-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FkNJivgLqbQ67Q/3OV83ifqxFaXXFg5KU8ZQGozfK3WaHkQj0PnoTM5JoLur95HQ aMLN+yMYomkpY2OjZmCnNw== 0000891618-96-000640.txt : 19960525 0000891618-96-000640.hdr.sgml : 19960525 ACCESSION NUMBER: 0000891618-96-000640 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 29 FILED AS OF DATE: 19960524 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VENTANA MEDICAL SYSTEMS INC CENTRAL INDEX KEY: 0000893160 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 942976937 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-04461 FILM NUMBER: 96572085 BUSINESS ADDRESS: STREET 1: 3865 N BUSINESS CENTER DRIVE CITY: TUCSON STATE: AZ ZIP: 85705 BUSINESS PHONE: 5208872155 MAIL ADDRESS: STREET 1: 3865 N BUSINESS CENTER DR CITY: TUCSON STATE: AZ ZIP: 85705 S-1 1 FORM S-1 REGISTRATION STATEMENT 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ VENTANA MEDICAL SYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 3841 94-2976937 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
3865 NORTH BUSINESS CENTER DRIVE TUCSON, ARIZONA 85705 (520) 887-2155 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) R. JAMES DANEHY PRESIDENT AND CHIEF EXECUTIVE OFFICER VENTANA MEDICAL SYSTEMS, INC. 3865 NORTH BUSINESS CENTER DRIVE TUCSON, ARIZONA 85705 (520) 887-2155 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: BARRY E. TAYLOR, ESQ. GARY L. SELLERS, ESQ. CHRISTOPHER D. MITCHELL, ESQ. SIMPSON THACHER & BARTLETT TREVOR J. CHAPLICK, ESQ. 425 LEXINGTON AVENUE WILSON SONSINI GOODRICH & ROSATI NEW YORK, NEW YORK 10017-3954 PROFESSIONAL CORPORATION (212) 455-2000 650 PAGE MILL ROAD PALO ALTO, CALIFORNIA 94304-1050 (415) 493-9300
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------ CALCULATION OF REGISTRATION FEE - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- PROPOSED PROPOSED MAXIMUM MAXIMUM AGGREGATE TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE - ---------------------------------------------------------------------------------------------------- Common Stock, $0.001 par value......................... 3,450,000 shares $16.00 $55,200,000 $19,035 - ---------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------
(1) Includes 450,000 shares that the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457 under the Securities Act of 1933, as amended. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 VENTANA MEDICAL SYSTEMS, INC. CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS OF PART I ITEMS OF FORM S-1
ITEM NUMBER AND HEADING IN FORM S-1 REGISTRATION STATEMENT LOCATION OF CAPTION IN PROSPECTUS - ------------------------------------------------------- ------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus........... Forepart of Registration Statement; Outside Front Cover Page; Additional Information 2. Inside Front and Outside Back Cover Pages of Prospectus....................................... Inside Front Cover Page; Outside Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........................ Prospectus Summary; The Company; Risk Factors 4. Use of Proceeds.................................. Use of Proceeds 5. Determination of Offering Price.................. Outside Front Cover Page; Underwriting 6. Dilution......................................... Dilution; Risk Factors 7. Selling Security Holders......................... Principal and Selling Stockholders 8. Plan of Distribution............................. Outside and Inside Front Cover Pages; Underwriting; Outside Back Cover Page 9. Description of Securities to be Registered....... Prospectus Summary; Dividend Policy; Capitalization; Description of Capital Stock; Shares Eligible for Future Sale 10. Interests of Named Experts and Counsel........... Legal Matters 11. Information with Respect to the Registrant....... Outside and Inside Front Cover Pages; Prospectus Summary; Risk Factors; Use of Proceeds; Dividend Policy; Capitalization; Dilution; Selected Consolidated Financial and Operating Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal Stockholders; Description of Capital Stock; Shares Eligible for Future Sale; Financial Statements; Outside Back Cover Page 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities... Not Applicable
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MAY 24, 1996 3,000,000 SHARES LOGO VENTANA MEDICAL SYSTEMS, INC. COMMON STOCK ------------------------------ Of the 3,000,000 shares (the "Shares") of common stock, par value $.001 per share (the "Common Stock"), offered hereby (the "Offering"), 2,200,000 Shares are being sold by Ventana Medical Systems, Inc. ("Ventana" or the "Company") and 800,000 Shares are being sold by certain stockholders of the Company (the "Selling Stockholders"). See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the sale of Shares by the Selling Stockholders. Prior to the Offering, there has been no public market for the Common Stock of the Company, and no assurance can be given that an active trading market for the Common Stock will develop after the Offering. It is currently estimated that the initial public offering price will be between $14.00 and $16.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. ------------------------------ THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. ------------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS - ------------------------------------------------------------------------------------------------------- Per Share.......................... $ $ $ $ - ------------------------------------------------------------------------------------------------------- Total(3)........................... $ $ $ $ - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities arising under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses of the Offering payable by the Company, estimated at $925,000. (3) Certain of the Selling Stockholders have granted the Underwriters a 30-day option to purchase up to an additional 450,000 shares of Common Stock on the same terms as the Common Stock offered hereby solely to cover over-allotments, if any (the "Over-Allotment Option"). If the Over-Allotment Option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Selling Stockholders will be $ , $ and $ , respectively. See "Underwriting" and "Principal and Selling Stockholders." ------------------------------ The Shares are being offered by the several Underwriters, subject to prior sale, when, as and if delivered and accepted by them, subject to certain conditions, including the approval of certain legal matters by counsel for the Underwriters. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the Shares will be made against payment therefor on or about , 1996, at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167. ------------------------------ BEAR, STEARNS & CO. INC. DILLON, READ & CO. INC. , 1996 4 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors," and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus (i) assumes no exercise of the Underwriters' Over-Allotment Option, (ii) reflects a 1-for-2.7059046 reverse split of the Common Stock to be effected prior to the closing of this Offering, (iii) reflects the conversion of all outstanding shares of Convertible Redeemable Preferred Stock ("Preferred Stock") into Common Stock and cancellation of accrued dividends upon such conversion, and (iv) assumes the exercise of warrants to purchase 64,244 shares of Common Stock of the Company upon the closing of this Offering, which warrants will terminate if not so exercised. See "Description of Capital Stock" and "Underwriting." The Shares of Common Stock offered hereby are subject to a high degree of risk. See "Risk Factors." This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in "Risk Factors." THE COMPANY Ventana develops, manufactures and markets proprietary instrument/reagent systems that automate immunohistochemistry ("IHC") and in situ hybridization ("ISH") tests for the analysis of cells and tissues on microscope slides. These tests are important tools used in the diagnosis of and selection of treatment for cancer. With a worldwide installed base of 581 instruments as of March 31, 1996, the Company believes that it is the worldwide leader in the automated IHC testing market. The Company estimates that its installed base is approximately five times as large as the combined installed base of instruments of all of the Company's current competitors. Ventana has placed instruments with 35 of the 42 cancer centers designated by the National Cancer Institute including the Mayo Clinic, the Dana Farber Cancer Institute, The Johns Hopkins University and the M.D. Anderson Cancer Center. Each Ventana proprietary system placed provides a recurring revenue stream as customers consume reagents and supplies sold by the Company with each test conducted. Ventana's "patient priority" systems (the Ventana ES and gen II) perform multiple tests rapidly on a single patient biopsy thereby providing a matrix of diagnostic data to the pathologist. In February 1996, Ventana acquired BioTek Solutions, Inc. ("BioTek") for several strategic reasons. The Company believes the combination of Ventana's "patient priority" systems and BioTek's TechMate "batch processing" systems, which process high volumes of tests on multiple patient biopsies, will enable the Company to serve the full range of health care institutions that perform IHC tests. Ventana increased its installed base of instruments from 294 to 581, as of March 31, 1996, as a result of the acquisition, thereby increasing the corresponding aggregate recurring reagent revenue stream and enabling the Company to become the worldwide leader in automated IHC testing. Ventana believes significant synergies and margin improvements can be realized from the integration of BioTek into Ventana's business model in which important value-added activities are performed internally, in contrast to BioTek's reliance on third parties. Cancer is the second leading cause of death in the United States accounting for 25% of deaths. Currently, approximately 10 million people have a history of invasive cancer. It is estimated that approximately 1.4 million new cases of invasive cancer will be diagnosed each year. The vast majority of IHC testing associated with cancer diagnosis and treatment in the United States is conducted in an aggregate of approximately 2,200 clinical institutions and reference and research laboratories. The Company estimates that these institutions and laboratories create the opportunity for the placement of as many as 2,500 automated IHC testing instruments. The Company believes that less than 20% of such institutions and laboratories currently conduct IHC testing on an automated basis. The international market for instrument placements is estimated by the Company to be approximately 1.2 times the size of the United States market with Europe accounting for approximately 55% of the international market potential. As compared to manual IHC testing, Ventana's automated systems provide improved reliability, reproducibility and consistency of test results. The systems' economic advantages include reduced cost per test, faster turnaround time, increased test throughput and a reduced dependence on skilled laboratory technicians. The Company believes it will play a critical, expanding role in cancer science as researchers will use Ventana systems to accelerate the identification and development of new tests and its installed base of instruments will speed the commercialization and clinical implementation of such new tests. The main element of the Company's strategy to strengthen its leadership position in automated IHC testing is to maximize instrument placements in order to create a barrier that competitors will need to overcome. To meet this objective, the Company plans to introduce two lower priced instruments, one for potential patient priority customers (the Ventana NexES) and one for potential batch processing customers (the TechMate 250). The Company believes that these lower priced instruments will enable it to increase its emphasis on instrument placements through reagent agreement plans ("RAPs"), through which a customer obtains the use of an instrument with no capital investment in exchange for the customers' commitment to purchase reagents from the Company at a higher price than if the instrument had been purchased. The Company believes that it can accelerate the rate of expansion of its installed base of instruments by using RAPs because the required capital investment associated with a purchase, a significant sales hurdle, will be eliminated. 3 6 THE OFFERING Common Stock offered: By the Company.......................... 2,200,000 shares By the Selling Stockholders............. 800,000 shares Total........................... 3,000,000 shares Common Stock to be outstanding after the Offering................................ 10,974,883 shares(1) Use of proceeds........................... For repayment of approximately $15.9 million of indebtedness, capital expenditures, working capital and general corporate purposes. Proposed Nasdaq National Market Symbol.... VMSI
- --------------- (1) Includes 8,710,639 outstanding shares of Common Stock, 64,244 shares of Common Stock issuable upon the exercise of outstanding warrants which would otherwise expire upon the closing of this Offering and the 2,200,000 Shares of Common Stock offered by the Company hereby. Excludes 879,183 shares of Common Stock issuable upon exercise of warrants that may remain outstanding after the completion of this Offering and 840,357 shares of Common Stock issuable upon the exercise of options outstanding under the Company's stock option plans. 4 7 SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ACTUAL ------------------------------------------------ PRO FORMA(1) --------------------------------------- THREE MONTHS THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, YEAR ENDED ENDED MARCH 31, DECEMBER 31, --------------------------- ------------------ ------------------- ----------------- 1993 1994 1995 1995 1996 1994 1995 1995 1996 ------- ------- ------- ------- -------- -------- -------- ------- ------- STATEMENT OF OPERATIONS DATA: Sales: Instruments....................... $ 1,162 $ 2,588 $ 4,644 $ 1,007 $ 1,594 $ 5,798 $ 8,396 $ 2,040 $ 1,733 Reagents and others............... 1,519 3,339 5,969 1,195 2,552 6,647 11,079 2,378 3,495 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total net sales................. 2,681 5,927 10,613 2,202 4,146 12,445 19,475 4,418 5,228 Cost of goods sold................. 1,722 2,531 4,282 936 1,435 5,883 9,096 2,134 1,927 ------- ------- ------- ------- ------- ------- ------- ------- ------- Gross profit....................... 959 3,396 6,331 1,266 2,711 6,562 10,379 2,284 3,301 Operating expenses: Research and development.......... 2,100 1,926 2,239 556 613 2,687 4,407 721 771 Selling, general and administrative.................. 4,067 6,899 7,435 1,594 2,279 9,942 10,968 2,367 2,704 ------- ------- ------- ------- ------- ------- ------- ------- ------- Loss from operations before nonrecurring expenses and amortization of intangibles....... (5,208) (5,429) (3,343) (884) (181) (6,067) (4,996) (804) (174) Nonrecurring expenses.............. -- -- -- -- (7,083) (8,373) -- -- -- Amortization of intangibles........ -- -- -- -- -- (1,344) (1,344) (336) (336) ------- ------- ------- ------- ------- ------- ------- ------- ------- Loss from operations............... (5,208) (5,429) (3,343) (884) (7,264) (15,784) (6,340) (1,140) (510) Interest income (expense).......... 229 59 74 50 (5) 59 74 50 (5) ------- ------- ------- ------- ------- ------- ------- ------- ------- Net loss........................... $(4,979) $(5,370) $(3,269) $ (834) $ (7,269) $(15,725) $ (6,266) $(1,090) $ (515) ======= ======= ======= ======= ======= ======= ======= ======= ======= Net loss per share, as adjusted(2)....................... $ (0.39) $ (0.10) $ (0.85) $ (0.66) $ (0.12) $ (0.05) ======= ======= ======= ======= ======= ======= Shares used in computing net loss per share, as adjusted(2)......... 8,354 8,220 8,585 9,466 9,331 9,696 ======= ======= ======= ======= ======= =======
MARCH 31, 1996 -------------------------- ACTUAL AS ADJUSTED(3) ------- -------------- BALANCE SHEET DATA: Cash and cash equivalents.............................................................. $ 3,436 $ 18,413 Long-term debt......................................................................... 15,035 -- Working capital........................................................................ 1,195 16,172 Total assets........................................................................... 24,752 39,729 Accumulated deficit(4)................................................................. (29,398) (29,398) Total stockholders' equity(4).......................................................... 1,475 31,487
SELECTED OPERATING DATA: The following table sets forth the Company's pro forma annual instrument placements and instrument installed base for the periods indicated as if the acquisition of BioTek had taken place on January 1, 1992:
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED ---------------------------- MARCH 31, 1992 1993 1994 1995 1996 ---- ---- ---- ---- ------------ INSTRUMENT PLACEMENTS (UNITS): Patient priority (Ventana)............................................. 17 56 74 113 33 Batch processing (BioTek).............................................. 4 37 106 128 12 -- -- --- --- --- Total annual placements.............................................. 21 93 180 241 45 == == === === === Total instrument installed base.................................... 22 115 295 536 581 == == === === === RAPs in installed base............................................. 6 25 44 66 72 == == === === ===
- --------------- (1) Adjusted to reflect the acquisition of BioTek as of January 1, 1994. BioTek was acquired February 26, 1996. (2) See Note 1 to Consolidated Financial Statements and Note 8 to the Unaudited Pro Forma Condensed Consolidated Financial Statements for information concerning the computation of net loss per share. (3) Adjusted to give effect to the receipt of the net proceeds from the sale of the Shares of Common Stock offered by the Company hereby and the application thereof (at an assumed initial public offering price of $15.00 per share). See "Use of Proceeds" and "Capitalization." (4) Actual amounts reflect the assumed conversion of the Preferred Stock but not the exercise of warrants which would otherwise expire upon the closing of this Offering. 5 8 RISK FACTORS In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing the Shares of Common Stock offered hereby. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ materially from those anticipated by the forward-looking statements as a result of certain factors, including those set forth in Risk Factors and elsewhere in this Prospectus. Continuing Losses; Uncertainty of Future Profitability. The Company has incurred cumulative losses of $29.4 million from its inception in 1985 through March 31, 1996. In February 1996, the Company acquired BioTek, which had sustained cumulative losses of $17.7 million since its inception in October 1990. The Company intends to make increased investments in both product development and sales and marketing and expects to incur operating losses through at least the first half of 1997. The Company's ability to achieve profitability is dependent on a variety of factors including the extent to which its instrument and reagent systems continue to achieve market acceptance, the Company's ability to compete successfully, the Company's ability to develop, introduce, market and distribute existing and new diagnostic systems, the Company's ability to expand manufacturing capacity as required, the successful integration of BioTek's operations 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, if profitability is achieved, the level of profitability cannot be accurately predicted and there can be no assurance that any such profitablity will be sustained. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." 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 recurring once an 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 sales and instruments placed through RAPs. 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. In addition, a significant portion of the Company's expense levels are 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Rate of Market Acceptance and Technological Change. Use of automated systems to perform diagnostic tests is relatively new. Historically, the diagnostic tests performed by the Company's systems have been performed manually by laboratory personnel. The rate of market acceptance of the Company's products will be largely dependent on the Company's ability to persuade the medical community of the benefits of automated diagnostic testing using the Company's products. Market acceptance and sales of the Company's products may also be affected by the price and quality of the Company's products. The Company's products could also be rendered obsolete or noncompetitive by virtue of technological innovations in the field of 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. See "Business." 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 the diagnosis of cancer and additional disease states. In particular, the Company must successfully and timely introduce the NexES and TechMate 250. These instruments are 6 9 smaller capacity, lower priced instruments than the Company's current instruments and are necessary to expand the market opportunity at smaller hospitals and reference laboratories in the United States and Europe. The Company depends in part on the success of medical research in developing new antibodies, nucleic acid probes and clinical diagnostic procedures that can be adapted for use in the Company's systems. In addition, the Company will need to obtain licenses on satisfactory terms to certain of these technologies, as to which there is 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 widespread 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. See "Business -- Research and Development." Competition. Competition in the diagnostic industry is intense and is expected to increase. 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 effective or less costly than those developed by the Company and may be more successful than the Company in manufacturing and marketing their products. Although the Company plans to continue to work to develop new and improved products, there are other companies engaged in research and development of diagnostic devices or reagents, and the introduction of such devices or alternative methods for diagnostic testing could hinder the Company's ability to compete effectively and could have a material adverse effect on the Company's business, financial condition and results of operations. Many of the companies selling or developing diagnostic devices, instruments, reagents and genetic probe tests have financial, manufacturing, marketing and distribution resources significantly greater than those of Ventana. In addition, many of these competitors have long-term supplier relationships with Ventana's existing and potential customers. The Company's patient priority instruments require the use of the Company's detection chemistries but can be used with primary antibodies supplied by third parties, and the Company's batch processing instruments can be used with both detection chemistries and primary antibodies supplied by third parties. Accordingly, the Company encounters significant competition in the sale of reagents for use on its instruments that can be used with reagents supplied by third parties. See "Business -- Competition." Manufacturing Risks and Dependence on Key Suppliers; Third-Party Manufacturers. 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. BioTek currently manufactures reagents in its Santa Barbara, California facility and Ventana manufactures reagents in its Tucson, Arizona facilities. The Company expects to complete, in September 1996, the consolidation of reagent manufacturing in its Tucson facilities. Difficulties or delays in integrating reagent manufacturing could result in the inability to achieve anticipated cost reductions and could have a material adverse effect on the Company's business, financial condition and results of operations. Ventana must 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. 7 10 The Company's reagent products are formulated from both chemical and biological materials utilizing proprietary Ventana technology as well as standard processing techniques. Certain components and raw materials, primarily antibodies, used in the manufacturing of the Company's reagent products are currently provided by single-source vendors. There can be no assurance that the materials or reagents needed by the Company will be available in commercial quantities or at acceptable prices. Any supply interruption or yield problems encountered in the use of materials from these vendors could have a material adverse effect on the Company's ability to manufacture its products until a new source of supply is obtained. The use of alternative or additional suppliers could be time consuming and expensive. In addition, a number of the components used to manufacture the ES and gen II instruments are fabricated on a custom basis to the Company's specifications and are currently available from a limited number of sources. Consequently, in the event the supply of materials or components from 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. See "Business -- Manufacturing." The Company relies on two outside parties to manufacture its batch processing instruments. Kollsman Manufacturing Company, Inc. ("Kollsman") currently manufactures the TechMate 500 instrument and the Company is in the process of negotiating a contract with Kollsman for the continued manufacture of such instrument. The Company has entered into a contract manufacturing agreement with LJL BioSystems, Inc. ("LJL") for the manufacture of the TechMate 250 instrument. There can be no assurance that these manufacturers will be able to meet the Company's product needs in a satisfactory, cost effective and timely manner. The Company's reliance on third-party manufacturers involves a number of additional risks, including the absence of guaranteed capacity, and reduced control over delivery schedules, quality assurance and costs. Although the Company believes that these manufacturers have an economic incentive to perform such manufacturing for the Company, the amount and timing of resources to be devoted to these activities by such manufacturers are not within the control of the Company, and there can be no assurance that manufacturing problems will not occur in the future. Any such manufacturing or supply problems could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Distributors. The Company's patient priority systems and reagents are sold directly by Company personnel to end-users in North America and internationally. The Company's batch processing instruments and reagents are sold under distribution agreements entered into by BioTek. In the United States, batch processing instruments and reagents are sold through Curtin Matheson Scientific, Inc., a subsidiary of Fischer Scientific, Inc. ("CMS"), under an exclusive agreement that expires in April 1998. In Europe, batch processing instruments are sold through DAKO A/S ("DAKO") which also pays BioTek a fixed dollar royalty for each instrument in service in exchange for the right to sell its own reagents for use with such systems. The agreement with DAKO provides DAKO with exclusive distribution rights for batch processing instruments in Europe and other territories, subject to certain performance requirements. The agreement expires in December 1999. Accordingly, the Company is likely to be dependent upon DAKO for international sales of batch processing instruments through this date. United States sales through CMS are subject to several operating conditions and risks. In particular, it has historically been necessary for BioTek to support, and the Company anticipates that it will need to continue to support, the efforts of CMS with direct field sales and support personnel. As a result, the Company generates lower gross margins on sales through CMS than it would generate were it to sell directly to end-users and incurs higher selling expenses than typically associated with third-party distribution arrangements. As a result of these factors and due to the presence of the Company's direct sales force in the United States, the Company does not intend to renew the agreement with CMS upon its expiration in April 1998. The Company has had discussions regarding possible modifications to or early termination of the relationship with CMS. However, these discussions are not currently ongoing. To the extent that CMS does not adequately promote and market batch processing instruments and reagents or manage customer relationships or in the event that difficulties arise in the relationship between the Company and CMS, the Company's sales of batch processing instruments and reagents in the United States could be adversely affected and the Company could also experience disruptions in the supply of batch processing instruments and reagents to customers in the 8 11 United States. These developments could have a material adverse effect on the Company's business, financial condition and results of operations. In connection with BioTek's agreement with DAKO, DAKO made two loans secured by a pledge of substantially all of BioTek's assets. DAKO also made prepayments on future instrument sales and reagent royalties to BioTek. These loans and prepayments were used to fund TechMate 250 instrument development and working capital requirements. The aggregate balance of the secured loans and prepayments was $1.6 million and $0.9 million, respectively, at March 31, 1996. Of the secured loans, $0.3 million bears interest at 5% per annum and the remaining $1.3 million does not bear interest. The prepayments do not bear interest. The secured loans and prepayments are recorded as advances from distributor in the Company's Consolidated Financial Statements. The amounts payable under these loans are repaid through discounts on DAKO instrument purchases from BioTek. Upon termination of the distribution agreement or in the event of a default by BioTek under the distribution agreement (including a failure to satisfy development milestones with respect to the TechMate 250 instrument), the secured loans will convert to fixed term loans that will be due and payable in 12 equal quarterly installments commencing upon such event. Since the acquisition of BioTek, Ventana and DAKO have been engaged in discussions regarding various provisions of the distribution agreement. DAKO has asserted that BioTek has not fulfilled its obligations with respect to development and commercial introduction of the TechMate 250 instrument. The Company denies this assertion and believes that it is in substantial compliance with its obligations under these development milestones. In particular, the Company believes that the recent contract manufacturing agreement with LJL will enable it to satisfy DAKO's requirements for TechMate 250 instruments. Nevertheless, the negotiations with DAKO could result in an attempt by DAKO to exercise contractual remedies available to it under the distribution agreement and terms of the secured loans, an interruption in the distribution of the Company's batch processing instruments outside the United States or litigation between the parties with respect to the agreement, which would involve significant costs as well as diversion of management time. Any of the foregoing could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company would prevail in any litigation involving the agreement. DAKO's remedies under the agreement include (i) requiring repayment of the secured loans in 12 equal quarterly installments commencing upon a default by BioTek and (ii) an irrevocable license to manufacture TechMate instruments for resale internationally and a related reduction in the fixed dollar royalty rate paid by DAKO to BioTek for each instrument included in the royalty base. There can be no assurance as to the future course or outcome of the Company's negotiations with DAKO or as to the Company's future relationship with DAKO. If DAKO were successful in obtaining a manufacturing license for TechMate instruments, the Company could experience a loss of instrument and royalty revenue which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, termination of the agreement with DAKO could adversely affect the Company's results of operations. Past and Future 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 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 in integrating the BioTek operations or any future acquisitions and there can be no assurance that the acquisition of BioTek or any other 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. Any such problems could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, 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 9 12 amortization expense. These factors could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." 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 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 development, manufacture or sale of such products could be prevented. Litigation would result in significant cost to the Company as well as diversion of management time. Adverse determinations in any such proceedings could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Patents and Proprietary Rights." 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. BioTek is a party to litigation initiated by BioGenex Laboratories, Inc. ("BioGenex") relating to certain alleged past infringements of patent rights of BioGenex. The Company believes that the resolution of this matter will not have a material adverse effect on the Company's business, financial condition and results of operations. For additional detail regarding this litigation, see "Business -- Legal Proceedings." Uncertainty of Future Funding of Capital Requirements. The Company anticipates that its existing capital resources, including the net proceeds of this Offering and interest earned thereon, will be adequate to satisfy its capital requirements through at least the next 18 to 24 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 RAPs, 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 could result in the issuance of equity securities which would be dilutive to existing stockholders. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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 a material adverse effect on the Company's business, financial condition and results of operations. See "Management." 10 13 Uncertainties Related to Government Funding. A portion of the Company's products are sold to universities, research laboratories, private foundations and other institutions where funding is dependent upon grants from government agencies, such as the National Institutes of Health. Research funding by the government, however, may be significantly reduced under several budget proposals being discussed by the United States Congress or for other reasons. Any such reduction may materially affect the ability of the Company's research customers to purchase the Company's products. FDA and Other Government Regulation. The manufacturing, marketing and sale of the Company's products are subject to extensive and rigorous government regulation in the United States and in other countries. In the United States and certain other countries, the process of obtaining and maintaining required regulatory approvals is lengthy, expensive and uncertain. In the United States, the FDA regulates, as medical devices, clinical diagnostic tests and reagents, as well as instruments used in the diagnosis of adverse conditions. The Federal Food, Drug, and Cosmetic Act governs the design, testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of the Company's products. There are two principal FDA regulatory review paths for medical devices: the 510(k) pre-market notification ("510(k)") process and the pre-market approval ("PMA") process. The PMA process typically requires the submission of more extensive clinical data and is costlier and more time-consuming to complete than the 510(k) process. For a detailed description of this regulatory framework, see "Business -- Government Regulation." 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. The Company's instruments, with respect to automated IHC testing functions, have been categorized by the FDA as automated cell staining devices and have been exempted from the 510(k) notification process. To date, ISH tests have not received FDA approval and, therefore, use of the gen II for ISH tests will be restricted to research applications. New instrument products that the Company may introduce could require future 510(k) notifications. Certain antibodies that the Company may wish to market with labeling indicating that they can be used in the diagnosis of particular diseases may require PMA approval. In addition, the FDA has proposed that some of the antibody products that Ventana may wish to market be subjected to a pre-filing certification process. Certain of the Company's products are currently sold for research use and are labeled as such. Failure to comply with applicable regulatory requirements can, among other consequences, result in fines, injunctions, civil penalties, suspensions or loss of regulatory approvals, recalls or seizures of products, operating restrictions and criminal prosecutions. In particular, the FDA enforces regulations prohibiting the marketing 11 14 of products for nonindicated uses. In addition, governmental regulations may be established that could prevent or delay regulatory approval of the Company's products. Delays in or failure to receive approval of products the Company plans to introduce, loss of or additional restrictions or limitations relating to previously received approvals, other regulatory action against the Company or changes in the applicable regulatory climate could individually or in the aggregate have a material adverse effect on the Company's business, financial condition and results of operations. The Company is also required to register as a medical device manufacturer with the FDA and is inspected on a routine basis by the FDA for compliance with the FDA GMP regulations. The Company's clinical laboratory customers are subject to CLIA, which is intended to insure 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. To date, compliance with these laws and regulations has not had a material effect on the Company's financial position; however, 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. See "Business -- Government Regulation." Availability of Third-Party Reimbursement and 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 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. 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 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. See "Business -- Third-Party Reimbursement." Product Liability and Recalls; Product Liability Insurance. Although to date the Company has not experienced any product liability claims, the marketing and sale of the Company's diagnostic instruments and reagents entails such risks. The Company has product liability insurance coverage with a per occurrence maximum of $2.0 million and an aggregate annual maximum of $5.0 million. There can be no assurance that this level of insurance coverage will be adequate or that insurance coverage will continue to be available on acceptable terms or at all. A product liability claim or recall could have a material adverse effect on the Company's business, reputation, financial condition and results of operations. 12 15 Control by Existing Stockholders; Anti-Takeover Provisions. After this Offering, the Company's officers, directors and principal stockholders will beneficially own approximately 55% of the Company's outstanding Common Stock. These stockholders will be able to elect all members of the Company's Board of Directors and will have the ability to control corporate actions requiring stockholder approval. Such concentration of ownership may have the effect of delaying or preventing a change in control of the Company. In addition, the Board of Directors has the authority, without action by the stockholders, to fix the rights and preferences of, and issue shares of, one or more series of preferred stock, which may have the effect of delaying or preventing a change in control of the Company, and to issue additional Common Stock which would be dilutive to existing stockholders. In addition, provisions in the Company's Certificate of Incorporation and Bylaws (i) prohibit the stockholders from acting by written consent without a meeting or calling a special meeting of stockholders and (ii) require advance notice of business proposed to be brought before an annual or special meeting of stockholders. The amendment or modification of these provisions will require the affirmative vote of the holders of 66 2/3% of the outstanding shares of Common Stock. See "Principal and Selling Stockholders" and "Description of Capital Stock." Absence of Prior Public Market; Possible Volatility of Stock Price. Prior to this Offering, there has been no public market for the Company's Common Stock. There can be no assurance that an active trading market for the Common Stock will develop or, if developed, will be sustained. The public offering price will be established by negotiations between the Company and the Representatives of the Underwriters and may bear no relationship to the price at which the Company's Common Stock trades after the Offering. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. In addition, the market price of the Company's Common Stock, similar to the securities of other medical device and life sciences companies, is likely to be highly volatile. Factors such as fluctuations in the Company's operating results, announcements of technological innovations or new products by the Company or its competitors, FDA and other 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. Shares Eligible for Future Sale. Sales of Common Stock (including shares issued upon the exercise of outstanding options) in the public market after this Offering could impair the Company's ability to raise capital through an offering of securities and could materially adversely affect the market price of the Common Stock. Such sales also might make it more difficult for the Company to sell equity securities or equity-related securities in the future at a time and price that the Company deems appropriate or at all. Upon consummation of this Offering, the Company will have 10,974,883 shares of Common Stock outstanding, of which the 3,000,000 Shares offered hereby will be freely tradable (unless held by affiliates of the Company) and the remaining 7,974,883 shares will be restricted securities within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). Approximately 39,703 of such shares will be available for immediate public resale on the date of this Offering. An additional 8,778 shares of Common Stock will be saleable between 90 and 180 days after this Offering. The Company's directors, executive officers and certain stockholders, who in the aggregate hold 7,551,250 shares of Common Stock of the Company outstanding immediately prior to the completion of this Offering, have entered into or are subject to lock-up agreements under which they have agreed not to sell, directly or indirectly, any shares owned by them for a period of 180 days after the date of this Prospectus without the prior written consent of Bear, Stearns & Co. Inc. Holders of outstanding options to purchase Common Stock have entered into or are subject to similar agreements. Upon expiration of the 180-day lock-up agreements, approximately 7,900,451 shares of Common Stock (including approximately 349,201 shares subject to outstanding vested options) will become eligible for immediate public resale, subject in some cases to vesting provisions and volume limitations pursuant to Rule 144. The remaining approximately 310,908 shares held by existing stockholders will become eligible for public resale at various times over a period of less than two years following the completion of this Offering, subject in some cases to vesting provisions and volume limitations. 7,277,777 of the shares outstanding immediately following the completion 13 16 of this Offering will be entitled to registration rights with respect to such shares upon termination of lock-up agreements. The number of shares sold in the public market could increase if registration rights are exercised. See "Description of Capital Stock -- Registration Rights" and "Shares Eligible for Future Sale." Dilution. The initial public offering price is substantially higher than the net tangible book value per share of Common Stock. Investors purchasing shares of Common Stock in this Offering will therefore incur immediate and substantial dilution. See "Dilution." Absence of Dividends. The Company has not declared or paid any cash dividends since its inception and does not anticipate paying any dividends in the foreseeable future. In addition, the Company's bank credit agreement currently prohibits the Company from paying cash dividends. See "Dividend Policy." 14 17 THE COMPANY Ventana was incorporated in California in June 1985 and was reincorporated in Delaware in December 1993. As used in this Prospectus, the terms "Ventana" and the "Company" refer to Ventana Medical Systems, Inc. and its subsidiaries, Ventana Medical Systems, S.A., Ventana Medical Systems GmbH and BioTek Solutions, Inc. unless the context otherwise requires. The Company's principal executive offices are located at 3865 North Business Center Drive, Tucson, Arizona 85705. Its telephone number is (520) 887-2155. Ventana(TM), the Ventana logo(TM), ES(TM), gen II, TechMate(TM) and CheMate(TM) are trademarks of the Company. Trademarks of others are also referred to in this Prospectus. USE OF PROCEEDS The net proceeds to the Company from the sale of the Shares of Common Stock offered hereby are estimated to be approximately $30.0 million assuming an initial public offering price of $15.00 per share and after deducting the estimated underwriting discounts and commissions and expenses of the Offering. The Company intends to use $15.9 million of the estimated net proceeds from the Offering to repay (i) $13.9 million of debt incurred in connection with the acquisition of BioTek and financing of related working capital requirements (the "Acquisition Debt") and (ii) a $2.0 million bank term loan (the "Term Loan"). The Acquisition Debt bears interest at 7% per annum and matures in February 1998; however, accrued interest will be forgiven if the principal is repaid prior to December 31, 1996. The Acquisition Debt is due and payable 30 days after the completion of this Offering. The Term Loan bears interest at a rate of 2% over the bank's prime rate, is secured by a pledge of the Company's assets and matures in March 1999. The Company expects to use approximately $1.8 million of the net proceeds during the next 12 months for capital expenditures for manufacturing and computer equipment. The Company anticipates that the estimated remaining net proceeds of $12.3 million will be used for working capital and general corporate purposes. Although the Company may use a portion of the net proceeds for the acquisition of complementary businesses, products or technologies, the Company currently has no agreements or commitments in this regard. Pending such uses, the Company intends to invest the net proceeds of the Offering in short-term, interest-bearing, investment-grade securities. The Company will not receive any proceeds from the sale of Shares by the Selling Stockholders. DIVIDEND POLICY The Company has not declared or paid any dividends since its inception and does not intend to pay any dividends in the foreseeable future. In addition, the Company's bank credit agreement currently prohibits the Company from paying cash dividends. 15 18 DILUTION The net tangible book value of the Company at March 31, 1996 was $(10.9) million or $(1.33) per share after giving effect to the conversion of the Preferred Stock into Common Stock and the issuance of 64,244 shares of Common Stock upon the assumed exercise of outstanding warrants which would otherwise expire upon the closing of this Offering. The net tangible book value per share represents the Company's total tangible assets less total liabilities, divided by the number of shares of Common Stock outstanding (assuming conversion of the Preferred Stock). Dilution per share represents the difference between the amount per share paid by investors in this Offering and the net tangible book value per share after the Offering. After giving effect to (i) the sale of Shares in this Offering at an assumed initial public offering price of $15.00 per share and (ii) the issuance of 64,244 shares of Common Stock upon the assumed exercise of outstanding warrants which would otherwise expire upon the closing of this Offering, the estimated net proceeds to the Company would be approximately $30.0 million and the net tangible book value of the Company at March 31, 1996 would be $19.3 million or $1.74 per share. This represents an immediate increase in net tangible book value of $3.07 per share to existing stockholders and an immediate dilution in net tangible book value of $13.26 per share to new investors purchasing Shares at the assumed initial public offering price. The following table illustrates this per share dilution: Assumed initial public offering price per share.......................... $15.00 Net tangible book value per share before the Offering.................. $(1.33) Increase per share attributable to new investors....................... 3.07 ------ Net tangible book value per share after the Offering..................... 1.74 ------ Immediate dilution per share to new investors............................ $13.26 ======
The following table summarizes, as of March 31, 1996, the difference between the existing stockholders and new investors purchasing Shares in this Offering with respect to the number of Shares of Common Stock purchased, the total consideration paid and the average price per share paid (assuming an initial public offering price of $15.00 per share):
SHARES PURCHASED TOTAL CONSIDERATION ---------------------- ----------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholders.............. 8,073,117 79% $31,508,000 49% $ 3.90 New investors...................... 2,200,000 21% 33,000,000 51% 15.00 ------- --- ------- --- Total.................... 10,273,117 100% $64,508,000 100% $ 6.28 ======= === ======= ===
The computations in the above table (i) are determined before deducting the underwriting discounts and commissions and estimated expenses of the Offering payable by the Company, (ii) assume no exercise of outstanding stock options or warrants, other than the issuance of 64,244 shares of Common Stock upon the assumed exercise of outstanding warrants which would otherwise expire upon the closing of this Offering and (iii) do not give effect to stock issuance activity subsequent to March 31, 1996, which consists of 646,659 shares issued upon the exercise of stock purchase rights and 55,107 shares issued upon the exercise of options and warrants through May 15, 1996. At May 15, 1996, there were options outstanding to purchase 840,357 shares of Common Stock at an exercise price of $2.48 per share. In addition, warrants to purchase 879,183 shares of Common Stock at an exercise price of $5.82 per share may remain outstanding upon the completion of this Offering. To the extent outstanding options and warrants are exercised, there will be further dilution to new investors. See "Management -- Incentive Stock Plans," "Description of Capital Stock" and Notes 7 and 10 to the Consolidated Financial Statements. 16 19 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1996, after giving effect to the conversion of the Preferred Stock into Common Stock upon the closing of the Offering, the restatement of the Company's Certificate of Incorporation to provide for authorized capital stock consisting of 50,000,000 shares of Common Stock and 5,000,000 shares of undesignated preferred stock, and adjusted for the receipt of the estimated net proceeds from the sale of Common Stock offered hereby and the application thereof:
MARCH 31, 1996 ------------------------ AS ACTUAL ADJUSTED(1) -------- ----------- (IN THOUSANDS) Long-term debt(2)..................................................... $ 15,035 $ -- Stockholders' equity: Preferred Stock: $.001 par value, 5,000,000 shares authorized; none outstanding...................................................... -- -- Common Stock: $.001 par value, 50,000,000 shares authorized; 8,008,890 shares issued and outstanding and; 10,273,117 shares issued and outstanding, as adjusted-amount paid in(3)(4)(5)...... 31,016 61,028 Accumulated deficit(6)................................................ (29,398) (29,398) Cumulative foreign currency translation adjustment.................... (143) (143) -------- -------- Total stockholders' equity(4)(5).................................... 1,475 31,487 -------- -------- Total capitalization........................................ $ 16,510 $ 31,487 ======== ========
- --------------- (1) As adjusted shares outstanding includes the issuance of 64,244 shares of Common Stock upon the assumed exercise of outstanding warrants which would otherwise expire upon the closing of this Offering. As adjusted shares outstanding excludes 840,357 shares issuable upon exercise of stock options outstanding under the Company's 1988 Incentive Stock Option Plan as of May 15, 1996 and warrants to purchase 879,183 shares of Common Stock which may remain outstanding upon completion of this Offering. As adjusted shares outstanding does not give effect to stock issuance activity after March 31, 1996, which consists of 646,659 shares issued upon exercise of stock purchase rights and 55,107 shares issued upon the exercise of options and warrants through May 15, 1996. See "Management -- Incentive Stock Plans," "Description of Capital Stock" and Notes 7 and 10 to the Consolidated Financial Statements. (2) As of March 31, 1996, the Company had outstanding borrowings of $1.0 million under the bank credit agreement. Subsequent to March 31, 1996, the Company borrowed an additional $1.0 million, all of which was converted into a $2.0 million term loan which will be repaid with the proceeds of this Offering. (3) Assumes net proceeds of $30.0 million from this Offering based on an assumed initial public offering price of $15.00 per share. (4) See Notes 6 and 7 to the Consolidated Financial Statements. (5) Actual amounts reflect the assumed conversion of the Preferred Stock but not the exercise of warrants which would otherwise expire upon the closing of this Offering. (6) Gives effect to cancellation of accrued Preferred Stock dividends upon the assumed conversion of the Preferred Stock into Common Stock. 17 20 SELECTED CONSOLIDATED ACTUAL AND PRO FORMA FINANCIAL AND OPERATING DATA The selected consolidated statement of operations data set forth below for the years ended December 31, 1995, 1994 and 1993, except for the components of net sales, are derived from the Company's audited Consolidated Financial Statements included elsewhere in this Prospectus. The selected consolidated statement of operations data set forth below for the years ended December 31, 1992 and 1991, except for the components of net sales, are derived from audited financial statements of the Company not included in this Prospectus. The selected actual consolidated statement of operations data for the three months ended March 31, 1996 and 1995, the components of net sales for all periods presented, and the balance sheet data at March 31, 1996 are derived from unaudited financial statements of the Company, which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for the unaudited periods. The selected pro forma statement of operations data are derived from the Unaudited Pro Forma Condensed Consolidated Financial Statements included elsewhere in this Prospectus. The unaudited interim information and pro forma information for the periods presented is not necessarily indicative of the results which may be realized in the future. The selected actual and pro forma consolidated financial and operating data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus.
