
-------- --------
Total liabilities and stockholders' equity $ 48,352 $ 32,410
======== ========
See accompanying notes.
F-2
<PAGE>
Ventana Medical Systems, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Years Ended
December 31,
---------------------------------
1997 1996 1995
-------- -------- --------
Sales:
Instruments $ 9,248 $ 8,591 $ 4,644
Reagents and other 22,905 15,538 5,969
-------- -------- --------
32,153 24,129 10,613
Cost of goods sold 11,138 10,632 4,282
-------- -------- --------
Gross profit 21,015 13,497 6,331
Operating expenses:
Selling, general and administrative 16,953 11,206 7,435
Research and development 3,050 2,749 2,239
Nonrecurring expenses 1,656 10,262 --
Amortization of acquisition costs 509 424 --
-------- -------- --------
Loss from operations (1,153) (11,144) (3,343)
Other income (expense) 781 (137) 74
-------- -------- --------
Net loss $ (372) $(11,281) $ (3,269)
======== ======== ========
Net loss per share, as adjusted,
basic and diluted $ (.03) $ (1.22) $ (0.43)
======== ======== ========
Shares used in computing net loss
per share, as adjusted 12,778 9,243 7,571
======== ======== ========
See accompanying notes.
F-3
<PAGE>
Ventana Medical Systems, Inc.
Consolidated Statements of Convertible Redeemable Preferred Stock
and Stockholders' Equity (Deficit)
(In thousands, except share data)
<TABLE>
<CAPTION>
Stockholders' Equity (Deficit)
------------------------------------------------------------------
Cumulative
Convertible Redeemable Foreign
Preferred Stock Common Stock Additional Currency
----------------------------------- -------------- Paid-In Accumulated Translation
Series A Series C Series D Total Shares Amount Capital Deficit Adjustment Total
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $536 $10,041 $19,660 $30,237 875,005 $1 $ 189 $(24,275) $ (46) $(24,131)
Sale of Series D
preferred stock -- -- 2,507 2,507 -- -- -- -- -- --
Accretion of preferred
stock redemption
requirement -- 655 1,781 2,436 -- -- -- (2,436) -- (2,436)
Sale of common stock -- -- -- -- 160,210 -- 67 -- -- 67
Repurchase of common stock -- -- -- -- (15,051) -- (13) -- -- (13)
Translation adjustment -- -- -- -- -- -- -- -- (74) (74)
Net loss -- -- -- -- -- -- -- (3,269) -- (3,269)
----------------------------------- ------------------------------------------------------------------
Balance at December 31, 1995 536 10,696 23,948 35,180 1,020,164 1 243 (29,980) (120) (29,856)
Sale of Series D
preferred stock -- -- 413 413 -- -- -- -- -- --
Accretion of preferred
stock redemption
requirement -- 328 1,027 1,355 -- -- -- (1,355) -- (1,355)
Conversion of preferred
stock upon completion of
initial public offering (536) (11,024) (25,388)(36,948) 6,716,997 7 27,735 9,206 -- 36,948
Proceeds of initial
public offering, net of
expenses $1,221 -- -- -- -- 1,963,975 2 17,042 -- -- 17,044
Conversion of debt into
common stock -- -- -- -- 222,973 -- 3,016 -- -- 3,016
Sale of common stock-
other -- -- -- -- 1,054,129 1 849 -- -- 850
Translation adjustment -- -- -- -- -- -- -- -- (96) (96)
Net loss -- -- -- -- -- -- -- (11,281) -- (11,281)
----------------------------------- ------------------------------------------------------------------
Balance at December 31, 1996 -- -- -- -- 10,978,238 11 48,885 (33,410) (216) 15,270
Proceeds from public
offering, net of
expenses $530 -- -- -- -- 1,881,066 2 26,132 -- -- 26,134
Sale of common stock-
other -- -- -- -- 387,922 -- 1,296 -- -- 1,296
Translation adjustment -- -- -- -- -- -- -- -- 75 75
Net loss -- -- -- -- -- -- -- (372) -- (372)
----------------------------------- ------------------------------------------------------------------
Balance at December 31, 1997 $ -- $ -- $ -- $ -- 13,247,226 $ 13 $76,313 $(33,782) $ (141) $42,403
=======================================================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Ventana Medical Systems, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Operating activities:
Net loss $ (372) $(11,281) $ (3,269)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,029 1,052 911
Purchased in-process research and
development -- 7,900 --
Gain on early extinguishment of debt -- 300 --
Changes in operating assets and liabilities
net of effects from acquisition of
BioTek Solutions, Inc. in 1996:
Accounts receivable (4,017) (2,598) (474)
Inventories (1,862) (1,377) (874)
Other assets (1,065) (288) (114)
Accounts payable 846 181 422
Other current liabilities (643) (1,626) 459
-------- -------- --------
Net cash used in operating activities (5,084) (7,737) (2,939)
Investing activities:
Purchase of property and equipment (4,263) (815) (956)
Purchase of intangible assets (44) (192) --
Acquisition of BioTek Solutions, Inc. -- (2,500) --
Sales (purchases) of short-term investments
available for sale 4,877 (4,877) --
-------- -------- --------
Net cash provided by (used in) investing
activities 570 (8,384) (956)
Financing activities:
Repayments of notes payable (10,279) -- --
Net proceeds from public offering 26,134 17,044 --
Issuance of debt (including amounts from
related parties) and stock 1,296 7,624 2,561
Repayment of debt, net of gain on
extinguishment -- (3,364) --
-------- -------- --------
Net cash provided by financing activities 17,151 21,304 2,561
Effect of exchange rate changes on cash 75 (96) (74)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents 12,712 5,087 (1,408)
Cash and cash equivalents, beginning of year
6,190 1,103 2,511
-------- -------- --------
Cash and cash equivalents, end of year $ 18,902 $ 6,190 $ 1,103
======== ======== ========
See accompanying notes
F-5
<PAGE>
Ventana Medical Systems, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
1. Organization and Significant Accounting Policies
Organization: Ventana Medical Systems, Inc. (the "Company") develops,
manufactures, and markets proprietary instruments and reagents that automate
diagnostic procedures used for molecular analysis of cells. At present, the
Company's principal markets are North America, Europe, and Japan.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Ventana Medical
Systems, S.A., Ventana Medical Systems GmbH, Ventana Medical Systems Japan K.K.,
and BioTek Solutions, Inc. (BioTek). All significant intercompany accounts have
been eliminated.
Reclassifications: The consolidated financial statements for 1995 and 1996 have
been reclassified to conform with the 1997 presentation.
Cash and Cash Equivalents: Cash equivalents include investments (primarily money
market accounts and overnight reverse repurchase agreements) with maturities of
three months or less from the date of purchase.
