<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended March 31, 1999.
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 -- 13,447,209 shares as of April 30, 1999.
<PAGE> 2
VENTANA MEDICAL SYSTEMS, INC.
INDEX TO FORM 10-Q
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets March 31, 1999 (Unaudited)
and December 31, 1998
Condensed Consolidated Statements of Operations Three months
ended March 31, 1999 and 1998 (Unaudited)
Condensed Consolidated Statements of Cash Flows Three months
ended March 31, 1999 and 1998 (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 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>
March 31, December 31,
ASSETS 1999 1998
--------- --------
(Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,113 $ 2,424
Accounts receivable 15,767 16,531
Inventories (Note 2) 10,932 11,009
Other current assets 2,647 1,787
--------- --------
Total current assets 31,459 31,751
Property and equipment, net (Note 3) 12,184 9,937
Intangibles, net (Note 4) 14,498 14,592
--------- --------
Total assets $ 58,141 $ 56,280
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,211 $ 3,536
Other current liabilities (Note 5) 5,575 5,053
--------- --------
Total current liabilities 8,786 8,589
Long term debt 1,843 1,907
Stockholders' equity
Common stock - $.001 par value; 50,000,000 shares
authorized; 13,465,206 and 13,421,819 shares
issued and outstanding at March 31, 1999 and
December 31, 1998, respectively 13 13
Additional Paid-In Capital 79,196 78,716
Accumulated deficit (30,904) (32,152)
Accumulated other comprehensive income (193) (193)
Treasury Stock - 40,000 shares, at cost (600) (600)
--------- --------
Total stockholders' equity 47,512 45,784
--------- --------
Total liabilities and stockholders' equity $ 58,141 $ 56,280
========= ========
</TABLE>
Note: The consolidated balance sheet at December 31, 1998 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 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
March 31
--------------------
1999 1998
---- ----
<S> <C> <C>
Sales:
Instruments $ 5,120 $ 3,595
Reagents and other 10,512 6,760
-------- --------
Total net sales 15,632 10,355
Cost of goods sold 4,988 3,453
-------- --------
Gross profit 10,644 6,902
Operating expenses:
Research and development 1,629 1,200
Selling, general and administrative 7,399 4,974
Amortization of intangibles 253 127
-------- --------
Income from operations 1,363 601
Other income 24 210
-------- --------
Pretax income 1,387 811
Provision for income tax 138 --
-------- --------
Net income $ 1,249 $ 811
======== =======
Net income per share (Note 6)
Basic $ 0.09 $ 0.06
======== =======
Diluted $ 0.09 $ 0.06
======== =======
</TABLE>
See accompanying notes
4
<PAGE> 5
VENTANA MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 1,249 $ 811
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 893 545
Changes in operating assets and liabilities, net 61 (488)
-------- --------
Net cash provided by operating activities 2,203 868
INVESTING ACTIVITIES:
Purchase of property and equipment, net (2,885) (342)
Purchase of intangible assets (45) (1)
-------- --------
Net cash used in investing activities (2,930) (343)
FINANCING ACTIVITIES:
Repayment of debt (64) --
Issuance of stock 480 902
-------- --------
Net cash provided by financing activities 416 902
Effect of exchange rate change on cash -- 21
-------- --------
Net (decrease) increase in cash and cash equivalents (311) 1,448
Cash and cash equivalents, beginning of period 2,424 18,902
-------- --------
Cash and cash equivalents, end of period $ 2,113 $ 20,350
======== ========
</TABLE>
See accompanying notes
5
<PAGE> 6
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, 1998.
