<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the period ended September 30, 1998.
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
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 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 [ ]
Applicable Only to Issuers Involved in Bankruptcy
(Formal name, former address and former fiscal year, if changed from last
report)
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 -- 13,392,428 shares as of October 30, 1998.
<PAGE> 2
VENTANA MEDICAL SYSTEMS, INC.
INDEX TO FORM 10-Q
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1998 (Unaudited) and December 31, 1997
Condensed Consolidated Statements of Operations
Three months ended September 30, 1998 and 1997 (Unaudited)
Nine months ended September 30, 1998 and 1997 (Unaudited)
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997 (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
2
<PAGE> 3
VENTANA MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
------------- -------------
(Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,275 $ 18,902
Accounts receivable 11,581 8,047
Inventories (Note 2) 8,157 5,134
Other current assets 3,073 2,109
------------- -------------
Total current assets 40,086 34,192
Property and equipment, net (Note 3) 6,901 6,105
Intangibles, net (Note 4) 7,637 8,055
------------- -------------
Total assets $ 54,624 $ 48,352
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,374 $ 2,584
Other current liabilities (Note 5) 3,224 2,894
------------- -------------
Total current liabilities 5,598 5,478
Long term debt 1,826 471
Stockholders' equity
Preferred stock - $.001 par value; 5,000,000 shares
authorized (Note 7) -- --
Common stock - $.001 par value; 50,000,000 shares
authorized; 13,368,526 and 13,247,226 shares
issued and outstanding at September 30, 1998 and
December 31, 1997, respectively 13 13
Additional Paid-In Capital 78,148 76,313
Accumulated deficit (30,532) (33,782)
Accumulated other comprehensive losses (Note 8) (429) (141)
------------- -------------
Total stockholders' equity 47,200 42,403
------------- -------------
Total liabilities and stockholders' equity $ 54,624 $ 48,352
============= =============
</TABLE>
Note: The condensed consolidated balance sheet at December 31, 1997 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
3
<PAGE> 4
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
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales:
Instruments $ 3,047 $ 2,142 $ 10,469 $ 6,032
Reagents and other 8,061 5,872 22,576 16,393
------------ ------------ ------------ ------------
Total net sales 11,108 8,014 33,045 22,425
Cost of goods sold 3,303 2,511 10,233 7,992
------------ ------------ ------------ ------------
Gross profit 7,805 5,503 22,812 14,433
Operating expenses:
Research and development 1,435 702 4,026 2,145
Selling, general and administrative 5,699 4,555 16,220 11,563
Non-recurring expenses -- -- -- 1,656
Amortization of acquisition costs 128 128 382 382
------------ ------------ ------------ ------------
Income (loss) from operations 543 118 2,184 (1,313)
Other income (expense) 594 (5) 1,066 257
------------ ------------ ------------ ------------
Net income (loss) $ 1,137 $ 113 $ 3,250 $ (1,056)
============ ============ ============ ============
Net income (loss) per share (Note 6)
Basic $ 0.09 $ 0.01 $ 0.24 $ (0.08)
============ ============ ============ ============
Diluted $ 0.08 $ 0.01 $ 0.22 $ (0.08)
============ ============ ============ ============
</TABLE>
See accompanying notes
4
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VENTANA MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income (loss) $ 3,250 $ (1,056)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,990 1,505
Changes in operating assets and liabilities, net (6,301) (2,258)
------------ ------------
Net cash used in operating activities (1,061) (1,809)
INVESTING ACTIVITIES:
Purchase of property and equipment, net (2,113) (3,142)
Purchase of intangible assets -- (43)
------------ ------------
Net cash used in investing activities (2,113) (3,185)
FINANCING ACTIVITIES:
Issuance (repayment) of debt (including amounts
from related parties) and stock 1,835 (10,321)
Net proceeds from public offering -- 26,138
------------ ------------
Net cash provided by financing activities 1,835 15,817
Effect of exchange rate change on cash (288) 47
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,627) 10,870
Cash and cash equivalents, beginning of period 18,902 11,067
------------ ------------
Cash and cash equivalents, end of period $ 17,275 $ 21,937
============ ============
</TABLE>
See accompanying notes
5
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VENTANA MEDICAL SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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, 1997.
The information furnished reflects all adjustments which, in the opinion of
management, are necessary for a fair presentation of results for the interim
periods. Such adjustments consisted only of normal recurring items. It should
also be noted that results for the interim periods are not necessarily
indicative of the results expected for the full year or any future period.