Short-term Investments: Short-term investments are carried at fair value and
include highly liquid investments with maturities of one year or less from the
date of purchase. These investments, classified as available for sale, consist
of U.S. Treasury Bills for which cost approximates market value.
Inventories: Inventories, principally chemical, biological and instrument parts
and reagents and finished instruments, are stated at the lower of cost (first-in
first-out) or market.
Property and Equipment: Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over estimated useful lives of three
to ten years. Amortization of leasehold improvements is calculated using a
straight-line method over the term of the lease. Maintenance and repairs are
charged to operations as incurred.
Property and equipment includes diagnostic instruments used for sales
demonstrations or placed with customers under several types of arrangements,
including cancelable reagent plans (RPs), qualified reagent installed bases
(QRIBs) and rentals. New instruments are no longer placed into the RP program.
However, certain longstanding agreements continue on a month-to-month basis,
wherein the customer is required to purchase a minimum quantity of reagents in
order to keep the instrument. QRIB instruments are placed with customers for
evaluation periods of up to six months. The customer is required to purchase a
minimum amount of reagents and at the end of the evaluation
F-6
<PAGE>
Ventana Medical Systems, Inc.
Notes to Consolidated Financial Statements (continued)
period must purchase, rent or return the instrument. The manufacturing cost of
demonstration, RP, QRIB and rental instruments is amortized over a period of 36
to 48 months to cost of goods sold.
Intangibles: Intangible assets consist primarily of goodwill, customer base,
developed technology acquired in the BioTek acquisition (see Note 12), and
patents. Such assets are amortized over estimated useful lives of 15 to 20
years.
Impairment is recognized in operating results if a permanent decline in value
occurs. The Company measures possible impairment of its intangible assets
periodically by comparing the cash flows generated by those assets to their
carrying values. The Company periodically evaluates the useful lives assigned to
the various categories of intangible assets considering such factors as (i)
demand, obsolescence, competition, market share, and other economic factors;
(ii) legal and regulatory provisions; and (iii) the periods expected to be
benefited.
Revenue Recognition: Sales of instruments and reagents are generally recognized
upon shipment. Revenues from reagents sold under RPs and similar leasing
arrangements are recognized when reagents are shipped. Service revenue is
recognized as service is rendered.
For the year ended December 31, 1997, sales to DAKO A/S, a European distributor
for the Company, represented approximately 20% of consolidated net sales. For
the year ended December 31, 1996, sales to DAKO A/S and Curtin Matheson
Scientific, a subsidiary of Fischer Scienific, Inc. represented 17% and 16% of
consolidated net sales, respectively.
Concentration of Credit Risk: The Company sells its instruments and reagent
products primarily to hospitals, medical clinics, reference laboratories, and
universities. Credit losses have been minimal to date. The Company invests its
excess cash primarily in U.S. government securities and bank money market
accounts and has an established policy relating to diversification and
maturities that is designed to maintain safety and liquidity. The Company has
not experienced any material losses on its cash equivalents or short-term
investments.
Nonrecurring Expenses: The 1997 non-recurring expenses relate primarily to a
legal judgment against BioTek. Nonrecurring expenses in 1996 consisted of the
estimated costs of integrating BioTek's operations into Ventana's and the cost
of research and development in process acquired from BioTek (see Note 12).
F-7
<PAGE>
Ventana Medical Systems, Inc.
Notes to Consolidated Financial Statements (continued)
Foreign Currency Translations: Foreign currency financial statements of the
Company's foreign subsidiaries are converted into United States dollars by
translating balance sheet accounts at the current exchange rate at year end and
statement of operations account at the average exchange rate for the year, with
resulting translations adjustments reported as a separate component of
stockholders' equity.
Income Taxes: The Company accounts for income taxes using the liability method.
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates and laws expected to be in effect when the differences
are expected to reverse. Valuation allowances are established when necessary to
reduce the carrying amount of deferred tax assets to their net realizable value.
Use of Estimates: The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments: The Company's cash, short-term investments
and accounts receivable represent financial instruments as defined by Statement
of Financial Accounting Standards No. 107, Disclosures About Fair Value of
Financial Instruments. The carrying value of these financial instruments is a
reasonable approximation of fair value, due to their current maturites.
Stock-Based Compensation: The Company accounts for its employee stock
compensation arrangements under the provisions of APB No. 25, Accounting for
Stock Issued to Employees, and intends to continue to do so.
Impact of Recently Issued Accounting Standards: In June 1997, the Financial
Accounting Standards Board issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in the financial statements. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods provided for comparative purposes is
required. The Company is in the process of determining its preferred format. The
adoption of SFAS No. 130 will have no impact on the Company's consolidated
results of operations, financial position or cash flows.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which is
effective for years beginning after December 15, 1997. SFAS No. 131 establishes
standards for the
F-8
<PAGE>
Ventana Medical Systems, Inc.
Notes to Consolidated Financial Statements (continued)
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore the
company will adopt the new requirements retroactively in 1998. Management has
not completed its review of SFAS No. 131, but does not anticipate that the
adoption of this statement will have significant effect on the Company's
reported segments.
Loss per Share: In February 1997, the Financial Accounting Standards Board
issued SFAS No. 128, Earnings per Share. SFAS No. 128 replaced the calculation
of primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Loss per share amounts for all periods have been presented,
and where appropriate, restated to conform to the requirements of SFAS No. 128,
as well as Staff Accounting Bulletin No. 98 (issued by the Securities and
Exchange Commission in February 1998), which amends the determination of and
accounting for "cheap stock" in periods prior to an initial public offering. The
effect of dilutive securities is computed using the treasury stock method.
Loss per share is computed using the weighted average number of shares of common
stock outstanding. Common equivalent shares from stock options and warrants are
excluded from the computation as their effect is antidilutive.
Net loss per share, historical basis, was as follows:
Years Ended
December 31,
---------------------
1996 1995
-------- --------
(In Thousands, except
for per share data)
Net loss $(11,281) $ (3,269)
Less accretion of preferred stock dividends (1,355) (2,436)
-------- --------
Net loss applicable to common stock $(12,636) $ (5,705)
======== ========
Net loss per common share $ (2.14) $ (5.96)
======== ========
Weighted average shares outstanding 5,907 957
======== ========
F-9
<PAGE>
Ventana Medical Systems, Inc.
Notes to Consolidated Financial Statements (continued)
The as adjusted calculation of net loss per share presented in the consolidated
statements of operations has been computed as described above, but also gives
effect to the conversion of all outstanding shares of convertible redeemable
preferred stock into common stock upon closing of the Company's initial public
offering (determined using the if-converted method) and the exercise of warrants
to purchase Series D preferred stock which would otherwise have expired upon
completion of the Offering.