ACTUAL PRO FORMA(1) -------------------------------------------------------------------- ------------------------------------- THREE MONTHS THREE MONTHS ENDED YEAR ENDED YEAR ENDED DECEMBER 31, MARCH 31, DECEMBER 31, ENDED MARCH 31, STATEMENT OF ----------------------------------------------- ------------------ ------------------ ---------------- OPERATIONS: 1991 1992 1993 1994 1995 1995 1996 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- -------- -------- ------- ------- ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Sales: Instruments...... $ 50 $ 717 $ 1,162 $ 2,588 $ 4,644 $ 1,007 $ 1,594 $ 5,798 $ 8,396 $ 2,040 $1,733 Reagents and other.......... 28 452 1,519 3,339 5,969 1,195 2,552 6,647 11,079 2,378 3,495 ------- ------- ------- -------- ------- ------- ------- ------ ------ Total net sales........ 78 1,169 2,681 5,927 10,613 2,202 4,146 12,445 19,475 4,418 5,228 Cost of goods sold............. 49 832 1,722 2,531 4,282 936 1,435 5,883 9,096 2,134 1,927 ------- ------- ------- -------- ------- ------- ------- ------ ------ Gross profit....... 29 337 959 3,396 6,331 1,266 2,711 6,562 10,379 2,284 3,301 Operating expenses: Research and development.... 1,352 1,194 2,100 1,926 2,239 556 613 2,687 4,407 721 771 Selling, general and administrative... 892 2,465 4,067 6,899 7,435 1,594 2,279 9,942 10,968 2,367 2,704 ------- ------- ------- -------- ------- ------- ------- ------ ------ Loss from operations before nonrecurring expenses and amortization of intangibles...... (2,215) (3,322) (5,208) (5,429) (3,343) (884) (181) (6,067) (4,996) (804) (174) Nonrecurring expenses......... -- -- -- -- -- -- (7,083) (8,373) -- -- -- Amortization of intangibles...... -- -- -- -- -- -- -- (1,344) (1,344) (336) (336) ------- ------- ------- -------- ------- ------- ------- ------ ------ Loss from operations....... (2,215) (3,322) (5,208) (5,429) (3,343) (884) (7,264) (15,784) (6,340) (1,140) (510) Interest income (expense)........ 23 48 229 59 74 50 (5) 59 74 50 (5) ------- ------- ------- -------- ------- ------- ------- ------ ------ Net loss........... $(2,192) $(3,274) $(4,979) $(5,370) $(3,269) $ (834) $ (7,269) $(15,725) $(6,266) $(1,090) $ (515) ======= ======= ======= ======== ======= ======= ======= ====== ====== Per share data(2): Net loss per share, as adjusted....... $ (0.39) $ (0.10) $ (0.85) $ (0.66) $ (0.12) $(0.05) ======= ======= ======= ====== Shares used in computing net loss per share, as adjusted.... 8,354 8,220 8,585 9,466 9,331 9,696 ======= ======= ======= ======
MARCH 31, 1996 --------------------------- ACTUAL AS ADJUSTED(3) -------- -------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents........................................................................ $ 3,436 $ 18,413 Long-term debt................................................................................... 15,035 -- Working capital.................................................................................. 1,195 16,172 Total assets..................................................................................... 24,752 39,729 Accumulated deficit(4)(5)........................................................................ (29,398 ) (29,398) Total stockholders' equity(5).................................................................... 1,475 31,487
- --------------- (1) Adjusted to reflect the acquisition of BioTek as of January 1, 1994. BioTek was acquired February 26, 1996. (2) See Note 1 to Consolidated Financial Statements and Note 8 to the Unaudited Pro Forma Condensed Consolidated Financial Statements for information concerning the computation of net loss per share. (3) Adjusted to give effect to the receipt of the net proceeds from the sale of the Shares of Common Stock offered by the Company hereby and the application thereof at an assumed initial public offering price of $15.00 per share. See "Use of Proceeds" and "Capitalization." (4) Gives effect to cancellation of accrued Preferred Stock dividends upon the assumed conversion of the Preferred Stock into Common Stock. (5) Actual amounts reflect the assumed conversion of the Preferred Stock but not the exercise of warrants which would otherwise expire upon the closing of this Offering. 18 21 SELECTED OPERATING DATA: The following table sets forth the Company's annual pro forma instrument placements and instrument installed base for the periods indicated as if the acquisition of BioTek had taken place on January 1, 1992:
THREE MONTHS ENDED MARCH YEAR ENDED DECEMBER 31, 31 ------------------------------- ------------- 1992 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- ---- INSTRUMENT PLACEMENTS (UNITS): Patient priority.................................. 17 56 74 113 28 33 Batch processing.................................. 4 37 106 128 35 12 -- --- --- --- --- --- Total current placements..................... 21 93 180 241 63 45 == === === === === === RAPs in current placements........................ 6 19 19 22 8 6 == === === === === === INSTRUMENT INSTALLED BASE (UNITS): Patient priority.................................. 18 74 148 261 176 294 Batch processing.................................. 4 41 147 275 182 287 -- --- --- --- --- --- Total instrument installed base.............. 22 115 295 536 358 581 == === === === === === RAPs in installed base............................ 6 25 44 66 52 72 == === === === === ===
19 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and historical and pro forma results of operations of the Company should be read in conjunction with the Financial Statements and related Notes thereto included elsewhere in this Prospectus. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ materially from those anticipated by the forward-looking statements as a result of certain factors, including those set forth in Risk Factors and elsewhere in this Prospectus. OVERVIEW Ventana develops, manufactures and markets proprietary instrument/reagent systems that automate IHC and ISH tests for the analysis of cells and tissues on microscope slides. Each Ventana proprietary system placed provides a recurring revenue stream as customers consume reagents and supplies sold by the Company with each test conducted. Reagents consist of two components: a primary antibody and a detection chemistry which is used to visualize the primary antibody. Therefore, the principal economic drivers for the Company are the number, type and method of sale of instruments placed 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, as new instrument placements represent a smaller percentage of the Company's existing installed base of instruments and as RAP placements increase as a percentage of total instrument placements. In February 1996, Ventana acquired BioTek for aggregate consideration of $18.8 million, consisting of cash, promissory notes and the assumption of liabilities. BioTek, founded in 1990, markets and sells automated diagnostic systems that perform reliable, high volume batch processing of a single IHC test on multiple patient biopsies. Ventana acquired BioTek for several strategic reasons including its installed instrument base and complementary product line. Historically, BioTek generated lower gross margins than Ventana due to its employment of a different business strategy which primarily involved the use of third parties for key activities. BioTek's instruments were produced by third-party manufacturers which prevented BioTek from capturing manufacturing margin. BioTek's instruments have an open configuration, enabling the customer to use reagents purchased from BioTek or others which impacted both the price and volume of reagents purchased by customers from BioTek. In contrast, Ventana's instruments have a closed configuration requiring the customer to use Ventana's prepackaged detection chemistries. BioTek also realized lower gross margins on reagents than Ventana due to its utilization of intermediate materials in the manufacturing process which resulted in the capture of fewer value-added steps. BioTek used 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 both lower gross margins than if it had sold its products directly and a higher level of selling expense than typically incurred in conjunction with third-party distribution arrangements. Ventana's goal is to integrate the operations of BioTek into the Ventana business model, in which manufacturing, sales and marketing activities are performed by Company employees. In May 1996, the Company completed the integration of the BioTek and Ventana direct field sales and technical personnel. The Company does not intend to renew the United States distribution agreement with CMS which expires in April 1998. The Company is engaged in discussions with DAKO regarding various aspects of the distribution arrangement. The international distribution agreement with DAKO expires in December 1999. The Company expects to complete the consolidation of BioTek's reagent manufacturing into Ventana's Tucson facilities in September 1996. Following this consolidation, the Company intends to convert BioTek's reagent manufacturing to the process used by Ventana in which basic raw materials are used and important value-added steps are performed internally. The Company believes that in the near term it will be more cost effective to continue sourcing batch processing instruments from third-party manufacturers. The Company expects to complete a contract manufacturing agreement with Kollsman for the TechMate 500 instrument and has entered into an 20 23 agreement with LJL for production of the Company's next generation batch processing instrument, the TechMate 250. From its inception in 1985 through its first commercial sale in late 1991, Ventana's activities consisted primarily of research and development of its instrument and reagent systems. During this period, Ventana incurred aggregate net losses of $5.2 million. During the period from January 1, 1992 through March 31, 1996, the Company incurred additional net losses of $24.2 million including $7.1 million related to the expensing of in-process research and development and restructuring costs associated with the acquisition of BioTek for cumulative losses of $29.4 million as of March 31, 1996. Similarly, BioTek incurred over $17.7 million in losses from operations from its inception in October 1990 until its acquisition by the Company in February 1996. The Company expects that it will continue to incur losses through at least the first half of 1997 as a result of expenses associated with the integration of BioTek's operations and expenses associated with the expansion of manufacturing, sales and marketing activities. There can be no assurance that the Company will achieve profitability or that profitability, if achieved, will be sustained on an annual or quarterly basis, or at all. The Company provides a number of alternatives for instrument placements including direct sales, non-recourse lease and rental programs and RAPs. Under a RAP, the customer obtains the use of an instrument with no capital investment in exchange for the customer's commitment to purchase reagents from the Company at a higher price per unit than if the customer had purchased the instrument. The terms of RAP arrangements vary from customer to customer; however, the Company's current RAPs are generally for a one-year term, are renewed automatically unless the customer gives notice of nonrenewal and are cancellable during an initial 180-day trial period. To date, no instruments placed through RAPs have been returned by the user and some RAP customers have purchased the instruments. For instruments placed through RAPs, the Company incurs the cost of manufacturing or procuring instruments and recognizes revenues only as customers purchase reagents rather than at the time of instrument placement. The manufacturing cost of instruments placed through RAPs is charged to cost of goods sold by depreciating standard costs over a period of three or four years. As a result, gross profit for instruments placed through RAPs is recognized over a three or four year period rather than at the time of placement, as is the case in direct sales. Revenue associated with instruments placed through RAPs is based on a volume pricing matrix which is designed to enable the Company to recover the sales value of the instrument through an increased price on the reagents purchased by the user. The Company typically recovers the cash costs associated with the placement of instruments through RAPs in less than two years. Due to the working capital requirements associated with RAPs, the Company has historically sought to limit the amount of instruments placed through RAPs to approximately 30% of instrument placements. However, the Company anticipates that the percentage of instruments placed through RAPs will increase with the introduction of the NexES and TechMate 250 and as the Company obtains the additional working capital required to support additional RAP placements, which may in the future result in a decrease in instrument sales both in absolute dollars and as a percentage of total revenues. As of March 31, 1996, the Company had placed 72 instruments through RAPs. The Company's future results of operations may fluctuate significantly from period to period due to a variety of factors. The initial placement of an instrument is subject to a longer, less consistent sales cycle than the sale of reagents which begin and 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. Results of operations for the remainder of 1996 are also expected to be affected by costs associated with the integration of BioTek's operations. These include costs associated with centralizing reagent manufacturing, expanding reagent product offerings for batch processing instruments and eliminating operational redundancies. Other factors that may result in fluctuations in operating results include 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, and increased research and development expenditures. In addition, a significant portion of the Company's expense levels are based on its expectation of a higher level of revenues in the future 21 24 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. Total revenues grew from $2.7 million in 1993 to $10.6 million in 1995, a compound annual growth rate of 98%. Instrument sales grew from $1.2 million in 1993 to $4.6 million in 1995, a compound annual growth rate of 96%. Reagent sales grew from $1.5 million in 1993 to $6.0 million in 1995, a compound annual growth rate of 100%. The growth in revenues is primarily attributable to the growth in (i) instrument placements and (ii) the instrument installed base and the associated corresponding increase in the aggregate recurring reagent revenue stream. The Company's installed base of instruments increased from 74 in 1993 to 261 in 1995. Instrument placements have increased in every year, from 56 in 1993 to 113 in 1995. The Company's installed base of instruments was significantly enhanced by the BioTek acquisition in the first quarter of 1996. Gross margin increased from 36% in 1993 to 60% in 1995 as both instrument and reagent gross margins increased. Gross margin increased primarily due to a higher level of revenues available to cover fixed costs and economies of scale and efficiencies in purchasing and manufacturing activities. Research and development and selling, general and administrative expenses in the period were maintained at levels that anticipated a higher level of revenues in the future, which resulted in operating losses in each year between 1993 and 1995. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1996 AND 1995 Ventana acquired BioTek on February 26, 1996. Consequently, approximately one month of BioTek operations are included in the results of operations for the three months ended March 31, 1996. Net Sales Presented below is a summary of revenue, instrument placements and instrument installed base for the three months ended March 31, 1996 and 1995.
THREE MONTHS ENDED MARCH 31, ----------------------------------------------- 1995 --------------------- $ ------ 1996 REVENUE SUMMARY: --------------------- % OF SALES $ % OF SALES ---------- ------ ---------- (DOLLARS IN THOUSANDS) Instruments............................... $1,007 46% $1,594 38% Reagents and other........................ 1,195 54% 2,552 62% ------ ---- ------ ---- Total revenue..................... $2,202 100% $4,146 100% ====== ==== ====== ====
THREE MONTHS INSTRUMENT PLACEMENTS (UNITS): ENDED MARCH 31, --------------- Patient priority: 1995 ---- 1996 ---- IHC/ES............................................................. 23 30 ISH/gen II......................................................... 5 3 -- - --- Total patient priority..................................... 28 33 Batch processing..................................................... -- 7 -- - --- Total current placements................................... 28 40 === === RAPs in current placements........................................... 8 6
22 25
MARCH 31, ------------------ INSTRUMENT INSTALLED BASE (UNITS): 1995 1996 ---- ------- Patient priority: IHC/ES........................................................... 174 276 ISH/gen II....................................................... 2 18 --- --- Total patient priority................................... 176 294 Batch processing................................................... -- 287 --- --- Total instrument installed base.......................... 176 581 === === RAPs in installed base............................................. 52 72
Net sales for the three months ended March 31, 1996 increased 88% to $4.1 million from $2.2 million in the three months ended March 31, 1995. The increase in net sales was attributable to a 58% increase in instrument sales and a 114% increase in reagent sales. Instrument sales increased due to increased instrument placements and higher selling prices associated with gen II placements. Reagent sales increased due to sales of reagents to new customers, as well as to increases in reagent sales to existing customers. United States patient priority reagent consumption by customers with instruments in place before October 1, 1994 increased an average of 19% from the first quarter of 1995 to the first quarter of 1996. Gross Margin Gross profit for the three months ended March 31, 1996 increased to $2.7 million from $1.3 million in the three months ended March 31, 1995. Gross margin for the three months ended March 31, 1996 increased to 65% from 58% in the three months ended March 31, 1995. Overall gross margins increased primarily due to a shift in revenue mix toward higher margin reagent products. Gross margins on instrument sales increased due to increased sales of gen II instruments, improvements in manufacturing efficiencies and increased absorption of manufacturing overhead. Gross margins on reagent sales increased due to economies of scale associated with increased volumes and improvements in manufacturing efficiencies. Research and Development Research and development expense was approximately equal in the three months ended March 31, 1996 and 1995, but declined to 15% of net sales in the period ended March 31, 1996 from 25% of net sales in the period ended March 31, 1995. Research and development expense for the three months ended March 31, 1996 related primarily to the development of new reagents and instruments, including the NexES. Research and development expense for the period ended March 31, 1995 related primarily to gen II instrument development and reagent development. Selling, General and Administrative ("SG&A") Presented below is a summary of SG&A expense for the three months ended March 31, 1996 and 1995.
THREE MONTHS ENDED MARCH 31, ----------------------------------------------- 1995 1996 --------------------- --------------------- $ % OF SALES $ % OF SALES ------ ---------- ------ ---------- (DOLLARS IN THOUSANDS) Sales and marketing......................... $1,212 55% $1,701 41% Administration.............................. 382 17% 578 14% ------ ---------- ------ ---------- Total SG&A........................ $1,594 72% $2,279 55% ====== ======== ====== ========
SG&A expense in the three months ended March 31, 1996 increased to $2.3 million from $1.6 million in the three months ended March 31, 1995, but declined to 55% of net sales in the period ended March 31, 1996 from 72% of net sales in the period ended March 31, 1995. The fluctuation in SG&A expense from period to period reflects the growth of Ventana's internal sales and marketing organization to facilitate its market expansion strategy and a corresponding increase in infrastructure expenses to support a larger business base. The growth in sales and marketing expense is the result of the Company's decision to service the market 23 26 through its own sales and marketing staff and expenses needed to support sales growth. Increases in administrative expense are associated with the Company's regulatory strategy and costs associated with supporting an expanding business base. In-Process Research and Development Expense In accordance with Statement of Financial Accounting Standards No. 2 "Accounting for Research and Development Costs" ("FAS 2"), the Company charged to expense at the date of the acquisition of BioTek, $5.0 million relating to the portion of the purchase price allocated to those in-process research and development projects where technological feasibility had not yet been established and for which there are no alternative future uses. YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 Net Sales Presented below is a summary of revenue, instrument placements and instrument installed base for the three years ended December 31, 1995, 1994 and 1993.
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 1993 1994 1995 ------------------- ------------------- -------------------- $ % OF SALES $ % OF SALES $ % OF SALES ------ ---------- ------ ---------- ------- ---------- (DOLLARS IN THOUSANDS) REVENUE SUMMARY: Instruments..................... $1,162 43% $2,588 44% $ 4,644 44% Reagents and other.............. 1,519 57% 3,339 56% 5,969 56% ------ ---- ------ ---- ---- Total revenue......... $2,681 100% $5,927 100% $10,613 100% ====== ==== ====== ==== ====
YEAR ENDED DECEMBER 31, ---------------------- INSTRUMENT PLACEMENTS (UNITS): 1993 1994 1995 ---- ---- ---- Patient priority: IHC/ES................................................................ 56 74 98 ISH/gen II............................................................ -- -- 15 -- --- --- Total current placements...................................... 56 74 113 == === === RAPs in current placements.............................................. 19 19 22 == === ===
DECEMBER 31, ---------------------- INSTRUMENT INSTALLED BASE (UNITS): 1993 1994 1995 ---- ---- ---- Patient priority: IHC/ES................................................................ 74 148 246 ISH/gen II............................................................ -- -- 15 -- --- --- Total instrument installed base............................... 74 148 261 == === === RAPs in installed base.................................................. 25 44 66 == === ===
Net sales for the year ended December 31, 1995 increased by 79% to $10.6 million from $5.9 million for the year ended December 31, 1994. Net sales for the year ended December 31, 1994 increased by 121% to $5.9 million from $2.7 million for the year ended December 31, 1993. The increases in net sales were attributable to increases in instrument sales as well as increases in reagent sales. Instrument sales increased over the prior year by 79% in 1995 and 123% in 1994, respectively. Reagent sales increased over the prior year by 79% in 1995 and 120% in 1994, respectively. Instrument sales increased during these periods primarily due to increased placements. Instrument sales in 1995 were positively impacted by the higher selling prices associated with gen II instrument placements. Instrument sales in 1995 and 1994 were impacted by the 24 27 placement of a significant number of instruments through RAPs, which resulted in lower instrument revenues than if the placements had been made on a direct sale basis. Reagent sales grew primarily because of the growth in the installed base of instruments, as well as increased sales to existing customers. Despite the growth in the Company's installed base of instruments from 1993 to 1995, reagent sales as a percentage of net sales did not increase significantly. This was due primarily to (i) the high percentage of new instrument placements in each year relative to the existing installed base of instruments, (ii) the recognition of revenues on direct instrument sales at the time of sale and (iii) the receipt of reagent revenue for only that portion of the year during which an instrument was in place. Gross Margin Gross profit for the year ended December 31, 1995 increased to $6.3 million from $3.4 million in the year ended December 31, 1994 and $1.0 million in the year ended December 31, 1993. Gross margin increased to 60% in 1995 from 57% in 1994 and 36% in 1993. The improvement in gross margin resulted primarily from a higher volume of revenues available to cover the Company's fixed costs, economies of scale and efficiencies in manufacturing operations. Gross margins on instruments increased in 1994 as compared to 1993 primarily due to reductions in instrument manufacturing costs. Instrument gross margins in 1995 were approximately equivalent to 1994. Reagent gross margins decreased in 1994 as compared to 1993 due primarily to primary antibody promotional programs initiated during 1994 and partially offset by improvements in manufacturing efficiencies during 1994. Reagent gross margins in 1995 increased compared to 1994 and exceeded the margins achieved in 1993 because the Company (i) discontinued its primary antibody promotional programs, (ii) realized lower material prices from higher purchasing volumes and (iii) achieved improvements in manufacturing efficiencies. Research and Development Research and development expense in the year ended December 31, 1995 increased to $2.2 million from $1.9 million in the year ended December 31, 1994 and $2.1 million in the year ended December 31, 1993. Research and development expense primarily reflects gen II and NexES development and development of additional primary antibodies. Selling, General and Administrative Presented below is a summary of the various components of SG&A expense and their respective percentages of net sales during the years ended December 31, 1995, 1994 and 1993.
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- 1993 1994 1995 --------------------- --------------------- --------------------- $ % OF SALES $ % OF SALES $ % OF SALES ------ ---------- ------ ---------- ------ ---------- (DOLLARS IN THOUSANDS) Sales and marketing.............. $2,748 103% $4,843 81% $5,674 53% Administration................... 1,319 49% 2,056 35% 1,761 17% ------ ---------- ------ ---------- ------ ----- Total SG&A............. $4,067 152% $6,899 116% $7,435 70% ====== ======== ====== ======== ====== ========
SG&A expense in the year ended December 31, 1995 increased to $7.4 million from $6.9 million in the year ended December 31, 1994 and $4.1 million in the year ended December 31, 1993. The fluctuation in SG&A expense from period to period reflects the growth of Ventana's internal sales and marketing organization to facilitate its market expansion strategy and a corresponding increase in infrastructure expenses to support a larger business base. The growth in sales and marketing expense is the result of the decision by the Company to service the market through its own sales and marketing staff and costs needed to support sales growth during these periods. The increase in administrative expense is associated with the Company's regulatory strategy and costs associated with supporting an expanding business base. 25 28 INCOME TAXES Ventana and BioTek have neither provided for nor paid any federal income taxes since their respective inceptions because neither company generated taxable income in any fiscal year. At December 31, 1995, Ventana had net operating loss carryforwards for federal and state purposes of approximately $12.0 million. These federal and state carryforwards will begin to expire in 2000 and 1996 respectively, if not previously utilized. The Company also has research and development tax credit carryforwards of approximately $0.7 million which will begin to expire in 2005, if not previously utilized. Utilization of Ventana's net operating loss carryforwards will be subject to limitations due to the "change in ownership" provisions of the Internal Revenue Code of 1986, as amended (the "Code") as a result of the Company's prior issuances of equity securities. These carryforwards, therefore, may expire prior to being fully utilized. Future financings may cause additional changes in ownership and further limitations on the use of federal net operating loss carryforwards. Due to the losses incurred by Ventana since inception, deferred tax assets of approximately $8.6 million at December 31, 1995, related to these carryforwards, credits and temporary differences, have been fully reserved in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). At December 31, 1995, BioTek had net operating loss carryforwards for federal and state purposes of approximately $10.8 million. These federal and state carryforwards will begin to expire in 2008, if not previously utilized. Utilization of BioTek's net operating loss carryforwards will be subject to limitations due to the change in ownership provisions of the Code as a result of the acquisition by Ventana. Therefore, these carryforwards may expire prior to being fully utilized. Due to the losses incurred by BioTek since inception, deferred tax assets of $5.7 million at December 31, 1995, related to these carryforwards, have been reserved in accordance with FAS 109. ACCOUNTING FOR STOCK-BASED COMPENSATION In October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), was issued. FAS 123 is effective for the Company's 1996 financial statements. The Company intends to continue to account for employee stock options in accordance with APB Opinion No. 25 and will include the pro forma disclosures required by FAS 123 beginning in 1996. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS The Company acquired BioTek for $18.8 million on February 26, 1996. The pro forma results of operations reflect the Company's operations as if it had acquired BioTek on January 1, 1994 and are adjusted to reflect the sale of 2,200,000 shares of Common Stock by the Company in this Offering and the application 26 29 of the net proceeds therefrom. The acquisition has been accounted for as a purchase. The composition of the consideration paid for BioTek and the preliminary allocation of the purchase price is presented below:
(IN THOUSANDS) The purchase price for BioTek consisted of: Cash consideration................................................... $ 2,500 Stock issued to BioTek noteholders................................... 3,007 Exchange Notes issued................................................ 8,978 Note payable -- escrow for contingencies............................. 234 Net historical liabilities assumed................................... 4,044 ----- Total purchase price......................................... $ 18,763 ===== The purchase price was allocated as follows: Tangible net assets.................................................. $ 2,288 In-process research & development.................................... 5,000 Goodwill............................................................. 1,875 Developed technology................................................. 2,000 Customer base........................................................ 4,200 Covenant not to compete.............................................. 1,800 Assembled work force................................................. 500 Trademark and trade names............................................ 1,100 ----- Total purchase price......................................... $ 18,763 =====
In accordance with FAS 2, the Company charged to expense at the date of the acquisition $5.0 million relating to the portion of the purchase price allocated to those in-process research and development projects where technological feasibility had not yet been established and where there are no alternative future uses. Upon closing of the acquisition, BioTek's revenue recognition policy was changed to adopt the Company's policy to record sales only upon the ultimate sale of products by CMS to end-users. The pro forma sales and related costs of goods sold, are adjusted as if BioTek had followed this policy beginning January 1, 1994. The combined effect of the pro forma change in accounting policy is an increase in net sales in both 1994 and 1995. This is primarily due to (i) shipments of instruments and reagents to CMS in 1993 and 1994 which were subsequently placed with end-users in 1994 and 1995 and (ii) sales being recorded at prices paid by the end-user as opposed to the net price paid by CMS. Accordingly, cost of goods sold has been adjusted to reflect the differences in the timing of sales and the mix of products sold, and selling expense has been increased to reflect the distribution commission paid to CMS. The commission is equal to the product of (i) the number of units shipped to end users and (ii) the difference between the price paid by the end-user to CMS and the net price paid by CMS. The pro forma financial results reflect cost savings associated with (i) consolidation of facilities (allocated to cost of goods sold (50%), research and development expense (10%), and selling, general, and administrative expense (40%)) and (ii) elimination of certain redundant selling and administrative positions. The pro forma financial results also reflect nonrecurring items including $5.0 million of acquired in-process research and development which was charged to expense (as discussed above) and $2.1 million of costs associated with the acquisition and integration of BioTek. These charges were incurred in the first quarter of 1996 and are reflected in the pro forma financial statements as if such charges had been incurred in the year ended December 31, 1994. Comparisons of pro forma results for the first quarter of 1996 to the first quarter of 1995 are not meaningful because Ventana's results of operations for the first quarter of 1996 include approximately one month of BioTek operations. 27 30 PRO FORMA RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995 AND 1994 AND THREE MONTHS ENDED MARCH 31, 1996 AND 1995 Net Sales Presented below is a summary of pro forma consolidated revenue, instrument placements and instrument installed base for the years ended December 31, 1995 and 1994 and the three months ended March 31, 1996 and 1995.