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>
March 31 December 31
1999 1998
-------- -----------
(in thousands)
<S> <C> <C>
Raw material and work-in-process $ 5,286 $ 5,165
Finished goods 5,646 5,844
------- -------
$10,932 $11,009
======= =======
</TABLE>
6
<PAGE> 7
VENTANA MEDICAL SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
-------- -----------
(in thousands)
<S> <C> <C>
Diagnostic instruments $ 9,416 $ 7,267
Machinery and equipment 5,569 4,835
Computers and related equipment 2,255 2,021
Leasehold improvements 675 561
Furniture and fixtures 218 305
------- ------
18,133 14,989
Less accumulated depreciation and amortization 6,800 5,759
Projects in progress 851 707
------- ------
$12,184 $ 9,937
======= =======
</TABLE>
4. INTANGIBLES
Intangibles consist of the following:
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
-------- -----------
(in thousands)
<S> <C> <C>
Customer base $ 4,100 $ 4,100
Developed technology 2,800 2,800
Goodwill 7,808 7,637
Supply contract 1,200 1,200
Workforce in place 100 100
Patents 492 492
------- -------
16,500 16,329
Less accumulated amortization 2,002 1,737
------- -------
$14,498 $14,592
======= =======
</TABLE>
7
<PAGE> 8
5. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
-------- -----------
(in thousands)
<S> <C> <C>
Accrued payroll and payroll taxes $ 1,371 $ 1,161
Accrued commissions 305 385
Deferred revenue 1,385 1,037
Accrued legal or settlement reserves 78 338
Contingent purchase consideration 900 900
Sales tax payable/(receivable) 117 (95)
Long-term debt, current portion 47 59
Other accrued expenses 1,372 1, 268
------- -------
$ 5,575 $ 5,053
======= =======
</TABLE>
6. EARNINGS PER SHARE
The following sets forth the computation of basic and diluted earnings per
share for the periods indicated (in thousands), except per share data.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------- --------
<S> <C> <C>
Net income $ 1,249 $ 811
Weighted average common shares outstanding, basic 13,404 13,255
Add: dilutive stock options and warrants 1,174 1,302
------- -------
Weighted average common shares outstanding, diluted 14,578 14,557
======= =======
Net income per share, basic $ 0.09 $ 0.06
======= =======
Net income per share, diluted $ 0.09 $ 0.06
======= =======
</TABLE>
8
<PAGE> 9
VENTANA MEDICAL SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. COMPREHENSIVE INCOME
The components of comprehensive income for the three month periods ended
March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
-------- --------
<S> <C> <C>
Net income $ 1,249 $ 811
Foreign currency translation -- 21
-------- -------
Comprehensive income $ 1,249 $ 832
======== =======
</TABLE>
Accumulated other comprehensive income consists exclusively of foreign currency
translation adjustments at March 31, 1999 and 1998.
8. FOREIGN CURRENCY TRANSLATIONS
Due to a significant change in economic facts and circumstances during 1998,
effective January 1, 1999 the Company changed the functional currencies for its
foreign subsidiaries from the local currencies to the U.S. Dollar. The primary
change in the economic facts and circumstances involved changing the business
model for the subsidiaries from one of essentially serving the needs of local
distributors to a model where the subsidiary is an active marketer of the
Company's instruments and reagents, which has resulted in higher pricing and
improved gross margins. The change in model was precipitated by litigation with
a major European distributor, which was settled in 1998.
9. PROVISION FOR INCOME TAXES
Income Taxes have been provided for at a consolidated effective rate of $10%,
the rate expected to approximate the 1999 full year provision. The rate reflects
the limitations on the use of the Company's net operating loss carryforwards for
alternative minimum tax purposes in the U.S.
9
<PAGE> 10
10. LINE OF CREDIT
Effective March 17, 1999, the amount available to the Company under its
revolving line of credit agreement was increased from $5 million to $10 million
and the renewal date extended from May 31, 1999 to March 31, 2000.
11. OPERATING SEGMENT AND ENTERPRISE DATA
The Company has three reportable segments: North America (primarily the United
States), Europe (primarily France and Germany) and Japan (formed in 1998).