2. Inventories
Inventories consist of the following:
December 31,
-------------------
1997 1996
-------------------
(In Thousands)
Raw materials and work-in-process $4,033 $2,379
Finished goods 1,101 893
-------------------
$5,134 $3,272
===================
3. Property and Equipment
Property and equipment consist of the following:
December 31,
-------------------
1997 1996
-------------------
(In Thousands)
Diagnostic instruments $4,830 $2,762
Machinery and equipment 2,684 2,193
Computers and related equipment 1,970 945
Leasehold improvements 472 253
Furniture and fixtures 177 292
-------------------
10,133 6,445
Less accumulated depreciation and amortization 4,028 3,144
-------------------
$6,105 $3,301
===================
F-10
<PAGE>
Ventana Medical Systems, Inc.
Notes to Consolidated Financial Statements (continued)
4. Intangible Assets
Intangible assets consist of the following:
December 31,
-------------------
1997 1996
-------------------
(In Thousands)
Customer base $4,100 $4,100
Developed technology 2,800 2,800
Goodwill, patents and other 2,244 2,200
-------------------
9,144 9,100
Less amortization 1,089 519
-------------------
$8,055 $8,581
===================
5. Other Current Liabilities
Other current liabilities consist of the following:
December 31,
-------------------
1997 1996
-------------------
(In Thousands)
Accrued payroll and payroll taxes $ 421 $ 435
Accrued commissions 146 150
Deferred revenue 334 816
Accrued legal reserves 946 432
Sales tax payable 410 281
Other accrued expenses 637 788
-------------------
$2,894 $2,902
===================
6. Line of Credit
During 1997, the Company had $2,750,000 available under a line of credit
arrangement with a bank which is subject to renewal in February 1998. Borrowings
under the line are collateralized by the Company's receivables and intellectual
property. The line contains certain financial covenants with which the Company
must comply and prohibits the payment of dividends on the Company's stock. No
borrowings were outstanding under the line at December 31, 1997. However,
$1,415,000 of the line of credit is not available to the Company at this time,
as it supports irrevocable letters of credit issued by the bank.
F-11
<PAGE>
Ventana Medical Systems, Inc.
Notes to Consolidated Financial Statements (continued)
7. Long-term Debt
Long-term debt consists of the following:
December 31,
-------------------
1997 1996
-------------------
(In Thousands)
Exchange Notes, repaid in 1997 $ -- $6,067
Notes payable to stockholders,
repaid in 1997 -- 4,846
Notes payable to a customer, interest
imputed at approximately 10%,
repaid through discounts
on future purchases 471 1,587
-------------------
$ 471 $12,500
===================
The Exchange Notes were issued in connection with the BioTek acquisition (See
Note 12). On March 25, 1996, approximately $3,016,000 of the Exchange Notes were
converted into common stock.
On October 18, 1996, the Company redeemed for $3.4 million Exchange Notes with a
face value of $3.7 million. The resulting gain on extinguishment of debt was
reflected in operating results in the fourth quarter of 1996.
The remaining Exchange Notes were repaid in February 1997. In accordance with
the note terms, all interest was forgiven, as the Exchange notes were repaid
prior to February 26, 1997. The reversal of the $603,000 of previously accrued
interest expense is included in operating results in the first quarter of 1997.
8. Stockholders' Equity
During 1997, the Company granted options to purchase a total of 300,000 shares
$12.625, fair market value on the date of the grant to two Directors of the
Company for consulting services to be performed through February 2000.
On February 26, 1996, the Company sold 646,664 shares of common stock to two
directors of the Company and a related partnership at a price of $1.62 per share
for their efforts and assistance in completing the BioTek acquisition and
assisting management with its integration of the companies. Receivables of
$901,000 due from the directors have been netted against Common Stock at
December 31, 1997 and 1996. These loans, including interest at the rate of 6%,
were repaid on February 26, 1998.
F-12
<PAGE>
Ventana Medical Systems, Inc.
Notes to Consolidated Financial Statements (continued)
Upon closing of the Company's initial public offering on July 26, 1996, all
outstanding shares of its Series A, C and D redeemable Convertible Preferred
stock were converted into 6,716,997 shares of Common Stock.
Warrants for the purchase of 727,884 shares of Common Stock were outstanding and
fully exercisable at December 31, 1997, at an exercise price of $5.82 per share.
These warrants may be exercised on a net basis and will begin to expire in
February 2001, to the extent not previously exercised.
Under the Company's 1988 Stock Option Plan ("the 1988 Plan"), up to 1,339,663
shares of common stock have been reserved for grant to employees and directors.
In order to be incentive stock options (ISOs), options must be granted at not
less than 100% of fair market value of the Company's stock on the date of grant.
Options generally vest over a four year period and expire five to ten years
after the date of grant. However, the Board of Directors, at its discretion, may
decide the period over which options become exercisable and their expiration
dates.
In April 1996, the Company's Board of Directors authorized the 1996 Stock Option
Plan ("the 1996 Plan"). A total of 1,000,000 shares of common stock have been
reserved for issuance under the 1996 Plan. In order to be ISOs, options must be
granted at not less than 100% of the fair market value of the Company's stock on
the dates of grant. Options generally vest over four years and expire in ten
years.
In April 1996, the Board of Directors authorized the 1996 Employee Stock
Purchase Plan ("the 1996 Purchase Plan"). A total of 200,000 shares of common
stock have been reserved for issuance under the 1996 Purchase Plan. A total of
54,236 shares of common stock have been issued under the 1996 Purchase Plan at a
prices ranging from $8.18 per share to $11.05. The 1996 Purchase Plan permits
eligible employees to purchase common stock through payroll deductions, subject
to certain limitations. The price at which stock may be purchased under the 1996
Purchase Plan is equal to 85% of the fair market value of the common stock on
the lower of the first day of each 24 month offering period or the last day of
each subsequent purchase period.
In June 1996, the Company adopted the 1996 Director Stock Option Plan (the
"Director Plan") and reserved a total of 250,000 shares of common stock for
issuance thereunder. Commencing with the Company's 1997 annual meeting of
stockholders, each nonemployee director is granted a nonstatutory option to
purchase an amount of shares of the Company's common stock equal to 5,000 shares
multiplied by a fraction, the numerator of which shall be $15.00 and the
denominator of which shall be the fair market value of one share of the
Company's common stock on the dates of grant. The exercise price of options
granted under the Director Plan are equal to the fair market value of one
F-13
<PAGE>
Ventana Medical Systems, Inc.