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, --------------------------------- ------------------------------- 1994 1995 1995 1996 -------------- -------------- ------------- ------------- $ % $ % $ % $ % ------- ---- ------- ---- ------ ---- ------ ---- (DOLLARS IN THOUSANDS) REVENUE SUMMARY: Instruments........................... $ 5,798 47% $ 8,396 43% $2,040 46% $1,733 33% Reagents and other.................... 6,647 53% 11,079 57% 2,378 54% 3,495 67% ------- ---- ------- ---- ------ ---- ------ ---- Total revenue....................... $12,445 100% $19,475 100% $4,418 100% $5,228 100% ======= ==== ======= ==== ====== ==== ====== ====
THREE MONTHS YEAR ENDED ENDED MARCH DECEMBER 31, 31, ------------- ------------- INSTRUMENT PLACEMENTS (UNITS): 1994 1995 1995 1996 ---- ---- ---- ---- Patient priority: IHC/ES......................................................... 74 98 23 30 ISH/gen II..................................................... -- 15 5 3 --- --- --- --- Total patient priority...................................... 74 113 28 33 Batch processing................................................. 106 128 35 12 --- --- --- --- Total current placements.................................... 180 241 63 45 === === === === RAPs in current placements....................................... 19 22 8 6
DECEMBER 31, MARCH 31, ------------- ------------- 1994 1995 1995 1996 ---- ---- ---- ---- INSTRUMENT INSTALLED BASE (UNITS): Patient priority: IHC/ES......................................................... 148 246 174 276 ISH/gen II..................................................... -- 15 2 18 --- --- --- --- Total patient priority...................................... 148 261 176 294 Batch processing................................................. 147 275 182 287 --- --- --- --- Total instrument installed base............................. 295 536 358 581 === === === === RAPs in installed base........................................... 44 66 52 72
Total consolidated pro forma net sales increased 57% in 1995 as compared to 1994 and 18% during the first quarter of 1996 as compared to the first quarter of 1995. The increase in net sales resulted from increased instrument placements and reagent sales by both companies. Consolidated pro forma instrument sales increased 45% during 1995 as compared to 1994 and declined 15% during the first quarter of 1996 compared to the first quarter of 1995. Despite increased international unit sales by BioTek, the increase in pro forma instrument sales in 1995 was less than that experienced by Ventana due to lower average selling prices on European units and a decrease in United States instrument placements by BioTek. Pro forma instrument placements and sales during the fourth quarter of 1995 and first quarter of 1996 were adversely affected by BioTek's inability to procure instruments due to insufficient working capital. BioTek instruments sold internationally by DAKO, which compose approximately 40% of BioTek's installed base of instruments, generate recurring royalty income from DAKO in exchange for DAKO's right to supply such customers with reagents. Pro forma reagent sales increased 67% during 1995 as compared to the 79% reagent sales growth experienced by Ventana during the same time period. Pro forma reagent sales growth in 1995 was less than Ventana's because BioTek's installed base of instruments shifted towards 28 31 European placements and such placements generated a fixed royalty income stream which is less per instrument than the recurring reagent revenue stream associated with United States placements. Gross Margin Pro forma gross profit in the quarter ended March 31, 1996 increased to $3.3 million from $2.3 million in the quarter ended March 31, 1995 and increased to $10.4 million in the year ended December 31, 1995 from $6.6 million in the year ended December 31, 1994. Pro forma gross margin increased to 63% in the quarter ended March 31, 1996 from 52% in the quarter ended March 31, 1995. Pro forma gross margin was 53% in each of the years ended December 31, 1995 and 1994. Pro forma gross margins are lower than Ventana's stand-alone gross margins because BioTek's margins are adversely affected by BioTek's (i) use of contract manufacturers and third-party distributors, (ii) lower value-added reagent manufacturing strategy and (iii) lower reagent volumes and pricing due to the open configuration of BioTek's instruments. Research and Development Pro forma research and development expense was approximately equal in the quarters ended March 31, 1996 and 1995. Pro forma research and development expense in the year ended December 31, 1995 increased to $4.4 million from $2.7 million in the year ended December 31, 1994. Pro forma research and development expense reflects increased expenditures by Ventana to support the development of new instruments and reagents including the gen II, the NexES and primary antibodies. These expenditures also reflect BioTek's development of the TechMate 250 instrument and an ISH oven. During 1995 and the first quarter of 1996, BioTek reduced its research and development expenditures primarily due to working capital constraints. Selling, General and Administrative Pro forma SG&A expense increased to $2.7 million in the quarter ended March 31, 1996 from $2.4 million in the quarter ended March 31, 1995 and increased to $11.0 million in the year ended December 31, 1995 from $9.9 million in the year ended December 31, 1994. Pro forma SG&A expense reflects increased expenditures to expand sales and marketing capabilities in the United States and Europe and increased administrative expenditures to support higher manufacturing and sales volumes. SG&A expenditures at BioTek were limited due to BioTek's working capital constraints and its use of third-party distributors in the United States and Europe. 29 32 QUARTERLY PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS The following table contains summary unaudited quarterly pro forma consolidated statements of operations data for the five quarters ended March 31, 1996. Management has prepared the quarterly pro forma consolidated statements of operations data on the same basis as the Unaudited Pro Forma Condensed Consolidated Statements of Operations contained in this Prospectus. The Company's results of operations have varied and may continue to fluctuate significantly from quarter to quarter. Results of operations in any period should not be considered indicative of the results to be expected for any future period. SUMMARY UNAUDITED QUARTERLY PRO FORMA CONDENSED CONSOLIDATED FINANCIAL AND OPERATING DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE 1995 MONTHS ------------------------------------- ENDED FIRST SECOND THIRD FOURTH MARCH 31, QUARTER QUARTER QUARTER QUARTER 1996 ------- ------- ------- ------- --------- STATEMENT OF OPERATIONS DATA: Sales: Instruments................................... $ 2,040 $ 2,148 $ 2,461 $ 1,747 $ 1,733 Reagents and other............................ 2,378 2,484 2,931 3,286 3,495 ------- ------- ------- ------- ------- Total net sales....................... 4,418 4,632 5,392 5,033 5,228 Cost of goods sold.............................. 2,134 2,236 2,438 2,288 1,927 ------- ------- ------- ------- ------- Gross profit.................................... 2,284 2,396 2,954 2,745 3,301 Operating expenses: Research and development...................... 721 1,815 1,002 869 771 Selling, general and administrative........... 2,367 3,130 2,675 2,796 2,704 ------- ------- ------- ------- ------- Loss from operations before amortization of intangibles................................... (804) (2,549) (723) (920) (174) Amortization of intangibles..................... (336) (336) (336) (336) (336) ------- ------- ------- ------- ------- Loss from operations............................ (1,140) (2,885) (1,059) (1,256) (510) Interest income (expense)....................... 50 37 25 (38) (5) ------- ------- ------- ------- ------- Net loss........................................ $(1,090) $(2,848) $(1,034) $(1,294) $ (515) ------- ------- ------- ------- ------- Pro forma net loss per share(1)................. $ (0.12) $ (0.30) $ (0.11) $ (0.14) $ (0.05) ======= ======= ======= ======= ======= Pro forma shares used in computing net loss per share(1).................................. 9,331 9,453 9,525 9,551 9,696 ======= ======= ======= ======= ======= OPERATING DATA: Instrument placements (Units): Patient priority (Ventana).................... 28 23 30 32 33 Batch processing (BioTek)..................... 35 38 39 16 12 ------- ------- ------- ------- ------- Total annual placements............... 63 61 69 48 45 ======= ======= ======= ======= ======= Instrument installed base (Units): Patient priority (Ventana).................... 176 199 229 261 294 Batch processing (BioTek)..................... 182 220 259 275 287 ------- ------- ------- ------- ------- Total installed base.................. 358 419 488 536 581 ======= ======= ======= ======= =======
- --------------- (1) Pro forma shares used in computing pro forma net loss per share are adjusted to reflect the sale of 1,112,000 shares of Common Stock by the Company in this Offering to repay acquisition debt. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company's expenses have significantly exceeded its net sales, resulting in an accumulated deficit of $29.4 million at March 31, 1996. The Company has funded its operations primarily through the private placement of approximately $31.6 million of equity and debt securities. At March 31, 1996, the Company's principal source of liquidity consisted of cash and cash equivalents of $3.4 million and available borrowing capacity under the Company's bank credit facility. 30 33 Net cash flow from operating activities during the three months ended March 31, 1996 and 1995 was approximately $(0.9) million and $(0.4) million, respectively. Net cash flow from operating activities was approximately $(2.9) million, $(5.3) million and $(5.1) million for the years ended December 31, 1995, 1994 and 1993, respectively. Net cash flow from operating activities during these periods primarily reflects the Company's operating losses. Net cash flow from investing activities was $(2.6) million and $(0.4) million for the three months ended March 31, 1996 and 1995, respectively. The Company expended $2.5 million in cash as part of the consideration for the purchase of BioTek in the three months ended March 31, 1996. Net cash flow from investing activities (excluding sales or purchases of short-term investments) was approximately $(1.0) million, $(0.6) million and $(1.7) million for the years ended December 31, 1995, 1994 and 1993. Net cash flow from investing activities was primarily used for capital expenditures to increase manufacturing capacity and to upgrade management information systems. Net cash flow from financing activities was $5.7 million and $2.4 million for the three months ended March 31, 1996 and 1995, respectively. Net cash flow from financing activities was $2.6 million, $3.0 million and $5.1 million for the years ended December 31, 1995, 1994 and 1993, respectively. Net cash flow from financing activities was primarily the result of private placements of equity securities. During the quarter ended March 31, 1996, the Company raised $4.6 million through the private placement of subordinated notes which included warrants to purchase an aggregate of 879,183 shares of Common Stock of the Company at an exercise price of $5.82 per share. The proceeds of these notes were used to fund the cash portion of the BioTek acquisition consideration and to provide working capital. These notes bear interest at 7% per annum, which will be forgiven if the notes are repaid prior to December 31, 1996. The subordinated notes are required to be repaid by the Company within 30 days of the completion of this Offering. The Company also has a credit facility with a bank lender which consists of a term loan facility of $2.0 million and a revolving line of credit of $2.7 million. The term loan and the revolving line of credit bear interest at the lender's prime rate plus 2.0% per annum and mature in 1999. The revolving line of credit permits the Company to borrow up to a specified percentage of eligible accounts receivable. The credit facility is secured by a pledge of substantially all of the Company's assets and is subject to certain financial covenants, including certain financial ratios and dividend restrictions. At March 31, 1996, the Company had borrowed $1.0 million under the revolving credit line which was subsequently converted to a term loan. Subsequent to March 31, 1996, the Company borrowed an additional $1.0 million under the term loan facility. The Company plans to repay the entire $2.0 million balance of the term loan with the net proceeds of this Offering. In 1994, the Company arranged, on a non-recourse basis, for third-party lease financing for instrument purchases by customers. To date, this program has generated 12 non-recourse leases and has had a small positive net cash flow impact for the Company. In connection with the acquisition of BioTek, Ventana issued an aggregate of $12.2 million in exchange notes (collectively, the "Exchange Notes") to the holders of outstanding indebtedness of BioTek. The Exchange Notes bear interest at the rate of 7% per annum which will be forgiven if the Exchange Notes are repaid prior to December 31, 1996. The Exchange Notes provided each holder with the opportunity, during a 30-day period, to convert Exchange Notes into shares of Ventana Common Stock at a conversion price of $13.53 per share. Upon expiration of the conversion period, an aggregate of $3.0 million in principal amount of Exchange Notes were converted into 225,100 shares of Common Stock and an aggregate of $9.2 million of Exchange Notes remained outstanding. These Exchange Notes are due and payable 30 days after the completion of this Offering and will be repaid with the net proceeds of this Offering. In connection with BioTek's agreement with DAKO, DAKO made two loans secured by a pledge of substantially all of BioTek's assets. DAKO also made prepayments on future instrument sales and reagent royalties to BioTek. These loans and prepayments were used to fund TechMate 250 instrument development and working capital requirements. The aggregate balance of the secured loans and prepayments was $1.6 million and $0.9 million, respectively, at March 31, 1996. Of the secured loans, $0.3 million bear interest 31 34 at 5% per annum and the remaining $1.3 million does not bear interest. The prepayments do not bear interest. The secured loans and prepayments are recorded as advances from distributor in the Company's Consolidated Financial Statements. The loans are repaid through discounts on DAKO's purchases of instruments from BioTek. Upon termination of the distribution agreement or in the event of a default by BioTek under the distribution agreement, these loans will convert to fixed term loans that will be due and payable in 12 equal quarterly installments commencing upon such event. See "Business -- Sales, Marketing and Customer Support." The Company believes that the anticipated net proceeds from this Offering together with its existing capital resources, and interest earned thereon, will be sufficient to satisfy its working capital requirements through at least 1997. 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 RAPs, 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 be required to raise additional capital in the future through the issuance of either equity securities or debt instruments or both. There is no assurance such capital will be available to the extent required by or on terms acceptable to the Company or at all. 32 35 BUSINESS OVERVIEW Ventana develops, manufactures and markets proprietary instrument/reagent systems that automate IHC and ISH tests for the analysis of cells and tissues on microscope slides. These tests are important tools used in the diagnosis of and selection of treatment for cancer. The Company believes that it is the worldwide leader in the automated IHC testing market, as the Company estimates that its worldwide installed base of 581 instruments as of March 31, 1996 is approximately five times as large as the combined installed base of instruments of all of the Company's current competitors. Ventana has placed instruments with 31 of the 40 leading cancer centers according to U. S. News & World Report and 35 of the 42 cancer centers designated by the National Cancer Institute, including the Mayo Clinic, the Dana Farber Cancer Institute, The Johns Hopkins University, the M.D. Anderson Cancer Center and the Fred Hutchinson Cancer Center. Each Ventana proprietary system placed provides a recurring revenue stream as customers consume reagents and supplies sold by the Company with each test conducted. Consequently, two key elements of the Company's strategy are to increase the number of instrument placements and to maximize the recurring revenue stream per placement through increased sales of reagents and supplies. In late 1991, Ventana began commercial shipment of its first system, the Ventana 320 instrument and related reagents used for automated IHC tests. Since then, Ventana has developed and introduced the Ventana ES, the successor to the 320, as well as the Ventana gen II, which is capable of performing ISH tests in addition to IHC tests. These patient priority systems use Ventana's proprietary horizontal slide processing technology to perform multiple tests rapidly on a single patient biopsy. In February 1996, Ventana acquired BioTek which introduced its first automated IHC system, the TechMate 1000, in 1992, and has also introduced the successor TechMate 500 instrument. BioTek's batch processing systems use proprietary vertical slide processing technology to reliably and cost effectively process high volumes of single tests on multiple patient biopsies. These complementary product lines enable Ventana to serve a broad range of customers. Smaller hospitals, which generally do not handle a high volume of cancer patients, typically use patient priority systems to meet their automated testing needs. Reference and research laboratories which serve numerous institutions typically use batch processing systems to process large volumes of tests. Large hospitals with a high volume of patients and a broad range of test requirements may use both patient priority and batch processing systems. Cancer is the second leading cause of death in the United States accounting for 25% of deaths (approximately 555,000 deaths per year). Currently, approximately 10 million people in the United States have a history of invasive cancer, and it is estimated that approximately 1.4 million new cases of invasive cancer will be diagnosed each year. The vast majority of IHC testing associated with cancer diagnosis and treatment in the United States is conducted in an aggregate of approximately 2,200 clinical institutions and reference and research laboratories. The Company estimates that these institutions and laboratories create the opportunity for the placement of as many as 2,500 automated IHC testing instruments. The Company believes that less than 20% of such institutions and laboratories currently conduct IHC testing on an automated basis. The international market for automated IHC and ISH testing is estimated by the Company to be approximately 1.2 times the size of the United States market with Europe accounting for approximately 55% of the international market potential. Currently most IHC testing is performed manually which often yields inconsistency of test results. As compared to manual IHC testing, Ventana's automated systems provide improved reliability, reproducibility and consistency of test results. The systems' economic advantages include reduced cost per test, faster turnaround time, increased test throughput and a reduced dependence on skilled laboratory technicians. Additional benefits include the ability to perform new and emerging diagnostic tests, improved visual clarity which aids the interpretation of test results, and the ability to obtain maximum clinical information from minimally sized biopsies. The Company believes it will play a critical, expanding role in cancer science as researchers will use Ventana systems to accelerate the identification and development of new tests and that its installed base of instruments will speed the commercialization and clinical implementation of such new tests. 33 36 The Company anticipates that its reagent test menu will expand due to the major emphasis of cancer research on the identification of new prognostic IHC and ISH indicators. ACQUISITION OF BIOTEK Ventana acquired BioTek in February 1996 for total consideration of $18.8 million. The acquisition of BioTek enhanced Ventana's competitive position and enabled the Company to become the worldwide leader in the automated IHC and ISH testing market. Ventana's installed base of instruments increased from 294 instruments to 581 instruments as of March 31, 1996 as a result of the acquisition. The increase in the instrument base also increased the aggregate recurring revenue stream from reagents and supplies sold to customers. The acquisition also enabled Ventana to add a number of prestigious cancer centers to its list of customers. BioTek's product line complements Ventana's and enables the Company to meet the differing needs of customers requiring patient priority or batch processing systems, or both. The acquisition also creates the opportunity for operational synergies including the change to higher value-added and consolidation of reagent manufacturing, the rationalization of sales and marketing forces and the elimination of redundant regulatory, general and administration functions and personnel. Historically, BioTek generated lower gross margins than Ventana due to its employment of a different business strategy which primarily involved the use of third parties for key activities. BioTek's instruments were produced by third-party manufacturers which prevented BioTek from capturing manufacturing margin. BioTek's instruments have an open configuration, enabling the customer to use reagents purchased from BioTek or others, which impacted both the price and volume of reagents purchased by customers from BioTek. In contrast, Ventana's instruments have a closed configuration requiring the customer to use Ventana's prepackaged detection chemistries. BioTek also realized lower gross margins on reagents than Ventana due to its utilization of intermediate materials in the manufacturing process which resulted in the capture of fewer value-added steps. BioTek used DAKO and CMS as third-party distributors in the United States and international markets, respectively, and supported its United States sales efforts with field sales and technical support personnel. As a result, BioTek experienced both lower gross margins than if it had sold its products directly and a higher level of selling expense than typically incurred in conjunction with third-party distribution arrangements. Ventana's goal is to integrate the operations of BioTek into the Ventana business model, in which manufacturing, sales and marketing activities are performed by Company employees. In May 1996, the Company completed the integration of the BioTek and Ventana direct field sales and technical personnel. The Company does not intend to renew the United States distribution agreement with CMS which expires in April 1998. The Company is engaged in discussions with DAKO regarding various aspects of the distribution arrangement, which expires in December 1999. The Company expects to complete the consolidation of BioTek's reagent manufacturing into Ventana's Tucson facilities in September 1996. Following this consolidation, the Company intends to convert BioTek's reagent manufacturing to the process used by Ventana in which basic raw materials are used and important value-added steps are performed internally. The Company believes that in the near term it will be more cost effective to continue sourcing batch processing instruments from third-party manufacturers. The Company expects to complete a contract manufacturing agreement with Kollsman for the TechMate 500 instrument and has entered into an agreement with LJL for production of the Company's next generation batch processing instrument, the TechMate 250. INDUSTRY BACKGROUND IMMUNOHISTOCHEMISTRY Cancer is the second leading cause of death in the United States accounting for 25% of deaths (555,000 deaths per year). Currently, approximately 10 million people in the United States have a history of invasive cancer, and it is estimated that approximately 1.4 million new cases will be diagnosed each year. In the United States, the lifetime risk of developing invasive cancer is 47% for males and 38% for females. The risk of developing cancer increases with age. Among the principal forms of cancer are leukemia, lymphoma and cervical, breast, urinary, lung, prostate, ovarian, colon and rectal cancer. 34 37 Early detection is the number one factor in increasing the long term survival of cancer patients. Health care professionals are increasing their emphasis on and use of screening and early detection programs for cancer because cancer treatments are generally significantly more effective and less costly the earlier that cancer is detected. Complementing screening and early detection are recent advances in less invasive biopsy methods that can obtain tissue samples from progressively smaller tumors. As a result of these developments, there has been a steady increase in the initial diagnosis of invasive cancer. However, smaller tissue samples are often difficult to analyze with traditional diagnostic tests, increasing the dependence of surgical pathologists on IHC for accurate diagnosis of early stage cancer. After preliminary screening of a biopsy to determine the presence of cancer, IHC is the principal diagnostic test method used for cancer diagnosis and therapy selection. IHC tests use specific antibodies to identify and detect antigens (proteins) in cells and tissues which assist pathologists in assessing various aspects of a patient's cancer. IHC tests, or assays, have two major components: primary antibodies and detection chemistries. The primary antibody is the specific antibody used to bind to the antigen in question. Detection chemistries are composed of multiple reagents including secondary antibodies, enzyme conjugates/complexes and chromogenic enzyme substrates which allow visualization of the primary antibody. IHC tests are performed on cells and tumor tissue to: - determine the type of cancer - determine the site of the primary tumor - determine the degree of malignancy - determine if the cancer has metastasized - assist in the selection of the most appropriate therapy - monitor patient progress - develop a prognosis Correct prognosis is essential in selecting the appropriate therapy regimen and monitoring program for individual cancer patients. IHC assays provide significant prognostic information such as cell cycle and hormone receptor status which, in many cases, cannot be obtained from other tests. This information allows the pathologist to improve risk assessment on an individual patient basis. IHC testing is therefore instrumental to controlling and reducing health care costs and improving cancer survival rates because earlier, more accurate diagnoses and prognoses can lead to earlier, more targeted therapy and may reduce the risk of use of an incorrect or inappropriate treatment. Manual IHC assays require skilled technical personnel to perform as many as 60 individual processes and can require several days to complete. For the assay to be successful, each process must be performed in the proper sequence and for the proper length of time. In addition, the length of time and the reagents used for each of the steps varies depending upon the primary antibody used in the assay. The complexity of manual IHC assays leads to poor reproducibility and inconsistency of results. Therefore, while IHC has been used routinely in clinical diagnosis for over 10 years, the requirement of skilled technical personnel, labor intensity (approximately 40 slides per day per technician) and lack of standardization has limited the growth of clinical IHC. The development of new diagnostic systems composed of instruments and reagents has resulted in the automation of tests in a number of diagnostic market segments. The trend toward automation of diagnostic testing began in the 1960s with the automation of hematology testing by Coulter Electronics Corporation and clinical chemistry testing by Technicon Instruments Corporation. In the 1980s, Abbott Laboratories, Inc. ("Abbott") introduced two instruments with proprietary prepackaged reagents to automate immunoassay tests performed on serum or urine. Ventana's systems are fundamental enabling technologies that overcome major obstacles, including the inherent limitations of manual processing, which have historically prevented both the broader use and growth of IHC. 35 38 IN SITU HYBRIDIZATION ISH tests are advanced tests for infectious disease and cancer diagnosis and other applications that generate visual signals based on probes used to detect the presence of specific nucleic acids (DNA/RNA) contained in a cell. Over the next decade, Ventana believes that ongoing research and development in the field of molecular analysis will result in the continued introduction of new IHC and ISH tests. ISH assays are technically far more challenging and labor intensive than IHC assays. In addition to requiring a similar number of processes which must be performed in the proper sequence and for the proper length of time, ISH assays require multiple wash solutions, or buffers, and the temperature at which each of the steps must be executed typically ranges from 37(++)C to 98(++)C. Furthermore, the conditions for each of these processes is dependent upon the specific probe being used. Due to this extreme degree of technical difficulty, there are very few clinical laboratories capable of performing manual ISH assays. Ventana's gen II system represents a fundamental enabling technology for the rapid, accurate and cost effective identification of unique RNA and DNA (probe diagnostics) and is designed to overcome the inherent limitations of manual processing. VENTANA STRATEGY The Company's objective is to strengthen its worldwide leadership position in the automated IHC testing market and to develop and expand the automated ISH testing market. The following represent key elements of the Company's strategy: Maximize Instrument Placements. The Company's objective is to strengthen its competitive position in the automation of IHC testing by establishing a larger installed base of instruments that current or future market entrants must overcome. The Company estimates that its worldwide installed base of 581 instruments is approximately five times as large as the combined installed base of instruments of all of the Company's current competitors. The Company believes that its placement of instruments in 35 of the 42 cancer centers designated by the National Cancer Institute provides a powerful reference tool for potential new customers. To facilitate instrument placements, the Company offers customers a wide selection of instruments which address the patient priority needs of hospital clinical laboratories and the batch processing needs of large hospitals and reference and research laboratories. In order to satisfy the broad spectrum of customers' operational and financial criteria, the Company intends to continue to offer several instrument procurement options, including RAPs, and to expand the range and price points of its instrument offerings. Under a RAP, the customer obtains the use of an instrument with no capital investment in exchange for the customer's commitment to purchase reagents from the Company at a higher price than if the instrument had been purchased. The Company believes it can accelerate the rate of expansion of its installed base by increasing its emphasis on the placement of instruments through RAPs because the required capital investment associated with a purchase, a significant sales hurdle, will be eliminated. Maximize Revenue Stream Per Placement. Each instrument placed provides the Company with a recurring revenue stream through the sale of reagents and supplies. The Company seeks to increase this revenue stream by converting all existing manual tests performed by the customer to full automation and by selling to the customer all reagents required for such tests. The Company then seeks to have the customer expand its test menu through the inclusion of all tests that are offered by Ventana as well as new tests as they are introduced. To meet these objectives, the Company's systems have been designed as broad enabling platforms which permit customers to easily expand their test menu. The Company also has a comprehensive customer education program which includes on-site technical training in instrument use, user group meetings and Company-sponsored national teleconferences with leading medical experts who regularly update customers on diagnostic and testing developments. Develop New and Enhanced Products. Since 1991, the Company has successfully introduced and commercialized the Ventana ES, the Ventana gen II and the TechMate 500, as well as 48 new reagents. The Company intends to introduce lower priced instruments which it expects it will place through RAPs in order to provide greater financial flexibility for its customers in instrument procurement. Ventana recently initiated broad-scale commercialization of its gen II ISH system and has placed 15 systems in leading research sites in 36 39 the United States and Europe. The Company intends to continue to innovate in the field of automated cellular diagnostics through the development and introduction of new instruments, software and reagents. Expand Intellectual Property Position. The Company seeks to expand its intellectual property position by entering into strategic alliances, acquiring rights of first refusal on future commercial developments and licensing existing technologies. The Company evaluates and intends to pursue the licensing of nucleic acid probe technology for ISH applications from biopharmaceutical companies, research institutions and others. In conjunction with gen II system placements, the Company has and continues to enter into agreements with customers which provide the Company with a right of first refusal to commercialize new tests developed by such customers for use on the gen II system. The Company believes customers are willing to enter into these arrangements because the gen II is an enabling platform that facilitates the development and commercialization of new ISH tests. PRODUCTS The Company offers proprietary systems composed of instrumentation, reagents and consumable products which are designed to enable clinical and research laboratories to perform standardized IHC and ISH testing. The proprietary nature of the Company's systems is based upon the interrelationship among the electronics and mechanical and software control of the instrument and the stabilization, composition, packaging and delivery of reagents. The Company's broad line of products includes patient priority systems targeted to hospital clinical laboratories and batch processing systems targeted to large hospital clinical laboratories and reference and research laboratories. The Company's patient priority systems are "closed" in that customers must purchase detection chemistries from Ventana in order to operate the instruments. Although the Company's existing batch processing systems are "open," providing the customer with the ability to purchase reagents from either the Company or other sources, users of more than 85% of the Company's United States installed batch processing systems regularly purchase reagents from the Company. The following are the principal benefits of automated cellular and tissue analysis using the Company's integrated systems as compared with manual methods: - improved reliability, reproducibility and consistency of test results - reduced cost per test - faster turnaround time for test results - increased test throughput for the testing laboratory - ability to perform new and emerging molecular tests - reduced dependence on skilled laboratory technicians - ability to perform special staining applications (batch processing instruments) - ability to obtain maximum clinical information from minimally-sized biopsies - ability to document processing protocols (patient priority instruments) - enhanced cellular differentiation through multiple staining on a single slide To confirm the cost advantages of automated analysis using the Company's instruments as compared to manual methods, the Company completed a cost study involving 11 representative users of the Company's systems. These users encompass a cross-section of the Company's customers and include hospitals of varying sizes and a reference laboratory. The cost data compiled in the study was based on the users' internal allocations of IHC test costs. The results of the study indicate that automated IHC analysis using the Company's products results in cost savings per test of approximately 10% as compared to manual methods. INSTRUMENT PRODUCTS Patient Priority Instruments. Ventana currently offers two patient priority systems, the Ventana ES and the Ventana gen II. The Ventana patient priority systems provide a complete automated approach, requiring users to only prepare specimens and place them on microscope slides. The patient priority systems are barcode driven and are designed for multiple tests on a single patient biopsy with rapid turnaround time and walk-away convenience. A barcode label affixed to each slide positively identifies the slide and the test procedures to be 37 40 performed. Up to 40 slides can be processed at one time in the reaction chamber of the instrument utilizing as many as 25 individual reagents, providing the user with significant flexibility. The instrument scans the barcodes on the slides and the reagent dispensers and processes each slide with the unique steps necessary to perform each test. The Company's proprietary software controls all aspects of the test procedures. The steps of dispensing, incubating (i.e. temperature and time control) and washing are performed by the instrument using a series of proprietary chemical/mechanical methods developed by Ventana. These methods are critical to obtaining precise, sensitive and rapid test results and make the system reliable and easy to use. Typically, the processing of slides on the instrument requires less than two hours. The Ventana gen II uses the same basic architecture as the Ventana ES instrument and has additional functions enabling it to perform ISH tests. These functions are (i) an improved heating system which allows for incubation temperatures of up to 98(++)C, (ii) rapid incubation temperature cycling and (iii) additional and improved wash stations which permit the use of multiple buffers and instrument controlled changes in the concentration of buffers. Ventana's gen II system represents a fundamental enabling technology for the rapid, accurate and cost effective identification of unique RNA and DNA (probe diagnostics) and is designed to overcome the inherent limitations of manual processing. The Company is currently in the process of developing a new IHC instrument, the NexES. The NexES, a patient priority system having IHC capabilities similar to the Ventana ES, will be offered at a lower price per unit than the ES. Unlike the Ventana ES, the NexES is based upon a modular design and an external personal computer with a Windows 95 operating environment for software control. Each module holds up to 20 slides in the reaction chamber and 25 reagents in its reagent carousel. The modular design of the NexES and external personal computer will permit the linkage of up to eight NexES modules together, creating the capacity to process up to 160 slides using up to 200 reagents at one time. The NexES will therefore offer users a significant degree of flexibility as users can purchase from one to eight modules depending upon their test volume requirements. Initial prototypes of the NexES are currently at the in-house testing stage with beta site testing scheduled for early 1997. Commercial introduction of the NexES is currently scheduled for 1997. Batch Processing Instruments. The Company's line of TechMate batch processing instruments are designed for large volume testing using a single antibody on multiple patient biopsies and research applications in which long incubation times and unique detection chemistries are required. The Company's batch processing instruments employ capillary action to perform IHC tests. Patient biopsies are placed on capillary gap slides which maintain a space of predetermined width between adjacent slides when loaded into TechMate systems. Reagents are loaded into disposable reagent trays and programmable software directs the instrument to apply the reagents in the proper sequence. The instrument immerses the bottoms of the slides in the reagents as programmed and the reagents are drawn up the slide and over the tissue specimen by capillary action. After each reagent application and incubation, the instrument removes the reagent from the specimen by placing the slides onto disposable blotting pads. The Company's original batch instrument, the TechMate 1000, has a 300 slide capacity. This large capacity is suited to large reference laboratories which run a limited number of antibody tests on vast numbers of patient biopsies. The Company has ceased production of the TechMate 1000. The successor instrument, the TechMate 500, has a 120 slide capacity, which is applicable to both large and moderately-sized reference laboratories and large research laboratories. The Company has completed development of, and through LJL is initiating production of, the TechMate 250 instrument. The TechMate 250, which has a 40 slide capacity, is targeted primarily for the European market. REAGENT AND CONSUMABLE PRODUCTS Reagent Products Reagent products are composed of primary antibodies and detection chemistries, each of which is required for an IHC test. Customers that have patient priority systems must use Ventana detection chemistries on all tests; such customers have the option of purchasing primary antibodies from Ventana or other sources. Customers who have the Company's batch processing systems have the option of purchasing both antibodies and detection chemistries from Ventana or other sources. Users of more than 85% of the Company's United States installed batch processing systems regularly purchase reagents from the Company. 38 41 Primary Antibodies. Ventana sells a line of in excess of 30 primary antibodies used to detect antigens in combination with detection chemistry kits on the Company's instruments. Ventana markets all of the antibodies used to perform the IHC tests that currently account for approximately 85% of total IHC test volume. Detection Kits. Detection chemistries typically account for approximately 70% of the total expenditures for reagents required to perform IHC tests using the Company's instruments. Ventana produces a line of detection chemistries for use on both patient priority and batch processing systems which provide the user with standardized reagents, thereby giving the user convenient and rapid results. The detection chemistries have been developed by the Company using proprietary formulations which, when combined with the Company's primary antibodies and other reagents, optimize the results of tests performed on the Company's instruments. These kits generate the visual signal in an IHC reaction at the site where a primary antibody is bound to a specific antigen or molecule in the cell or tissue. The patient priority system utilizes detection kits which include (i) a DAB Kit which generates a brown color; (ii) an AEC Kit which generates a deep red color; (iii) an AlkPhos Red Kit which generates a bright red color; and (iv) an AlkPhos Blue Kit which generates a deep blue color. The Company currently sells DAB and AlkPhos Red for use with its batch processing instruments. The detection kits are designed to perform tests on a wide variety of specimens, so a laboratory can, for example, perform tests on tissue preserved in paraffin and on frozen tissue simultaneously. The Company's detection chemistries have been formulated to provide long term stability for reproducibility and ease of use as well as a high signal to noise ratio for optimal sensitivity. Consumable Products Ventana offers a line of consumable ancillary products that are necessary for processing slides on the Company's instruments. These include buffers for optimizing the IHC reaction and counterstains for staining cell nuclei, which are used with both patient priority and batch processing instruments. The buffers ensure good morphology, low backgrounds and high signals. The counterstains provide additional convenience for the customer by eliminating the need for additional processing of the slides after staining on the instrument. For use with patient priority instruments, Ventana also supplies a proprietary liquid coverslip which is used to inhibit evaporation during processing in the instrument, fixatives for maintaining the morphology of cells or tissues, enzymes for unmasking antigens, and slide barcodes for use in identifying the slide and its specific IHC reaction steps. For use with batch processing instruments, the Company also provides disposable reagent trays which are used to hold the reagents during IHC reactions, capillary gap slides and wicking pads used for reagent removal between applications. MARKETS AND CUSTOMERS There are approximately 4,200 acute care hospitals and clinics in the United States. Of these, there are approximately 1,900 hospitals with over 200 beds which perform the vast majority of surgical and other medical procedures related to cancer diagnosis and treatment. In addition, there are approximately 200 reference and research laboratories and approximately 100 biotechnology and pharmaceutical companies which also perform substantial numbers of IHC and ISH tests. The combination of these health care institutions creates a total instrument site potential of 2,200 locations. Ventana considers this to be its core market segment for cancer testing and focuses the bulk of its sales and marketing efforts on these institutions. The Company estimates there are as many as 2,500 instrument placement opportunities in the 2,200 potential instrument site locations in the United States. The international market for instrument placements is estimated by the Company to be approximately 1.2 times the size of the United States market. Europe is estimated to account for approximately 55% of the international market potential, Japan approximately 20% and the Pacific Rim and Latin American markets the balance of the international market opportunity. As of March 31, 1996, the Company had 441 instrument placements in 406 of the 2,200 potential United States instrument sites. The Company believes that less than 25% of such United States potential instrument sites currently conduct IHC testing on an automated basis. The Company believes that its worldwide installed base of 581 instruments is approximately five times as large as the combined installed base of instruments of all of the Company's current competitors. 