Segment information at and for the three months ended March 31, 1999 and 1998
follows:
<TABLE>
<CAPTION>
Three months ended March 31, 1999
--------------------------------------------------
North Elimina-
America Europe Japan tions Totals
------- ------ ------ -------- -------
<S> <C> <C> <C> <C> <C>
Sales to external customers $12,925 $2,058 $ 649 $ -- $15,632
Segment profit (loss) 1,487 (448) 169 41 1,249
Segment assets 70,966 7,058 1,766 (21,649) 58,141
</TABLE>
<TABLE>
<CAPTION>
Three months ended March 31, 1998
--------------------------------------------------
North Elimina-
America Europe Japan tions Totals
------- ------ ------ -------- -------
<S> <C> <C> <C> <C> <C>
Sales to external customers $ 9,319 $ 942 $ 94 $ -- $10,355
Segment profit (loss) 1,413 (417) (144) (41) 811
Segment assets 61,776 3,976 880 (16,402) 50,230
</TABLE>
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 "Additional Risk Factors" elsewhere in this
report.
11
<PAGE> 12
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 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
12
<PAGE> 13
relatively fixed in nature. Therefore, if revenue levels are below expectations,
operating results in a given period are likely to be adversely affected.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Net Sales
Net sales for the three months ended March 31, 1999 as compared to the same
period in 1998 increased 51% to $15.6 million from $10.4 million. The increase
in net sales was attributable to a 42% increase in instrument sales for the
three month period and a 56% increase in reagent and other sales for the three
month period. Instrument sales increased primarily as a result of increased
direct sales resources as well as sales of special stains tissue processors and
electron microscopy instruments which were not offered by the Company in the
first quarter of 1998. Sales increased in the 1999 period compared to 1998
period in all geographic segments: 39% in North America ($12.9 million versus
$9.3 million), 118% in Europe ($2.1 million versus $0.9 million) and 590% in
Japan ($0.6 million versus $0.1 million).
Gross Profit
Gross profit for the three months ended March 31, 1999 increased to $10.6
million from $6.9 million for the same period in 1998. In addition, the
Company's gross margin for the three month period ended March 31, 1999 increased
to 68% from 67% for the prior year period. The slight margin increase was due to
a larger portion of revenue being derived from reagents, which have better
margins than instruments.
Research and Development
Research and development expenses were $1.6 million for the three months ended
March 31, 1999. These amounts represent a 36% increase for the three month
period over the prior year. The increase results primarily from substantial
development work on the new in situ hybridization instrument, an increase in
reagent research activity and an increase in staffing levels. Research and
development expenses decreased as a percent of sales to 10% for the three months
in 1999 periods compared to 12% in 1998.
Selling, General and Administrative ("SG&A")
Presented below is a summary of SG&A expense for the three months ended March
31, 1999 and 1998.
13
<PAGE> 14
SG&A SUMMARY
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1999 1998
------------- -------------
% %
$ SALES $ SALES
------------- -------------
($ in thousands)
<S> <C> <C> <C> <C>
Sales and marketing $6,064 39% $3,851 37%
Administration 1,335 8% 1,123 11%
------ --- ------ ---
Total SG&A $7,399 47% $4,974 48%
====== === ====== ===
</TABLE>
SG&A expense for the three months ended March 30, 1999 increased to $7.4 million
from $5.0 million. SG&A expense as a percentage of net sales decreased in the
1999 period to 47% from 48% for the comparable 1998 period. The increase in SG&A
expenses from period to period reflects the tremendous 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. Administrative expenses
increased in absolute terms (although they decreased as a percentage of sales)
due primarily to the Company's expanding business base in Europe and Japan plus
costs associated with new administrative systems and functions.
Amortization of Intangibles
Intangible assets consist primarily of goodwill, customer base and developed
technology resulting from acquisitions 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 $0.3 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 and
recognize any impairment should the Company determine these assets are impaired.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999 the Company's principal source of liquidity consisted of
cash and cash equivalents of $2.1 million. The Company also had a $10 million
revolving bank credit facility and no borrowings outstanding thereunder as of
March 31, 1999. 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's liquidity was greatly impacted in late 1998 by three events: (1)
the decision to purchase for cash 100% of the common stock of BioTechnology
Tools, Inc. (BTTI), (2) the decision to purchase for cash certain assets of
Oncor, Inc., and (3) the decision to repurchase 40,000 shares of the Company's
own common stock. All transactions occurred in the fourth quarter and together
reduced available cash by almost $14 million ($8 million for BTTI, $5 million
for certain assets of
14
<PAGE> 15
Oncor, and $0.6 million for the stock repurchase). Expenditures for BTTI and the
Oncor assets included the impact of planned efficiency moves such as reducing
accounts payable, purchasing additional inventory and the partial integration of
operations. As a consequence of these actions, the Company expects cash and
interest income to remain at low levels in the foreseeable future.