Notes to Consolidated Financial Statements (continued)
share of the Company's common stock on the dates of grant. A total of 40,200
shares have been issued under the Plan at $10.125 per share. Each option granted
under the Director Plan vests on a cumulative monthly basis over a one-year
period and has a 10-year term. The Director Plan will terminate in June 2001,
unless terminated earlier.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB No. 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123"), requires the use of option valuation models that
were not developed for use in valuing employee stock options. Under APB No. 25,
because the exercise price of the Company's stock options equals or exceeds the
fair market value of the underlying stock on the dates of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and such information has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions for 1997, 1996, and 1995: risk-free interest rate of 6.0%, 6.28%,
and 6.28% dividend yield of 0%, volatility factor of the expected market price
of the Company's common stock of .726 and .755 and .755, and an expected life of
the options of 5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
F-14
<PAGE>
Ventana Medical Systems, Inc.
Notes to Consolidated Financial Statements (continued)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the related vesting period. The Company's pro forma
information follows:
Year Ended December 31
--------------------------------------------
1997 1996 1995
--------------------------------------------
(In Thousands, except for per share data)
As reported $ (372) $(11,281) $(3,269)
Pro forma compensation
expense for stock options:
1995 Grants (83) (34) (82)
1996 Grants (281) (268) --
1997 Grants (1,639) -- --
--------------------------------------------
Pro forma net loss $(11,583) $3,351
$(2,375)
============================================
Pro forma net loss per share $ (0.19) $ (1.25) $(0.44)
============================================
Pro forma compensation expense presented may not be representative of future pro
forma expense, when amortization of multiple years of awards may be reflected.
A summary of the Company's stock option activity, and related information is as
follows:
Outstanding Stock Options
---------------------------------------
Weighted Average
Number of Exercise
Options Price Per Share
---------------------------------------
Balance at January 1, 1995 612,777 $0.74
Granted 324,505 0.84
Exercised (160,210) 0.36
Canceled (126,618) 0.36
---------------------------------------
Balance at December 31, 1995 650,454 0.95
Granted 271,396 9.65
Exercised (183,351) 0.89
Canceled (23,264) 0.84
---------------------------------------
Balance at December 31, 1996 715,235 3.89
Granted 1,436,460 11.89
Exercised (224,978) 1.71
Canceled (299,596) 5.92
---------------------------------------
Balance at December 31, 1997 1,627,121 $10.88
=======================================
F-15
<PAGE>
Ventana Medical Systems, Inc.
Notes to Consolidated Financial Statements (continued)
The weighted average fair values of stock options granted during 1997, 1996, and
1995 for which the exercise price was equal to the fair market value of the
stock were $7.55, $7.42, and $0.63 per share, respectively. The weighted average
fair values of stock options granted during 1996 and 1995 for which the exercise
price exceeded the fair market value of the stock were $0.89 and $0.03 per
share.
<TABLE>
<CAPTION>
Stock Options at December 31, 1997
----------------------------------------------------------------
Weighted Average Weighted Average
Number of Options Exercise Price Remaining Contractual
Range of Exercise Prices Outstanding Outstanding Life
- --------------------------------------- ----------------------------------------------------------------
<S> <C> <C> <C>
$0.24 - $1.62 199,252 $ 0.90 6.9
$10.00 - $10.15 323,434 $10.02 9.3
$12.25 - $13.50 942,985 $12.41 8.4
$14.63 - $17.00 161,450 $16.00 7.9
----------------------------------------------------------------
Totals 1,627,121 $10.88 8.3
================================================================
</TABLE>
Options for the purchase of 164,042 shares were immediately exercisable at
December 31, 1997. The weighted average exercise price for exercisable options
was $5.20 at December 31, 1997.
9. Income Taxes
The Company's deferred tax assets consist of the following:
December 31,
-------------------
1997 1996
--------------------
(In Thousands)
Non-current:
Net operating loss carryforwards $ 5,206 $ 5,396
Capitalized research and development 2,755 2,650
General business credit carryforwards 968 929
Other 360 217
Current:
Miscellaneous 1,002 525
--------------------
Total deferred tax assets 10,291 9,717
Valuation reserve (10,291) (9,717)
--------------------
Net deferred tax assets $ -- $ --
====================
F-16
<PAGE>
Ventana Medical Systems, Inc.
Notes to Consolidated Financial Statements (continued)
The valuation allowance for deferred tax assets was increased by $574,000, and
$1,135,000 in the years ended December 31, 1997 and 1996, respectively to fully
offset deferred tax assets.
Temporary differences between the net operating losses for financial reporting
and income tax purposes primarily relate to the deferral of research and
development expenses for tax purposes.
At December 31, 1997, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $13.6 and $9.8 million,
respectively. These federal and state carryforwards will begin to expire in 1998
if not previously utilized. The Company also has research and development tax
credit carryforwards of approximately $1,000,000 which will begin to expire in
2005, if not previously utilized. Utilization of the Company's net operating
loss carryforwards will be subject to limitations due to the "change in
ownership" provisions of the Internal Revenue Code of 1996, as amended, as a
result of the Company's prior issuances of equity securities. These
carryforwards, therefore, may expire prior to being fully utilized. Future
financings may cause additional changes in ownership and further limitations on
the use of federal net operating loss carryforwards.
10. Commitments and Contingencies
The Company conducts its corporate operations from leased facilities. In
addition to monthly rental payments, the Company is responsible for certain
monthly operating and maintenance expenses of such facilities. The lease expires
in 2001. The future minimum rental payments under this and other operating lease
arrangements at December 31, 1997 are as follows:
(In Thousands)
--------------
1998 $ 495
1999 396
2000 375
2001 147
2002 71
Thereafter 6
------------
$1,490
============
Rent expense totaled $580,000, $448,000 and $188,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
F-17
<PAGE>
Ventana Medical Systems, Inc.
Notes to Consolidated Financial Statements (continued)
In July 1997, the U.S. District Court in San Jose, California awarded a judgment
of approximately $850,000 to a competitor based on alleged patent infringement
by a subsidiary of the Company. This amount was fully expensed by the second
quarter of 1997. This matter is currently being appealed by the Company.
DAKO has initiated binding arbitration with the Company regarding the pricing of
the Company's TechMate 250 product. Currently, DAKO is purchasing such
instruments at the price level established by the Company. The arbitration is
scheduled for October 1998.
Four former BioTek noteholders have filed an action against the Company and
certain of its directors and stockholders alleging the Company violated federal
and California securities law and engaged in common law fraud in connection with
the BioTek acquisition and conversion of BioTek notes. This matter does not yet
have a trial date.
The Company is also involved in various other actions arising in the normal
course of business. Management, in conjunction with outside counsel,
periodically reviews such matters and makes any accruals deemed necessary.
Management is of the opinion that the disposition of these claims will not have
a material effect on the Company's financial position or results of operations.
11. Foreign Operations, Geographic, and Segment Data
The Company operates predominantly in one segment, the medical diagnostic
devices industry. Inventory transfers to foreign subsidiaries are made at
standard cost. The following summary includes both net sales to unaffiliated
customers and transfers between geographic areas. The North America operations
include corporate activity that benefits the Company as a whole. The North
America geographic area represents primarily the United States. The European
geographic area represents primarily France and Germany.