39 42 Ventana has placed instruments with 31 of the top 40 cancer centers according to U.S. News & World Report and 35 of the 42 cancer centers designated by the National Cancer Institute, including the Mayo Clinic, the Dana Farber Cancer Institute, The Johns Hopkins University, the M.D. Anderson Cancer Center and the Fred Hutchinson Cancer Center. Presented below is a selected list of existing customers: HOSPITALS AND CLINICS Albany Medical Center Hospital (3 units) Baylor School of Medicine Boston University City of Hope National Medical Center (3 units) Cleveland Clinic (3 units) Columbia Presbyterian Dana Farber Cancer Institute Fox Chase Cancer Center Fred Hutchinson Cancer Center (2 units) Georgetown University (2 units) Harvard University Medical School (2 units) The Johns Hopkins University (2 units) REFERENCE AND RESEARCH LABORATORIES Corning Nichols/MetPath (2 units) Dianon (2 units) National Cancer Institute National Institutes of Health (5 units) M.D. Anderson Cancer Center (2 units) Mayo Clinic (4 units) New York University (2 units) Northwestern University Ochsner Clinic Stanford University UCLA Medical Center University of Chicago (4 units) University of Michigan (4 units) Walter Reed Army Medical Center (2 units) Yale University BIOTECHNOLOGY AND PHARMACEUTICAL Amgen, Inc. (2 units) Bristol-Myers Squibb Company Eli Lilly and Company Prizm Pharmaceuticals Schering-Plough Corporation The Company intends to introduce lower priced instruments, including the NexES and the TechMate 250, which it expects to place through RAPs in order to provide greater financial flexibility for its customers in equipment procurement. The Company believes that lower priced systems and the RAP program will have particular appeal to those hospitals which are currently losing reimbursement revenue and incurring increased costs as a result of not performing IHC tests internally. Additionally, smaller hospitals can benefit from the Company's RAP programs and lower priced instruments due to the absence of an initial capital expenditure and an increased ability to compete with larger hospitals by providing IHC testing and consultation on site. SALES, MARKETING AND CUSTOMER SUPPORT Ventana markets and sells its instruments and reagents in North America through a direct sales force and CMS. The Company markets and sells its instruments and reagents in Europe through a direct sales organization headquartered in Strasbourg, France, distribution relationships in certain countries and a distribution arrangement with DAKO, a manufacturer and supplier of reagents used in manual IHC testing. The distribution arrangements with CMS in the United States and DAKO in Europe were inherited with the BioTek acquisition and only relate to batch processing systems. The Company plans to seek a strategic partner for the Japanese market and is in the early stages of evaluating distributors for other geographic markets. Although BioTek used third parties for sales and distribution, BioTek maintained a small field sales organization in the United States in order to support the efforts of CMS. Ventana completed the integration of BioTek's field based personnel in May 1996. Ventana's direct sales force in North America now consists of 24 direct representatives, 4 regional managers, a national managed care accounts manager, a national sales manager, 7 field based technical marketing representatives and 4 field service engineers. Ventana's patient priority systems are sold through its direct sales force. The sales force is organized around geographic territories which have been designed to provide each sales representative with an approximately equal number of sales opportunities. The Company's sales representatives typically have technical backgrounds or prior medical capital equipment sales experience. The Company's sales representatives are incentivized to both increase instrument placements and maximize recurring reagent sales. 40 43 BioTek entered into its distribution agreement with CMS in January 1993. Under the agreement, CMS has exclusive United States distribution rights for TechMate instruments and related reagents. The agreement requires CMS to make good-faith commercial efforts to purchase certain specified quantities of instruments and to maintain a sufficient inventory of reagents to meet customer requests. Under the terms of the agreement, CMS is guaranteed specified gross profit margins on instruments, subject to BioTek's prior approval of sales below prices prescribed by the agreement. Repairs, customer service and provision of spare parts are the responsibility of BioTek. BioTek is obligated to repurchase at cost all unsalable instruments and any slow-moving reagents. Unless earlier amended, replaced or terminated, the agreement with CMS expires in April 1998. United States sales through CMS are subject to several operating conditions. In particular, it has historically been necessary for BioTek to support, and the Company anticipates that it will need to continue to support, the efforts of CMS with direct field sales and support personnel. As a result, the Company generates lower gross margins on sales through CMS than it would generate were it to sell directly to end-users and incurs higher selling expenses than typically associated with third-party distribution arrangements. As a result of these factors and due to the presence of the Company's direct sales force in the United States, the Company does not intend to renew the agreement with CMS upon its expiration in April 1998. The Company has had discussions regarding possible modifications to or early termination of the relationship with CMS. However, these discussions are not currently ongoing. Ventana's sales force in Europe consists of eight sales and support personnel located in France. This sales force markets and sells Ventana's patient priority systems direct in France, Germany and the Benelux countries and markets and sells through distribution relationships in Italy, Spain and Scandinavia. This sales force is geographically organized and is compensated in a manner similar to the United States sales force. Ventana expects to significantly expand its direct sales and marketing activities in Europe in 1996 and 1997. BioTek entered into its agreement with DAKO in September 1994. DAKO is a market leader in Europe in supplying reagents for use in manual IHC tests. DAKO has exclusive rights to distribute TechMate instruments and related accessories in Europe and several other territories. The agreement also permits DAKO to supply customers with its own reagents for the instruments in return for paying BioTek a fixed dollar royalty amount over a five-year royalty term for each instrument installed at a customer site. As of March 31, 1996, there were 115 instruments included in the royalty base. Under the agreement, DAKO is subject to certain minimum purchase requirements for instruments. In connection with BioTek's agreement with DAKO, DAKO made two loans secured by a pledge of substantially all of BioTek's assets. DAKO also made prepayments on future instrument sales and reagent royalties to BioTek. These loans and prepayments were used to fund TechMate 250 instrument development and working capital requirements. The aggregate balance of the secured loans and prepayments was $1.6 million and $0.9 million, respectively, at March 31, 1996. Of the secured loans, $0.3 million bears interest at 5% per annum and the remaining $1.3 million does not bear interest. The prepayments do not bear interest. The secured loans and prepayments are recorded as advances from distributor in the Company's Consolidated Financial Statements. The amounts payable under these loans are repaid through discounts on DAKO purchases of instruments from BioTek. Upon termination of the distribution agreement or in the event of a default by BioTek under the distribution agreement (including a failure to satisfy development milestones with respect to the TechMate 250 instrument), these loans will convert to fixed term loans that will be due and payable in 12 equal quarterly installments commencing upon such event. Since the acquisition of BioTek, Ventana and DAKO have been engaged in discussions regarding various provisions of the distribution agreement. DAKO has asserted that BioTek has not fulfilled its obligations with respect to the development and commercial introduction of the TechMate 250 instrument. The Company denies this assertion and believes that it is in substantial compliance with its obligations under these development milestones. In particular, the Company believes that the recent contract manufacturing agreement with LJL will enable it to satisfy DAKO's requirements for TechMate 250 instruments. Nevertheless, the negotiations with DAKO could result in an attempt by DAKO to exercise contractual remedies available to it under the distribution agreement and the terms of the secured loans, an interruption in the distribution of the Company's batch processing instruments outside the United States or litigation between the parties with respect to the agreement, which would involve significant costs as well as diversion of 41 44 management time. Any of the foregoing could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company would prevail in any litigation involving the agreement. DAKO's remedies under the agreement include (i) requiring repayment of the secured loans in 12 equal quarterly installments commencing upon a default by BioTek and (ii) an irrevocable license to manufacture TechMate instruments for resale internationally and a related reduction in the fixed dollar royalty rate paid by DAKO to BioTek for each instrument included in the royalty base. There can be no assurance as to the future course or outcome of the Company's negotiations with DAKO or as to the Company's future relationship with DAKO. If DAKO were successful in obtaining a manufacturing license for TechMate instruments, the Company could experience a loss of instrument revenue which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, termination of the agreement with DAKO could adversely affect the Company's results of operations. Ventana's sales and marketing strategy for its systems is focused on increasing its penetration of the hospital and laboratory market through several instrument placement options. The options include conventional sales, financing through a third-party lease company and RAPs. RAP contracts currently being offered by the Company are generally for a one-year term, are automatically renewed unless the customer gives notice of nonrenewal and are cancellable during an initial 180-day trial period. Due to the working capital requirements associated with RAPs, the Company has historically sought to limit the amount of instruments placed through RAPs to approximately 30% of instrument placements. However, the Company anticipates that the percentage of instruments placed through RAPs will increase with the introduction of the NexES and TechMate 250 and as the Company obtains the additional working capital required to support additional RAP placements, which may in the future result in a decrease in instrument sales both in absolute dollars and as a percentage of total revenues. As of March 31, 1996, the Company had placed 72 instruments through RAPs. A key component of the Company's business strategy is to increase the sale of reagents into its installed instrument base through a high level of customer support. The Company's technical marketing representatives assist in training customers in the use of the Company's systems and seek to increase customer reagent utilization by facilitating the transfer of workload from manual procedures. Through direct customer contact, the Company's technical marketing representatives are able to promote sales of reagents and suggest new IHC test applications to customers. New customers receive initial training on the systems either in the field or at Ventana's facilities in Tucson, Arizona. The Company's technical marketing representatives then visit the customer to provide additional on-site training. Thereafter, Ventana actively supports customers with periodic product bulletins and provides 24-hour customer telephone support. Ventana actively markets its products through participation at industry trade shows, video and audio presentations by leading pathologists and direct mail. The Company provides emergency field service for instruments during an initial warranty period of 6 to 12 months. After the warranty period has expired, field service is provided under service contract or on a billed time and material basis. As of April 30, 1996 the Company had 85 instruments under service contracts out of a total of approximately 230 instruments in the United States that are outside the warranty period. Current annual service contract prices typically range from $4,250 to $6,500. MANUFACTURING The Company manufactures its patient priority instruments at its facilities in Tucson, Arizona. The Company is currently in the process of expanding its manufacturing operations in Tucson and believes that this expansion will provide the Company with sufficient manufacturing capacity to meet its anticipated requirements for patient priority instruments for approximately the next three years. Components for patient priority instruments are purchased from a variety of vendors, subject to stringent quality specifications. The components are assembled by Ventana's highly skilled manufacturing technicians into finished products. A quality assurance group performs tests at regular intervals in the manufacturing cycle to verify compliance with the Company's specifications and regulatory requirements, including FDA GMP requirements. 42 45 A number of the components used in the ES and gen II systems are fabricated on a custom basis to the Company's specifications and are currently obtained from a limited number of sources. To date, however, the Company has not experienced any material disruptions in the supply of such components. The Company believes that additional suppliers, if required, could be obtained and qualified. To date, the Company has not experienced significant difficulties with manufacturing yields and has experienced minimal manufacturing waste in the patient priority instrument manufacturing process. The Company has relationships with third-party manufacturers for the manufacture of batch processing instruments. The Company uses Kollsman for the manufacture of TechMate 500 instruments and LJL for the manufacture of TechMate 250 instruments. The Company has entered into a contract manufacturing agreement with LJL and is negotiating a contract manufacturing agreement with Kollsman. Reagents sold for use with the Company's patient priority instruments are manufactured by Ventana, which purchases basic raw materials and performs value-added manufacturing processes, such as formulation and packaging, at its facilities. Certain components and raw materials, primarily antibodies, used in the manufacturing of the Company's reagent products are currently provided by single source vendors. To date, the Company has not experienced any material disruptions in supply from these vendors and has experienced levels of manufacturing waste in the reagent manufacturing process that it believes to be below industry averages. Reagents sold for use with the Company's batch processing instruments have historically been manufactured by third parties, with only a few final steps in the manufacturing process being performed internally. The Company expects to complete the consolidation of batch processing reagent manufacturing into Ventana's Tucson facilities in September 1996. Following this consolidation, Ventana intends to convert the manufacturing process for such reagents to the process used by Ventana in which basic raw materials are used and important value-added steps are performed internally. The goals of this transition are to capture margin and value added currently being lost through payments to third-party manufacturers, increase economies of scale in both raw material purchasing and manufacturing, standardize procedures and processes, increase control over scheduling and improve manufacturing flexibility. The Company's reagent manufacturing process at its Tucson, Arizona facility is currently semi-automated. The Company anticipates that as production volumes increase it will increase the level of automation. The Company currently has sufficient reagent manufacturing capacity to meet its anticipated needs for approximately the next three years. The Company's long-term plans are to build a separate reagent manufacturing facility in the Tucson area to increase its reagent manufacturing capacity and increase the level of automation of the manufacturing process. The Company anticipates commencing construction of this facility in 1998. The Company's manufacturing operations are required to be conducted in accordance with FDA GMP requirements. GMP requires the Company to maintain documentation and process control in a prescribed manner with respect to manufacturing, testing and quality control. In addition, the Company is subject to FDA inspections to verify compliance with GMP requirements. The Company also intends to implement manufacturing policies and procedures which will enable the Company to receive ISO 9000 certification. ISO 9000 standards are global standards for manufacturing process control and quality assurance. After mid-1998, the Company will be required to obtain the CE mark for continued sale of its products in the countries comprising the European Union. The CE mark is an international symbol of quality assurance and compliance with applicable European Union medical device directives. RESEARCH AND DEVELOPMENT The Company's research and development projects are generally divided between reagent development and instrumentation development. Reagent development emphasizes existing instrumentation, and with the recent acquisition of BioTek, is divided into consolidation and integration, patient priority, IHC and ISH projects. Instrument development emphasizes the development of new instruments and enhancements to existing instruments. 43 46 Reagent Development Projects. Ventana's objective is to consolidate the reagent manufacturing process for both patient priority and batch processing systems in order to have common formulations to improve manufacturing efficiencies. The Company estimates that reagent manufacturing will be consolidated at Ventana's Tucson facilities in September 1996 and that by 1998 the Company will have fully integrated the reagent formulations and manufacturing processes for patient priority and batch processing reagents. Ventana's principal focus in the area of new reagent product development is the introduction of new prognostic indicators. Ventana closely monitors third-party development of new primary antibodies with prognostic potential. When such prognostic markers appear, Ventana will seek to incorporate the marker into its product line or will use its licensed fusion protein technology to develop similar markers. Ventana is also developing a second generation estrogen receptor ("ER") assay for use in breast cancer diagnosis. The assay incorporates an improved primary antibody clone which significantly increases the assay's sensitivity. The improved ER assay is currently undergoing beta testing and is expected to be available for sale labelled for research use only in the fourth quarter of 1996. The Company also intends to seek appropriate FDA approvals or clearances for this product. Ventana is also improving its detection chemistry sensitivity by developing a first generation amplification kit. This amplification system will be compatible with all four existing patient priority detection chemistries marketed by the Company as well as the first generation of ISH detection chemistries currently under development. Through the use of monoclonal antibodies that recognize each of the molecules used to label nucleic acid probes in ISH tests, Ventana is developing a line of ISH detection chemistries for research use. The Company's ISH detection chemistries are scheduled for beta testing during the third quarter of 1996 with availability for commercial sale for research use expected in 1997. Instrumentation Development Projects. In addition to completion of development of the NexES instrument, Ventana has two major instrument development projects underway. The first, the COSMIC, is a microscope system which is aimed at the emerging field of telepathology and information transfer. This system uses rastering of focused light and conventional optics to provide high resolution digital images in real time. The images generated by the microscope are digitized and stored or sent to remote sites. Twelve production prototypes are currently being manufactured and beta site testing is scheduled for 1997. Ventana is also developing a barcode label printing system for use with its patient priority instruments, all of which are barcode driven. To support its patient priority systems, Ventana currently maintains a stock inventory of 125 different prepackaged barcodes. The barcode printer will enable customers to print their own barcode labels from a stock of proprietary blank barcodes. This will reduce the number of stock inventory barcode labels maintained by Ventana to one and enable the customer to include pertinent patient information on each slide for tracking purposes. At April 30, 1996, Ventana's research and development group consisted of 24 persons, many of whom have graduate degrees. Ventana's research and development activities are performed primarily in-house by Ventana employees. These efforts are supplemented by consulting services and assistance from Ventana's scientific advisors. In addition to these projects, the Company inherited with the acquisition of BioTek a development program for an ISH oven designed for use with TechMate 1000 and 500 instruments. This instrument will require substantial additional development work and will also require the development of detection chemistries for use with the instrument. During the years ended December 31, 1995, 1994 and 1993, Ventana spent $2.2 million, $1.9 million and $2.1 million, respectively, on research and development. Pro forma spending for the years ended December 31, 1995 and 1994 was $4.4 million and $2.7 million, respectively. PATENTS AND PROPRIETARY RIGHTS Ventana has pursued a strategy of patenting key technology as it relates to both the automation and the chemistry of analyzing cells and tissues on microscope slides. Ventana has been issued 10 United States patents and one European patent and has filed additional United States and international patent applications. Three of Ventana's United States patent applications have been allowed. Several of Ventana's issued United 44 47 States patents relate to reagent formulations and methods, including a reagent formulation characterized by long-term stability and a method of inhibiting evaporation of reagents during processing. Other Ventana issued United States patents relate to Ventana's reagent dispenser, the use of Ventana's liquid coverslip as an evaporation inhibitor, a tissue fixative and various aspects of the capillary gap technology underlying BioTek's batch processing instruments. Pending applications relate to chemical engineering aspects of the methods used in the automated instrument for performing IHC tests on slides and inventions related to the Company's reagents and their formulations. In addition, a patent application filed by the Company covers an improved liquid coverslip for high temperature applications. The expiration dates of the Company's issued United States patents range from March 2005 to July 2013. There can be no assurance that the Company's patent applications will result in patents being issued or that any issued patents will provide protection against competitive technologies or will be held valid if challenged. Others may independently develop products or processes similar to those of the Company or design around or otherwise circumvent patents issued to the Company. Because patent applications in the United States are maintained in secrecy until patents are issued and since publication of discoveries in scientific literature tends to lag behind actual discoveries by several months, Ventana cannot be certain that it was the first creator of inventions covered by its patents or pending patent applications or that it was the first to file patent applications for such inventions. Moreover, the Company may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine the priority of inventions, which could result in substantial cost to the Company. In the event that any relevant claims of third-party patents are upheld as valid and enforceable, the Company could be prevented from practicing the subject matter claimed in such patents, or would be required to obtain licenses from the patent owners of each of such patents or to redesign its products or processes to avoid infringement. There can be no assurance that such licenses would be available or, if available, would be available on terms acceptable to the Company or that the Company would be successful in any attempt to redesign its products or processes to avoid infringement. If the Company does not obtain necessary licenses, it could be subject to litigation and encounter delays in product introductions while it attempts to design around such patents. Alternatively, the development, manufacture or sale of such products could be prevented. Litigation would result in significant cost to the Company as well as diversion of management time. The outcome of any such litigation cannot be predicted with any assurance. Adverse determinations in any such proceedings could have a material adverse effect on the Company's business, financial condition and results of operations. BioTek is a party to litigation initiated by BioGenex relating to past infringements of patent rights of BioGenex. For a discussion of these proceedings, see "Legal Proceedings." Ventana also relies upon trade secret protection for its confidential and proprietary information. There can be no assurance that others will not independently develop substantially equivalent proprietary information or techniques, gain access to Ventana's trade secrets or disclose such technology, or that Ventana can effectively protect its trade secrets. Litigation to protect Ventana's trade secrets would result in significant cost to the Company as well as diversion of management time. Adverse determinations in any such proceedings or unauthorized disclosure of Ventana trade secrets could have a material adverse effect on Ventana's business, financial condition and results of operations. Ventana's policy is to require its employees, consultants and significant scientific collaborators to execute confidentiality agreements upon the commencement of an employment or consulting relationship with Ventana. These agreements generally provide that all confidential information developed or made known to the individual during the course of the individual's relationship with Ventana is to be kept confidential and not disclosed to third parties except in specific circumstances. Agreements with employees provide that all inventions conceived by the individual in the course of rendering services to Ventana shall be the exclusive property of Ventana. There can be no assurance, however, that these agreements will not be breached or that they will provide meaningful protection or adequate remedies for unauthorized use or disclosure of Ventana's trade secrets. 45 48 COMPETITION Competition in the diagnostic industry is intense and is expected to increase. Ventana's instrument and reagent systems for IHC tests compete with products offered by various manufacturers as well as with manual diagnostic methods. In addition, flow cytometry can be used for cellular testing and may, in certain markets, be competitive with the Company's products. Several companies, including Leica (a division of Leitz Microscope GmbH), Shandon Scientific Limited (a subsidiary of Life Sciences International PLC), BioGenex and DAKO (U.S.) have instruments that perform IHC tests and that can be used with any supplier's reagents. Although these instruments are not fully automated, the ability of these instruments to be used with any suppliers' reagents may be attractive to certain customers. As of March 31, 1996, the Company had an installed base of 581 instruments which the Company estimates is more than five times the combined installed base of instruments of all of the Company's current competitors. The major suppliers of primary antibodies in the anatomical pathology market in the United States are DAKO, BioGenex and Coulter Immunology. The primary suppliers of detection chemistries in the United States are Vector Laboratories, BioGenex and DAKO. The Company's competitors may succeed in developing products that are more reliable or effective or less costly than those developed by the Company and may be more successful than the Company in manufacturing and marketing their products. Although the Company plans to continue to work to develop new and improved products, there are other companies engaged in research and development of diagnostic devices or reagents, and the introduction of such devices or alternative methods for diagnostic testing could hinder the Company's ability to compete effectively and could have a material adverse effect on the Company's business, financial condition and results of operations. Many of the companies selling or developing diagnostic devices, instruments, reagents and genetic probe tests have financial, manufacturing, marketing and distribution resources significantly greater than those of Ventana. In addition, many of these competitors have long-term supplier relationships with Ventana's existing and potential customers. The Company's patient priority instruments require the use of the Company's detection chemistries but can be used with primary antibodies supplied by third parties, and the Company's batch processing instruments can be used with both detection chemistries and primary antibodies supplied by third parties. Accordingly, the Company encounters significant competition in the sale of reagents for use on those of its instruments that can be used with reagents supplied by third parties. GOVERNMENT REGULATION The manufacturing, marketing and sale of the Company's products are subject to regulation by governmental authorities in the United States and other countries. In the United States, clinical diagnostic devices are subject to rigorous FDA regulation. The Federal Food, Drug and Cosmetic Act governs the design, testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of the Company's products. Obtaining regulatory approval for new products within this regulatory framework may take a number of years and involves the expenditure of substantial resources. In addition, there can be no assurance that this regulatory framework will not change or that additional regulation will not arise, which may affect approval of or delay an application or require additional expenditures by the Company. The FDA regulates, as medical devices, instruments, diagnostic tests and reagents that are traditionally manufactured and commercially marketed as finished test kits or equipment. Some clinical laboratories, however, choose to purchase individual reagents intended for specific analytes and develop and prepare their own finished diagnostic tests. Although neither the individual reagents nor the finished tests prepared from them by the clinical laboratories have traditionally been regulated by the FDA, the FDA has recently proposed a rule that, if adopted, would regulate the reagents sold to clinical laboratories as medical devices. The proposed rule would also restrict sales of these reagents to clinical laboratories certified under CLIA as high complexity testing laboratories. The Company intends to market some diagnostic products as finished test kits or equipment and others as individual reagents; consequently, some or all of these products will be regulated as medical devices. 46 49 The Company's clinical diagnostic systems are regulated by the FDA under a 3-tier classification system -- Class I, II and III. The degree of regulation, as well as the cost and time required to obtain regulatory approvals, generally increases from Class I to Class III. Most diagnostic devices are regulated as Class I or Class II devices, although certain diagnostic tests for particular diseases may be classified as Class III devices. Prior to entering commercial distribution, most Class I, II, or III medical devices must undergo FDA review under one of two basic review schemes depending upon the type of device or procedure. These review schemes are the 510(k) pre-market notification process and the PMA process. A 510(k) notification is generally a filing submitted to demonstrate that the device in question is "substantially equivalent" to another legally marketed device. Approval under this procedure may be granted within 90 days, but generally takes longer, and in some cases up to a year or more. Class I and II devices, as well as certain Class III devices for which the FDA has not called for a PMA, are reviewed under the 510(k) process. For all other Class III products, the manufacturer must file a PMA to show that the product is safe and effective based on extensive clinical testing and controlled trials among several diverse testing sites and population groups. These controlled trials may be conducted under an Investigational Device Exemption ("IDE") cleared by the FDA, or they may be conducted without FDA review if exempt from IDE requirements. The PMA process typically involves significantly more clinical testing than does the 510(k) procedure and could involve a significantly longer FDA review period after the date of filing. In responding to a PMA application, the FDA can either accept it for filing or reject it and require the manufacturer to include additional information in a resubmitted application. PMA applications that are accepted for filing may be reviewed by an FDA scientific advisory panel, which issues either a favorable or unfavorable recommendation regarding the device. The FDA is not bound by the panel's recommendation, but tends to give it significant weight. By law, the PMA process is to be completed within 180 days of acceptance of the PMA application for filing, although this time period can be, and typically is, extended by the FDA. A PMA application can take from one to several years to complete, and there can be no assurance that any submitted PMA application will ultimately be approved. Further, clearance or approval may place substantial restrictions on to whom and the indications for which the product may be marketed or to whom it may be marketed. Additionally, there can be no assurance that the FDA will not request additional data, or request that the Company conduct further clinical studies. The Company's instruments, with respect to automated IHC testing functions, been categorized by the FDA as automated cell staining devices and have been exempted from the 510(k) notification process. To date, ISH tests have not received FDA approval and, therefore, use of the gen II for ISH tests will be restricted to research applications. New instrument products that the Company may develop and introduce could require 510(k) notifications and clearances or PMA applications. All of the detection chemistries and most of the primary antibody products being sold by the Company are currently classified as Class II devices. Many of Ventana's detection chemistries have received 510(k) clearance from the FDA. Some of the antibodies being marketed by the Company are labeled for diagnostic use and have received 510(k) clearance from the FDA. The Company may wish to market certain antibodies with a label indicating that they can be used in the diagnosis of particular diseases, including cancer. These devices may be classified as Class III devices and may therefore require a PMA. After products have been cleared for marketing by the FDA, the Company will be subject to continuing FDA obligations. Clearances may be withdrawn or products may be recalled if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. The FDA may require surveillance programs to monitor the effect of products which have been commercialized, and has the power to prevent or limit further marketing of the product based on the results of these post-marketing programs. The FDA enforces regulations prohibiting the marketing of products for unapproved uses. Further, if the Company wanted to make changes on a product after FDA clearance or approval, including changes in indications or intended use or other significant modifications to labeling or manufacturing, additional clearances or approvals would be required. The FDA has broad regulatory and enforcement powers including the ability to levy fines and civil penalties, suspend or delay issuance of approvals, seize or recall products, withdraw clearances or approvals, restrict or enjoin the marketing of products, and impose civil and criminal penalties, any one or more of which could have a material adverse effect upon the Company. 47 50 The Company is subject to FDA GMP regulations. The Company is in the process of implementing policies and procedures which are intended to allow the Company to receive ISO 9000 certification. ISO 9000 standards are worldwide standards for manufacturing process control, documentation and quality assurance. There can be no assurance that the Company will be successful in meeting ISO 9000 certification requirements. Under GMP regulations and ISO 9000 standards, the Company is subject to ongoing FDA and international compliance inspections. Laboratories using the Company's diagnostic devices for clinical use in the United States are regulated under CLIA, which is intended to ensure the quality and reliability of medical testing. Regulations implementing CLIA establish requirements for laboratories and laboratory personnel in the areas of administration, participation and proficiency testing, patient test management, quality control, personnel, quality assurance and inspection. Under these regulations, the specific requirements that a laboratory must meet depend on the complexity of the test being performed by the laboratory. Under CLIA regulations, all laboratories performing moderately complex or highly complex tests will be required to obtain either a registration certificate or certificate of accreditation from the Health Care Financing Administration. CLIA requirements may prevent some clinical laboratories from using certain of the Company's diagnostic products. Therefore, there can be no assurance that CLIA regulations and future administrative interpretations of CLIA will not have a material adverse impact on the Company by limiting the potential market for the Company's products. The Company sells products in certain international markets and plans to enter additional international markets. International sales of medical devices are subject to foreign government regulation, the requirements of which vary substantially from country to country. These range from comprehensive device approval requirements for some or all of the Company's medical device products to requests for product data or certifications. FDA approval is required for the export of Class III devices. In addition to the foregoing, the Company is subject to numerous federal, state and local laws and regulations relating to such matters as safe working conditions, laboratory and manufacturing practices, fire hazard control, disposal of hazardous or potentially hazardous substances and other environmental matters. To date, compliance with these laws and regulations has not had a material effect on the Company's financial position, and the Company has no plans for material capital expenditures relating to such matters. However, there can be no assurance that it will not be required to incur significant costs to comply with such laws and regulations in the future, or that such laws or regulations will not in the future have a material adverse effect on the Company's business. Any violation of, and the cost of compliance with, these regulations could have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company believes it will be able to comply with all applicable regulations regarding the manufacture and sale of diagnostic products, such regulations are always subject to change and depend heavily upon administrative interpretations. Delays in or failure to receive clearances or approvals of products the Company plans to introduce, or changes in the applicable regulatory climates could have a material adverse effect upon the business, financial condition or results of operations of the Company. THIRD-PARTY REIMBURSEMENT Third-party payors, such as governmental programs and private insurance plans, can indirectly affect the pricing or relative attractiveness of the Company's products by regulating the maximum amount of reimbursement they will provide to the Company's customers for diagnostic testing services. In recent years, health care costs have risen substantially, and third-party payors have come under increasing pressure to reduce such costs. In this regard, legislative proposals relating to health care reform and cost containment have been introduced at the state and federal levels. The cost-containment measures that health care payors are instituting and the impact of any health care reform could have a material adverse effect on the levels of reimbursement the Company's customers receive from third-party payors and as a result on the Company's ability to market and sell its products. Such factors could have a material adverse effect on the Company's business, financial condition and results of operations. 48 51 FACILITIES Ventana's research laboratories, instrument and reagent manufacturing facilities and administrative offices are located in approximately 30,000 square feet of leased space in Tucson, Arizona. The lease expires in March 2001, subject to renewal terms. The BioTek research laboratory and reagent manufacturing facilities are located in a 8,500 square foot facility in Santa Barbara, California. This lease expires in September 1998; however, these operations are expected to be consolidated into the Tucson facilities in September 1996. The Company believes these premises can be subleased for the remaining term of the lease. EMPLOYEES As of April 30, 1996, Ventana employed 126 persons full time. Of these employees, 57 were engaged in sales and marketing, 24 in research and development, 30 in manufacturing and 15 in general and administrative functions. None of Ventana's employees are covered by a collective bargaining agreement. Ventana considers its relations with its employees to be satisfactory. BACKLOG Ventana typically ships orders for instruments and reagents shortly after receipt, and accordingly does not maintain a significant backlog. LEGAL PROCEEDINGS In March 1995, BioGenex sued BioTek in federal court for infringement of certain patents held by BioGenex relating to an antigen retrieval method used in IHC tests. BioGenex's claims include claims of both direct and contributory infringement. BioTek has denied infringement and has asserted several defenses, including invalidity of the patent that is the subject of the litigation. In April 1995, BioTek ceased offering the products that were the subject of the alleged infringements. BioTek's total sales of these products during the period were approximately $0.6 million. A trial is currently scheduled for October 1, 1996. The parties have, from time to time, engaged in settlement negotiations. There can, however, be no assurance that a pre-trial settlement will be reached. Although there can be no assurance as to the ultimate resolution of this matter, based on currently available information, the Company does not believe that the resolution of this matter will have a material adverse effect on the Company's business, financial condition or results of operations. The Company has received notices of various claims from certain current and former employees of BioTek. To date, no litigation has been instituted by any of these individuals. However, there can be no assurance that such individuals will not institute litigation against the Company. Based on its review of these matters, the Company does not believe that their resolution will have a material adverse effect on the Company's business, financial condition or results of operations. Other than the foregoing litigation, the Company is not a party to any material pending litigation. 49 52 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the directors and executive officers of the Company as of May 15, 1996:
NAME AGE POSITION -------------------------- --- --------------------------------- Jack W. Schuler(1) 55 Chairman of the Board of Directors R. James Danehy 51 President, Chief Executive Officer and Director Stephen A. Tillson, Ph.D. 55 Vice President, Scientific Affairs and Quality Assurance R. Michael Rodgers 50 Vice President, Finance, Chief Financial Officer and Secretary Michael K. Cusack 39 Vice President, Marketing Anthony L. Hartman 45 Vice President, Research and Development Brian J. McGraw 35 Director of Engineering David P. Pauluzzi 35 National Sales Manager Bernard O. C. Questier 42 Vice President, European Operations Rex J. Bates 72 Director Michael R. Danzi 36 Director Edward M. Giles(1) 60 Director Thomas M. Grogan, M.D. 50 Director John Patience(2) 48 Director C. Anthony Stellar, M.D. 66 Director James M. Strickland 53 Director James R. Weersing(2) 57 Director
- --------------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. Mr. Schuler has served as a director of Ventana since April 1991 and as Chairman of the Board of Directors since November 1995. Mr. Schuler has been Chairman of the Board of Directors of Stericycle, Inc., a specialized medical waste management company, since March 1990. Mr. Schuler is also a partner in Crabtree Partners, a Chicago based venture capital firm. Prior to joining Stericycle, Mr. Schuler held various executive positions at Abbott from December 1972 through August 1989, serving most recently as President and Chief Operating Officer. He is currently a director of Medtronic, Inc., Somatogen, Inc. and Chiron Corporation. Mr. Schuler received a B.S. in Mechanical Engineering from Tufts University and an M.B.A. from Stanford University. Mr. Danehy has served as President and Chief Executive Officer and a director of Ventana since September 1994. From June 1994 to September 1994, Mr. Danehy served as a consultant to the Company. From November 1993 to June 1994 Mr. Danehy served as an interim Chief Executive Officer and consultant for BioStar Diagnostics, where he also served as a director from January 1994 to March 1995. From 1972 to 1993, Mr. Danehy worked in a variety of capacities for Abbott. From 1977 through 1989, Mr. Danehy held marketing and general management responsibilities in Abbott's Diagnostics Division that included Product Manager for hepatitis products, Marketing Manager for Clinical Chemistry Systems, Group Marketing Manager for TDx Systems, Director of Marketing for North America and General Manager for Transfusion Diagnostics which included the AIDS test. Mr. Danehy received a B.S. in Chemistry from St. Joseph's College and an M.B.A. from Loyola University of Chicago. Dr. Tillson has served as Vice President of Scientific Affairs and Quality Assurance since August 1995. From the time of his joining Ventana in May 1992 until July 1995, Dr. Tillson served as Director of Scientific 50 53 Affairs and Quality Assurance. From January 1990 to May 1992, Dr. Tillson was as a principal of Ticon Company Consulting. He has 25 years experience in the diagnostic and pharmaceutical industry. Dr. Tillson holds a Ph.D. from Purdue University and received a B.S. from California State Polytechnic University and an M.B.A. from St. Mary's College of California. Mr. Rodgers joined Ventana in February 1994 as Chief Financial Officer and was appointed Vice President, Finance and Secretary in May 1994. From June 1992 until October 1993, Mr. Rodgers was Vice President and Chief Financial Officer with BioMedical Waste Systems, Inc., a medical waste management firm. From December 1988 to December 1991, Mr. Rodgers served as Executive Vice President of Friedkin Investments, Inc., a merchant banking firm. Mr. Rodgers received a B.S. in Business and Accounting from Menlo College and an M.B.A. from the University of Houston. Mr. Rodgers is a Certified Public Accountant. Mr. Cusack has served as Vice President of Marketing since September 1994. Mr. Cusack has also served as President Directeur General of Ventana Medical Systems, S.A., a wholly-owned subsidiary of Ventana, since September 1995. From November 1992 until joining Ventana, Mr. Cusack acted as General Manager, Europe and Mideast for CYTYC S.A.R.L., a medical diagnostics company with operations in the United States and abroad. Prior to CYTYC, Mr. Cusack held various marketing and managerial positions with Abbott's Diagnostics Division. Mr. Cusack received a B.S. from the University of Delaware and an M.B.A. from Temple University. Mr. Hartman has served as Vice President of Research and Development since April 1996. Mr. Hartman joined Ventana in August 1990 as Senior Research and Development Scientist, and he has also served as Director of Product Development and Customer Support. Prior to joining Ventana, Mr. Hartman was a Research Assistant Professor of Pathology at the University of Cincinnati College of Medicine where he supervised the departmental service laboratory for IHC and ISH. Mr. Hartman received a B.S. in General Science from the University of Portland and an M.S. in Biophysics and Genetics from the University of Colorado. Mr. McGraw joined Ventana in September 1991 and has been the Director of Engineering since December 1994. Prior to Mr. McGraw's promotion to Director of Engineering, he was a Senior Engineer. From July 1987 until August 1991, Mr. McGraw held various management and system design positions in Abbott's Diagnostics Division. Mr. McGraw received a B.S. in Mechanical Engineering from West Virginia University. Mr. Pauluzzi has served as National Sales Manager of Ventana since June 1995. He had previously served in various sales positions since joining Ventana in March 1993. From January 1985 until joining Ventana, Mr. Pauluzzi worked for Abbott's Diagnostics Division in a variety of marketing and sales and product management positions. Mr. Pauluzzi received a B.B.A. in Public Accounting from Loyola University of Chicago. Mr. Questier has served as Vice President of European Operations of Ventana since February 1996. From October 1990 until joining Ventana in October 1995, Mr. Questier held a number of management positions in E.I. DuPont de Nemours, most recently as Business Manager for New Products in Europe. Mr. Questier received a degree in Chemical Engineering from the Technical Institute in Oostende, Belgium. Mr. Bates has served as a director of Ventana since April of 1996. From August 1991 to May 1995 Mr. Bates served on the Board of Directors of Twentieth Century Industries and was a member of its compensation committee. Prior to Twentieth Century Industries, Mr. Bates served as the Vice-Chairman of the Board of Directors of the State Farm Mutual Automobile Insurance Company. Mr. Bates also served as State Farm's Chief Investment Officer. In March of 1991, Mr. Bates retired from State Farm. Prior to Mr. Bates' employment with State Farm, he was a partner in the investment firm of Stein, Roe & Farnham in Chicago. Mr. Bates received a B.S. and an M.S. from the University of Chicago. Mr. Danzi has served as a director of Ventana since April 1996. Prior to the acquisition of BioTek, Mr. Danzi served as the President and Chairman of BioTek and was associated with BioTek as a director and investor since 1993. Mr. Danzi is the founder and Managing Director of Danzi Capital Group, a securities firm. Mr. Danzi received a B.S. in Materials Science and Engineering from Cornell University, is a graduate 51 54 of the United States Naval Nuclear Power School graduate level engineering program and received an M.B.A. from Harvard University. Mr. Giles has served as director of Ventana since September 1992. Mr. Giles has served as Chairman and President of The Vertical Group, Inc., a venture capital investment firm, since January 1989. Mr. Giles was previously President of F. Eberstadt & Co., Inc., a securities firm, and Vice Chairman of Peter B. Cannell & Co., Inc., an investment management firm. He is currently a director of McWhorter Technologies, Inc. Mr. Giles received a B.S.E.E. in Chemical Engineering from Princeton University and an M.S. in Industrial Management from the Massachusetts Institute of Technology. Dr. Grogan is a founder, a director and Chairman Emeritus of Ventana. He has served as a director since the founding of the Company in June 1985 and as Chairman of the Board of Ventana from June 1985 to November 1995. He is currently a professor of pathology at the University of Arizona, College of Medicine, where he has taught since 1979. He received a B.A. in Biology from the University of Virginia and an M.D. from George Washington School of Medicine. Dr. Grogan completed a post-doctorate fellowship at Stanford University. Mr. Patience has served as a director of Ventana since July 1989. Mr. Patience was a co-founder and served as a General Partner of Marquette Venture Partners, a venture capital investment firm, from January 1988 until March 1995. Since April 1995, Mr. Patience has been a partner in Crabtree Partners, a Chicago-based venture capital firm. Mr. Patience was previously a partner in the consulting firm of McKinsey & Co., specializing in health care. He is currently a director of TRO Learning, Inc. Mr. Patience received a B.A. in Liberal Arts and an L.L.B. from the University of Sydney, Australia, and an M.B.A. from the University of Pennsylvania Wharton School of Business. Dr. Stellar has served as a director of Ventana since April 1996. Since 1964, he has been in private practice as a surgeon in Laguna Hills, California. Dr. Stellar is certified by the American Board of Surgery and the Board of Thoracic Surgery and is a Fellow of the American College of Surgeons and the College of Chest Physicians. Dr. Stellar received a B.S. and an M.D. from Stanford University. Mr. Strickland has served as a director of Ventana since December 1987. Mr. Strickland is a founder and has been the General Partner of Coronado Venture Management L.P., a venture capital investment firm, since October 1986. Mr. Strickland was previously Vice President of Burr Brown Corporation, a semiconductor manufacturer. Mr. Strickland received a B.S. and an M.S. in Electrical Engineering from the University of New Mexico and an M.S. in Industrial Administration from the Carnegie Institute of Technology. Mr. Weersing has served as a director of Ventana since October 1994. Since 1984, Mr. Weersing has been a Managing Director of MBW Venture Partners, a venture capital investment firm. Mr. Weersing has also served as President of JRW Technology, Inc., a consulting firm. Mr. Weersing served as a director of Circadian, Inc., an asthma dosage management company, from December 1993 until January 1996. Circadian filed a petition under Chapter 7 of the federal bankruptcy laws in January 1996. Mr. Weersing received an B.S.M.E. and an MBA from Stanford University. BOARD OF DIRECTORS The Company's Bylaws authorize and the Company currently has a board of 10 directors. All directors hold office until the next annual meeting of stockholders or until their successors have been elected. Officers serve at the discretion of the Board of Directors. There are no family relationships among any of the directors or executive officers of the Company. The Company does not pay cash compensation to directors for serving in that capacity, although the Company does reimburse directors for expenses incurred in attending Board of Directors meetings. The Board of Directors has, among other committees, a Compensation Committee that makes recommendations concerning salaries and incentive compensation for employees of and consultants to the Company and an Audit Committee that reviews the results and scope of the audit and other services provided by the Company's independent auditors. From and after the closing date of the acquisition of BioTek and until the repayment of the principal amount of the Exchange Notes by Ventana in exchange for notes held by holders of BioTek, Ventana is obligated to nominate at its annual meetings of stockholders two 52 55 representatives of BioTek (the "BioTek Representatives") for election to Ventana's Board of Directors. The BioTek Representatives who are currently serving on the Board of Directors pursuant to this right are Michael R. Danzi and C. Anthony Stellar, M.D. EXECUTIVE COMPENSATION The following table sets forth certain information regarding the compensation of the Company's Chief Executive Officer and each of the other four most highly compensated executive officers calculated on an annual basis (salary and bonus) for services rendered in all capacities to the Company during the year ended December 31, 1995 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ----------------------- AWARDS ----------------------- ANNUAL COMPENSATION RESTRICTED SECURITIES ALL OTHER -------------------- STOCK UNDERLYING ANNUAL NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS($) OPTIONS COMPENSATION($) - ------------------------------- ------ -------- ------- ---------- ---------- --------------- R. James Danehy................ 1995 $200,000 -- -- -- -- President and Chief Executive Officer Bernard O. C. Questier......... 1995 150,000(1) 0(2) -- 36,956 $63,800(3) Vice President, European Operations David P. Pauluzzi.............. 1995 84,855 48,207(4) -- 23,098 -- National Sales Manager Michael K. Cusack.............. 1995 100,054 -- -- -- -- Vice President, Marketing R. Michael Rodgers............. 1995 97,030 -- -- 15,152 -- Vice President, Finance and Chief Financial Officer and Secretary
- --------------- (1) Mr. Questier joined the Company in October of 1995. During 1995, he was paid $12,500 per month. His salary is fixed to the French Franc to protect against currency fluctuations should the United States Dollar depreciate relative to the French Franc; however, if the United States Dollar appreciates relative to the French Franc, Mr. Questier's salary shall remain unchanged. (2) Although Mr. Questier received no bonus for 1995, he was guaranteed a one-time nonrecurring $7,500 bonus in 1996 for signing his employment contract in October of 1995 and meeting certain other conditions. (3) Consists of relocation expenses of $55,000 associated with Mr. Questier's move from Germany to France, which have been accrued but not yet fully paid, and an $8,800 annual automobile allowance. (4) Consists entirely of commissions earned through employment as the Company's Northern Regional Sales Manager prior to his promotion to National Sales Manager in June of 1995. 53 56 STOCK OPTION INFORMATION The following table contains information concerning the stock option grants made to each of the Named Officers for the year ended December 31, 1995. OPTION GRANTS IN LAST YEAR
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED ------------------------------------------------------ ANNUAL RATES OF NUMBER OF % OF TOTAL STOCK PRICE SECURITIES OPTIONS EXERCISE APPRECIATION FOR UNDERLYING GRANTED TO OR BASE OPTION TERM(4) OPTIONS EMPLOYEES PRICE EXPIRATION ------------------- NAME GRANTED(1) IN 1995(2) ($/SH)(3) DATE 5%($) 10%($) - -------------------------- ---------- ---------- --------- ---------- ------- ------- R. James Danehy........... -- -- -- -- -- -- Bernard O. C. Questier.... 36,956 11.39% $0.84 10/4/05 $19,496 $49,406 David P. Pauluzzi......... 23,098 7.12 0.84 4/4/05- 12,185 30,879 6/30/05 Michael K. Cusack......... -- -- -- -- -- -- R. Michael Rodgers........ 15,152 4.67 0.84 4/4/05 7,993 20,256
- --------------- (1) Options were granted under the Company's 1988 Stock Option Plan. These generally vest over four years from the date of grant. (2) Based on an aggregate of 324,467 options granted by the Company in the year ended December 31, 1995 under the Company's 1988 Stock Option Plan to all employees of and consultants to the Company, including the Named Executive Officers. (3) The exercise price per share of each option was equal to the fair market value of the Common Stock on the date of grant as determined by the Company's Board of Directors. (4) The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Securities and Exchange Commission. There can be no assurance provided to any executive officer or any other holder of the Company's securities that the actual stock price appreciation over the 10-year option term will be at the assumed 5% and 10% levels or at any other defined level. Unless the market price of the Common Stock appreciates over the option term, no value will be realized from the option grants made to the executive officers. AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES The following table sets forth, for each of the Named Executive Officers, the shares acquired and the value realized on exercises of stock options during the year ended December 31, 1995 and the year-end number and value of exercisable and unexercisable options.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS SHARES AT DECEMBER 31, 1995 AT DECEMBER 31, 1995 ACQUIRED ON VALUE ---------------------------- ---------------------------- NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------- ----------- ------------ ----------- ------------- ----------- ------------- R. James Danehy........ -- -- 4,968 209,419 $ 3,898 $ 164,333 Bernard O.C. Questier............. -- -- -- 36,956 -- 29,000 David P. Pauluzzi...... 1,899 $1,461 661 25,157 495 19,620 Michael K. Cusack...... -- -- 8,623 20,942 6,767 16,433 R. Michael Rodgers..... 9,239 6,500 4,157 31,320 3,150 23,040
- --------------- (1) The value of "in-the-money" stock options represents the positive spread between the exercise price of stock options, which ranges from $0.60 per share to $0.95 per share, and the fair market value for the Company's Common Stock of $1.62 per share as of December 31, 1995, as determined by the Company's Board of Directors. 54 57 EMPLOYMENT AGREEMENTS The Company has an employment agreement with Bernard O.C. Questier, its Vice President of European Operations. The agreement provides for annual compensation of $150,000, which is fixed to the French Franc to protect against currency fluctuations should the United States Dollar depreciate relative to the French Franc; however, if the United States Dollar appreciates relative to the French Franc, Mr. Questier's salary shall remain unchanged. The agreement also provides for, in the event of Mr. Questier's termination, continued compensation through the quarter in which notice of termination is given plus one additional full quarter. The agreement does not provide for any specified term of employment. The Company currently has no employment contracts or agreements with any of the other Named Executive Officers or with any other person. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Board of Directors consists of Jack W. Schuler and Edward M. Giles. The Compensation Committee makes recommendations to the Board of Directors concerning salaries and incentive compensation for employees of and consultants to the Company, except that the Compensation Committee has full power and authority to grant stock options to the Company's executive officers under the Company's 1996 Stock Option Plan. Mr. Danehy served as a member of the Compensation Committee until April 1996. STOCK PLANS 1996 Stock Option Plan. The Company's 1996 Stock Option Plan (the "1996 Stock Plan") was adopted by the Board of Directors in April 1996. A total of 1,000,000 shares of Common Stock are reserved for issuance under the 1996 Stock Plan. As of May 15, 1996, no options to purchase shares of Common Stock have been granted pursuant to the 1996 Stock Plan. 1988 Stock Option Plan. The Company's 1988 Stock Option Plan (the "1988 Stock Plan") was adopted by the Board of Directors in March 1988 and approved by the stockholders in February 1989. A total of 1,339,663 shares of Common Stock are reserved for issuance under the 1988 Stock Plan. As of May 15, 1996, 298,453 shares of Common Stock had been issued upon exercise of stock options, options to purchase an aggregate of 840,357 shares were outstanding at a weighted average exercise price of $2.48 per share, and 200,842 shares remained available for future issuance under the 1988 Stock Plan. 1991 Employee Stock Purchase Plan. The Company's 1991 Employee Stock Purchase Plan (the "1991 Purchase Plan") was adopted by the Board of Directors in 1991 and approved by the stockholders in 1991. Shares of Preferred Stock convertible into an aggregate of 92,391 shares of Common Stock have been authorized for issuance under the 1991 Purchase Plan of which 82,408 shares have been issued. The 1991 Purchase Plan, which is intended to qualify under Section 423 of the Code, is administered by the Board of Directors of the Company or by a committee appointed by the Board of Directors. The 1991 Purchase Plan will terminate on June 30, 1996 at the conclusion of the current purchase period. 1996 Employee Stock Purchase Plan. The Company's 1996 Employee Stock Purchase Plan (the "1996 Purchase Plan") was adopted by the board of directors in April 1996. A total of 200,000 shares of Common Stock are reserved for issuance under the 1996 Purchase Plan. Under the 1996 Purchase Plan, the Company withholds a specified percentage of each salary payment to participating employees over certain offering periods. Any employee who is currently employed for at least 20 hours per week and more than five months in a calendar year by the Company or any majority owned subsidiary designated by the Board of Directors from time to time, and who does not own 5% or more of the total combined voting power or value of all classes of the capital stock of the Company or of any subsidiary of the Company, is eligible to participate in the 1996 Purchase Plan. Unless the Board of Directors determines otherwise, each offering period will run for 24 months and will be divided into four consecutive periods of approximately six months. The first offering period and first purchase period will commence on or about the date of this Prospectus. New offering periods will commence every six months. The price at which stock is purchased under the 1996 Purchase Plan is equal to 55 58 85% of the fair market value of the Common Stock on the first day of the applicable offering period or the last day of the applicable purchase period, whichever is lower. SECTION 401(K) PLAN In September 1993, the Company adopted a Retirement Savings and Investment Plan that is intended to qualify under Section 401(k) of the Code (the "401(k) Plan") covering the Company's full-time employees located in the United States. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit ($9,500 in 1996) and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require, additional matching contributions to the 401(k) Plan by the Company on behalf of all participants in the 401(k) Plan. To date, the Company has not made any contributions to the 401(k) Plan. LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION The Company has adopted provisions in its Restated Certificate of Incorporation that eliminate the personal liability of its directors for monetary damages arising from breach of their fiduciary duties in certain circumstances to the fullest extent permitted by law, and authorize the Company to indemnify its directors and officers to the fullest extent permitted by law. Such limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. The Company's Bylaws provide that the Company will indemnify its directors and officers to the fullest extent permitted by Delaware law, including circumstances in which indemnification is otherwise discretionary under Delaware law. The Company has entered into indemnification agreements providing for the foregoing with its directors and executive officers. The indemnification agreements may require the Company, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as officers or directors (other than liabilities arising from willful misconduct of a culpable nature) and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. At present, there is no pending litigation or proceeding involving a director or officer of the Company where indemnification is required or permitted, nor is the Company aware of any threatened litigation or proceeding that may result in a claim for such indemnification. 56 59 CERTAIN TRANSACTIONS Since January 1, 1993, the Company has sold shares of Series D Preferred Stock convertible into shares of Common Stock in private financings. In connection with such sales, the Company has also issued warrants to acquire shares of Series D Preferred Stock at an exercise price of $5.82 which are convertible into shares of Common Stock. The purchasers of the Series D Preferred Stock included the following 5% stockholders, directors and entities affiliated with directors.
SHARES OF SERIES D SHARES OF SERIES D PREFERRED STOCK NAME PREFERRED STOCK(1) UNDERLYING WARRANTS -------------------------------------------- ------------------ ------------------- DIRECTORS AND ENTITIES AFFILIATED WITH DIRECTORS Entities affiliated with Coronado Venture Fund (James M. Strickland)..................... 103,136 860 Edward M. Giles IRA......................... 1,211 61 MBW Venture Partners, L.P. (James R. Weersing)................................. 90,466 4,524 Jack W. Schuler............................. 12,200 611 Entities affiliated with The Vertical Group (Edward M. Giles)......................... 10,624 533 Rex J. Bates................................ 5,090 255 OTHER 5% STOCKHOLDERS State Farm Mutual Automobile Insurance Company................................... 171,890 8,780 Entities affiliated with Marquette Venture Partners.................................. 475,123 6,716
- --------------- (1) Each share of Preferred Stock will convert into one share of Common Stock upon the closing of this Offering. In April 1996, the Company sold an aggregate of 646,659 shares of Common Stock to Jack Schuler, the Company's Chairman, John Patience, a director of the Company, and venture capital funds affiliated with Marquette Venture Partners ("Marquette"), a principal stockholder of the Company, at a purchase price of $1.62 per share. Messrs. Schuler and Patience paid the purchase price for their shares 10% in cash and 90% through a full recourse promissory note secured by the underlying shares of Common Stock. Marquette paid the purchase price for their shares in cash. These stock purchases were approved by the Company's Board of Directors in principle in January 1996 and the specific terms of the stock purchases were approved by the Board of Directors on February 23, 1996. Messrs. Schuler and Patience were provided with the opportunity to purchase these shares in connection with (i) their efforts and assistance in completing the BioTek acquisition and assisting management with the integration of the companies, (ii) Mr. Schuler's decision to serve as Chairman of the Board of Directors and (iii) Mr. Schuler's and Mr. Patience's devotion of a significant portion of their work time to the Company's business. These shares are subject to a right of repurchase at cost in favor of the Company, which repurchase right will lapse as the shares become vested. The shares will become vested as follows: (i) an aggregate of 193,946 shares (including 97,010 shares purchased by Mr. Schuler, 66,753 shares purchased by Mr. Patience and 30,183 shares purchased by Marquette) will become vested upon the completion of this Offering, (ii) 172,462 shares purchased by Mr. Schuler will vest in 48 equal monthly installments commencing February 26, 1996 provided that Mr. Schuler continues to serve as Chairman of the Board of Directors, and (iii) 129,347 shares purchased by Mr. Patience and 150,904 shares purchased by Mr. Schuler will vest in 24 equal monthly installments provided that such individuals devote one-half of their work time to the Company's business on a cumulative basis over such vesting period. In August 1994 the Company hired R. James Danehy to serve as President, Chief Executive Officer and a director of the Company. In connection therewith, the Company issued Mr. Danehy a stock option (the "Option") covering 295,650 shares of Common Stock at an exercise price of $0.84 per share. In addition, the 57 60 Company provided Mr. Danehy the opportunity to purchase up to $200,000 of Series D Preferred Stock at $5.82 per share. As an incentive to purchase such shares, the Company also provided Mr. Danehy the opportunity to purchase approximately 0.37 additional shares of Common Stock at $0.84 per share for each two shares of Series D Preferred Stock purchased. Mr. Danehy acquired 34,378 shares of Series D Preferred Stock and 17,189 shares of Common Stock pursuant to this right in January 1996. In order to facilitate the transfer of shares to Mr. Danehy's individual retirement account ("IRA"), the Company in November 1995 cancelled 81,263 shares subject to the Option which had vested and allowed Mr. Danehy to purchase 81,263 shares of Common Stock at a purchase price of $0.84 per share through his self-directed IRA. In January 1996 the Company granted Mr. Danehy options to acquire 28,974 shares of Common Stock at $1.62 per share. In February 1996 the Company acquired BioTek for aggregate consideration of $18.8 million including the issuance of approximately $12.0 million in Exchange Notes in exchange for notes held by the holders of BioTek. In addition, $0.2 million in Exchange Notes were held back from the amounts payable at the closing of the acquisition and placed in escrow to indemnify Ventana from losses incurred in connection with certain matters related to the acquisition. Until the Exchange Notes have been repaid, the Company is obligated to nominate at its annual meeting of stockholders two BioTek Representatives for election to Ventana's Board of Directors. The BioTek Representatives currently serving on the Ventana Board are Michael R. Danzi and C. Anthony Stellar, M.D. In connection with the acquisition, Mr. Danzi and Dr. Stellar exchanged BioTek notes for Exchange Notes in aggregate principal amounts of $85,620 and $1,110,094, respectively. The Exchange Notes provide each holder, during a 30-day period, the opportunity to convert Exchange Notes into shares of Ventana Common Stock at a conversion price of $13.53 per share. Holders of Exchange Notes who did not make an election to convert all or any portion of such holders' Exchange Notes were deemed to have automatically converted one-half of the principal amount of such holders' Exchange Notes. No interest was deemed to accrue on the balance of Exchange Notes which were converted. Upon expiration of the conversion period, an aggregate of $3.0 million in principal amount of Exchange Notes were converted into 225,100 shares of Common Stock and an aggregate of $9.2 million of Exchange Notes remained outstanding. In connection with the acquisition in February 1996, the Company issued (the "BioTek Financing") $4.6 million of convertible subordinated debt (the "Notes") together with warrants to purchase 800,343 shares of Series D Preferred Stock at an exercise price of $5.82 per share (the "Warrants") to certain current stockholders of the Company. The proceeds from the issuance of the Notes were used to fund all of the cash portion of the consideration paid by Ventana to acquire BioTek plus related working capital requirements. In May 1996, the Company provided all holders of Preferred Stock who did not participate in the BioTek Financing the opportunity to purchase identical securities as were issued in the BioTek Financing and pursuant to the election by such holders, $0.45 million principal amount of Notes and Warrants to acquire 78,808 shares of Series D Preferred Stock were issued. The Notes were convertible into Common Stock at a conversion price of $13.53 per share for a period of 30 days from issuance. No holders elected to convert their Notes into Common Stock. The following table sets forth the aggregate principal amount of the Ventana 58 61 Notes and the number of shares of Series D Preferred Stock to be issued upon exercise of the Warrants held by executive officers, directors and 5% stockholders:
SHARES LOAN UNDERLYING PRINCIPAL WARRANTS --------- ---------- MBW Venture Partners, L.P...................................... 938,424 162,059 State Farm Mutual Automobile Insurance Company................. 630,555 108,893 Jack W. Schuler................................................ 688,601 118,917 Entities affiliated with Edward M. Giles....................... 653,944 112,933 John Patience.................................................. 559,884 96,689 Rex J. Bates................................................... 64,698 11,173 James M. Strickland............................................ 5,000 860 Thomas M. Grogan, M.D.(1) ..................................... 2,667 459
- --------------- (1) Represents shares beneficially owned by C. Ovens, Inc. 59 62 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information known to the Company with respect to the beneficial ownership of its Common Stock as of May 15, 1996 (assuming the exercise of all outstanding warrants and the conversion of all outstanding shares of Preferred Stock into Common Stock), and as adjusted to reflect the sale of Common Stock offered by the Company and by each of the Selling Stockholders hereby, for (i) each Selling Stockholder, (ii) each person who is known by the Company to own beneficially more than 5% of the Company's Common Stock, (iii) each of the Company's directors, (iv) each Named Executive Officer, and (v) all directors and executive officers as a group.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO NUMBER OF OWNED AFTER THE OFFERING(1)(2) SHARES OFFERING(3) -------------------- BEING ------------------- NAME NUMBER PERCENT OFFERED NUMBER PERCENT - ---------------------------------------------- ---------- ------- --------- --------- ------- EXECUTIVE OFFICERS, DIRECTORS OR 5% STOCKHOLDERS Entities affiliated with Marquette Venture Partners(4) 520 Lake Cook Rd., Suite 450 Deerfield, IL 60015........................... 1,918,650 21.9% 444,017 1,474,633 13.4% MBW Venture Partners, L.P.(5) James R. Weersing 365 South Street Morristown, NJ 07960........................ 1,442,351 16.1 -- 1,442,351 13.0 State Farm Mutual Automobile Insurance Company(6) One State Farm Plaza Bloomington, IL 61701....................... 887,173 10.0 -- 887,173 8.0 Jack W. Schuler(7) 1419 Lake Cook Road, Suite 415 Deerfield, IL 60015......................... 965,963 10.9 -- 965,963 8.7 R. James Danehy(8)............................ 209,890 2.4 -- 209,890 1.9 R. Michael Rodgers(9)......................... 22,291 * -- 22,291 * Michael K. Cusack(10)......................... 14,053 * -- 14,053 * David P. Pauluzzi(11)......................... 10,927 * -- 10,927 * Bernard O.C. Questier......................... 0 * -- 0 * Rex J. Bates(12).............................. 31,301 * -- 31,301 * Michael R. Danzi(13).......................... 9,566 * -- 9,566 * Edward M. Giles(14)........................... 291,548 3.3 -- 291,548 2.6 Thomas M. Grogan, M.D.(15).................... 169,820 1.9 -- 169,820 1.5 John Patience(16)............................. 292,789 3.3 -- 292,789 2.6 C. Anthony Stellar, M.D.(17).................. 19,959 * -- 19,959 * James M. Strickland(7)(18).................... 402,547 4.6 -- 402,547 3.7 James R. Weersing(5)(19)...................... 1,448,560 16.5 -- 1,448,560 13.2 All directors and executive officers as a group (17 persons)........................ 3,940,247 41.2 -- 3,932,579 33.5
60 63
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO NUMBER OF OWNED AFTER THE OFFERING(1)(2) SHARES OFFERING(3) -------------------- BEING ------------------- NAME NUMBER PERCENT OFFERED NUMBER PERCENT - ---------------------------------------------- ---------- ------- --------- --------- ------- OTHER SELLING STOCKHOLDERS The CIT Group/Venture Capital, Inc.(20)....... 1,186,047 13.4% 101,945 1,084,102 9.8% Interwest Partners IV, L.P. .................. 1,003,616 11.4 86,265 917,351 8.4 Victoria Bannister(21)........................ 286,863 3.3 10,744 276,119 2.5 W. Ross Humphreys(22)......................... 148,218 1.7 73,558 74,660 * J. David Lowell(23)........................... 64,191 * 28,428 35,763 * David Nunnery................................. 46,993 * 931 46,062 * Jan Karel Smeets.............................. 31,271 * 15,635 15,636 * Douglas F. Sweet.............................. 30,465 * 716 29,749 * Richard B. Peterson(24)....................... 25,955 * 5,157 20,798 * Thomas B. Healey.............................. 20,882 * 10,441 10,441 * Dorothy L. O'Neal Revocable Trust(25)......... 19,903 * 8,814 11,089 * Wm. Kent Wonders(26).......................... 12,839 * 1,895 10,944 * Entities affiliated with the Myron S. and Joan D. Eichen Family Trust(27).................. 10,175 * 2,043 8,132 * Charles J. Casebeer(28)....................... 9,765 * 260 9,505 * Jessica Youle(29)............................. 9,630 * 4,264 5,366 * Mary Cawley(30)............................... 6,653 * 3,326 3,327 * Lawrance A. Brown, Jr.(31).................... 4,958 * 613 4,345 * Philip E. McCarthy(32)........................ 2,941 * 96 2,845 * Entities affiliated with the Thomas H. and Rosemary S. Tisch Trust..................... 2,349 * 546 1,803 * Ned M. Weinshenker Money Purchase Pension Plan................................ 905 * 210 695 * Wayne L. Clevenger Pension Plan............... 411 * 96 315 *