The Company expects to use between $4.0 million and $5.0 million of its
available resources during the current year for fixed asset 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 three months ended March 31, 1999, net cash used in operations and
investing activities was approximately $0.7 million, versus $0.5 million
provided by operations in the three months ended March 31, 1998, primarily due
to purchases of property and equipment.
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.
ADDITIONAL RISK FACTORS
Continuing Losses; Uncertainty of Future Profitability
The Company has incurred significant cumulative losses from its inception in
1985 through March 31, 1999. 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
15
<PAGE> 16
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 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.
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
16
<PAGE> 17
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.
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. 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
17
<PAGE> 18
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 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.
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
18
<PAGE> 19
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.
Uncertainty of Future Funding of Capital Requirements
The Company anticipates that its existing capital resources and available
borrowing capacity under the Company's revolving credit line will be adequate to
satisfy its capital requirements for the next 12 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. 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 could be significantly reduced.
Any such reduction may materially affect the ability of many of the Company's
research customers to purchase the Company's products.
19
<PAGE> 20
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 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.
20
<PAGE> 21
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 non-indicated 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, 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
21
<PAGE> 22
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.
READINESS FOR THE YEAR 2000
The Company is engaged in a company-wide project to prepare its business for the
change in date from the year 1999 to 2000. The Company has assembled a Year 2000
project team consisting of Company employees and third-party consultants. The
goal of the Year 2000 project is to assure that there are no major interruptions
in the Company's business operations relating to the transition to the year
2000. The scope of the Company's Year 2000 project includes (i) identifying and
taking appropriate corrective action to remedy the Company's software, hardware
and embedded technology, (ii) working with the payroll service, with which the
Company communicates electronically, to help protect such activity from being
adversely affected by the Year 2000, and (iii) contacting key vendors and
service providers and requesting assurances that such third parties will be Year
2000 compliant. The status of the Year 2000 project is reported regularly to
senior management and the Board of Directors.
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<PAGE> 23
The Year 2000 project team has implemented a compliance process to address Year
2000 issues in the Company's software and hardware systems and embedded
technology consisting of the following nine steps: (1) inventory, (2) risk
assessment, (3) prioritization, (4) impact analysis, (5) remediation, (6)
testing, (7) certification, (8) deployment, and (9) approval. The Company's
critical systems have been the project team's top priority. The Company's
critical systems include systems which are the most essential to the Company to
continue its operations without interruption. The Company believes it has
completed its compliance process beyond the deployment and testing phases for
approximately 90 percent of its critical software and hardware systems, with
approximately 80 percent of its critical software and hardware systems having
been tested and 20 percent currently being tested. With regard to embedded
technology, the Company has completed the remediation and testing phases for 60
percent of its facilities. The business software and hardware of recently
acquired companies and assets not compliant and will be replaced by the
implementation of a new Oracle ERP System. The Company's target for completing
its compliance process for all of its critical systems is mid 1999. The
Company's target for completing its compliance process for its non-critical
systems is the end of 1999. The Company is directly working with certain key
third parties to remediate and test affected systems where practicable. The
Company sent surveys to key vendors and service providers requesting information
regarding the status of their Year 2000 readiness. The Company is also in the
process of reviewing the public Year 2000 disclosures of key customers. Based
upon this information, the Company is in the process of identifying potential
critical Year 2000 issues involving key third parties, if any, and either
resolving those issues or developing contingency plans to the extent
practicable.