F-18
<PAGE>
Ventana Medical Systems, Inc.
Notes to Consolidated Financial Statements (continued)
Year Ended December 31,
--------------------------------
1997 1996 1995
--------------------------------
(In Thousands)
Net Sales
North America $ 28,808 $ 22,257 $ 9,657
Europe 3,345 1,872 956
Consolidated subsidiaries 2,691 1,896 521
--------------------------------
34,844 26,025 11,134
Eliminations (2,691) (1,896) (521)
--------------------------------
$ 32,153 $ 24,129 $ 10,613
================================
Net Income (Loss):
North America $ 198 $(10,130) $ (2,654)
Europe (221) (869) (363)
Japan (244) -- --
--------------------------------
(267) (10,999) (3,017)
Eliminations (105) (282) (252)
--------------------------------
$ (372) $(11,281) $ (3,269)
================================
Identifiable Assets:
North America $ 52,831 $ 49,589 $ 8,823
Europe 3,842 1,526 1,099
Japan 177 -- --
--------------------------------
56,850 51,115 9,922
Eliminations (8,498) (18,705) (2,544)
--------------------------------
$ 48,352 $ 32,410 $ 7,378
================================
12. BioTek Acquisition
The Company acquired BioTek for $19.1 million on February 26, 1996. The
acquisition has been accounted for as a purchase. The results of BioTek are
included in the accompanying consolidated financial statements from the date of
acquisition.
The purchase price for BioTek consisted of:
(In thousands)
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 assumed 4,389
-------
$19,107
=======
F-19
<PAGE>
Ventana Medical Systems, Inc.
Notes to Consolidated Financial Statements (continued)
The purchase price was allocated as follows:
(In thousands)
Tangible net assets $ 2,252
In-process research and development 7,900
Goodwill and other intangibles 2,055
Developed technology 2,800
Customer base 4,100
-------
Total purchase price $19,107
=======
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. This amount in
included as a component of nonrecurring expenses in the accompanying
consolidated statements of operations. The remaining nonrecurring expenses of
$2.4 million consist of integration and other indirect acquisition costs.
Pro forma results of operations for the years ended December 31, 1996 and 1995,
assuming consummation of the purchase as of January 1, 1995 and as adjusted to
reflect the sale of common stock by the Company and the application of the net
proceeds therefrom, are as follows:
Year ended December 31,
-------------------------------
1996 1995
-------------------------------
(Unaudited, in Thousands except
for per share data)
Net sales $ 25,211 $ 19,475
Net loss $ (2,353) $(15,792)
Net loss per share $ (0.22) $ (1.74)
F-20
EXHIBIT 10.19 (C)
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered Into as of August 15, 1997, by
and between Ventana Medical Systems, Inc. ("Borrower") whose address Is 3865
North Business Drive, Tucson, Arizona 85705, and Silicon Valley Bank ("Bank")
whose address is 3003 Tasman Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other Indebtedness which may be
owing by Borrower to Bank, Borrower is Indebted to Bank pursuant to, among other
documents, a Loan and Security Agreement, dated February 20, 1995, (the "Loan
Agreement), as amended. The Loan Agreement provided for, among other things, a
Committed Line In the original principal amount of Two Million Seven Hundred
Fifty Thousand and 001100 Dollars ($2,750,000.00) (the "Revolving Facility").
Defined terms used but not otherwise defined herein shall have the same meanings
as in the Loan Agreement
Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as
the "Obligations".
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Obligations is
secured by the Collateral as defined in the Loan Agreement, and a Collateral
Assignment, Patent Mortgage and Security Agreement dated February 20, 1995.
Additionally, repayment of the Obligations Is guaranteed by Bio Tek Solutions,
Inc. (the "Guarantor") pursuant to an Unconditional Guaranty (the "Guaranty").
The Guaranty Is secured by a Guarantor Security Agreement dated March 22, 1996.
Concurrently herewith, the aforementioned Guaranty and Guarantor Security
Agreement are being released pursuant to the terms of this Loan Modification
Agreement
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Obligations shall be referred
to as the "Security Documents". Hereinafter, the Security Documents, together
with all other documents evidencing or securing the Obligations shall be
referred to as the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
A. Modification(s) to Loan Agreement.
1. Section 1.1 entitled "Definitions' is hereby amended in part to
read as follows:
"Revolving Maturity Date" means February 15,1998.
2. Subsection (a) of Section 2.3 entitled "Interest Rates, Payments
and Calculations" is hereby amended in its entirety) to read as
follows:
Any Advances evidenced by the Note shall bear Interest, on the
average Daily Balance, at a rate per annum equal to the Prime
Rate.
3. Section 6.8 entitled "Quick Ratio" is hereby amended in its
entirety to read as follows:
Borrower shall maintain, on a quarterly basis and without
consolidation, a ratio of Quick Assets to Current Liabilities of
at least 1.50 to 1.00.
4. Section 6.10 entitled "Debt-Net Worth Ratio" is hereby amended in
its entirety to read as follows:
Borrower shall maintain, on a quarterly basis and without
consolidation a ratio of Total Liabilities to Tangible Net Worth
of not more than 1.00 to 1.00.
<PAGE>
B. Release of Guaranty.
Bank, by Its acceptance hereof, agrees to release the Guaranty of
Bio Tek Solutions, Inc., provided that no Event of Default has
occurred and is continuing under any of the Existing Loan
Documents (other than the default waived herein). All parties to
this Loan Modification Agreement acknowledge and agree that
Bank's release of the Guaranty In no way shall limit or impair
Bank's right against Borrower or against any security pledge by
the foregoing parties.
C. Waiver of Default.
Bank hereby waives Borrowers existing default under the Loan
Agreement by virtue of Borrower's failure to comply with the
profitability covenant as of the quarter ended June 30, 1997.
Bank's waiver of Borrower's compliance of this covenant shall
apply only to the foregoing period. Accordingly, for the quarter
ending September 30,1997, Borrower shall be in compliance with
this covenant
Bank's agreement to waive the above-described default (1) in no
way shall be deemed an agreement by the Bank to waive Borrower's
compliance with the above-described covenant as of all other
dates and (2) shall not limit or Impair the Bank's right to
demand strict performance of this covenant as of all other dates
and (3) shall not limit or impair the Bank's right to demand
strict performance of all other covenants as of any date.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below). agrees that it has no defenses against the obligations to pay any
amounts under the Existing Loan Documents.
6. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below)
understands and agrees that in modifying the existing Obligations, Bank is
relying upon Borrowers representations, warranties, and agreements, as set forth
in the Existing Loan Documents. Except as expressly modified pursuant to this
Loan Modification Agreement, the terms of the Existing Loan Documents remain
unchanged and In full force and effect Bank's agreement to modifications to the
existing Obligations pursuant to this Loan Modification Agreement In no way
shall obligate Bank to make any future modifications to the Obligations. Nothing
In this Loan Modification Agreement shall constitute a satisfaction of the
Obligations. It is the Intention of Bank and Borrower to retain as liable
parties all makers and endorsers of Existing Loan Documents, unless the party is
expressly released by sank In writing. No maker, endorsers or guarantor will be
released by virtue of this Loan Modification Agreement The terms of this
paragraph apply not only to this Loan Modification Agreement, but also to all
subsequent loan modification agreements.
<PAGE>
This Loan Modification Agreement Is executed as of the date first written
above.
BORROWER: BANK:
VENTANA MEDICAL SYSTEMS, INC. SILICON VALLEY BANK
By: /s/ Pierre Sice By: /s/ Kevin J. Conway
------------------------------- --------------------------------
Name: Pierre Sice Name: Kevin J. Conway
Title: VP & CFO Title: VP
3
Ventana Medical Systems, Inc.
Exhibit 11.1
Statement of Computation of Weighted Average Shares Outstanding
(in thousands except per share data)
<TABLE>
<CAPTION>
Twelve Months Ended
Dec. 31,
--------
1997 1996
-------- --------
(Audited)
<S> <C> <C>
Numerator:
Net income (loss) $ (372) $(11,281)
-------- --------
Denominator:
Weighted average common shares outstanding 12,778 51907
Assumed conversion of preferred 3,319
Assumed exercise of Series D warrants 17
SAB Cheap Stock -- --
-------- --------
Denominator for basic and diluted earning per share 12,778 9,243
======== ========
Loss per share, as adjusted, basic and diluted $ (0.03) $ (1.22)
======== ========
<CAPTION>
Three Months Ended
Dec. 31,
--------
1997 1996
-------- --------
(Audited)
<S> <C> <C>
Numerator:
Net income (loss) $ 684 $ 253
-------- --------
Denominator:
Weighted average common shares outstanding 13,227 10,931
Assumed conversion of preferred -- --
Assumed exercise of Series D warrants -- --
SAB Cheap Stock -- --
-------- --------
Denominator for basic earning per share 13,227 10,931
Effect of dilutive stock options and warrants 949 986
-------- --------
Denominator for diluted earning per share - adjusted
weighted-average shares and assumed conversions 14,176 11,917
======== ========
Net income per share, as adjusted, basic $ 0.05 $ 0.02
======== ========
Net income per share, as adjusted, diluted $ 0.05 $ 0.02
======== ========
</TABLE>
Exhibit 13.1
United States
Securities and Exchange Commission
Washington. D.C. 20549
FORM 1OQ
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Period Ended September 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
(Formal name, former address and former fiscal year,
if changed from 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 --- 13,099,915 shares as of November 6, 1997
<PAGE>
Ventana Medical Systems, Inc.
INDEX TO FORM 10-Q
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 30, 1997 (Unaudited) and December 31, 1996
Condensed Consolidated Statements of Operations
Three months ended September 30, 1997 and 1996 (Unaudited)
Nine months ended September 30, 1997 and 1996 (Unaudited)
Condensed Consolidated Statement of Cash Flows
Nine months ended September 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
1
<PAGE>
Ventana Medical Systems, Inc.
Condensed Consolidated Balance Sheets
(In thousands except share data)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
-------- --------
(Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21,937 $ 11,067
Accounts receivable 6,104 5,145
Inventories (Note 2) 4,084 3,272
Other 2,679 1,044
-------- --------
Total current assets 34,804 20,528
Property and equipment, net (Note 3) 5,365 3,301
Intangibles, net (Notes 4 and 5) 8,197 8,581
-------- --------
Total assets $ 48,366 $ 32,410
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,316 $ 1,738
Other current liabilities 3,472 2,902
-------- --------
Total current liabilities 5,788 4,640
Long term debt (Note 6) 1,139 12.500
Stockholders' equity (Note 7):
Preferred stock - $.001 par value; 5,000,000 shares
authorized; no shares issued or outstanding
Common stock- $.O01 par value; 50,000,000 shares
authorized; 10,978,238 and 13,098,772 shares Issued
and outstanding at December 31, 1998 and
September 30, 1997, respectively 76,074 48,896
Accumulated deficit (34,486) (33,410)
Cumulative foreign currency translation adjustment (169) (216)
-------- --------
Total stockholders' equity 41,439 15,270
-------- --------
Total liabilities and stockholders' equity $ 48,366 $ 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>
Ventana Medical Systems, Inc.
Condensed Consolidated Statements of Operations
(in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
------- ------- ------- --------
<S> <C> <C> <C> <C>
Sales:
Instruments $ 2,142 $ 1,554 $ 6,032 $ 4,854
Reagents and other 5,872 4,654 16,393 11,041
------- ------- ------- --------
Total net sales 8,014 6,208 22,425 15,895
Cost of goods sold 2,511 2,685 7,992 6,543
------- ------- ------- --------
Gross profit 5,503 3,523 14,433 9,352
Operating expenses:
Research and development 702 809 2,145 2,176
Selling, general and administrative 4,555 3,036 11,563 8,107
Non-recurring expenses -- 67 1,656 10,262
Amortization of intangibles 128 134 382 315
------- ------- ------- --------
Income (loss) from operations 118 (523) (1,313) (11,508)
Other income (expense) (5) 38 257 (26)
------- ------- ------- --------
Net income (loss) $ 113 $ (485) $(1,056) $(11,508)
======= ======= ======= ========
Net income (loss) per share, as adjusted (Note 8) $ 0.01 $ (0.05) $ (0.08) $ (1.02)
======= ======= ======= ========
Shares used in computing net per share 13,989 10,196 12,629 9,581
======= ======= ======= ========
</TABLE>
See accompanying notes
3
<PAGE>
Ventana Medical Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1997 1996
-------- --------
<S> <C> <C>
Operating activities:
Net loss $ (1,056) $(11,534)
Adjustments to reconcile net loss to cash used
in operating activities:
Purchase In process research and development (Note 5) -- 7,900
Depreciation and amortization 1,505 1,196
Changes in operating assets and liabilities, net (2,258) (1,735)
-------- --------
Net cash used in operating activities (1,809) (4,173)
Investing activities:
Purchase of property and equipment, net (3,142) (891)
Purchase of intangible assets (Note 4) (43) (3,362)
Acquisition of BioTek Solutions, Inc. (Note 5) -- (2,500)
-------- --------
Net cash used in investing activities (3,185) (6,753)
Financing activities:
Issuance (repayment) of debt (including amounts
from related parties) and stock (Note 6) (10,321) 8,772
Net proceeds from public offering (Note 7) 26,138
-------- --------
Net cash provided by financing activities 15,817 27,037
Effect of exchange rate change on cash 47 (99)
-------- --------
Net increase in cash and cash equivalents 10,870 16,012
Cash and cash equivalents, beginning of period
-------- --------
Cash and cash equivalents, end of period $ 21,937 $ 17,116
======== ========
</TABLE>
4
<PAGE>
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:
September 30 December 31
1997 1996
------- -------
(in thousands)
Raw material and work-in-process $ 3,506 $ 2,379
Finished goods 578 893
------- -------
$ 4,084 $ 3,272
======= =======
5
<PAGE>
3. Property and Equipment
Property and equipment consist of the following:
September 30 December 31
1997 1996
------ ------
(in thousands)
Diagnostic instruments $3,780 $2,762
Machinery and equipment 3,901 2,193
Computers and related equipment 919 945
Furniture and fixtures 121 292
Leasehold improvements 394 253
------ ------
9,115 6,445
Less accumulated depreciation and amortization 3,750 3,144
------ ------
$5,365 $3,301
====== ======
4. Intangibles
Intangibles consist of the following:
September 30 December 31
1997 1996
------ ------
(in thousands)
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 947 519
$8,197 $8,581
====== ======
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 lb. purchase price is presented below;
The purchase price for BioTek consisted of:
(in thousands)
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
=======
6
<PAGE>
The purchase price was allocated as follows:
(in thousands)
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
=======
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:
In February 1997, the Company sold, through an underwritten secondary offering,
1,850,000 shares of its Common Stock at $15.00 per share plus an additional
31,066 shares issued upon exercise of the underwriter's over-allotment option,
resulting in net proceeds of $26.1 million to the Company. Legal and accounting
fees associated with the offering totaled $0.5 million.