The presentation of these consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
------------- -------------
(in thousands)
<S> <C> <C>
Raw material and work-in-process $ 4,337 $ 4,033
Finished goods 3,820 1,101
------------- -------------
$ 8,157 $ 5,134
============= =============
</TABLE>
6
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VENTANA MEDICAL SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
------------- -------------
(in thousands)
<S> <C> <C>
Diagnostic instruments $ 5,627 $ 4,830
Machinery and equipment 3,990 3,464
Computers and related equipment 1,849 1,190
Leasehold improvements 543 472
Furniture and fixtures 188 177
------------- -------------
12,197 10.133
Less accumulated depreciation and amortization 5,296 4,028
------------- -------------
$ 6,901 $ 6,105
============= =============
</TABLE>
4. INTANGIBLES
Intangibles consist of the following:
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
Customer base $ 4,100 $ 4,100
Developed technology 2,800 2,800
Goodwill, patents and other 2,244 2,244
------------ ------------
9,144 9,144
Less accumulated amortization 1,507 1,089
------------ ------------
$ 7,637 $ 8,055
============ ============
</TABLE>
5. OTHER CURRENT LIABILITIES:
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
Accrued payroll and payroll taxes $ 836 $ 421
Accrued commissions 379 146
Deferred revenue 891 334
Accrued legal reserves 0 946
Sales tax payable 256 410
Other accrued liabilities 862 637
------------ ------------
$ 3,224 $ 2,894
============ ============
</TABLE>
7
<PAGE> 8
VENTANA MEDICAL SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. EARNINGS PER SHARE:
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share, which was required to be adopted by the Company on December
31, 1997. 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 and is
computed using the weighted average number of shares of common stock outstanding
in the periods presented, adjusted for the effect of dilutive securities on the
balance sheet date. Net income per share for all periods has been presented in
conformance with the requirements of SFAS No. 128 as well as Staff Accounting
Bulletin No. 98 issued by the Securities and Exchange Commission in February
1998.
Statement of Computation of Weighted Average Shares
Outstanding and Net Income (Loss) Per Share
(in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,137 $ 113 $ 3,250 $ (1,056)
Weighted average common shares
outstanding, basic 13,351 13,031 13,301 12,629
Add: dilutive stock options and warrants 1,391 958 1,390 --
------------ ------------ ------------ ------------
Weighted average common shares
outstanding, diluted 14,742 13,989 14,691 12,629
Net income (loss) per share, basic $ 0.09 $ 0.01 $ 0.24 $ (0.08)
============ ============ ============ ============
Net income (loss) per share, diluted $ 0.08 $ 0.01 $ 0.22 $ (0.08)
============ ============ ============ ============
</TABLE>
7. PREFERRED SHARES PURCHASE RIGHTS DIVIDEND:
On March 9 1998, the Company's Board of Directors approved the establishment of
a rights plan. Pursuant to this plan, the Board of Directors declared a dividend
distribution of one Preferred Shares Purchase Right on each outstanding share of
the Company's Common Stock for shareholders of record on May 8, 1998. Each right
entitles stockholders to buy 1/1000th of a share of the Company's Series A
Participating Preferred Stock at an exercise price of eighty-five dollars
($85.00). The Rights become exercisable following the tenth day after a person
or group announces an acquisition of 20% or more of the Company's Common Stock
or announces commencement of a tender offer the consummation of which would
result in ownership by the person or group of 20% or more of the Common Stock.
The Company is entitled to redeem the Rights at $0.01 per Right at any time on
or before the tenth day following acquisition by a person or group of 20% or
more of the Company's Common Stock.
8
<PAGE> 9
VENTANA MEDICAL SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
If, prior to redemption of the Rights, a person or group acquires 20% or more of
the Company's Common Stock, each Right not owned by a holder of 20% or more of
the Common Stock will entitle its holder to purchase, at the Right's then
current exercise price, that number of shares of Common Stock of the Company
(or, in certain circumstances as determined by the Board of Directors, cash,
other property or other securities) having a market value at that time of twice
the Right's exercise price. If, after the tenth day following acquisition by a
person or group of 20% or more of the Company's Common Stock, the Company sells
more than 50% of its assets or earning power or is acquired in a merger or other
business combination transaction, the acquiring person must assume the
obligation under the Rights and the Right will become exercisable to acquire
Common Stock of the acquiring person at the discounted price. At any time after
an event triggering exercisability of the Rights at a discounted price and prior
to the acquisition by the acquiring person of 50% or more of the outstanding
Common Stock, the Board of Directors of the Company may exchange the Rights
(other than those owned by the acquiring person or its affiliates) for Common
Stock of the Company at an exchange ratio of one share of Common Stock per
Right.
8. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this statement
had no impact on the Company's net income or stockholders' equity. At present,
the only component of comprehensive income for the Company relates to foreign
currency translation adjustments. The components of comprehensive income for the
three and nine month periods ended September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,137 $ 113 $ 3,250 $ (1,056)
Foreign currency translation adjustments (252) (8) (288) 47
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 885 $ 105 $ 2,962 $ (1,009)
============ ============ ============ ============
</TABLE>
9
<PAGE> 10
VENTANA MEDICAL SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
9. RECENTLY ISSUED ACCOUNTING STANDARDS
In June, 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 131, Disclosure about Segments of an Enterprise and
Related Information, which is effective for years beginning after December 15,
1997. Statement 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, geographical
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.
10
<PAGE> 11
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 Medical Systems, Inc. ("Ventana" or "the Company") should be read in
conjunction with the Condensed Consolidated Financial Statements and related
Notes thereto included elsewhere in this Form 10-Q. This Report on Form 10-Q
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Actual events or results may differ materially from those anticipated by
such forward-looking statements as a result of the factors described herein and
in the documents incorporated herein by reference. Such forward-looking
statements include, but are not limited to, statements concerning risks
associated with the incidence of cancer and cancer screening, improvements in
automated immunohistochemistry ("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 develops, manufactures and markets proprietary instrument/reagent
systems that automate tissue preparation, IHC tests, special stains ("SS") tests
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 primary antibodies,
detection chemistry used to visualize primary antibodies plus chemical compounds
and dies used in special stains. 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.
Ventana is a medical device company and, as such, is regulated by the United
States Food and Drug Administration ("FDA"). As a result, the majority of the
Company's products are regulated by FDA regulations which include the 510(k)
pre-market notification ("510(k)") process, pre-market approval ("PMA") process,
good manufacturing procedures ("GMP") and the Clinical Laboratory Improvement
Amendments of 1988 ("CLIA"). See "Certain Factors Which May Affect Future
Results" elsewhere in this report.
In February 1996, Ventana acquired BioTek Solutions, Inc. ("BioTek"), for an
aggregate consideration of $19.1 million, consisting of cash, promissory notes,
and the assumption of liabilities. The transaction was accounted for as a
purchase. The purchase price was allocated between tangible net assets and
intangible assets consisting of developed technology, customer list, goodwill
and in-process research and development.
11
<PAGE> 12
As a result of the merger, the Company assumed certain contractual obligations
and contingent liabilities including contractual arrangements with DAKO A/S
("DAKO"), Curtin Matheson Scientific, Inc. (a subsidiary of Fisher Scientific,
Inc.) ("CMS"), Kollsman Manufacturing Company, Inc. ("Kollsman") and LJL
BioSystems, Inc. ("LJL"). 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. BioTek's instruments also use a detection chemistry and batch
processing approach which differ from the Company's proprietary system and which
also contribute to those products' lower margins. Ventana's strategy regarding
BioTek has been 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 United States distribution agreement between BioTek and CMS
was terminated by mutual agreement in October 1997. The international
distribution agreement with DAKO was amended and restated in May 1998 and
provides for exclusive distribution of TechMate instruments by DAKO in defined
geographic areas until the earlier of December 31, 1999 or when DAKO introduces
a competitive product.
On October 14, 1998, Ventana acquired Biotechnology Tools, Inc. ("BTTI"), a
Tucson company engaged in the design and manufacture of tissue processors,
microtomes, ultra microtomes and cryogenic devices, for a consideration of $6.5
million. The consideration is subject to a $1.5 million offset for amounts due
BTTI from certain management shareholders and to a retention by the Company of
$1.2 million to fund potential adjustments in the purchase price and to secure
the indemnification on obligations of the selling shareholders. The acquisition
will be accounted for as a purchase.
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 of up to six months provided the customer purchases a
minimum amount of reagents and 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 the instrument is either
sold or rented rather than at the time of instrument placement. The
manufacturing cost of instruments placed through QRIBs and rentals is charged to
cost of goods sold by depreciating standard costs over a period of four years.