- --------------- * Less than 1%. (1) Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock. (2) Applicable percentage of ownership is based on 8,774,883 shares of Common Stock outstanding as of May 15, 1996 together with shares issuable pursuant to applicable options and warrants of such stockholder which may be exercised within 60 days after May 15, 1996. Shares of Common Stock subject to options and warrants currently exercisable or exercisable within 60 days after May 15, 1996 are deemed outstanding for computing the percentage ownership of the person holding such options and warrants, but are not deemed outstanding for computing the percentage of any other person. Assumes the issuance of 64,244 shares of Common Stock upon the assumed exercise of outstanding warrants which would otherwise expire upon the closing of this Offering. (3) Assumes no exercise of the Underwriters' Over-Allotment Option. See "Underwriting." Applicable percentage ownership is based upon 10,974,883 shares of Common Stock outstanding as of May 15, 1996 together with shares issuable pursuant to applicable options and warrants for each stockholder currently exercisable or exercisable within 60 days after May 15, 1996. 61 64 In the event that the Over-Allotment Option is exercised, entities affiliated with Marquette Venture Partners, The CIT Group/Venture Capital, Inc., Interwest Partners IV, L.P., Victoria Bannister, David Nunnery, Douglas F. Sweet, Richard B. Peterson, entities affiliated with Myron S. Eichen and Joan D. Eichen Family Trust, Charles J. Casebeer, Lawrance A. Brown, Jr., Philip E. McCarthy, entities affiliated with the Thomas H. and Rosemary S. Tisch Trust, Ned M. Weinshenker Money Purchase Plan and Wayne L. Clevenger Pension Plan will sell to the Underwriters a percentage of the shares subject to the Over-Allotment Option approximately equal to the percentage of the Shares being offered by such Selling Stockholder (and set forth in the table above) bears to the total number of Shares being offered by all such Selling Stockholders (and set forth in the table above). (4) Includes 1,464,153 shares beneficially owned by Marquette Venture Partners, L.P.; 441,871 shares beneficially owned by Marquette Venture Partners II, L.P.; and 12,626 shares beneficially owned by MVP II Affiliate Fund, L.P. (5) Includes 1,280,292 shares beneficially owned by MBW Venture Partners, L.P. (of which 162,059 shares are issuable upon the exercise of warrants held by MBW Venture Partners, L.P.). Mr. Weersing, a director of the Company, is Managing Director of MBW Venture Partners Limited. Mr. Weersing disclaims beneficial ownership of the shares beneficially owned by MBW Venture Partners, L.P. except to the extent of his proportional partnership interest therein. (6) Includes 108,893 shares issuable upon the exercise of warrants held by State Farm Mutual Automobile Insurance Company. (7) Includes 118,917 shares issuable upon the exercise of warrants held by Mr. Schuler; 73,512 shares beneficially owned by Mr. Schuler, as custodian for Tanya Eva Schuler; 73,513 shares beneficially owned by Mr. Schuler, as custodian for Tess Heidi Schuler; and 73,512 shares beneficially owned by Mr. Schuler, as custodian for Tino Hans Schuler. (8) Includes 77,059 shares issuable upon the exercise of options exercisable within 60 days of May 15, 1996 held by Mr. Danehy. (9) Includes 13,050 shares issuable upon the exercise of options exercisable within 60 days of May 15, 1996 held by Mr. Rodgers. (10) Includes 12,935 shares issuable upon the exercise of options exercisable within 60 days of May 15, 1996 held by Mr. Cusack. (11) Includes 8,056 shares issuable upon the exercise of options exercisable within 60 days of May 15, 1996 held by Mr. Pauluzzi. (12) Includes 11,173 shares issuable upon the exercise of warrants held by Mr. Bates. (13) Includes 1,087 shares beneficially owned by Barbara A. Danzi. (14) Includes 122,886 shares beneficially owned by Vertical Fund, L.P. (of which 85,945 shares are issuable upon the exercise of warrants held by Vertical Fund, L.P.); 36,741 shares beneficially owned by Vertical Medical Partners, L.P.; and 108,292 shares beneficially owned by Vertical Partners, L.P. (of which 21,831 shares are issuable upon the exercise of warrants held by Vertical Partners, L.P.). Also includes 23,429 shares beneficially owned by Edward M. Giles IRA (of which 5,157 shares are issuable upon the exercise of warrants held by Edward M. Giles IRA). Mr. Giles, a director of the Company, is Chairman and President of The Vertical Group, Inc. Mr. Giles disclaims beneficial ownership of the shares beneficially owned by such entities affiliated with The Vertical Group, Inc. except to the extent of his proportionate partnership interest therein. (15) Includes 3,696 shares beneficially owned by Andrew Grogan; 7,710 shares beneficially owned by C. Ovens, Inc. (of which 459 shares are issuable upon the exercise of warrants held by C. Ovens, Inc.); and 38,306 shares issuable upon exercise of options exercisable within 60 days of May 15, 1996 held by Dr. Grogan. (16) Includes 96,689 shares issuable upon the exercise of warrants held by Mr. Patience. (17) Includes 740 shares beneficially owned by Diane Stellar, and 740 shares beneficially owned by Andrew Stellar. 62 65 (18) Includes 860 shares issuable upon the exercise of warrants held by Mr. Strickland. Also includes 120,670 shares beneficially owned by Coronado Venture Fund; 163,059 shares beneficially owned by Coronado Venture Fund II, L.P.; 103,996 shares beneficially owned by Coronado Venture Fund III, L.P.; and 13,962 shares beneficially owned by Coronado Venture Co-Investor Limited Partnership. Mr. Strickland, a director of the Company, is a general partner of Coronado Venture Management. Mr. Strickland disclaims beneficial ownership of the shares beneficially owned by such entities except to the extent of his proportionate partnership interest therein. (19) Includes 6,209 shares beneficially owned by James R. Weersing and Mary H. Weersing, Trustees of the Weersing Family Trust U/D/T dated April 24, 1991. (20) Includes 77,351 shares issuable upon exercise of warrants held by the CIT Group/Venture Capital, Inc. (21) Includes 15,303 shares issuable upon the exercise of warrants held by Ms. Bannister. (22) Includes 1,101 shares issuable upon the exercise of warrants held by Mr. Humphreys. (23) Includes 7,334 shares issuable upon the exercise of warrants held by Mr. Lowell. (24) Includes 6,668 shares issuable upon the exercise of warrants held by Mr. Peterson. (25) Includes 2,274 shares issuable upon the exercise of warrants held by the Dorothy L. O'Neal Revocable Trust. (26) Includes 1,467 shares issuable upon the exercise of warrants held by Mr. Wonders. (27) Includes 1,134 shares issuable upon the exercise of warrants held by the Myron S. and Joan D. Eichen Family Trust. (28) Includes 1,116 shares issuable upon the exercise of warrants held by Mr. Casebeer. (29) Includes 1,101 shares issuable upon the exercise of warrants held by Ms. Youle. (30) Includes 370 shares beneficially owned by Ms. Cawley as custodian for Andrew C. Cawley, and 370 shares beneficially owned by Ms. Cawley as custodian for Graham D. Cawley. (31) Includes 1,851 shares issuable upon the exercise of warrants held by Mr. Brown. (32) Includes 2,119 shares issuable upon the exercise of warrants held by Mr. McCarthy, and 822 shares owned by the Philip E. McCarthy Pension Plan. 63 66 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company will consist of 50,000,000 shares of Common Stock and 5,000,000 shares of preferred stock after giving effect to the restatement of the Company's Certificate of Incorporation upon the closing of this Offering. Prior to this Offering, there has been no public market for the Company's Common Stock. The following summary of certain provisions of the Common Stock and preferred stock does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the Company's Restated Certificate of Incorporation which is included as an exhibit to the Registration Statement of which this Prospectus is a part and by the provisions of applicable law. COMMON STOCK As of May 15, 1996, there were 10,974,883 shares of Common Stock outstanding which were held of record by 359 stockholders, as adjusted to reflect the conversion of all outstanding shares of Preferred Stock upon the closing of this Offering and the issuance of 64,244 shares of Common Stock upon the exercise of outstanding warrants on the closing of this Offering. The holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available for that purpose. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after the payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. The Common Stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are fully paid and nonassessable, and the Shares of Common Stock to be issued upon the closing of this Offering will be fully paid and non-assessable. Provisions in the Company's Certificate of Incorporation and Bylaws (i) prohibit the stockholders from acting by written consent without a meeting or calling a special meeting of stockholders and (ii) require advance notice of business proposed to be brought before an annual or special meeting of stockholders. The amendment or modification of these provisions will require the affirmative vote of the holders of 66 2/3% of the outstanding shares of Common Stock. PREFERRED STOCK Effective upon the closing of this Offering, the Company will be authorized to issue 5,000,000 shares of undesignated preferred stock, none of which will be outstanding upon the closing of this Offering. The Board of Directors will have the authority, without further action by the stockholders, to issue the undesignated preferred stock in one or more series, to fix the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued shares of undesignated preferred stock and to fix the number of shares constituting any series and the designation of such series. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders, may discourage bids for the Company's Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price of and the voting and other rights of the holders of Common Stock. At present, the Company has no plans to issue any of the preferred stock. WARRANTS After the completion of this Offering, the Company will have outstanding warrants to purchase 879,183 shares of Common Stock at an exercise price of $5.82 per share. These warrants are currently exercisable, will terminate in February 2001 and may be exercised on a net basis. CERTAIN PROVISIONS OF DELAWARE LAW Ventana is a Delaware corporation and subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date the 64 67 person became an interested stockholder, unless (with certain exceptions) the "business combination" or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of a corporation's voting stock. The existence of this provision would be expected to have an anti-takeover effect with respect to transactions not approved in advance by the Board of Directors, including discouraging attempts that might result in a premium over the market price for the shares of Common Stock held by stockholders. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is Norwest Bank Minnesota, N.A. Its telephone number is (800) 468-9716. SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market could adversely affect market prices prevailing from time to time. Sales of substantial amounts of Common Stock of the Company in the public market after the restrictions lapse could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon the completion of this Offering, the Company will have 10,974,883 shares of Common Stock outstanding, assuming no exercise of options after May 15, 1996 and no exercise of outstanding warrants other than warrants to purchase 64,244 shares of Common Stock that will terminate if not exercised upon the completion of this Offering. Of these 10,974,883 shares, the 3,000,000 shares sold in this Offering will be freely tradable without restriction under the Securities Act, unless held by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act. The remaining 7,974,883 shares of Common Stock held by existing stockholders were issued and sold by the Company in reliance on exemptions from the registration requirements of the Securities Act. These shares may be sold in the public market only if registered, or pursuant to an exemption from registration such as Rule 144, 144(k) or 701 under the Securities Act. The Company's directors, executive officers, certain stockholders and all option holders, who in the aggregate hold 7,551,250 shares of Common Stock, have entered into lock-up agreements under which they have agreed not to offer, sell, contract to sell, grant any option to purchase or otherwise dispose of, or agree to dispose of, directly or indirectly, any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into Common Stock owned by them for a period of 180 days after the date of this Prospectus, without the prior written consent of Bear, Stearns & Co. Inc. The Company has entered into a similar agreement, except that the Company may grant options and issue stock under its current stock option and stock purchase plans and pursuant to other currently outstanding options. Approximately 39,703 shares of Common Stock will be available for immediate public resale on the date of this Offering. An additional 8,778 shares of Common Stock will be saleable between 90 and 180 days after this Offering. Upon expiration of the lock-up agreements, approximately 7,900,451 shares of Common Stock (including approximately 349,201 shares subject to outstanding vested options) will become eligible for immediate public resale, subject in some cases to vesting provisions and volume limitations pursuant to Rule 144. The remaining approximately 310,908 shares held by existing stockholders will become eligible for public resale at various times over a period of less than two years following the completion of this Offering, subject in some cases to vesting provisions and volume limitations. 7,277,777 of the shares outstanding immediately following the completion of this Offering will be entitled to registration rights with respect to such shares upon the release of lock-up agreements. The number of shares sold in the public market could increase if such rights are exercised. As of May 15, 1996, 840,357 shares were subject to outstanding options. All of these shares are subject to the lock-up agreements described above. As soon as practicable after the date of this Prospectus, the Company intends to file a Registration Statement on Form S-8 covering shares issuable under the Company's 65 68 1988 Stock Plan (including shares subject to then outstanding options under such plans), the Company's 1996 Stock Plan and 1996 Employee Stock Purchase Plan, thus permitting the resale of such shares in the public market without restriction under the Securities Act after expiration of the applicable lock-up agreements. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned shares for at least two years (including the holding period of any prior owner, except an affiliate) is entitled to sell in "broker's transactions" or to market makers, within any three-month period commencing 90 days after the date of this Prospectus, a number of shares that does not exceed the greater of (i) one percent of the number of shares of Common Stock then outstanding (approximately 110,000 shares immediately after this Offering) or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the required filing of a Form 144 with respect to such sale. Sales under Rule 144 are generally subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least three years, is entitled to sell such shares without having to comply with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Under Rule 701 under the Securities Act, persons who purchase shares upon exercise of options granted prior to the effective date of this Offering are entitled to sell such shares 90 days after the effective date of this Offering in reliance on Rule 144, without having to comply with the holding period requirements of Rule 144 and, in the case of non-affiliates, without having to comply with the public information, volume limitation or notice provisions of Rule 144. The Securities and Exchange Commission has recently proposed reducing the initial Rule 144 holding period to one year and the Rule 144(k) holding period to two years. There can be no assurance as to when or whether such rule changes will be enacted. If enacted, such modifications will have a material effect on the times when shares of the Company's Common Stock become eligible for resale. REGISTRATION RIGHTS OF CERTAIN HOLDERS The holders of 7,277,777 shares of Common Stock (including shares issuable upon exercise of warrants) (the "Registrable Securities") or their transferees are entitled to certain rights with respect to the registration of such shares under the Securities Act of 1933, as amended (the "Securities Act"). These rights are provided under the terms of an agreement between the Company and the holders of Registrable Securities. Subject to certain limitations in the agreement, if the holders of at least 25% of the Registrable Securities request, the Company must on two occasions after six months from the effective date of this Offering, use its best efforts to register the Registrable Securities for public resale. If the Company registers any of its Common Stock either for its own account or for the account of other security holders, the holders of Registrable Securities are entitled to include their shares of Common Stock in the registration, subject to the ability of the underwriters to limit the number of shares included in the Offering. The holders of Registrable Securities may also require the Company (but not more than once during any 12-month period) to register all or a portion of their Registrable Securities on Form S-3 when use of such form becomes available to the Company, provided, among other limitations, that the proposed aggregate selling price is at least $1.0 million. All registration expenses must be borne by the Company and all selling expenses relating to Registrable Securities must be borne by the holders of the securities being registered. 66 69 UNDERWRITING The underwriters named below (the "Underwriters"), for whom Bear, Stearns & Co. Inc. and Dillon, Read & Co. Inc. are acting as representatives (the "Representatives"), have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement, to purchase from the Company and the Selling Stockholders, the number of Shares of Common Stock set forth opposite their names below:
NUMBER UNDERWRITER OF SHARES ------------------------------------------------------------------ --------- Bear, Stearns & Co. Inc........................................... Dillon, Read & Co. Inc............................................ --------- Total................................................... 3,000,000 ========
Subject to the terms and conditions of the Underwriting Agreement, the Underwriters have agreed to purchase all of the Shares of Common Stock being sold pursuant to the Underwriting Agreement if any are purchased (excluding Shares covered by the Over-Allotment Option). The Representatives have advised the Company that the Underwriters propose to offer the Common Stock to the public initially at the public offering price set forth on the cover page of this Prospectus and to selected dealers (who may include Underwriters) at such price less a concession of not more than $ per share. Additionally, the Underwriters may allow, and such dealers may reallow, a concession of not more than $ per share to certain other dealers. After the initial public offering, the public offering price and other selling terms may be changed by the Underwriters. Certain of the Selling Stockholders have granted to the Underwriters an option to purchase up to 450,000 additional Shares of Common Stock at the initial public offering price, less the underwriting discount, set forth on the cover page of this Prospectus, solely to cover over-allotments, if any. This option may be exercised in whole or in part at any time within 30 days from the date of this Prospectus. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of Shares of Common Stock to be purchased by it shown in the above table bears to the total number of Shares of Common Stock offered hereby. The Offering of the Shares is made for delivery, when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of the Offering without notice. The Underwriters reserve the right to reject an order for the purchase of Shares in whole or in part. The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act and to contribute to payments the Underwriters may be required to make in respect thereof. The officers, directors and certain stockholders of the Company, who in the aggregate own 7,551,250 shares of Common Stock, have agreed that they will not, without the prior written consent of Bear, Stearns & Co. Inc., offer, sell, or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock owned by them during the 180 day period following the date of this Prospectus. The Company has agreed that it will not, without the prior written consent of Bear, Stearns & Co. Inc., offer, sell or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock during the 180 days following the date of this Prospectus, except that the Company may issue shares of Common Stock and options to purchase Common Stock under its 1996 Stock Plan and its 1996 Employee Stock Purchase Plan. Prior to the Offering, there has been no public market for the Common Stock. The initial public offering price for the Common Stock will be determined by negotiation among the Company and the Representatives. Among the factors to be considered in determining the initial public offering price are prevailing market and 67 70 economic conditions, revenues and earnings of the Company, market valuations of other companies engaged in the health care industry, estimates of the business potential and prospects of the Company, the present state of the Company's operations, the Company's management and other factors deemed relevant. The estimated initial public offering price range set forth on the cover of this preliminary prospectus is subject to change as a result of market conditions and other factors. The negotiated initial public offering price may bear no relationship to the price at which Common Stock trades after the Offering. The Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. In February 1996, Bear, Stearns & Co. Inc. rendered a fairness opinion to the Company in connection with the acquisition of BioTek for which Bear, Stearns & Co. Inc. received a fee of $200,000, consisting of $50,000 in cash and 69,760 shares of Series D Preferred Stock which will convert into 25,784 shares of Common Stock upon the completion of this offering. Bear, Stearns & Co. Inc. is not selling any of its shares of Common Stock in the Offering. In addition, two officers of Bear, Stearns & Co. Inc. and one officer of Dillon, Read & Co., Inc. own an aggregate of 36,356 shares of Common Stock. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. As of the date of this Prospectus, certain members of Wilson Sonsini Goodrich & Rosati, Professional Corporation and investment partnerships of which such persons are partners beneficially own 6,159 shares of the Company's Common Stock. Christopher D. Mitchell, Assistant Secretary of the Company, is a member of Wilson Sonsini Goodrich & Rosati, Professional Corporation. Certain legal matters in connection with this Offering will be passed upon for the Underwriters by Simpson Thacher & Bartlett (a partnership which includes professional corporations), New York, New York. EXPERTS The consolidated financial statements of Ventana Medical Systems, Inc. at December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995 and the financial statements of BioTek Solutions, Inc. at June 30, 1995 and December 31, 1995 and for the year ended June 30, 1995 and the six months ended December 31, 1995, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their respective reports thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. The financial statements of BioTek Solutions, Inc. as of June 30, 1993 and 1994 and for the two years in the period ended June 30, 1994 included in this Prospectus and Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1 under the Securities Act with respect to the Shares of Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and such Common Stock, reference is made to the Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contract or document to which reference is made are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected without charge at the Commission's principal offices, and copies of all or any part of the Registration Statement may be obtained from such office upon the payment of the fees prescribed by the Commission. 68 71 The Company intends to furnish its stockholders with annual reports containing consolidated financial statements audited by its independent auditors and with quarterly reports containing unaudited financial information for each of the first three quarters of each fiscal year. 69 72 INDEX TO FINANCIAL STATEMENTS
PAGE ---- VENTANA MEDICAL SYSTEMS, INC. Unaudited Pro Forma Condensed Consolidated Financial Statements Introduction to Unaudited Pro Forma Condensed Consolidated Financial Statements..... F-2 Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1996....... F-3 Unaudited Pro Forma Condensed Consolidated Statements of Operations for the Year Ended December 31, 1994.......................................................... F-4 Unaudited Pro Forma Condensed Consolidated Statements of Operations for the Year Ended December 31, 1995.......................................................... F-5 Unaudited Pro Forma Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 1995...................................................... F-6 Unaudited Pro Forma Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 1996...................................................... F-7 Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements............ F-8 VENTANA MEDICAL SYSTEMS, INC. Report of Ernst & Young LLP, Independent Auditors..................................... F-11 Audited Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996 (unaudited)...................................................................... F-12 Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and three months ended March 31, 1995 and 1996 (unaudited).............. F-13 Consolidated Statements of Convertible Redeemable Preferred Stock and Stockholders' Equity (Deficit) for the years ended December 31, 1993, 1994 and 1995 and three months ended March 31, 1996 (unaudited).......................................... F-14 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and three months ended March 31, 1995 and 1996 (unaudited).............. F-15 Notes to Consolidated Financial Statements.......................................... F-16 BIOTEK SOLUTIONS, INC. Report of Ernst & Young LLP, Independent Auditors..................................... F-26 Audited Financial Statements Balance Sheets as of June 30, 1995 and December 31, 1995............................ F-27 Statements of Operations for the year ended June 30, 1995 and six months ended December 31, 1995................................................................ F-28 Statements of Changes in Stockholders' Deficit for the year ended June 30, 1995 and six months ended December 31, 1995............................................... F-29 Statements of Cash Flows for the year ended June 30, 1995 and six months December 31, 1995......................................................................... F-30 Notes to Financial Statements....................................................... F-31 BIOTEK SOLUTIONS, INC. Report of Arthur Andersen LLP, Independent Public Accountants......................... F-37 Audited Financial Statements Balance Sheets as of June 30, 1993 and 1994......................................... F-38 Statements of Operations for the years ended June 30, 1993 and 1994................. F-39 Statements of Changes in Shareholders' Deficit for the years ended June 30, 1993 and 1994............................................................................. F-40 Statements of Cash Flows for the years ended June 30, 1993 and 1994................. F-41 Notes to Financial Statements....................................................... F-42
F-1 73 VENTANA MEDICAL SYSTEMS, INC. INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited pro forma condensed consolidated balance sheet as of March 31, 1996 includes the February 26, 1996 acquisition of BioTek Solutions, Inc. (BioTek). The accompanying unaudited pro forma condensed consolidated statements of operations for the years ended December 31, 1994 and 1995 and for the three months ended March 31, 1995 and 1996 have been prepared as if the acquisition of BioTek had been consummated as of January 1, 1994. The pro forma balance sheet amounts are further adjusted to reflect the sale of the Shares of Common Stock offered hereby and the utilization of the net proceeds of this Offering as described under "Use of Proceeds." The pro forma information is based on the historical financial statements of Ventana and BioTek giving effect to the transaction under the purchase method of accounting and the assumptions and adjustments described in the accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements. The pro forma information is not indicative of actual results that would have been achieved had the acquisition actually been completed as of the dates indicated. The pro forma condensed consolidated financial statements should be read in conjunction with "Management's Discussion and Analysis of Financial Conditions and Results of Operations" and the respective historical financial statements of Ventana Medical Systems, Inc. and BioTek Solutions, Inc. and the related notes thereto included elsewhere in this Prospectus. F-2 74 VENTANA MEDICAL SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31,1996 (IN THOUSANDS) ASSETS
PRO FORMA PRO FORMA HISTORICAL ADJUSTMENTS AS ADJUSTED ---------- ----------- ----------- Current assets: Cash and cash equivalents............................ $ 3,436 $ 14,977(a) $ 18,413 Accounts receivable.................................. 2,834 2,834 Inventories.......................................... 2,472 2,472 Other................................................ 695 695 -------- -------- Total current assets................................... 9,437 24,414 Property, plant and equipment, net..................... 2,923 2,923 Intangibles, net....................................... 12,392 12,392 -------- ------- -------- Total assets................................. $ 24,752 $ 14,977 $ 39,729 ======== ======= ======== LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable..................................... $ 1,216 $ 1,216 Other current liabilities............................ 7,026 7,026 -------- -------- Total current liabilities.............................. 8,242 8,242 -------- -------- Long term debt......................................... 15,035 $ (15,035)(a) -- Convertible redeemable preferred stock................. 36,135 (36,135)(b) -- Stockholders' equity (deficit):........................ -- Common stock -- amount paid in....................... 3,337 57,691 61,028 Accumulated deficit.................................. (37,854) 8,456(b) (29,398) Cumulative foreign currency transactions adjustment........................................ (143) (143) -------- ------- -------- Total stockholders' equity (deficit)......... (34,660) 66,147 31,487 -------- ------- -------- Total liabilities, convertible redeemable preferred stock and stockholders' equity (deficit).................................. $ 24,752 $ 14,977 $ 39,729 ======== ======= ========
See accompanying notes. F-3 75 VENTANA MEDICAL SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS, EXCEPT PER SHARE DATA)
VENTANA BIOTEK PRO FORMA PRO FORMA HISTORICAL HISTORICAL(1) ADJUSTMENTS COMBINED ---------- ------------- ----------- --------- Net sales............................... $ 5,927 $ 5,642 $ 876(2) $ 12,445 Cost of goods sold...................... 2,531 3,643 (291)(2)(3) 5,883 ------- ------- ------- -------- Gross profit............................ 3,396 1,999 1,167 6,562 Operating expenses: Research and development.............. 1,926 785 (24)(3) 2,687 Selling, general and administrative... 6,899 4,636 (1,593)(2)(3)(4) 9,942 ------- ------- ------- -------- Loss from operations before nonrecurring expenses and amortization of intangibles........................... (5,429) (3,422) 2,784 (6,067) Nonrecurring expenses................... -- 877 7,496(5) 8,373 Amortization of intangibles............. -- -- 1,344(6) 1,344 ------- ------- ------- -------- Loss from operations.................... (5,429) (4,299) (6,056) (15,784) Interest expense........................ 59 (1,610) 1,610(7) 59 ------- ------- ------- -------- Net loss................................ $ (5,370) $(5,909) $(4,446) $ (15,725) ======= ======= ======= ========
See accompanying notes. F-4 76 VENTANA MEDICAL SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA)
VENTANA BIOTEK PRO FORMA PRO FORMA HISTORICAL HISTORICAL(1) ADJUSTMENTS AS ADJUSTED ---------- ------------- ----------- ----------- Net sales.............................. $ 10,613 $ 6,920 $ 1,942(2) $19,475 Cost of goods sold..................... 4,282 4,294 520(2)(3) 9,096 ------- ------- ------ ------- Gross profit........................... 6,331 2,626 1,422 10,379 Operating expenses: Research and development............. 2,239 2,198 (30)(3) 4,407 Selling, general and administrative.................... 7,435 3,497 36(2)(3)(4) 10,968 ------- ------- ------ ------- Loss from operations before amortization of intangibles.......... (3,343) (3,069) 1,416 (4,996) Amortization of intangibles............ -- -- 1,344(6) 1,344 ------- ------- ------ ------- Loss from operations................... (3,343) (3,069) 72 (6,340) Interest (expense) income.............. 74 (2,224) 2,224(7) 74 ------- ------- ------ ------- Net loss............................... $ (3,269) $(5,293) $ 2,296 $(6,266) ======= ======= ====== ======= Pro forma net loss per share, as adjusted............................. $ (0.39) $ (0.66) ======= ======= Pro forma weighted average shares outstanding, as adjusted............. 8,354 9,466(8) ======= =======
See accompanying notes. F-5 77 VENTANA MEDICAL SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA)
VENTANA BIOTEK PRO FORMA PRO FORMA HISTORICAL HISTORICAL(1) ADJUSTMENTS AS ADJUSTED ---------- ------------- ----------- ----------- Net sales................................ $ 2,202 $ 1,421 $ 795(2) $ 4,418 Cost of goods sold....................... 936 875 323(2)(3) 2,134 ------- ------ ---- ------- Gross profit............................. 1,266 546 472 2,284 Operating expenses: Research and development............... 556 173 (8)(3) 721 Selling, general and administrative.... 1,594 779 (6)(2)(3)(4) 2,367 ------- ------ ---- ------- Loss from operations before amortization of intangibles......................... (884) (406) 486 (804) Amortization of intangibles.............. -- -- 336(6) (336) ------- ------ ---- ------- Loss from operations..................... (884) (406) 150 (1,140) Interest (expense) income................ 50 (498) 498(7) 50 ------- ------ ---- ------- Net loss................................. $ (834) $ (904) $ 648 $(1,090) ======= ====== ==== ======= Pro forma net loss per share, as adjusted............................... $ (0.10) $ (0.12) ======= ======= Pro forma weighted average shares outstanding, as adjusted............... 8,220 9,331(8) ======= =======
See accompanying notes. F-6 78 VENTANA MEDICAL SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
VENTANA BIOTEK PRO FORMA PRO FORMA HISTORICAL HISTORICAL(1) ADJUSTMENTS AS ADJUSTED ---------- ------------- ----------- ----------- Net sales............................. $ 4,146 $ 1,097 $ (15)(2) $ 5,228 Cost of goods sold.................... 1,435 593 (101)(2)(3) 1,927 -------- ------- ------- ------ Gross profit.......................... 2,711 504 86 3,301 Operating expenses: Research and development............ 613 163 (5)(3) 771 Selling, general and administrative................... 2,279 368 57(2)(3)(4) 2,704 -------- ------- ------- ------ Loss from operations before nonrecurring expenses and amortization of intangibles......... (181) (27) 34 (174) Nonrecurring expenses................. 7,083 413 (7,496)(5) -- Amortization of intangibles........... -- -- 336(6) 336 -------- ------- ------- ------ Loss from operations.................. (7,264) (440) 7,194 (510) Interest (expense) income............. (5) (944) 944(7) (5) -------- ------- ------- ------ Net loss.............................. $ (7,269) $(1,384) $ 8,138 $ (515) ======== ======= ======= ====== Pro forma net loss per share, as adjusted............................ $ (0.85) $ (0.05) ======== ====== Pro forma weighted average shares outstanding, as adjusted............ 8,585 9,696(8) ======== ======
See accompanying notes. F-7 79 VENTANA MEDICAL SYSTEMS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) The Company acquired BioTek for $18.8 million on February 26, 1996. The pro forma results of operations reflect the Company's operations as if it had acquired BioTek on January 1, 1994 and are adjusted to reflect the sale of 2,200,000 shares of Common Stock by the Company in this Offering and the application of the net proceeds therefrom. The acquisition has been accounted for as a purchase. The composition of the consideration paid for BioTek and the preliminary allocation of the purchase price is presented below: The purchase price for BioTek consisted of: Cash consideration............................................. $ 2,500 Stock issued to BioTek noteholders............................. 3,007 Exchange Notes issued.......................................... 8,978 Note payable - escrow for contingencies........................ 234 Net historical liabilities acquired............................ 4,044 -------------- Total purchase price................................. $ 18,763 =========== The purchase price was allocated as follows: Tangible net assets.......................................... $ 2,288 In-process research and development.......................... 5,000 Goodwill..................................................... 1,875 Developed technology......................................... 2,000 Customer base................................................ 4,200 Covenant not to compete...................................... 1,800 Assembled work force......................................... 500 Trademark and trade names.................................... 1,100 -------------- $ 18,763 ===========
In accordance with FAS 2, the Company charged to expense at the date of the acquisition $5.0 million relating to the portion of the purchase price allocated to those in-process research and development projects where technological feasibility had not yet been established and where there are no alternative future uses. Intangible assets consist primarily of goodwill, customer base and developed technology. Such assets are amortized over estimated useful lives ranging from 3 to 20 years. BALANCE SHEET ADJUSTMENTS (a) Adjustment reflects net proceeds from the Offering to the Company after repayment of outstanding Exchange Notes and bank debt. (b) Adjustment reflects the automatic conversion of the Company's Preferred Stock into Common Stock upon completion of an initial public offering. The related accumulated unpaid dividends of approximately $8.5 million will be canceled upon such conversion. STATEMENT OF OPERATIONS ADJUSTMENTS (1) BioTek's historical fiscal year ended on June 30. BioTek's historical results of operations have been adjusted to a calendar year basis to conform with the reporting period of Ventana. (2) Adjustments reflect a change in revenue recognition policy to adopt the Company's policy of recording sales upon shipment of instruments and reagents to end-users. As such, the pro forma sales and related costs of goods sold reflect the accounting policy of recognizing revenue, for United States sales only, upon F-8 80 VENTANA MEDICAL SYSTEMS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) the ultimate sale of products to the end-users as if such policy had been in effect as of January 1, 1994. The combined effect of the pro forma change in accounting policy is to increase net sales in both 1994 and 1995. This is primarily due to (i) shipments of instruments and reagents to CMS in 1993 and 1994 which were subsequently placed with end-users in 1994 and 1995 and (ii) recording sales based on prices paid by the end-user as opposed to the net price paid by CMS. Accordingly, cost of goods sold has been adjusted to reflect the differences in the timing of sales and the mix of products sold, and selling expense has been increased to reflect the distribution commission paid to CMS. The commission is equal to the product of (i) the number of units shipped to end-users and (ii) the difference between the price paid by the end-user to CMS and the net price paid by CMS to the Company. (3) Adjustments reflect expense reductions associated with the consolidation of manufacturing facilities into Ventana's facilities in Tucson, Arizona. Effective September 1996, the Santa Barbara facility will no longer be used. The resulting cost reductions from the facilities consolidation are allocated among cost of goods sold (50%), research and development expense (10%), and selling, general, and administrative expense (40%). (4) Reductions in selling, general, and administrative expense reflect (i) an increase in distribution expense associated with the change in revenue recognition policy discussed in footnote (2) above, (ii) the consolidation of the sales and marketing organizations of Ventana and BioTek, and (iii) the elimination of certain redundant administrative positions. A summary of the net savings recognized in the pro forma selling, general and administrative expense follows:
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, ----------------- ------------- 1994 1995 1995 1996 ------- ------- ----- ----- Distribution expense................................. $ 1,004 $ 1,038 $ 286 $ 166 Sales and marketing.................................. (1,331) (92) (75) 44 General and administrative........................... (1,266) (910) (217) (153) ------- ------- ----- ----- $(1,593) $ 36 $ (6) $ 57 ======= ======= ===== =====
(5) Adjustments for nonrecurring expenses reflect $5.0 million for acquired in-process research and development which was charged to expense in accordance with FAS 2, $2.1 million associated with the acquisition and integration of BioTek, and $0.4 million in fees incurred related to the BioTek acquisition. These charges were incurred in the first quarter of 1996 and are reflected as if such charges had been incurred in the year ended December 31, 1994. (6) Adjustment for amortization of intangibles arising from the BioTek acquisition. (7) Adjustment to eliminate interest expense on BioTek's debt as a result of the merger and the retirement of debt with the net proceeds from the Offering. F-9 81 VENTANA MEDICAL SYSTEMS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) (8) The calculation of pro forma weighted average number of shares outstanding is as follows:
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, --------------- 1995 1995 1996 ------------ ----- ----- Weighted average shares outstanding.................... 957 903 1,119 Assumed conversion of Series A, C, and D preferred shares............................................... 6,580 6,499 6,648 Assumed exercise of warrants to purchase Series D preferred shares..................................... 48 48 48 Stock options and restricted stock issued within one year of initial filing............................... 769 769 769 Shares of common stock issued in connection with the initial public offering to be used to retire acquisition debt..................................... 1,112 1,112 1,112 ------ ----- ----- Weighted average shares outstanding, as adjusted....... 9,466 9,331 9,696 ========== ===== =====
F-10 82 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors Ventana Medical Systems, Inc. We have audited the accompanying consolidated balance sheets of Ventana Medical Systems, Inc., as of December 31, 1994 and 1995, and the related consolidated statements of operations, convertible redeemable preferred stock and stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ventana Medical Systems, Inc., as of December 31, 1994 and 1995, and the consolidated results of their operations and their cash flows for the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Tucson, Arizona February 28, 1996, except for Note 10, as to which the date is , 1996 --------------------------------------------- The foregoing report is in the form that will be signed upon completion of the recapitalization described in Note 10 to the Consolidated Financial Statements. Tucson, Arizona May 21, 1996 F-11 83 VENTANA MEDICAL SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
DECEMBER 31, PRO FORMA --------------------- STOCKHOLDERS' 1994 1995 EQUITY (DEFICIT) -------- -------- MARCH 31, 1996 MARCH 31, ---------------- 1996 ----------- (UNAUDITED) (UNAUDITED) Current assets: Cash and cash equivalents.................. $ 2,511 $ 1,103 $ 3,436 Accounts receivable........................ 1,451 1,925 2,834 Inventories (Note 2)....................... 893 1,767 2,472 Other...................................... 38 24 695 -------- -------- ----------- Total current assets......................... 4,893 4,819 9,437 Property and equipment, net (Note 3)......... 2,169 2,258 2,923 Intangibles, net (Note 10)................... 217 301 12,392 -------- -------- ----------- Total assets................................. $ 7,279 $ 7,378 $ 24,752 ======== ======== ========= LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable........................... $ 639 $ 1,061 $ 1,216 Other current liabilities (Note 4)......... 534 993 7,026 -------- -------- ----------- Total current liabilities.................... 1,173 2,054 8,242 Long-term debt............................... -- -- 15,035 Commitments (Notes 6, 9 and 10) Convertible redeemable preferred stock at aggregate mandatory redemption value (Notes 6 and 10):................................. 30,237 35,180 36,135 $ -- Stockholders' equity (deficit) (Notes 7 and 10): Preferred stock -- $.001 par value; no shares authorized, issued or outstanding (5,000,000 shares authorized, no shares issued or outstanding at March 31, 1996 -- pro forma)...................... -- -- -- -- Common stock -- $.001 par value; 30,000,000 shares authorized, 875,005, 1,020,164, and 1,347,049 shares issued and outstanding at December 31, 1994 and 1995 and March 31, 1996, respectively (50,000,000 shares authorized, 8,008,890 shares issued and outstanding -- pro forma) -- amount paid in................ 190 244 3,337 31,016 Accumulated deficit........................ (24,275) (29,980) (37,854) (29,398) Cumulative foreign currency translation adjustment.............................. (46) (120) (143) (143) -------- -------- ----------- ---------------- Total stockholders' equity (deficit)......... (24,131) (29,856) (34,660) $ 1,475 ============ -------- -------- ----------- Total liabilities, convertible redeemable preferred stock, and stockholders' equity (deficit).................................. $ 7,279 $ 7,378 $ 24,752 ======== ======== =========
See accompanying notes. F-12 84 VENTANA MEDICAL SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, --------------------------------- --------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- (UNAUDITED) Net sales................................. $ 2,681 $ 5,927 $ 10,613 $ 2,202 $ 4,146 Cost of goods sold........................ 1,722 2,531 4,282 936 1,435 --------- --------- --------- --------- --------- 959 3,396 6,331 1,266 2,711 Operating expenses: Research and development................ 2,100 1,926 2,239 556 613 Selling, general and administrative..... 4,067 6,899 7,435 1,594 2,279 --------- --------- --------- --------- --------- Loss from operations before non-recurring expenses................................ (5,208) (5,429) (3,343) (884) (181) Nonrecurring expenses..................... -- -- -- -- (7,083) --------- --------- --------- --------- --------- Loss from operations...................... (5,208) (5,429) (3,343) (884) (7,264) Interest income (expense)................. 229 59 74 50 (5) --------- --------- --------- --------- --------- Net loss.................................. $ (4,979) $ (5,370) $ (3,269) $ (834) $ (7,269) ======== ======== ======== ======== ======== Net loss per share, as adjusted........... $ (0.39) $ (0.10) $ (0.85) ======== ======== ======== Shares used in computing net loss per share, as adjusted...................... 8,354 8,220 8,585 ======== ======== ========
See accompanying notes. F-13 85 VENTANA MEDICAL SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE DATA)
STOCKHOLDERS' EQUITY (DEFICIT) ------------------------------------------------------------ CUMULATIVE CONVERTIBLE REDEEMABLE FOREIGN PREFERRED STOCK COMMON STOCK CURRENCY ------------------------------------------- -------------------- ACCUMULATED TRANSLATION SERIES A SERIES C SERIES D TOTAL SHARES AMOUNT DEFICIT ADJUSTMENT TOTAL --------- --------- --------- ------- --------- -------- ------------ ----------- -------- Balance at January 1, 1993............... $ 536 $ 8,731 $ 9,034 $18,301 820,294 $ 165 $(10,147) $ -- $ (9,982) Sale of Series D preferred stock.. -- -- 5,117 5,117 -- -- -- -- -- Accretion of preferred stock redemption requirement...... -- 656 1,140 1,796 -- -- (1,796) -- (1,796) Sale of common stock............ -- -- -- -- 88,800 33 -- -- 33 Repurchase of stock............ -- (2) -- (2) (924) (1) -- -- (1) Net loss............. -- -- -- -- -- -- (4,979) -- (4,979) --------- --------- --------- ------- --------- -------- ------------ ----------- -------- Balance at December 31, 1993........... 536 9,385 15,291 25,212 908,170 197 (16,922) -- (16,725) Sale of Series D preferred stock.. -- -- 3,042 3,042 -- -- -- -- -- Accretion of preferred stock redemption requirement...... -- 656 1,327 1,983 -- -- (1,983) -- (1,983) Sale of common stock............ -- -- -- -- 29,199 8 -- -- 8 Repurchase of common stock..... -- -- -- -- (62,364) (15) -- -- (15) Translation adjustment....... -- -- -- -- -- -- -- (46) (46) Net loss........... -- -- -- -- -- -- (5,370) -- (5,370) --------- --------- --------- ------- --------- -------- ------------ ----------- -------- Balance at December 31, 1994........... 536 10,041 19,660 30,237 875,005 190 (24,275) (46) (24,131) Sale of Series D preferred stock.. -- -- 2,507 2,507 -- -- -- -- -- Accretion of preferred stock redemption requirement...... -- 655 1,781 2,436 -- -- (2,436) -- (2,436) Sale of common stock............ -- -- -- -- 160,210 67 -- -- 67 Repurchase of common stock..... -- -- -- -- (15,051) (13) -- -- (13) Translation adjustment....... -- -- -- -- -- -- -- (74) (74) Net loss........... -- -- -- -- -- -- (3,269) -- (3,269) --------- --------- --------- ------- --------- -------- ------------ ----------- -------- Balance at December 31, 1995........... 536 10,696 23,948 35,180 1,020,164 244 (29,980) (120) (29,856) Sale of Series D preferred stock (unaudited)...... -- -- 350 350 -- -- -- -- -- Accretion of preferred stock redemption requirement (unaudited)...... -- 163 442 605 -- -- (605) -- (605) Conversion of debt into common stock (unaudited)...... -- -- -- -- 225,100 3,007 -- -- 3,007 Sale of common stock (unaudited)...... -- -- -- -- 101,785 86 -- -- 86 Translation adjustment (unaudited)...... -- -- -- -- -- -- -- (23) (23) Net loss (unaudited)...... -- -- -- -- -- -- (7,269) -- (7,269) --------- --------- --------- ------- --------- -------- ------------ ----------- -------- Balance at March 31, 1996 (unaudited)... $ 536 $10,859 $24,740 $36,135 1,347,049 $ 3,337 $(37,854) $(143) $(34,660) ======== ======== ======== ======== ========= ========= ============ ========== =========