8. Net Income (Loss) Per Share:
Net income (loss) per share for the three months ended September 30, 1997 and
1996 and the nine months ended September 30, 1997 and 1996 is computed by
dividing net income (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 by the
Company 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 therefore have an impact on the Company's net income per share for the
quarter ended September 30, 1997, but not on the net loss for the quarter ended
September 30, 1996, because
7
<PAGE>
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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income (loss) $ 113 $ (485) $ (1,058) $(11,534)
Weighted average common shares
outstanding 13,031 10,198 12,629 9,581
Dilutive stock options and warrants 958 -- -- --
Weighted average common shares
outstanding during the period 13,989 10,196 12,629 9,581
Net income (loss) per share $ 0.01 $ (0.05) $ (0.08) $ (1.20)
======== ======== ======== ========
</TABLE>
8
<PAGE>
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 l0-Q. This
Report on Form 1O-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.
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 10(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)
9
<PAGE>
Scientific, Inc. (a subsidiary of Fisher Scientific, Inc.) ("CMS"), Kollsman
Manufacturing Company, Inc. ("Kollsman") and LJL BioSystems, Inc. ("LSL").
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 most manufacturing, sales and
marketing activities are performed by the Company. 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 and through RPs. In an RP, the Company has provided the customer with the
use of an instrument with no capital investment with the objective of creating
reagent revenue. Until September 1997, the terms and conditions of RP instrument
placements could vary from formal agreements specifying minimum volumes and
premium pricing for reagent purchases to short term, informal arrangements where
customers purchased reagents on a month to month basis. In addition, this
category of placements included a small number of month to month instrument
rentals wherein the rental fee replaced premium unit pricing which otherwise
would have been charged. In September 1997, the Company modified the program for
non-rental RPs to provide that these placements will convert to a sale or rental
within six months. This new approach reflects a recognition by the Company that
a rental provides an increased assurance of capital cost recovery. The
manufacturing cost of instruments placed through RPs, (including rentals) 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. Instruments provided to customers
under non-rental RPs are only considered placements if and when certain reagent
purchase criteria are met by the customer. As of September 30, 1997, the Company
had placed a total of 177 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 ~
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
10
<PAGE>
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 Nine Months Ended September 30, 1997 and 1996:
Net Sales:
Net sales for the three and nine months ended September 30, 1997 as compared to
the same periods of 1996 increased 29% and 41% to $8.0 million and $22.4 million
from $6.2 million and $15.9 million, respectively. The increase in net sales was
attributable to a 38% and 24% increase in instrument sales for the quarter and
nine months and a 26% and 48% increase in reagent and other sales for the
quarter and nine 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, including a one-time royalty pre-payment of $0.5
million recorded as revenue during the three months ended September 30, 1996,
the quarterly and nine-month percentage increases in reagent and other sales
would have been 42% and 56%, respectively.
Gross Margin:
Gross profit for the three and nine months ended September 30, 1997 increased to
$5.5 million and $14.4 million, respectively, from $3.5 million and $9.4 million
for the same periods in 1996. Gross margin for the three and nine months ended
September 30, 1997 increased to 69% and 64% from 57% and 59% for the same
periods during 1996. Gross margins on instrument sales increased slightly in the
three-month period ended September 30, 1997 compared to the corresponding period
in 1996 as a result of the August 1997 introduction of the NexES instrument,
which has a lower manufacturing cost than the ES. Instrument gross margins in
the
11
<PAGE>
nine-month period ended September 30, 1997 decreased slightly when compared to
the same period in 1996, primarily due to an increase of low-margin distributor
sales in Europe, coupled with unfavorable European exchange rates and increased
sales of lower margin batch processing instruments, offset by manufacturing
efficiencies and increased absorption of manufacturing overhead. Gross margins
on reagent and other sales increased in both the three and nine month periods
ended September 30, 1997 compared to the corresponding periods in 1996 due to
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. In addition, higher pricing for
reagents and increased service profitability contributed to both the three-month
and nine-month margin improvements.
Research and Development:
Research and development expenses were $0.7 million for the three months ended
September 30, 1997 and $2.1 million for the nine months ended September 30,
1997. This represents a 13% decrease for the three month period and a 1%
decrease for the nine 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 9% and 10% for the three and nine month
periods, respectively, in 1997 compared to approximately 13% and 14% for the
same periods during 1996. This decline was primarily due to increased sales.
Research and development expenses for the three and nine months ended September
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 nine months ended September
30, 1996 related primarily to the gen II instrument and IHC reagent development.
12
<PAGE>
Selling, General and Administrative ("SG&A"):
Presented below is a summary of SG&A expense for the three and nine months ended
September 30, 1997 and 1996.