The Company's future results of operations may fluctuate significantly from
period to period due to a variety of factors. The initial placement of an
instrument is subject to a longer, less consistent sales cycle than the sales of
reagents, which begin and typically are recurring once an instrument is placed.
The Company's operating results in the future are likely to fluctuate
substantially from period to period because instrument sales are likely to
remain an important part of revenues in the near future. The degree of
fluctuation will depend on the timing, level and mix of instruments placed
through direct sales and instruments placed through QRIBs or rentals. 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
12
<PAGE> 13
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 could be below that experienced during the past several fiscal
periods. Other factors that may result in fluctuations in operating results
include the timing of new product announcements and the introduction of new
products and new technologies by the Company and its competitors, market
acceptance of the Company's current or new products, developments with respect
to regulatory matters, availability and cost of raw materials purchased from
suppliers, competitive pricing pressures, increased sales and marketing expenses
associated with the implementation of the Company's market expansion strategies
for its instruments and reagent products, and increased research and development
expenditures. Future instrument and reagent sales could also be adversely
affected by the configuration of the Company's patient priority systems, which
require the use of the Company's detection chemistries, particularly if and to
the extent that competitors are successful in developing and introducing new IHC
instruments or if competitors offer reagent supply arrangements having pricing
or other terms more favorable than those offered by the Company. Such increased
competition in reagent supply could also adversely affect sales of reagents to
batch processing instrument customers since those instruments do not require the
use of the Company's reagents. In connection with future introductions of new
products, the Company may be required to incur charges for inventory
obsolescence in connection with unsold inventory of older generation products.
To date, however, the Company has not incurred material charges or expenses
associated with inventory obsolescence in connection with new product
introductions. In addition, a significant portion of the Company's expense
levels is based on its expectation of higher levels of revenues in the future
and is relatively fixed in nature. Therefore, if revenue levels are below
expectations, operating results in a given period are likely to be adversely
affected.
RESULTS OF OPERATIONS:
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997:
Net Sales:
Net sales for the three and nine months ended September 30, 1998 as compared to
the same periods in 1997 increased 39% and 47% to $11.1 million and $33.0
million from $8.0 million and $22.4 million, respectively. The increase in net
sales was attributable to a 42% and 74% increase in instrument sales for the
three and nine month periods and 37% and 38% increases in reagent and other
sales for the three and nine month periods. Instrument sales increased in the
three month period primarily as a result of increased direct sales resources in
the U.S. In addition, the nine month period benefited from a substantial number
of 1997 QRIB placements being converted to direct sales in 1998. Reagent and
other sales increased due to sales of reagents to new customers and increased
shipments to existing customers.
Gross Margin:
Gross profit for the three and nine months ended September 30, 1998 increased to
$7.8 million and $22.8 million, respectively, from $5.5 million and $14.4
million for the same periods in
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<PAGE> 14
1997. In addition, the Company's gross margin for the three and nine month
periods increased to 70% and 69% from 69% and 64% for the prior year periods.
Gross margins on instruments increased during the 1998 periods as a result of
sales of the Company's NexES instrument, introduced in late 1997, which has a
lower manufacturing cost than its predecessor. Gross margins on reagent and
other sales increased in the 1998 periods partly due to a higher mix of
proprietary reagent products, which carry a higher margin than batch processing
reagents. In addition, higher pricing for reagents and increased service
profitability contributed to the margin improvements.
Research and Development:
Research and development expenses were $1.4 million for the three months ended
September 30, 1998, and $4.0 million for the nine months ended September 30,
1998. These amounts represent a 104% increase for the three month period and an
88% increase for the nine month period over the respective periods of the prior
year. The increases resulted primarily from substantial development work on new
special stains and in situ hybridization instrumentation, but also reflected an
increase in reagent research activity and headcount investment. Research and
development expenses also increased as a percent of sales to 13% for the three
months and 12% for the nine months in 1998 periods compared to 9% and 10% for
the respective periods in 1997, for the reasons noted above.
Selling, General and Administrative ("SG&A"):
Presented below is a summary of SG&A expense for the three and nine months ended
September 30, 1998 and 1997.