All costs and expenses incurred to address the Year 2000 issue are charged
against income on a current basis. The total cost of the project is expected to
be approximately $30,000. These costs include costs of internal employees and
third-party consultants involved in the project and the costs of software and
hardware. The Company does not expect these costs and expenses to have a
material adverse effect on the Company's financial condition.
While the Company continues to focus on solutions for Year 2000 issues, and
expects to complete its Year 2000 project in a timely manner, the Company is in
the process of identifying potential major business interruptions that could
reasonably likely result from Year 2000 issues and will develop contingency
plans designed to address such potential interruptions. The Company may also
develop contingency plans designed to generally help protect the Company from
unanticipated Year 2000 business interruptions. Contingency plans are
anticipated to include, for example, the identification of alternate suppliers
or service providers, increases in safety levels of raw material and finished
goods inventories, and the development of alternate procedures. The Company's
contingency plans will be developed and modified over time as it receives better
information regarding the Year 2000 status of its systems and embedded
technology and third party readiness.
The most reasonably likely worst case scenario which could result from the
failure of the Company or its customers, vendors or other key third parties to
adequately address Year 2000 issues would include a temporary interruption or
curtailment in the Company's manufacturing or distribution operations at one or
more of its facilities. Such failures could also cause a delay or curtailment in
the processing of orders and invoices and the collection of revenues, as well as
the inability to maintain accurate accounting records, and lead to increased
costs and loss of sales. If these failures would occur, depending upon their
duration and severity, they could have a material adverse effect on the
Company's business, results of operations and financial condition.
23
<PAGE> 24
Management's estimates regarding expected completion dates and costs involved in
the Company's Year 2000 project are based upon various assumptions regarding
future events, including the availability of resources, the success of third
parties in addressing their Year 2000 issues, and other factors. While
management believes the Company is addressing the Year 2000 issue, there is no
guarantee that these estimated completion dates and costs will be achieved. In
the event that the estimated completion dates and costs differ materially from
the actual completion dates and costs, such could have a materially adverse
effect on the Company's financial condition and results of operations. In
addition, the Company cannot reasonably estimate the impact of Year 2000 on the
Company if key third parties, including financial institutions, suppliers,
customers, service providers, public utilities and governments, are unsuccessful
in completing their Year 2000 efforts.
24
<PAGE> 25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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.
25
<PAGE> 26
On April 16, 1999, Nelson Leung filed suit in Chancery Court of the State of
Delaware against the Company and its directors at the time of the Biotek
acquisition alleging breach of fiduciary duty, breach of contract and related
claims. Many of these claims are similar to those asserted in the Tse suit. The
suit, which the Company believes to be totally without merit, seeks class action
status for the Biotek shareholders. 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.
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 March 31,
1999.
26
<PAGE> 27
SIGNATURE
Pursuant to the requirements of the securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ventana Medical Systems, Inc.
Date: May 17, 1999 By: /s/ Pierre Sice
- --------------------------- -----------------------------------
Pierre Sice
Vice President, Chief Financial
Officer, Treasurer and Secretary.
(Principal Financial and Accounting
Officer)
27
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,113
<SECURITIES> 0
<RECEIVABLES> 16,342
<ALLOWANCES> 575
<INVENTORY> 10,932
<CURRENT-ASSETS> 31,459
<PP&E> 18,984
<DEPRECIATION> 6,800
<TOTAL-ASSETS> 58,141
<CURRENT-LIABILITIES> 8,786
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 47,499
<TOTAL-LIABILITY-AND-EQUITY> 58,141
<SALES> 15,632
<TOTAL-REVENUES> 15,632
<CGS> 4,988
<TOTAL-COSTS> 4,988
<OTHER-EXPENSES> 9,281
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> 1,387
<INCOME-TAX> 138
<INCOME-CONTINUING> 1,249
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,249
<EPS-PRIMARY> 0.09<F1>
<EPS-DILUTED> 0.09
<FN>
<F1>For purposes of this exhibit, primary means basic.
</FN>
</TABLE>