<TABLE>
<CAPTION>
SG&A Summary:
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
$ Sales $ Sales $ Sales $ Sales
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and marketing $ 3,272 41% $2,276 37% $ 8,470 38% $ 6,185 39%
Administration 1,283 16% 760 12% 3,093 14% 1,922 12%
------------- ------------ ------------- -------------
Total SG&A $ 4,555 57% $ 3,036 49% $11,563 52% $ 8,107 51%
============= ============ ============= =============
</TABLE>
SG&A expense for the three and nine months ended September 30, 1997 increased to
$4.6 million and $11.6 million from $3.0 million and $8.1 million for the three
and nine months ended September 30, 1996, respectively. SG&A expense as a
percentage of net sales increased to 57% and 52% for the three and nine months
ended September 30, 1997 compared to 49% and 51% for the same periods during
1996. 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 primarily
associated with pending litigation.
Non-recurring Expenses:
The $1.6 million in non-recurring expenses for the nine months ended September
30, 1997 is primarily related to a 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
13
<PAGE>
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 $34.5 million as of September 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 and its secondary offering completed in February 1997 which
resulted in net proceeds of $26.1 million. As of September 30, 1997 the
Company's principal source of liquidity consisted of cash and cash equivalents
of $21.9 million and borrowing capacity under its bank revolving line of credit.
The Company has a $2.7 million revolving bank credit facility, which expires on
February 15,1998. As of September 30, 1997, letters of credit were issued under
this line to facilitate certain contract manufacturing arrangements for the
production of TechMate instruments ($0.5 million) and to secure a legal judgment
in favor of BioGenex ($0.9 million) pending appeal by the Company, leaving an
available revolving credit facility of approximately $1.3 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.
On February 18, 1997, the Company completed a 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 nine months ended September 30, 1997 the Company used for operations
and investing activities approximately $5.0 million in cash versus $10.9 million
for the nine months ended September 30, 1996. A substantial portion of the 1996
net cash outflow related to the acquisition of BioTek.
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
14
<PAGE>
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 September 30, 1997,
the outstanding balance of the secured loans and prepayments was $0.7 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 the foreseeable future. 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
rentals, 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.
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
15
<PAGE>
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 and
rentals. The Company anticipates that the percentage of instruments placed
through RPs and rentals, 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 rental arrangements do not necessarily provide for specified reagent
purchase commitments and there can be no assurance regarding the timing or
volume of reagent purchases by such customers. Furthermore, customers that have
entered into agreements may cancel those agreements. Accordingly, there can be
no assurance regarding the level of revenues that will be generated by customers
procuring instruments through rental arrangements; therefore, the Company's
business, financial condition and results of operations could be materially and
adversely affected.
Rate of Market Acceptance and Technological Change. Use of automated systems to
perform diagnostic tests is relatively new. Historically, the diagnostic tests
performed by the Company's systems have been performed manually by laboratory
personnel. The rate of market acceptance of the Company's products will be
largely dependent on the Company's ability to persuade the medical community of
the benefits of automated diagnostic testing using the Company's products.
Market acceptance and sales of the Company's products may also be affected by
the price and quality of its products. The Company's products could also be
rendered obsolete or noncompetitive by virtue of technological innovations in
the fields of cellular or molecular diagnostics.
Risks Associated with Development and Introduction of New Products. The
Company's future growth and profitability will be dependent, in large part, on
its ability to develop, introduce and market new instruments and reagents used
in diagnosing and selecting treatment for cancer and other disease states. In
particular, the Company must timely and successfully introduce its new smaller
instruments to the market place. These instruments are smaller capacity, lower
priced instruments than the Company's current instruments and are necessary to
expand the market opportunity at smaller hospitals and reference laboratories in
the United States and Europe. The Company depends, in part, on the success of
medical research in developing new antibodies, nucleic acid probes and clinical
diagnostic procedures that can be adapted for use in the Company's systems. In
addition, the Company will need to obtain licenses, on satisfactory terms, for
certain technologies, which cannot be assured. Certain of the Company's products
are currently under development, initial testing or preclinical or clinical
evaluation by the Company. Other products are scheduled for future development.
Products under development or scheduled for future development may prove to be
unreliable from a diagnostic standpoint, may be difficult to manufacture in an
efficient manner, may fail to receive necessary regulatory clearances may not
achieve market acceptance or may encounter other unanticipated difficulties.
Competition. Competition in the diagnostic industry is intense and is expected
to increase. Competition in the diagnostic industry is based on, among other
things, product quality, price and the breadth of a company's product offerings.
The Company's systems compete both with products manufactured by competitors and
with traditional manual diagnostic procedures. The Company's competitors may
succeed in developing products that are more reliable or effectively less costly
than those developed by the Company and may be more successful than the Company
in manufacturing and marketing their products.
16
<PAGE>
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 GM? 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 have
been 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 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
17
<PAGE>
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 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 UL 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
18
<PAGE>
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 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
19
<PAGE>
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 GM? 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
20
<PAGE>
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 LHC 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 patents or proprietary rights, public
concern as to the safety of products developed by the Company or others, changes
in financial analysts' estimated earnings or recommendations regarding the
Company and general market conditions may have a material adverse effect on the
market price of the Company's Common Stock. The Company's results of operations
may, In future periods, fall below the expectations of public market analysts
and investors and, in such event, the market price of the Company's Common Stock
could be materially and adversely affected.
Absence of Dividends. The Company has not declared or paid any dividends since
its inception and does not intend to pay any dividends in the foreseeable
future. In addition, the Company's bank credit agreement currently prohibits the
Company from paying cash dividends.
21
<PAGE>
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. BioTek has appealed this
judgment.
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.
In connection with a disagreement as to which price should be charged by BioTek
to DAKO for the sale of TechMate 250 instruments, DAKO has filed an arbitration
request with the International Chamber of Commerce. Arbitrators have been named
by both BioTek and DAKO (one each) who must, in turn, agree on a third
arbitrator. The Company believes its position is strong; however, the results of
the proceedings are uncertain.
The Company has received notices of various claims from certain of its and
BioTek's former employees. Lawsuits have been filed against the Company and a
certain former BioTek employee alleging that certain commitments made to a
former employee in connection with his employment by BioTek were breached. Based
on its review of the 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.
22
<PAGE>
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
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 September
30, 1997.
23
<PAGE>
SIGNATURE
Pursuant to the requirements of the securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ventana Medical Systems, Inc.
Date: November 10, 1997 By: /s/ Pierre Sice
-------------------------------------
Pierre Sice
Vice President, Chief Financial Officer,
Treasurer and Secretary.
(Principal Financial and Accounting
Officer)
24
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
54 No. 333- 16707) pertaining to the registration of the 1996 Stock Option Plan,
1996 Director Option Plan. 1988 Stock Option Plan, and 1996 Employee Stock
Purchase Plan of Ventana Medical Systems, Inc. of our report dated January 23,
1998, with respect to the financial statements of Ventana Medical Systems, Inc.
included in this Annual Report (Form 10-K) for the year ended December 31,1997.
/s/ ERNST & YOUNG LLP
Tucson, Arizona
March 24, 1998
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