SG&A SUMMARY:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
% % % %
$ Sales $ Sales $ Sales $ Sales
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($ in thousands)
Sales and marketing $ 4,337 39% $ 3,272 41% $12,548 38% $ 8,470 38%
Administration 1,362 12% 1,283 16% 3,672 11% 3,093 14%
-------------- -------------- -------------- --------------
Total SG&A $ 5,699 51% $ 4,555 57% $16,220 49% $11,563 52%
============== ============== ============== ==============
</TABLE>
SG&A expense for the three month and nine months ended September 30, 1998
increased to $5.7 and $16.2 million from $4.6 million and $11.6 million for the
three and nine months ended September 30, 1997, respectively. SG&A expense as a
percentage of net sales decreased in 1998 periods to 51% and 49% for the three
and nine month periods as compared to 57% and 52% for the respective 1997
periods. The increase in SG&A expenses 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. As a percentage of sales, sales and marketing expenses
fell slightly in the quarter as compared to the prior year quarter, but were
equal during the nine month periods of 1997 and 1998. The decline in
administrative expenses as
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<PAGE> 15
percentage of sales in the 1998 periods was due to a relative decline in
litigation-related expenses. However, administrative expenses did increase in
absolute terms due primarily to the Company's expanding business base in Europe
and Japan.
Amortization of Intangibles:
Intangible assets consist primarily of goodwill, customer base and developed
technology resulting from the BioTek acquisition, and patents. Such assets are
amortized to expense over estimated useful lives of 15 to 20 years. As a result,
the Company will charge to expense each quarter approximately $0.1 million for
the amortization of these intangible assets. Additionally, the Company will
review the utility of these assets each quarter to assess their continued value.
Should the Company determine that any of these assets are impaired, it will
write them down to their estimated fair market value.
LIQUIDITY AND CAPITAL RESOURCES:
As of September 30, 1998 the Company's principal source of liquidity consisted
of cash and cash equivalents of $17.3 million. The Company also had a $5 million
revolving bank credit facility and no borrowings outstanding thereunder as of
September 30, 1998. 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.
Accrued interest of $0.6 million was reversed into income in February 1997.
On October 14, 1998, Ventana acquired BTTI, a Tucson company engaged in the
design and manufacture of tissue processors, microtomes, ultra microtomes and
cryogenic devices, for a consideration of $6.5 million. The consideration is
subject to a $1.5 million offset for amounts due BTTI from certain management
shareholders and to a retention by the Company of $1.2 million to fund potential
adjustments in the purchase price and to secure the indemnification on
obligations of the selling shareholders. The acquisition will be accounted for
as a purchase.
The Company expects to use approximately $4.0 million of its available resources
during the next twelve months for expenditures to increase manufacturing
capacity and to enhance 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, 1998, net cash used in operations and
investing activities was approximately $3.2 million, $1.8 million less than the
amount used in the nine months ended September 30, 1997.
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 on future
15
<PAGE> 16
instrument sales and reagent royalties to BioTek. These loans and prepayments
were used to fund TechMate 250 instrument development and working capital
requirements. In May 1998, the Company and DAKO entered into an amended and
restated distribution agreement for the purpose of addressing several matters
including the pricing dispute for the TechMate 250. The new agreement provides
for the aggregate amount of the negotiated reduction in the TechMate price to be
added to the BioTek debt to DAKO and for the entire debt to be unsecured. The
restated debt, which at September 30, 1998 was included as long term debt in the
Company's Condensed Consolidated Financial Statements in the amount of $1.6
million, accrues interest at 7% per annum payable quarterly commencing January
1, 2000. Principal payments on the debt are to be made in 16 quarterly
installments, also starting January 1, 2000.
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.
FUTURE FLUCTUATIONS IN OPERATING RESULTS. The Company derives revenues from the
sale of instruments and reagents through its direct sales force and certain
international distributors.
The initial placement of an instrument is subject to a longer, less consistent
sales cycle than the sale of reagents, which begin and are typically recurring
once the instrument is placed. Consequently, the Company's future operating
results are likely to fluctuate substantially from period to period because
instrument sales are likely to remain an important part of revenues in the near
future. The degree of fluctuation will depend on the timing, level and mix of
instruments placed through direct sale versus 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. 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.
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<PAGE> 17
RATE OF MARKET ACCEPTANCE AND TECHNOLOGICAL CHANGE. Use of the Company's
automated systems to perform diagnostic tests is becoming increasingly accepted
as a replacement for tests 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. 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.
MANUFACTURING RISKS. The Company has 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 must continue to increase production volumes of
instruments and reagents, in a cost effective manner, in order to be profitable.
To increase production levels, the Company will need to scale-up its
manufacturing facilities, increase its automated manufacturing capabilities and
continue to comply with current GMP regulations prescribed by the FDA and other
standards prescribed by various federal, state and local regulatory agencies in
the United States and other countries, including the International Standards
Organization ("ISO") 9000 Series certifications.
DEPENDENCE ON KEY SUPPLIERS. The Company's instruments and reagent products are
formulated from chemicals, biological materials and parts utilizing proprietary
Ventana technology as well as standard processing techniques. Certain
components, raw materials and primary antibodies, used in the manufacturing of
the Company's reagent products, are currently provided by single source vendors.
There can be no assurance that the materials or parts or needed by the Company
will be available in commercial quantities, at acceptable prices,
17
<PAGE> 18
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.
RISKS ASSOCIATED WITH DISTRIBUTION RELATIONSHIPS. The Company's batch processing
instruments and reagents have been sold under distribution agreements entered
into by BioTek. In the United States, batch processing instruments and reagents
were sold through Curtin Matheson Scientific, Inc. a subsidiary of Fisher
Scientific, Inc. ("CMS"), under an exclusive agreement until it was terminated
by mutual agreement in October 1997. United States sales through CMS were
subject to several operating conditions and risks. In particular, it had been
historically necessary for BioTek to support the efforts of CMS with direct
field sales and support personnel. As a result, the Company generated lower
gross margins on sales through CMS that it would generate were it to sell
directly to end-users and incurs higher selling expenses than typically
associated with third-party distribution arrangements. The Company has been
distributing all batch processing products directly to end-users in the United
States since the termination of this agreement.
In Europe and certain other territories, 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. The
exclusive distribution right expires on the earlier of the date of DAKO's own
product introduction or December 31, 1999. The Company does not anticipate
generating from DAKO significant sales of batch processing instruments through
the expiration date of this agreement.
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
18
<PAGE> 19
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, 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 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
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<PAGE> 20
data and is costlier and more time-consuming to complete than the 510(k)
process. Regulators 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 good
manufacturing procedures 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
Improvement Amendments of 1988 ("CLIA") regulations. These rules restrict the
sale of reagents to clinical laboratories certified under CLIA. The full
implementation of CLIA rules could limit the clinical customers to which the
Company could sell reagents in the future.
In addition to these regulations, the Company is subject to numerous federal,
state and local laws and regulations relating to such matters as safe working
conditions and environmental matters. There can be no assurance that such laws
and regulations will not in the future have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS RELATING TO AVAILABILITY OF THIRD-PARTY REIMBURSEMENT AND POTENTIAL
ADVERSE EFFECTS OF HEALTH CARE REFORM. The Company's ability to achieve revenue
growth and profitability may depend on the ability of the Company's customers to
obtain adequate levels of third-party reimbursement for the use of certain
diagnostic tests in the United States, Europe and other countries. Currently,
availability of third-party reimbursement is limited and uncertain for some IHC
tests.
PRODUCT LIABILITY AND RECALL; PRODUCT LIABILITY INSURANCE. The marketing and
sales of the Company's diagnostic instruments and reagents entails risk of
product liability claims. The Company has product liability insurance coverage
with a per occurrence maximum of $1.0 million and an aggregate annual maximum of
$10.0 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. 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
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<PAGE> 21
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 cash dividends
since its inception and does not intend to pay any cash dividends in the
foreseeable future. In addition, the Company's bank credit agreement currently
prohibits the Company from paying cash dividends.
READINESS FOR THE YEAR 2000. Many currently installed computer systems
and software products are coded to accept only two digit entries in the date
code field. As the Year 2000 approaches, these code fields will need to accept
four digit entries to distinguish years beginning with "19" from those
beginning with "20". As a result, in less than two years, computer systems
and/or software products used by many companies may need to be upgraded to
comply with such Year 2000 requirements. 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 fourth quarter of 1998. The total
cost of this project will be less than $10,000, none of which has been or will
be capitalized. The Company does not expect the project to have a significant
impact on its information technology ("IT") budget or other non-related IT
projects. The Company will continue to implement systems with strategic value
and has started to implement a major upgrade of its management information
systems which is expected to be completed in 1999.
In addition, the Company is initiating formal communications with significant
suppliers and customers to determine the extent of which the Company's interface
systems are vulnerable to those third parties' failure to remediate their own
Year 2000 issues. The Company is requesting that third party vendors represent
their products and services to be Year 2000 compliant and that they have a
program to test for Year 2000 compliance. However, the response of those third
parties is beyond the Company's control. To the extent that the Company does
not receive adequate responses by early 1999, it is prepared to develop
contingency plans, with completion of these plans scheduled for no later than
mid-1999. At this time, the company cannot estimate the additional cost, if
any, that might develope from such contingency plans. Breakdowns in the
Company's computer systems and applications, such as its manufacturing
application software and the computer chips embedded in its plant equipment, as
well as other Year 2000-related problems such a disruptions in the delivery of
materials, power, heat or water to the Company's facilities, could prevent the
Company from being able to manufacture and ship its products. If the Company
were to fail to correct a material Year 2000 problem, its normal business
activities and operations could be interrupted. Such interruptions could
materially and adversely affect the Company's results of operations, liquidity
and financial condition. To date, estimated Year 2000 costs are not considered
by the Company to be material to its financial condition.
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<PAGE> 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In March 1995, BioGenex Laboratories 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 included claims of both direct, indirect and contributory
infringement. BioTek denied infringement and asserted several defenses,
including the invalidity of the patent. In April 1995, BioTek ceased offering
the products that were the subject of the alleged infringement. In May 1997, a
judgment for approximately $850,000 was rendered against BioTek, which BioTek
appealed. In April 1998, the Court of Appeals denied the appeal and the Company
promptly satisfied all obligations stemming from the 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 U.S.
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, 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 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. On September 23, 1998, the
Court granted in part and denied in part the Company's motion to dismiss the
suit. Specifically, the Court dismissed two counts of the complaint but declined
to dismiss four counts. In October the Company filed an application for order
certifying an immediate appeal, which is pending. Based on the facts known to
date, the Company believes 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, as action entitled, , CA. Leung v. Ventana Medical
Systems, Inc., No. 15812, was filed in the Court of Chancery for the State of
Delaware. The plaintiff, which is related to the plaintiffs in the securities
action discussed in the preceding paragraph, seeks inspection of certain books
and records of the Company. The Company believes the plaintiff seeks the
documents for an improper purpose and intends 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 only for the plaintiff's
attorney to review the corporate documents supplied.
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<PAGE> 23
In connection with a disagreement as to which price should 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
was scheduled for October 1998. The parties entered into an agreement in May
1998 which resulted in a resolution of the pricing dispute and termination of
the arbitration proceeding.
The Company has received notices of various claims from certain former
employees. In particular, a lawsuit was filed by a former employee in May 1998
against the Company alleging sexual discrimination and associated claims. Based
on its review of the matter, the Company does not believe that the resolution of
these claims will have a material adverse effect on the Company's business,
financial condition, cash flows or results of operations.
Other than the foregoing proceedings, the Company is not a party to any material
pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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, 1998.
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<PAGE> 24
SIGNATURE
Pursuant to the requirements of the securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ventana Medical Systems, Inc.
/S/ Pierre Sice
Date: November 13, 1998 By: _____________________________________
Pierre Sice
Vice President, Chief Financial Officer,
Treasurer and Secretary.
(Principal Financial and Accounting
Officer)
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<PAGE> 25
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 17,275 21,937
<SECURITIES> 0 0
<RECEIVABLES> 12,013 6,157
<ALLOWANCES> 432 47
<INVENTORY> 8,157 4,084
<CURRENT-ASSETS> 40,086 34,804
<PP&E> 12,197 9,115
<DEPRECIATION> 5,296 3,750
<TOTAL-ASSETS> 54,624 48,366
<CURRENT-LIABILITIES> 5,598 5,788
<BONDS> 0 0
0 0
0 0
<COMMON> 13 11
<OTHER-SE> 47,187 41,428
<TOTAL-LIABILITY-AND-EQUITY> 54,624 48,366
<SALES> 33,045 22,425
<TOTAL-REVENUES> 33,045 22,425
<CGS> 10,233 7,992
<TOTAL-COSTS> 10,233 7,992
<OTHER-EXPENSES> 20,628 15,746
<LOSS-PROVISION> 130 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 3,250 (1,056)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 3,250 (1,056)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,250 (1,056)
<EPS-PRIMARY> 0.24<F1> (.08)<F1>
<EPS-DILUTED> 0.22 (.08)
<FN>
<F1>For purposes of this exhibit, primary means basic.
</FN>
</TABLE>