See accompanying notes. F-14 86 VENTANA MEDICAL SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, ------------------------------- ------------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------ -------- (UNAUDITED) OPERATING ACTIVITIES: Net loss................................. $(4,979) $(5,370) $(3,269) $ (834) $ (7,269) Adjustments to reconcile net loss to net cash used in operating activities: Purchased in-process research and development......................... -- -- -- -- 5,000 Depreciation and amortization.......... 334 477 911 211 252 Changes in operating assets and liabilities: Accounts receivable.................... (244) (941) (474) 165 (287) Inventories............................ (258) (24) (874) (64) (577) Other assets........................... (126) 37 (114) (39) (37) Accounts payable....................... 69 321 422 48 (344) Other current liabilities.............. 110 224 459 132 2,409 ------- ------- ------- ------ -------- Net cash used in operating activities.... (5,094) (5,276) (2,939) (381) (853) INVESTING ACTIVITIES: Purchase of property and equipment, net.................................... (1,700) (604) (956) (399) (59) Acquisition of BioTek Solutions, Inc..... -- -- -- -- (2,500) Sales (purchases) of short-term investments available for sale......... (4,063) 4,063 -- -- -- ------- ------- ------- ------ -------- Net cash (used in) provided by investing activities............................. (5,763) 3,459 (956) (399) (2,559) FINANCING ACTIVITIES: Repayments of notes payable.............. (42) (36) -- -- -- Issuance of debt (including amounts from related parties) and stock............. 5,147 3,035 2,561 2,415 5,722 ------- ------- ------- ------ -------- Net cash provided by financing activities............................. 5,105 2,999 2,561 2,415 5,722 Effect of exchange rate changes on cash................................... -- (46) (74) -- 23 ------- ------- ------- ------ -------- Net (decrease) increase in cash and cash equivalents............................ (5,752) 1,136 (1,408) 1,635 2,333 Cash and cash equivalents, beginning of period................................. 7,127 1,375 2,511 2,511 1,103 ------- ------- ------- ------ -------- Cash and cash equivalents, end of period................................. $ 1,375 $ 2,511 $ 1,103 $4,146 $ 3,436 ======= ======= ======= ====== ========
See accompanying notes. F-15 87 VENTANA MEDICAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 (INFORMATION FOR THE PERIODS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization: Ventana Medical Systems, Inc. (the "Company") develops, manufactures, and markets proprietary instruments and reagents that automate diagnostic procedures used for molecular analysis of cells. Subsequent to year end, the Company acquired all of the outstanding common stock of Biotek Solutions, Inc. ("Biotek"). See Note 10 for discussion of the Company's acquisition of Biotek. At present, the Company's principal markets are North America and Europe. Principles of Consolidation: The consolidated financial statements include the accounts of the Company's wholly-owned foreign subsidiaries, Ventana Medical Systems, S.A. and Ventana Medical Systems GmbH. All significant intercompany accounts have been eliminated. Interim Consolidated Financial Information: The consolidated financial statements at March 31, 1996 and for the three months ended March 31, 1995 and 1996 are unaudited, but include all adjustments (consisting only of normal recurring adjustments) that management considers necessary for a fair presentation of the financial information set forth therein, in accordance with generally accepted accounting principles. The results for the three months ended March 31, 1996 are not necessarily indicative of the results for the entire year. Reclassifications: The consolidated financial statements for 1993 and 1994 have been reclassified to conform with the 1995 presentation. Cash and Cash Equivalents: Cash equivalents include investments (primarily money market accounts and overnight reverse repurchase agreements) with maturities of three months or less from the date of purchase. On December 31, 1994, the Company purchased $2.1 million of U.S. Government Securities from Bank One, Arizona (the "Bank") under an agreement to resell such securities. The Company did not take possession of the securities which were instead held in the Company's safekeeping account at the Bank. The amortized cost of this investment approximates the market value. Inventories: Inventories, principally chemical and biological reagents and instrument parts and finished instruments, are stated at the lower of cost (first-in first-out) or market. Property and Equipment: Property and equipment are stated at cost. Depreciation is computed using the straight-line method over estimated useful lives of three to ten years. Amortization of leasehold improvements is calculated using a straight-line method over the term of the lease. Maintenance and repairs are charged to operations as incurred. Diagnostic instruments include automated instruments used by customers under cancelable reagent agreement plans, which generally are cancelable upon 90 days written notice. These agreements also require the customer to purchase a specified amount of reagents for tests from the Company over the term of the agreement. The manufacturing cost of the related instruments is amortized over a period of 36 to 48 months and charged to cost of goods sold. Diagnostic instruments also include instruments placed with customers for evaluation or demonstration as part of the Company's sales process. F-16 88 VENTANA MEDICAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995 (INFORMATION FOR THE PERIODS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) Intangibles: Intangible assets consist primarily of goodwill, customer base, and developed technology acquired in the BioTek acquisition (see Note 10). Such assets are amortized over estimated useful lives ranging from 3 to 20 years. Revenue Recognition: Sales of instruments and reagents are generally recognized upon shipment. Concentration of Credit Risk: The Company sells its instruments and reagent products primarily to hospitals, medical clinics, reference laboratories, and universities. Credit losses have been minimal to date. The Company invests its excess cash primarily in U.S. government securities and has an established policy relating to diversification and maturities that is designed to maintain safety and liquidity. The Company has not experienced any material losses on its cash equivalents or short-term investments. Nonrecurring Expenses: Nonrecurring expenses consist of the estimated costs of integrating Biotek's operations into Ventana's and the cost of research and development in process acquired from Biotek (see Note 10). Income Taxes: The Company accounts for income taxes using the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws expected to be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce the carrying amount of deferred tax assets to their net realizable value. Use of Estimates: The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments: The Company's cash, accounts receivable, and convertible redeemable preferred stock represent financial instruments as defined by Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments. The carrying value of these financial instruments is a reasonable approximation of fair value. Stock-Based Compensation: The Company accounts for its stock compensation arrangements under the provisions of APB No. 25, Accounting for Stock Issued to Employees, and intends to continue to do so. Loss Per Common Share: Loss per common share is computed using the weighted average number of shares of common stock outstanding, except as noted below. Common equivalent shares from stock options and warrants are excluded from the computation as their effect is antidilutive, except that, pursuant to the Securities and Exchange Commission Staff Accounting Bulletins and Staff policy, common and common equivalent shares issued during the period commencing 12 months prior to the initial filing of the proposed initial public offering at prices below the anticipated public offering price are presumed to have been in contemplation of the public offering and have been included in the calculation as if they were outstanding for all periods presented, determined using the treasury stock method and the anticipated price from the initial public offering. F-17 89 VENTANA MEDICAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995 (INFORMATION FOR THE PERIODS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) Net loss per common share was as follows:
YEARS ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, --------------------------------- --------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- (IN THOUSANDS) Net loss.................................. $ (4,979) $ (5,370) $ (3,269) $ (834) $ (7,269) Less accretion of preferred stock redemption requirement.................. (1,796) (1,983) (2,436) (579) (605) --------- --------- ---------- ---------- Net loss applicable to common stock....... $ (6,775) $ (7,353) $ (5,705) $ (1,413) $ (7,874) ========= ========= ========== ========== Net loss per common share................. $ (4.17) $ (4.36) $ (3.30) $ (0.84) $ (4.17) ========= ========= ========== ========== Weighted average shares outstanding....... 1,626 1,686 1,727 1,672 1,889 ========= ========= ========== ==========
The as adjusted calculation of net loss per share presented in the consolidated statements of operations has been computed as described above, but also gives effect to the conversion of all outstanding shares of convertible redeemable preferred stock into common stock upon closing of the Company's initial public offering (determined using the if-converted method) and the assumed exercise of warrants to purchase Series D preferred stock which would otherwise expire upon completion of the Offering. 2. INVENTORIES Inventories consist of the following:
DECEMBER 31, --------------- MARCH 31, 1994 1995 1996 ---- ------ --------- (IN THOUSANDS) Raw materials and work-in-process...................... $752 $1,265 $ 1,330 Finished goods......................................... 141 502 1,142 ---- ------ ------ $893 $1,767 $ 2,472 ==== ====== ======
3. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, ----------------- MARCH 31, 1994 1995 1996 ------ ------ --------- (IN THOUSANDS) Diagnostic instruments........................... $1,544 $2,008 $ 2,180 Machinery and equipment.......................... 1,356 1,501 2,340 Computers and related equipment.................. 187 284 275 Furniture and fixtures........................... 116 272 273 Leasehold improvements........................... 39 133 133 ------ ------ ------ 3,242 4,198 5,201 Less accumulated depreciation and amortization........ 1,073 1,940 2,278 ------ ------ ------ $2,169 $2,258 $ 2,923 ====== ====== ======
F-18 90 VENTANA MEDICAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995 (INFORMATION FOR THE PERIODS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) 4. OTHER CURRENT LIABILITIES Other current liabilities consist of the following:
DECEMBER 31, ------------- MARCH 31, 1994 1995 1996 ---- ---- --------- (IN THOUSANDS) Accrued payroll and payroll taxes................ $205 $289 $ 630 Accrued commissions.............................. 150 198 38 Deferred revenue................................. 46 127 1,955 Advances from distributor........................ -- -- 1,733 Accrued integration costs........................ -- -- 750 Accrued legal fees and settlement costs.......... -- -- 600 Sales tax payable................................ -- 167 312 Other accrued expenses........................... 133 212 1,008 ---- ---- ------ $534 $993 $ 7,026 ==== ==== ======
5. LINE OF CREDIT During 1995, the Company had $2.75 million available under a line of credit arrangement with a bank. Borrowings under the line are collateralized by the Company's receivables and intellectual property. The line contains certain financial covenants with which the Company must comply. No borrowings were outstanding under the line at December 31, 1995. Subsequent to year end, this arrangement was amended (see Note 10). 6. CONVERTIBLE REDEEMABLE PREFERRED STOCK Each share of Series A, C and D preferred stock is convertible, at the option of the holder, into approximately 0.37 share of common stock (subject to adjustments for events of dilution). Shares are automatically converted upon a public offering of common stock meeting specified criteria, which principally are a minimum amount of proceeds and price per share levels. Each share of preferred stock has the same voting rights as common stock and is entitled to the same number of votes as shares of common stock into which it is convertible. Subsequent to payment of all accumulated dividends, any dividend declared or paid would be pro rata and for preferred shares, would be based upon the number of shares of common stock into which such preferred shares are convertible. The holders of at least 50% of the outstanding preferred stock may request the Company to redeem 1/8 of the outstanding preferred stock each quarter beginning June 30, 1997. The redemption price of Series A preferred stock is $0.715 per share. The redemption prices for Series C and D preferred stock are $0.90 per share and $2.15 per share, respectively, plus accumulated unpaid dividends. If funds are not available for such redemptions, the shares must be redeemed as soon as funds are legally available. F-19 91 VENTANA MEDICAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995 (INFORMATION FOR THE PERIODS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) The following is a summary of mandatory redemption value, accumulated unpaid dividends and authorized, issued, and outstanding shares:
DECEMBER 31, ------------------------------------------- MARCH 31, 1993 1994 1995 1996 ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Series A (non-cumulative): Mandatory redemption................ $ 536 $ 536 $ 536 $ 536 Authorized, issued and outstanding shares........................... 750,000 750,000 750,000 750,000 Series C (9% cumulative): Mandatory redemption, including accumulated dividends............ $ 9,385 $ 10,041 $ 10,696 $ 10,859 Accumulated dividends............... $ 2,109 $ 2,765 $ 3,420 $ 3,583 Authorized shares................... 8,300,000 8,300,000 8,300,000 8,300,000 Issued and outstanding shares....... 8,083,039 8,084,543 8,084,543 8,084,543 Series D (9% cumulative): Mandatory redemption, including accumulated dividends............ $ 15,291 $ 19,660 $ 23,948 $ 24,740 Accumulated dividends............... $ 1,338 $ 2,650 $ 4,431 $ 4,873 Authorized shares................... 6,750,000 10,250,000 10,250,000 10,250,000 Issued and outstanding shares....... 6,489,954 7,911,836 9,098,741 9,191,764 Totals Mandatory redemption, including accumulated dividends............ $ 25,212 $ 30,237 $ 35,180 $ 36,135 Accumulated dividends............... $ 3,447 $ 5,415 $ 7,851 $ 8,456 Authorized shares................... 15,800,000 19,300,000 19,300,000 19,300,000 Issued and outstanding shares....... 15,322,993 16,746,379 17,933,284 18,026,307
In the event of the conversion of convertible redeemable preferred stock into common stock as a result of a public offering, all accumulated unpaid dividends on the preferred stock are canceled. In the event of a liquidation or merger, the preferred stockholders would receive $0.65 per share of Series A preferred stock, $0.90 per share plus any accumulated unpaid dividends for Series C preferred stock, and $2.15 per share plus any accumulated unpaid dividends for Series D preferred stock prior to any distribution to the common stockholders. If the assets of the Company are insufficient to permit the payment of the full amount of the liquidation preference to the preferred stockholders, the assets of the Company would be distributed to the preferred stockholders in proportion to the total number of preferred shares then outstanding. The articles of incorporation and the preferred stock agreements require the Company to meet certain provisions related to transaction and debt restrictions, stock dilution, redemption payments and administrative restrictions. If such requirements are not met, the holders of at least 50% of the outstanding preferred stock may request an increase in the number of directors of the Company's Board of Directors as would constitute a minimum majority and the holders of preferred stock, voting separately as a single class, may elect individuals to fill such newly created directorships. All preferences, covenants, and other provisions terminate upon an initial public offering. F-20 92 VENTANA MEDICAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995 (INFORMATION FOR THE PERIODS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) Through the Company's 1991 Employee Qualified Stock Purchase Plan (the "1991 Purchase Plan"), employees of the Company are able to purchase Series D preferred stock through accumulated payroll deductions for $2.15 per share. A total of 250,000 shares of Series D preferred stock have been reserved for issuance under this plan. Shares of 222,987 were issued and outstanding at December 31, 1995, which are convertible into 92,391 shares of common stock. Warrants for the purchase of 228,914 shares of Series D preferred stock are outstanding at December 31, 1995, with exercise prices of $2.15 per share. Such warrants will expire upon an initial public offering, to the extent not previously exercised and are convertible into 82,408 shares of common stock. 7. COMMON STOCK 1988 Stock Option Plan: Under the Company's 1988 Stock Option Plan (the "Plan"), incentive and non-qualified stock options for the purchase of up to 1,339,663 shares of common stock are reserved for grant to employees and directors. Options must be granted at not less than 100% of fair market value (as determined by the Board of Directors) at the date of grant. Options generally vest over a four year period and expire five to ten years after the date of grant. However, the Board of Directors, at its discretion, may decide the period over which options become exercisable and their expiration dates. A summary of stock option activity is as follows:
OUTSTANDING STOCK OPTIONS ----------------------------- NUMBER OF EXERCISE OPTIONS PRICE PER SHARE --------- --------------- Balance at January 1, 1993........................ 312,092 $0.18 -- $0.60 Granted......................................... 44,717 0.60 -- 0.95 Exercised....................................... (54,987) 0.18 -- 0.24 Canceled........................................ (28,836) 0.24 -- 0.60 --------- --------- Balance at December 31, 1993...................... 272,986 0.18 -- 0.95 Granted......................................... 564,836 0.84 -- 0.95 Exercised....................................... (28,090) 0.24 -- 0.95 Canceled........................................ (196,955) 0.18 -- 0.95 --------- --------- Balance at December 31, 1994...................... 612,777 0.24 -- 0.95 Granted......................................... 324,467 0.84 Exercised....................................... (160,210) 0.24 -- 0.95 Canceled........................................ (126,580) 0.24 -- 0.95 --------- --------- Balance at December 31, 1995...................... 650,454 0.24 -- 0.95 Granted......................................... 69,256 1.62 Exercised....................................... (7,616) 0.24 -- 0.95 Canceled........................................ (9,429) 0.60 -- 0.84 --------- --------- Balance at March 31, 1996......................... 702,665 $0.24 -- $1.62 ========= =========
Options to purchase 133,716 shares of common stock were immediately exercisable at December 31, 1995. F-21 93 VENTANA MEDICAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995 (INFORMATION FOR THE PERIODS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) 8. INCOME TAXES The Company's deferred tax assets consist of the following:
DECEMBER 31, ------------------- 1994 1995 ------- ------- (IN THOUSANDS) Non-current: Net operating loss carryforwards....................... $ 4,345 $ 5,004 Capitalized research and development................... 2,256 2,471 General business credit carryforwards.................. 617 767 Other.................................................. 67 186 Current: Miscellaneous.......................................... 19 154 ------ ------ Total deferred tax assets................................ 7,304 8,582 Valuation allowance...................................... (7,304) (8,582) ------ ------ Net deferred tax assets.................................. $ -- $ -- ====== ======
The valuation allowance for deferred tax assets was increased by $5,500,000, $1,843,000, and $1,319,000 in the years ended December 31, 1993, 1994, and 1995, respectively to fully offset deferred tax balances. Temporary differences between the net operating losses for financial reporting and income tax purposes primarily relate to the deferral of research and development expenses for tax purposes. At December 31, 1995, the Company has net operating loss carryforwards for federal and state purposes of approximately $12.0 million. These federal and state carryforwards will begin to expire in 2000 and 1996, respectively, if not previously utilized. The Company also has research and development tax credit carryforwards of approximately $700,000 which will begin to expire in 2005, if not previously utilized. Utilization of the Company's net operating loss carryforwards will be subject to limitations due to the "change in ownership" provisions of the Internal Revenue Code of 1996, as amended, as a result of the Company's prior issuances of equity securities. These carryforwards, therefore, may expire prior to being fully utilized. Future financings may cause additional changes in ownership and further limitations on the use of federal net operating loss carryforwards. 9. OPERATING LEASES The Company conducts its corporate operations from leased facilities. In addition to monthly rental payments, the Company is responsible for certain monthly operating and maintenance expenses of such facilities. The lease expires in 2001. The future minimum rental payments under this and other operating lease arrangements are as follows (in thousands): 1996.................................................. $185 1997.................................................. 151 1998.................................................. 137 1999.................................................. 245 2000.................................................. 289 Thereafter............................................ 72
Rent expense totaled $125,000, $157,000 and $188,000 for the years ended December 31, 1993, 1994 and 1995, respectively. F-22 94 VENTANA MEDICAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995 (INFORMATION FOR THE PERIODS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) 10. SUBSEQUENT EVENTS In April 1996, the Company's Board of Directors authorized the Company to file a Registration Statement with the Securities and Exchange Commission to sell shares of its common stock in an underwritten public offering. The Company's Board of Directors also approved a reduction in the number of authorized shares of undesignated preferred stock to 5,000,000 and an increase in the number of authorized shares of common stock to 50,000,000. Unaudited pro forma stockholders' equity, as adjusted for the assumed conversion of the Preferred Stock and concurrent cancellation of undeclared dividends of $8,456,000, is set forth on the accompanying consolidated balance sheet. In conjunction with the proposed Offering, the Board of Directors authorized a 1-for-2.7059046 reverse split of its common stock to be effected prior to the closing of the offering. The accompanying consolidated financial statements have been adjusted retroactively to reflect the reverse split of the common stock. The conversion ratios of the respective series of convertible preferred stock were automatically adjusted to reflect the reverse split. If the Offering is consummated under terms presently anticipated, all of the currently outstanding preferred stock will automatically convert into 6,661,841 shares of common stock, and 84,598 shares of common stock will be issued due to warrant exercises. Unaudited pro forma stockholders' equity as adjusted for the assumed conversion (but not for the exercise of outstanding warrants) is set forth in the accompanying balance sheet. The Company acquired BioTek for $18.8 million on February 26, 1996. The acquisition has been accounted for as a purchase. The purchase price for BioTek consisted of:
(IN THOUSANDS) Cash consideration............................. $ 2,500 Stock issued to BioTek noteholders............. 3,007 Exchange Notes issued.......................... 8,978 Note payable -- escrow for contingencies....... 234 Net historical liabilities assumed............. 4,044 ------- $ 18,763 =======
The purchase price was allocated as follows:
(IN THOUSANDS) Tangible net assets............................ $ 2,288 In-process research and development............ 5,000 Goodwill....................................... 1,875 Developed technology........................... 2,000 Customer base.................................. 4,200 Covenant not-to-compete........................ 1,800 Assembled work force........................... 500 Trademark and trade name....................... 1,100 ------ Total purchase price........................... $ 18,763 ======
The Company charged to expense at the date of the acquisition $5.0 million relating to the portion of the purchase price allocated to those in-process research and development projects where technological feasibility had not yet been established and where there are no alternative future uses. F-23 95 VENTANA MEDICAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995 (INFORMATION FOR THE PERIODS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) The Exchange Notes were convertible into the Company's common stock for 30 days subsequent to the acquisition. As of March 25, 1996 approximately $3,007,000 of the Exchange Notes were converted into the Company's common stock. The Exchange Notes are payable at the earlier of 30 days after an initial public offering of the Company's common stock of at least $20 million or February 1998. The Exchange Notes bear interest at 7% payable on December 31, 1996 and 1997. The December 31, 1996 interest payment may be made in cash or common stock, at the Company's option. If the Notes are redeemed prior to December 31, 1996, no interest is payable. On March 15, 1996, the Company amended its borrowing agreement with its bank. The Company obtained a lending commitment for $2.0 million under a term loan with interest at the bank's prime rate plus 2.0%. The Company will make monthly interest payments on amounts borrowed through March 1997, at which time any amount borrowed plus accrued interest must be repaid in 24 equal monthly installments. The Company's line of credit was extended through March 1997. During the quarter ended March 31, 1996, the Company raised $4.6 million through the private placement of subordinated notes which included warrants to purchase an aggregate of 2,378,898 shares of Preferred Stock of the Company at an exercise price of $2.15 per share which will convert into 879,183 shares of Common Stock upon the completion of this Offering. The proceeds of these notes were used to fund the cash portion of the BioTek acquisition consideration and to provide working capital. These notes bear interest at 7% per annum, which will be forgiven if the notes are repaid prior to December 31, 1996. The subordinated notes are required to be repaid by the Company within 30 days of the completion of this Offering. On February 26, 1996, the Company sold 646,659 shares of common stock to two directors of the Company and a related partnership at a price of $1.62 per share for their efforts and assistance in completing the BioTek acquisition and assisting management with its integration of the companies. These shares are subject to buyback by the Company at the issuance price for various periods. These buyback provisions lapse upon successful completion of an initial public offering or sale of the Company for a price of at least $10.82 per share. In May 1996, the Company established the 1996 Stock Option Plan (the "1996 Stock Plan") and reserved 1,000,000 shares of common stock for issuance. No options to purchase shares of common stock have been granted. F-24 96 VENTANA MEDICAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995 (INFORMATION FOR THE PERIODS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) In May 1996, the Board of Directors authorized the 1996 Employee Stock Purchase Plan (the "1996 Purchase Plan"). A total of 200,000 shares of common stock are reserved for issuance under the 1996 Purchase Plan. No shares have been issued under the 1996 Purchase Plan. The 1996 Purchase Plan permits eligible employees to purchase common stock through payroll deductions, subject to certain limitations. The price at which stock is purchased under the 1996 Purchase Plan is equal to 85% of the fair market value of the common stock on the first day of the applicable offering period or the last day of the applicable offering period, whichever is lower. F-25 97 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors BioTek Solutions, Inc. We have audited the accompanying balance sheets of BioTek Solutions, Inc., as of June 30, 1995 and December 31, 1995, and the related statements of operations, changes in stockholders' equity (deficit), and cash flows for the year ended June 30, 1995 and the six-months ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BioTek Solutions, Inc. as of June 30, 1995 and December 31, 1995, and the results of its operations and its cash flows for the year ended June 30, 1995 and the six-months ended December 31, 1995, in conformity with generally accepted accounting principles. Tucson, Arizona February 2, 1996, except for Note 12, as to which the date is February 20, 1996 F-26 98 BIOTEK SOLUTIONS, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS (Note 8)
JUNE 30, DECEMBER 1995 31, 1995 -------- ----------- Current assets: Cash............................................................... $ 275 $ 31 Accounts receivable, net of allowance of $50 at June 30, 1995 and $78 at December 31, 1995........................................ 425 523 Inventories (Note 4)............................................... 152 168 Prepaid expenses................................................... 115 607 -------- -------- Total current assets....................................... 967 1,329 Property and equipment, net (Note 5)................................. 940 795 Other assets (Note 6)................................................ 581 470 -------- -------- $ 2,488 $ 2,594 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable................................................... $ 1,443 $ 1,128 Accrued expenses (Note 7).......................................... 3,700 5,228 Current portion of long-term debt (Note 8)......................... 1,106 8,685 -------- -------- Total current liabilities.................................. 6,249 15,041 Long-term debt, less current portion (Note 8)........................ 8,971 2,080 Commitments and contingencies (Note 11) Stockholders' equity (deficit): Common stock, no par value: Authorized -- 10,000,000 shares Outstanding -- 8,593,915 and 9,024,195 shares at June 30, 1995 and December 31, 1995, respectively............................ 3,047 3,051 Accumulated deficit................................................ (15,764) (17,563) Treasury stock..................................................... (15) (15) -------- -------- Total stockholders' equity (deficit)....................... (12,732) (14,527) -------- -------- $ 2,488 $ 2,594 ======== ========
See accompanying notes. F-27 99 BIOTEK SOLUTIONS, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS)
SIX-MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, 1995 1995 ---------- ------------ Revenues............................................................ $ 6,043 $ 3,640 Cost of sales....................................................... 3,714 2,233 ------- ------- 2,329 1,407 Cost and expenses: Research and development.......................................... 1,734 751 Selling, general and administrative expenses...................... 3,666 1,327 ------- ------- Loss from operations................................................ (3,071) (671) Interest expense.................................................... 1,730 979 Amortization and other.............................................. 298 149 ------- ------- Net loss............................................................ $ (5,099) $ (1,799) ======= =======
See accompanying notes. F-28 100 BIOTEK SOLUTIONS, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ---------------------- SHARES ACCUMULATED TREASURY OUTSTANDING AMOUNT DEFICIT STOCK TOTAL ----------- ------ ----------- -------- -------- Balance, July 1, 1994................. 7,478,985 $2,335 $ (9,920) $ -- $ (7,585) Net loss............................ -- -- (5,099) -- (5,099) Issuance of common stock with debt............................. 1,082,964 694 -- -- 694 Repurchase of founder's shares with note............................. (950,000) -- (745) (15) (760) Shares issued as compensation for financings....................... 574,770 6 -- -- 6 Exercise of warrants................ 407,196 12 -- -- 12 --------- ------ -------- ---- -------- Balance, June 30, 1995................ 8,593,915 3,047 (15,764) (15) (12,732) Net loss............................ -- -- (1,799) -- (1,799) Exercise of warrants................ 430,280 4 -- -- 4 --------- ------ -------- ---- -------- Balance, December 31, 1995............ 9,024,195 $3,051 $ (17,563) $(15) $(14,527) ========= ====== ======== ==== ========
See accompanying notes. F-29 101 BIOTEK SOLUTIONS, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX-MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, 1995 1995 ---------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss............................................................ $ (5,099) $ (1,799) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization..................................... 1,501 776 Changes in operating assets and liabilities: Accounts receivable............................................... (306) (98) Inventories....................................................... 379 (16) Other assets...................................................... (152) (15) Accounts payable.................................................. (233) (834) Other liabilities................................................. 571 781 ---------- ------------ Net cash used in operating activities............................... (3,339) (1,205) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment................................. (84) -- ---------- ------------ Net cash used in investing activities............................... (84) -- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock............................................ 18 4 Issuance of notes payable, net of loan origination fees............. 3,418 957 ---------- ------------ Net cash provided by financing activities........................... 3,436 961 ---------- ------------ Net increase (decrease) in cash..................................... 13 (244) Cash, beginning of period........................................... 262 275 ---------- ------------ Cash, end of period................................................. $ 275 $ 31 ======== ========== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest.............................................. $ 351 $ 69 ======== ==========
See accompanying notes. F-30 102 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 1. BACKGROUND BioTek Solutions, Inc. (the Company) develops, manufactures, markets and supports proprietary computerized instruments that automate biopsy tests for the diagnosis of cancer, viruses and other conditions and diseases. These instruments use the Company's chemical reagents and utilize monoclonal antibodies, DNA probes and other sophisticated analytical techniques. This system effectively replaces the labor-intensive, manually-performed sequences of immunohistochemistry analysis of the biopsy, and allows the user to perform up to five test routines simultaneously with increased accuracy and significant cost reduction. The Company also provides extensive after-sale support and maintenance. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue: Revenue generally is recognized upon shipment of products. Revenue from service contracts is recognized ratably over the lives of the contracts. Credit Risk: Virtually all of the Company's sales are made through two distributors. The Company has not experienced bad debts from these distributors in the past. The domestic distribution agreement expires in April 1998, and the international distribution agreement expires in December 1999, if not renewed by the parties. A portion of the cash flows from these distribution agreements have been pledged to repay the advances from one of the distributors and to reimburse contract manufacturers for start-up expenses (see Note 7). Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market. Property and Equipment: Property and equipment are stated at cost. The Company capitalizes expenditures that materially increase asset lives and charges ordinary repairs and maintenance to operations as incurred. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets, which are generally three to five years. Income Taxes: The Company accounts for income taxes using the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws expected to be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce the carrying amount of deferred tax assets to their net realizable value. Stock-Based Compensation: The Company accounts for its stock compensation arrangements under the provisions of APB 25, Accounting for Stock Issued to Employees, and intends to continue to do so. Use of Estimates: The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's cash, accounts receivable, and long-term debt represent financial instruments as defined by Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments. The carrying value of these financial instruments is a reasonable approximation of fair value. F-31 103 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. INVENTORIES Inventories consist of the following:
JUNE 30, DECEMBER 31, 1995 1995 -------- ------------ (IN THOUSANDS) Raw materials and work-in-process...................... $100 $102 Finished goods......................................... 52 66 ---- ---- $152 $168 ==== ====
5. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
JUNE 30, DECEMBER 31, 1995 1995 --------- ------------- (IN THOUSANDS) Machinery and equipment............................... $ 1,311 $ 1,312 Furniture and fixtures................................ 31 31 Leasehold improvements................................ 135 135 Other................................................. 22 18 ------ ------ 1,499 1,496 Less accumulated depreciation and amortization........ 559 701 ------ ------ $ 940 $ 795 ====== ======
6. OTHER ASSETS Other assets consist of the following:
JUNE 30, DECEMBER 31, 1995 1995 --------- ------------- (IN THOUSANDS) Patents, net.......................................... $ 148 $ 167 Loan origination fees, net............................ 417 282 Deposits and other.................................... 16 21 ---- ---- $ 581 $ 470 ==== ====
Patents are net of amortization of $14,000 and $19,000 at June 30, 1995 and December 31, 1995, respectively. Loan origination fees are net of amortization of $512,000 and $647,000 at June 30, 1995 and December 31, 1995, respectively. Loan origination fees were paid to a broker/dealer controlled by a member of the Company's Board of Directors in connection with private placement offerings. These fees include a commission of 10% of the funds raised from investors not identified by the Company and 5% for investors identified by the Company, as well as five-year warrants to buy common stock equal to 10% of common stock issued for investors not identified by the Company and 6% for investors identified by the Company. These fees are included in other assets in the accompanying balance sheets and are being amortized over the terms of the related notes payable. F-32 104 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. ACCRUED EXPENSES Accrued expenses consist of the following:
JUNE 30, DECEMBER 31, 1995 1995 --------- ------------- (IN THOUSANDS) Advances from distributor............................. $ 1,402 $ 2,239 Legal fees and settlements............................ 868 1,124 Accrued interest...................................... 380 676 Deferred revenue...................................... 341 455 Reimbursement of start-up expenses to contract manufacturers....................................... 230 242 Due to officers....................................... 210 227 Other................................................. 269 265 ------ ------ $ 3,700 $ 5,228 ====== ======
8. LONG-TERM DEBT Long-term debt, consists of the following:
JUNE 30, DECEMBER 31, 1995 1995 --------- ------------- (IN THOUSANDS) Notes payable issued through private placements: 7.5% due July 31, 1995, extended (see below)........ $ 1,500 $ 1,500 7.5% due December 31, 1996.......................... 1,146 1,087 7.5% due March 31, 1996............................. 500 500 7.5% due June 30, 1996.............................. 600 600 8.25% due September 30, 1996........................ 5,869 5,869 Zero coupon, due September 30, 1997................. 1,113 1,334 Other................................................. 881 877 ------ ------ 11,609 11,767 Less: Original issue discount............................. 1,532 1,002 Current portion..................................... 1,106 8,685 ------ ------ $ 8,971 $ 2,080 ====== ======
Substantially all of the Company's financing has consisted of financing units. Each unit consists of a note payable with a fixed interest rate and a specified number of shares of the Company's common stock. The value of the common stock has been recorded as imputed interest on the notes payable, and is being amortized as additional interest expense over the life of the notes. This discount increases the interest rates on the notes from stated rates of between 7.5% and 8.25% to effective rates of between 7.8% and 31.6%. Annual maturities of the Company's long-term debt are $8,685,000 in 1996 and $2,080,000 in 1997. During the fiscal year ended June 30, 1995, investors holding notes with a face value of $966,000 and accrued interest of $180,000 due December 31, 1994 exchanged these notes for new notes with a face value of $1,146,000 due December 31, 1996 with interest payable quarterly at 7.5%. In accordance with the terms of the offering document, the Company extended the maturity of the notes originally due July 31, 1995 until October 31, 1995. Under the terms of the offering document, holders of F-33 105 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) these notes must proceed against the Company as a group (defined as holders of at least 50% of the total principal balance) to declare the notes in default. The Company has obtained waivers from holders of greater than 50% of the outstanding principal balance, deferring any action against the Company until March 31, 1996. Notes with a face value of $1,113,000 and $1,334,000 at June 30, 1995 and December 31, 1995 are convertible into the Company's common stock at a conversion rate of one share of stock per $1.00 of note principal. All notes call for quarterly payments of interest. The notes may be called prior to maturity at the option of the Company. The Company may extend the maturity of the notes by three months upon notice. The notes are automatically due in full upon liquidation of the Company, sale of the Company, default or an initial public offering in excess of $5,000,000. The notes are collateralized by substantially all of the Company's assets. In connection with the business combination transaction (see Note 12), Ventana Medical Systems, Inc. ("Ventana") replaced substantially all of the above notes with Ventana exchange notes ("Exchange Notes"). The Exchange Notes are payable at the earlier of 30 days after a successful public offering of Ventana stock or February 1998. The Exchange Notes bear interest at 7%, payable December 31, 1996 and 1997. The interest due December 31, 1996 is payable either in cash or Ventana common stock, at Ventana's option. If the notes are redeemed prior to December 31, 1996, no interest is payable. The Exchange Notes are convertible into Ventana common stock at a price of $5.00 per share for 30 days subsequent to the closing of the transaction. 9. STOCKHOLDERS' EQUITY (DEFICIT) In January 1994, the Board of Directors adopted the Amended and Restated 1991 Stock Incentive Plan (the Plan). The Plan provides for the granting of options to purchase common stock that are either intended to qualify as incentive common stock options or nonqualified options. All officers, directors, employees, consultants, advisers, independent contractors and agents are eligible to receive options under the Plan, except that only employees may receive incentive common stock options. The maximum number of common shares available for issuance under the Plan is 1,250,000. The exercise price of incentive common stock options granted under the Plan must be at least equal to the fair market value of the shares on the date of grant (110% of fair market value in the case of participants who own shares possessing more than 10% of the combined voting power of the Company) and may not have a term in excess of ten years from the date of grant (five years in the case of participants who own shares possessing more than 10% of the combined voting power of the Company). A summary of changes in the common shares under option follows:
SHARES PRICE UNDER OPTION RANGE ------------ ------------- Balance, July 1, 1994............................ 818,000 $.45 -- $3.00 Granted........................................ 8,000 2.50 Canceled....................................... (119,419) .45 -- 2.50 ------------ ------------- Balance, June 30, 1995........................... 706,581 .45 -- 3.00 Granted........................................ -- -- Canceled....................................... -- -- ------------ ------------- Balance, December 31, 1995....................... 706,581 $.45 -- $3.00 ========== ============
In January 1996, the Company's Board of Directors terminated the Plan pursuant to the Plan document. Upon termination, all options became fully vested. All options not exercised within 30 days of the termination are canceled. F-34 106 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Warrants for the purchase of 1,248,917 shares of common stock with exercise prices between $.01-$3.33 were outstanding at December 31, 1995. All warrants will be canceled upon closing of the Ventana acquisition (see Note 12). 10. INCOME TAXES The Company's deferred tax assets consist of the following:
JUNE 30, 1995 DECEMBER 31, 1995 ------------------- ------------------- NON- NON- CURRENT CURRENT CURRENT CURRENT ------- ------- ------- ------- (IN THOUSANDS) Net operating loss carryforwards...... $ -- $ 3,954 $ -- $ 4,331 Capitalized research and development......................... -- 1,025 -- 1,133 Research and development credits...... -- 76 -- 113 Basis of fixed assets................. -- 82 -- 110 Reserves and allowances not currently deductible.......................... 355 -- 332 -- ----- ------- ----- ------- 355 5,137 332 5,687 Valuation allowance................... (355) (5,137) (332) (5,687) ----- ------- ----- ------- Net deferred tax assets............... $ -- $ -- $ -- $ -- ===== ======= ===== =======
Temporary differences between the federal net operating losses for financial reporting and income tax purposes primarily relate to the deferral of research and development expenses for tax purposes. At June 30, 1995 and December 31, 1995, the Company had net operating loss carryforwards for federal and state purposes of $9,884,000 and $10,828,000, respectively. These federal and state carryforwards will begin to expire in 2008, if not previously utilized. Utilization of the Company's net operating loss carryforwards will be subject to limitations due to the change in ownership provisions of the Internal Revenue Code as a result of the acquisition by Ventana (see Note 12). These carryforwards, therefore, may expire prior to being fully utilized. 11. COMMITMENTS AND CONTINGENCIES The Company leases its operating facility under an operating lease. The Company has the following future minimum annual lease payments as of December 31, 1995:
(IN THOUSANDS) -------------- 1996........................... $147 1997........................... 113 1998........................... 66 ---- $326 ====
Total rent expense related to these facility leases was approximately $195,000 for the year ended June 30, 1995 and $110,000 for the six-months ended December 31, 1995. A competitor has filed suit against the Company alleging infringement of certain patent rights. The Company is involved in various other litigation arising in the normal course of business. Management, in conjunction with outside counsel, periodically reviews such matters and makes any accruals deemed necessary. Management is of the opinion that the disposition of these claims will not have a material effect on the Company's financial statements. F-35 107 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 12. SUBSEQUENT EVENT On February 20, 1996, the Company's stockholders approved the acquisition of all of the Company's outstanding common stock by Ventana for consideration of $18,763,000. The purchase price includes cash, issuance of Exchange Notes, and the assumption of liabilities. The Company does not anticipate any funds will remain for common stockholders once the Company's liabilities are settled. The Company will become a wholly owned subsidiary of Ventana, which will provide the financial resources for the Company to meet its operating needs. The Company incurred $1,395,000 in costs subsequent to year end related to the transaction, including the issuance of notes payable of $888,000 and the payment of cash of $328,000 paid to officers and directors of the Company. Subsequent to December 31, 1995, the Company renegotiated certain obligations with its vendors. Accounts payable, accrued expenses, and long-term debt with carrying values totaling $1,923,000 in the accompanying balance sheet were settled for $1,120,000. The resulting gain of $803,000 is not included in the accompanying statement of operations. F-36 108 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of BioTek Solutions, Inc. We have audited the accompanying balance sheets of BIOTEK SOLUTIONS, INC.(a California corporation) as of June 30, 1993 and 1994 and the related statements of operations, shareholders' deficit and cash flows for the years then ended June 30, 1993 and 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BioTek Solutions, Inc. as of June 30, 1993 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Los Angeles, California February 2, 1996 (except with respect to the information in Note 8 as to which the date is February 20, 1996) F-37 109 BIOTEK SOLUTIONS, INC. BALANCE SHEETS AS OF JUNE 30, 1993 AND 1994 ASSETS
1993 1994 ---------- ---------- Current Assets: Cash.............................................................. $ 100,519 $ 261,611 Accounts receivable, net of allowance of $41,650 and $44,984 at June 30, 1993 and 1994, respectively........................... 246,115 421,269 Inventories....................................................... 332,038 530,926 Prepaid expenses.................................................. -- 26,466 ---------- ---------- Total current assets...................................... 678,672 1,240,272 ---------- ---------- Property, Equipment and Leasehold Improvements: Equipment......................................................... 370,700 1,071,004 Furniture and fixtures............................................ 10,293 31,095 Leasehold improvements............................................ 30,754 130,841 Vehicles.......................................................... 5,000 5,000 Computer hardware and software.................................... 55,776 184,988 ---------- ---------- 472,523 1,422,928 Less -- Accumulated depreciation and amortization................. 55,076 279,139 ---------- ---------- 417,447 1,143,789 ---------- ---------- Other Assets: Patents, net of amortization of $1,929 and $6,543 at June 30, 1993 and 1994, respectively......................................... 59,957 90,319 Private placement origination fee, net of amortization of $51,816 and $168,897 at June 30, 1993 and 1994, respectively........... 206,684 464,816 Deposits.......................................................... 670 18,577 ---------- ---------- 267,311 573,712 ---------- ---------- $1,363,430 $2,957,773 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Accounts payable.................................................. $ 677,456 $1,862,903 Accrued liabilities............................................... 729,375 695,726 Other............................................................. 136,280 359,139 Restructuring reserve............................................. -- 611,441 Current portion of notes payable.................................. -- 979,000 Reimbursement of start-up expenses to contract manufacturer....... -- 662,000 ---------- ---------- Total current liabilities................................. 1,543,111 5,170,209 ---------- ---------- Notes Payable, net of current portion and original issue discount... 3,144,099 5,372,823 ---------- ---------- Commitments and Contingencies (Note 4) Stockholders' Deficit: Common stock, no par value Authorized -- 10,000,000 shares issued and outstanding 5,940,800 and 7,478,985 in 1993 and 1994 respectively.......... 743,646 2,335,031 Accumulated deficit............................................... (4,067,426) (9,920,290) ---------- ---------- (3,323,780) (7,585,259) ---------- ---------- $1,363,430 $2,957,773 ========== ==========
The accompanying notes are an integral part of these financial statements. F-38 110 BIOTEK SOLUTIONS, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1993 AND 1994
1993 1994 ----------- ----------- Revenues............................................................ $ 1,549,655 $ 6,159,843 ----------- ----------- Cost and expenses: Cost of revenues.................................................. 1,410,693 4,103,279 Research and development.......................................... 1,370,376 861,310 Selling, general and administrative expenses...................... 1,764,228 5,222,464 Restructuring expense............................................. -- 877,004 ----------- ----------- 4,545,297 11,064,057 ----------- ----------- Loss from operations........................................... (2,995,642) (4,904,214) ----------- ----------- Interest expense (income), net: Interest expense.................................................. 255,406 953,691 Interest income................................................... (7,722) (5,841) ----------- ----------- 247,684 947,850 ----------- ----------- Loss before provision for state income taxes................... (3,243,326) (5,852,064) Provision for state income taxes.................................... 1,000 800 ----------- ----------- Net loss............................................................ $(3,244,326) $(5,852,864) =========== ===========
The accompanying notes are an integral part of these financial statements. F-39 111 BIOTEK SOLUTIONS, INC. STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED JUNE 30, 1993 AND 1994
COMMON STOCK -------------------------- SHARES ACCUMULATED OUTSTANDING AMOUNT DEFICIT ----------- ---------- ----------- Balance, June 30, 1992................................ 3,945,000 $ 54,568 $ (823,100) Issuance of Common Stock in connection with private placement........................................ 229,800 2,298 -- Issuance of Common Stock in settlement of lawsuits in connection with bridge loan................... 50,000 500 -- Issuance of Common Stock in connection with the first private placement with a related party..... 900,000 9,000 -- Issuance of Common Stock in connection with the second private placement with a related party.... 250,000 207,500 -- Issuance of Common Stock in settlement of lawsuit with former board member......................... 266,000 220,780 -- Issuance of Common Stock in connection with the third private placement with a related party..... 300,000 249,000 -- Net loss.............................................. -- (3,244,326) --------- ----------- ------------ Balance, June 30, 1993................................ 5,940,800 743,646 (4,067,426) Issuance of common stock upon the exercise of warrants......................................... 5,000 2,250 -- Issuance of common stock in connection with the fourth, fifth and sixth private placements with a related party.................................... 1,533,185 1,589,135 -- Net loss.............................................. -- -- (5,852,864) --------- ----------- ------------ Balance, June 30, 1994................................ 7,478,985 $2,335,031 $(9,920,290) ========= =========== ============
The accompanying notes are an integral part of these financial statements. F-40 112 BIOTEK SOLUTIONS, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1993 AND 1994
1993 1994 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................................................ $(3,244,326) $(5,852,864) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation................................................. 51,626 228,677 Interest and amortization of loan fees....................... 94,993 552,912 Issuance of Common Stock for settlement of lawsuits.......... 221,280 -- Restructuring reserve........................................ -- 611,441 Reimbursement of start-up expenses to contract manufacturer................................................ -- 662,000 (Increase) decrease in: Accounts receivable.......................................... (245,115) (175,154) Inventories.................................................. (332,038) (198,888) Prepaid expenses............................................. 6,520 (26,466) Deposits..................................................... (48,989) (17,907) Patents...................................................... 2,660 (34,976) Increase (decrease) in: Accounts payable............................................. 659,940 1,185,447 Accrued liabilities.......................................... 706,427 (33,649) Other liabilities............................................ 91,280 222,859 ----------- ----------- Net cash used in operating activities................... (2,035,742) (2,876,568) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, equipment and leasehold improvements...... (376,149) (950,405) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Common Stock........................................ -- 2,670 Issuance of notes payable....................................... 2,626,000 4,360,608 Loan fees paid in association with issuance of notes payable.... (258,500) (375,213) ----------- ----------- Net cash provided by financing activities............... 2,367,500 3,988,065 ----------- ----------- NET INCREASE (DECREASE) IN CASH................................... (44,391) 161,092 Cash, beginning of period......................................... 144,910 100,519 ----------- ----------- Cash, end of period............................................... $ 100,519 $ 261,611 =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest..................................................... $ 50,000 $ 272,211 =========== =========== Taxes........................................................ $ 1,000 $ 1,600 =========== ===========
The accompanying notes are an integral part of these financial statements. F-41 113 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1994 1. SIGNIFICANT RISKS BUSINESS AND BASIS OF PRESENTATION BioTek Solutions, Inc. ("the Company") develops, manufactures, markets and supports proprietary computerized instruments that automate biopsy tests for the diagnosis of cancer, viruses and other conditions and diseases. These instruments use the Company's optimized chemical reagents and monoclonal antibodies. This system effectively replaces the labor-intensive, manually-performed sequences of the biopsy and surgical specimen preparation and allows the user to precisely and simultaneously perform up to five test routines with increased accuracy and significant cost reduction. The Company also provides extensive after-sale support and maintenance. The Company was formed in October 1990 and was a development stage company through June 30, 1992. The Company began selling products in the first quarter of fiscal 1993 and began volume sales in March 1993. The Company incurred net losses of $3,244,326 and $5,852,864 for the years ended June 30, 1993 and 1994, respectively. Continuing losses have adversely affected the liquidity of the Company. As of June 30, 1994, the Company had a working capital deficit of $3,929,937. The Company has relied upon private sales of equity and debt securities to obtain necessary working capital to support its activities. On February 20, 1996, the Company's stockholders approved the acquisition of the Company by Ventana Medical Systems, Inc. (Ventana)(see Note 8). RESTRUCTURING CHARGES During fiscal 1994, the Company recorded a $877,004 charge to income for the repositioning of the Company's operations. The repositioning was necessitated by plans of a new management team. The charge includes costs associated with reductions in work force, removal of former president and termination of various leases. The Company believes that the repositioning and resulting expense reductions will allow it to operate in a more efficient manner in the future. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION Revenue is recognized upon shipment of product. Revenue for the years ended June 30, 1993 and 1994 were comprised of the following:
1993 1994 ---------- ---------- Instruments......................................... $ 938,896 $3,519,723 Chemistries, disposables, service and other......... 610,759 2,640,120 ---------- ---------- $1,549,655 $6,159,843 ========== ==========
In January 1993, the Company signed an exclusive distribution agreement with Curtin Matheson Scientific, Inc. (CMS). This gave CMS the exclusive rights to sell instruments and consumables in the United States. Total sales to CMS for the years ended June 30, 1993 and 1994 were $1,213,000 and $5,445,394, respectively. CREDIT RISK Virtually all of the Company's sales are made through two distributors. The Company has not experienced bad debts from these distributors in the past. The distribution agreement with CMS expires in F-42 114 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) April 1998, and the international distribution agreement expires in December 1999, if not renewed by the parties. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVENTORY Inventory consists of automated instruments, chemical reagents, and replacement parts for the automated instruments (see Note 4). As of June 30, 1993 and 1994, inventory consisted of:
1993 1994 -------- -------- Raw materials.......................................... $219,633 $ 36,078 Work in process........................................ 71,729 114,328 Finished goods......................................... 40,676 380,520 -------- -------- $332,038 $530,926 ======== ========
Inventory is stated at the lower of cost (first-in, first-out) or market. DEPRECIATION AND AMORTIZATION Depreciation and amortization is provided through the use of the straight-line method over the estimated useful lives of the assets as follows:
ASSET TYPE USEFUL LIFE --------------------------------------- ------------------------- Equipment.............................. 5 years Furniture & Fixtures................... 5 years Leasehold Improvements................. Lesser of the asset life or the life of the respective lease Vehicles............................... 5 years Computer Hardware...................... 5 years Computer Software...................... 3 years
The Company capitalizes expenditures that materially increase asset lives and charges ordinary repairs and maintenance to operations as incurred. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the accounts and any gain or loss is included in results of operations. CAPITALIZED PATENT COSTS The Company capitalizes costs of obtaining patent rights for certain products. Amortization of capitalized patent cost is provided on a straight-line basis over 17 years. F-43 115 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) INCOME TAXES No provision was made for federal income tax purposes since the Company has recorded a net operating loss from inception. The primary difference between book and tax loss is the capitalization of research and development costs for tax purposes. At June 30, 1994, the Company had net operating losses for federal and state purposes of $6,754,000. These federal and state carryforwards will begin to expire in 2006, if not previously utilized. Utilization of the Company's net operating losses will be subject to limitations due to the change in ownership provisions of the Internal Revenue Code as a result of the acquisition by Ventana (see Note 8). These carryforwards, therefore, may expire prior to being fully utilized. 3. CAPITAL TRANSACTIONS On September 20, 1993, the shareholders approved an increase in the number of authorized shares of common stock from 6,500,000 to 10,000,000. In November 1990, the Company issued 1,000,000 shares of Common Stock to each of its three founders in exchange for $45,118. In addition, two of the founders transferred all their rights, title and interest in certain technology and equipment which was valued at zero. In July 1992, the Company issued 25,000 shares to each of two investors and a $24,000 note due December 31, 1992 with no interest. The note and shares were issued as part of a settlement agreement and mutual release among the investors, the Company and an officer of the Company. Between January 1992 and September 1992, the Company sold $979,000 in aggregate principal amount of units in a private placement to various investors. Each unit consisted of 30,000 shares of Common Stock and a senior secured note in the principal amount of $25,000 with interest accruing at 7.5 percent until maturity on July 31, 1995. Danzi Capital Group (DANZI) served as private placement agent for the offering (see Note 6). The Common Stock was valued at $.01 per share. In September 1992, the Company sold $1,500,000 in aggregate principal amount of units in a private placement to various investors. Each unit consisted of 15,000 shares of Common Stock and a senior unsecured note in the principal amount of $25,000 with interest accruing at 7.5 percent until maturity on July 31, 1995. Danzi served as private placement agent for the offering (see Note 6). The Common stock was valued at $.01 per share. In March 1993, the Company issued 266,000 shares to two former board members. These shares were issued as part of settlement agreements and a mutual release among the former board members and the Company. In April 1993, the Company sold $500,000 in aggregate principal amount of units in a private placement to various investors. Each unit consisted of 12,500 shares of Common Stock and a senior unsecured note in the principal amount of $25,000 with interest accruing at 7.5 percent until maturity on March 31, 1996. Danzi served as private placement agent for the offering (see Note 6). The Common stock was valued at $.83 per share. In May 1993, the Company sold $600,000 in aggregate principal amount of units in a private placement to various investors. Each unit consisted of 12,500 shares of Common Stock and a senior unsecured note in the principal amount of $25,000 with interest accruing at 7.5 percent until maturity on June 30, 1996. Danzi served as private placement agent for the offering (see Note 6). The Common Stock was valued at $.83 per share. Between July 1993 to October 1993, the Company sold $2,250,000 in aggregate principal amount of units in a private placement to various investors. Each unit consisted of 10,000 shares of Common Stock and a senior unsecured note in the principal amount of $25,000 with interest accruing at 8.25 percent until maturity F-44 116 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) on September 30, 1996. Danzi served as private placement agent for the offering (see Note 6). The Common Stock was valued at $.83 per share. Between March 1994 to June 1994, the Company sold $2,110,608 in aggregate principal amount of units in a private placement to various investors. Each unit consisted of 7,500 shares of Common Stock and a senior unsecured note in the principal amount of $25,000 with interest accruing at 8.25 percent until maturity on September 30, 1996. Danzi served as private placement agent for the offering (see Note 6). The Common Stock was valued at $1.33 per share. The value of the common stock has been recorded as imputed interest on the notes payable, and is being amortized as additional interest expense over the life of the notes. This discount increases the interest rates on the notes from stated rates of between 7.5 percent and 8.25 percent to effective rates of between 7.8 percent and 31.6 percent. 4. COMMITMENTS AND CONTINGENCIES ROYALTIES In May 1993, the Company entered into a royalty agreement with a slide manufacturer that obligates the Company to pay a percentage of the sales of certain items to the manufacturer based on terms defined in the royalty agreement with a guaranteed minimum of $50,000 per year for 4 years beginning in fiscal 1994. There was royalty expense of $50,000 for the year ended June 30, 1994 and no royalty expense for the year ended June 30, 1993. LEASES The Company leased its office facility during 1992 under an operating lease on a month to month basis. The Company also has four sales offices that are rented on a month to month basis. Total rental expense related to these facility leases was approximately $106,000 and $140,175 for the years ended June 30, 1993 and 1994, respectively. The future minimum annual lease payments under a new 5 year office lease agreement signed subsequent to year end is as follows:
YEAR ENDED JUNE 30, - ------------------------------ 1995.................... $112,794 1996.................... 112,794 1997.................... 112,794 1998.................... 112,794 $451,176
DISTRIBUTOR LICENSING AGREEMENT In January 1993, the Company entered into a 5 year exclusive distribution agreement with CMS, a major distributor of medical products, to purchase and promote the Company's products. As of June 30, 1994, CMS had purchased 104 TechMate(TM) systems. CMS is required to purchase a total of 300 units by April 1995 in order to retain its exclusive distribution rights. CMS has not met this obligation; however no action has been taken. STOCK PURCHASE AGREEMENT On February 14, 1992, the Company entered into a buy/sell agreement (the "Buy-Sell Agreement") with the three founders of the Company. Under the agreement, if a founder should be terminated for cause or voluntarily resign without written approval of the board, then the other founders and the Company shall have the option, but not the obligation, at any time and from time to time to purchase all or any portion of the F-45 117 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) shares owned by such founder. If the termination is determined to be without cause, then such founder shall have the right to require the Company to purchase all or a portion of the shares owned by-the-founder subject to certain limitations as defined in the agreement. The purchase price will be at fair market value determined on a semi-annual basis by the founders. If the fair market value is not adjusted the last agreed upon rate will prevail. The last established fair market value as set by the founders was $0.80 per share. LITIGATION As of July 6, 1994, the former president of the Company was terminated. As a result of an arbitration ruling in July 1995, the Company has issued the former president a note for $760,000 bearing interest at 7.5 percent per year for the repurchase of his 950,000 shares. In March 1995, a competitor filed suit against the Company alleging infringement of certain patent rights. The Company is involved in various other actions arising in the normal course of business. Management, in conjunction with outside counsel, periodically reviews such matters and makes any accruals deemed necessary. Management is of the opinion that the disposition of these claims will not have a material effect on the Company's financial position or results of operations. 5. NOTES PAYABLE Notes payable, all issued in connection with private placements (see Notes 3 and 6), consisted of the following as of June 30, 1994: Secured Notes payable, collateralized by the assets of the Company, interest at 7.5 percent payable quarterly, due December 31, 1994, subsequently extended to December 31, 1996........................................................ $ 979,000 Secured Notes payable, collateralized by the assets of the Company, interest at 7.5 percent payable quarterly, due July 31, 1995, subsequently extended to October 31, 1996......... 1,500,000 Unsecured Notes payable, interest at 7.5 percent payable quarterly, due March 31, 1996............................... 500,000 Unsecured Notes payable, interest at 7.5 percent payable quarterly, due June 30, 1996................................ 600,000 Unsecured Notes payable, interest at 8.25 percent payable quarterly, due September 30, 1996........................... 4,360,608 ---------- 7,939,608 ---------- Less: Original issue discount........................................ 1,587,785 Current portion................................................ 979,000 ---------- $5,372,823 ==========
In connection with the sale of the Company to Ventana (see Note 8), the outstanding notes were exchanged for Ventana notes which are interest free if paid by December 31, 1996 and ultimately due with interest at 7 percent on December 31, 1997. The entire amount is due 30 days after completion of an initial public offering. 6. RELATED PARTIES The Company has completed several private placement offerings in which Danzi was the placement agent. In connection with these offerings Danzi was paid a commission of 10 percent of the funds raised from F-46 118 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) investors not identified by the Company and 5 percent for investors identified by the Company, payable upon the closing of the transactions. As additional consideration, the Company granted Danzi five-year warrants to buy Common Stock equal to 10 percent of Common Stock issued to investors not identified by the Company and 6 percent for identified obtained by the Company. Total fees paid and warrants issued to Danzi during the years ended June 30, 1993 and 1994 were $258,500, and 140,300 warrants in 1993 and $427,000 and 126,171 warrants in 1994. The fees paid to Danzi have been capitalized and are being amortized over the life of the related notes payable. The warrants issued to Danzi are summarized as follows:
EXPIRATION DATE EXERCISE PRICE UNDERLYING SHARES ------------------------------------------------------- -------------- ----------------- Between October 1997 and May 1998...................... $ 1.00 140,300 Between July 1998 and June 1999........................ $ 1.00 126,171 ------- 266,471 =======
7. STOCK OPTIONS In November 1991, the Company adopted the Biotek Solutions, Inc. 1991 Stock Incentive Plan (the "Plan"). In January 1994, the Board of Directors adopted the Amended and Restated 1991 Stock Incentive Plan, subject to shareholder approval. The Plan provides for the granting of options to purchase Common Stock that are either intended to qualify as incentive Common Stock options or non-qualified options. All officers, directors, employees, consultants, advisers, independent contractors and agents are eligible to receive options under the Plan, except that employees may only receive incentive Common Stock options. The maximum number of shares available for issuance under the Plan is 1,250,000. The exercise price of incentive Common Stock options granted under the Plan must be at least equal to the fair market value of the shares on the date of grant (110 percent of fair market value in the case of participants who own shares possessing more than 10 percent of the combined voting power of the Company) and may not have a term in excess of 10 years from the date of grant (five years in the case of participants who are more than 10 percent Common Stockholders). A summary of changes in the shares under option follows:
SHARES PRICE RANGE -------- ----------- Balance, June 30, 1992...................................... 430,750 $ 0.45 Granted................................................... 303,000 0.45-- 0.83 Canceled.................................................. -- -- ------- ----------- Balance, June 30, 1993...................................... 733,750 0.45-- 0.83 Granted................................................... 176,750 0.83-- 3.00 Canceled.................................................. 92,500 0.83-- 2.50 ------- ----------- Balance, June 30, 1994...................................... 818,000 $0.45--$3.00 ======= ===========
At June 30, 1993 expiration dates for options outstanding ranged from fiscal 2002 to 2003. No amounts have been reflected in the Company's statements of operations with respect to these stock options. In January 1996, the Company's Board of Directors terminated the plan, pursuant to the plan document. Upon termination, all options became fully vested. All options not exercised within 30 days of the termination are canceled. F-47 119 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. SUBSEQUENT EVENTS On February 20, 1996, the Company's stockholders approved the acquisition of the Company by Ventana. Under the terms of the acquisition agreement, Ventana will pay $4.5 million in cash and notes and assume $12.5 million of the Company's liabilities. Substantially all of the proceeds to the Company will be used to retire existing liabilities. The Company does not anticipate any funds will remain for common stockholders once the Company's liabilities are settled. Subsequent to December 31, 1995, the Company renegotiated certain obligations with its vendors. Accounts payable, accrued expenses, and long-term debt with carrying values totaling $1,923,000 in the accompanying balance sheet were settled for $1,120,000. The resulting gain of $803,000 is not included in the accompanying statements of operations. F-48 120 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER, ANY UNDERWRITER OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary...................... 3 Risk Factors............................ 6 The Company............................. 15 Use of Proceeds......................... 15 Dividend Policy......................... 15 Dilution................................ 16 Capitalization.......................... 17 Selected Consolidated Financial and Operating Data........................ 18 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 20 Business................................ 33 Management.............................. 50 Certain Transactions.................... 57 Principal and Selling Stockholders...... 60 Description of Capital Stock............ 64 Shares Eligible for Future Sale......... 65 Underwriting............................ 67 Legal Matters........................... 68 Experts................................. 68 Additional Information.................. 68 Index to Consolidated Financial Statements............................ F-1
------------------ UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ SHARES LOGO VENTANA MEDICAL SYSTEMS, INC. COMMON STOCK ----------------------- PROSPECTUS ----------------------- BEAR, STEARNS & CO. INC. DILLON, READ & CO. INC. , 1996 - ------------------------------------------------------ - ------------------------------------------------------ 121 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee. SEC registration fee.............................................. $ 19,035 NASD filing fee................................................... 6,020 Nasdaq National Market listing fee................................ 40,000 Printing and engraving costs...................................... 150,000 Legal fees and expenses........................................... 300,000 Accounting fees and expenses...................................... 200,000 Blue Sky fees and expenses........................................ 20,000 Transfer Agent and Registrar fees................................. 5,000 Directors and officers insurance coverage premiums................ 150,000 Miscellaneous expenses............................................ 34,945 -------- Total................................................... $925,000 ========
- --------------- * To be filed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article 10 of the Registrant's Certificate of Incorporation provides for the indemnification of directors to the fullest extent permissible under Delaware law. Article VI of the Registrant's Bylaws provides for the indemnification of officers, directors, employees and agents of the corporation if such person acted in good faith and in a manner reasonably believed to be in and not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding the indemnified party had no reason to believe his conduct was unlawful. Section 145 of the Delaware General Corporation Law permits a corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by the current law. The Registrant will enter into indemnification agreements with its directors and executive officers, and intends to enter into indemnification agreements with any new directors and executive officers in the future. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since January 1, 1993, the Registrant has issued and sold (without payment of any selling commission to any person) the following unregistered securities (all of which are presented without giving effect to the reverse stock split to be effected prior to the closing of the Offering): (1) From inception of the Company, the Registrant issued and sold 807,585 shares of Common Stock to employees, directors and consultants at prices ranging from $.09 to $.35, upon exercise of incentive stock options under the Registrant's 1988 Stock Option Plan, or as stock purchases in connection with their employment with or services to the Company. (2) From inception of the Company, the Registrant issued and sold 222,989 shares of preferred stock to employees at prices ranging from $.90 to $2.15 per share pursuant to the 1991 Employee Stock Purchase Plan in connection with their employment with the Company. II-1 122 (3) From March 25, 1993 to January 23, 1995, Registrant issued 4,747,119 shares of Series D Preferred Stock at a price of $2.15 per share and 124,270 warrants for the purchase of Series D Preferred Stock with an exercise price of $2.15 per share to a total of 38 investors. (4) In October 1994, Registrant issued to R. James Danehy, President, Chief Executive Officer and a director of the Company a stock option covering 800,000 shares of Common Stock at an exercise price of $0.31 per share. 219,891 shares subject to such option which had vested were cancelled by the Company in November 1995, and the Company allowed Mr. Danehy to purchase 219,891 shares of Common Stock at a purchase price of $0.31 per share through his self-directed IRA. (5) In August 1994 the Company provided to Mr. Danehy the opportunity to purchase $200,000 of Series D Preferred Stock at $2.15 per share and an additional share of Common Stock at $0.84 per share for each two shares of Series D Preferred Stock purchased. Pursuant to his right, Mr. Danehy purchased 93,023 shares of Series D Preferred Stock and 46,512 shares of Common Stock at $0.31 per share in January 1996. (6) In February 1996, the Company issued approximately $12 million in Exchange Notes in exchange for notes held by 199 holders of BioTek notes as consideration for the acquisition of BioTek Solutions, Inc. Such Exchange Notes were convertible into Common Stock at a conversion price of $5.00 per share. Between February 26, 1996 and May 14, 1996 the Company issued approximately $5.1 million of convertible subordinated debt together with warrants to purchase 2,378,898 shares of Series D Preferred Stock at an exercise price of $2.15 per share to 68 investors (i.e., certain current stockholders and officers and directors of the Company). (7) In January 1996, the Company issued 69,767 shares of Series D Preferred Stock to Bear, Stearns & Co. Inc. as partial consideration for services rendered in connection with the acquisition of BioTek. The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and warrants issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Registrant. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION ----------- -------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement. 3.1(i)(a) Restated Certificate of Incorporation, as amended. 3.1(i)(b)* Form of Restated Certificate of Incorporation to be filed after the closing of the offering made under this Registration Statement. 3.1(ii)(a) Bylaws. 3.1(ii)(b)* Form of Bylaws to be effective on or about the closing of the Offering made under this Registration Statement. 4.1* Specimen Common Stock Certificate. 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1(a)* DAKO Distribution Agreement dated September 27, 1994. 10.1(b)* First Amendment to DAKO Distribution Agreement dated March 24, 1995. 10.1(c)* Further amendments to First Amendment to DAKO Distribution Agreement dated March 24, 1996.
II-2 123
EXHIBIT NUMBER DESCRIPTION ----------- -------------------------------------------------------------------------- 10.2(a)* Kollsman Secured Promissory Note dated December 4, 1994. 10.2(b)* Development Secured Promissory Note dated March 24, 1995. 10.3* Curtin Matheson Scientific, Inc. Distribution Agreement dated January 18, 1993. 10.4(a) Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19, 1996 -- Tranche 1 10.4(b) Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19, 1996 -- Tranche 2 10.4(c) Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19, 1996 -- Tranche 3 10.5(a) Restricted Stock Purchase Agreement with John Patience dated April 19, 1996 -- Tranche 1 10.5(b) Restricted Stock Purchase Agreement with John Patience dated April 19, 1996 -- Tranche 2 10.6* Form of Indemnification Agreement for directors and officers. 10.7(a) 1988 Stock Option Plan and forms of agreements thereunder. 10.7(b) 1996 Stock Option Plan and forms of agreements thereunder. 10.8(a) 1991 Employee Stock Purchase Plan. 10.8(b) 1996 Employee Stock Purchase Plan. 10.9 Questier Employment Agreement dated October 20, 1995. 10.10 Restated Investors Rights Agreement dated February 20, 1996. 10.11 Sublease of Premises between the Registrant and Jerry R. Jones & Associates, Inc., dated February 29, 1996, with attached Master Lease, dated October 26, 1988. 10.12 Master Lease Purchase Agreement between the Registrant and Copelco Leasing Corporation dated April 13, 1994. 10.13(a) Agreement and Plan of Reorganization dated January 19, 1996. 10.13(b) Agreement and Plan of Merger dated February 26, 1996. 10.13(c) Escrow Agreement dated February 26, 1996. 10.14(a) Form of Stock Purchase Warrant to Purchase shares of Series D Preferred Stock. 10.14(b) Form of Preferred Stock Purchase Warrant. 10.14(c) MBW and Marquette Warrants dated August 21, 1992. 10.14(d) Schuler Warrant dated September 30, 1992. 10.15(a) Form of Convertible Unsecured Promissory Note. 10.15(b) Form of Convertible Unsecured Promissory Note. 10.17* Novocastra Laboratories Ltd. Distribution Agreement dated August 19, 1992. 10.18* LJL BioSystems, Inc. Techmate 250 Production Agreement dated May 1, 1996. 10.19* Form of Right of First Refusal. 10.20(a)* Silicon Valley Bank Loan and Security Agreement dated February 20, 1995. 10.20(b)* Amendment to Silicon Valley Bank Loan and Security Agreement dated March 28, 1996. 11.1 Statement regarding computation of Per Share Earnings. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors (see page II-7). 23.2 Consent of Ernst & Young LLP, Independent Auditors (see page II-8). 23.3 Consent of Arthur Andersen LLP, Independent Public Accountants (see page II-9). 23.4 Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-4). 27.1 Financial Data Schedule.
- --------------- * To be filed by amendment. II-3 124 (b) FINANCIAL STATEMENT SCHEDULES No schedules have been filed herein because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 125 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tucson, State of Arizona, on the 23rd day of May, 1996. VENTANA MEDICAL SYSTEMS, INC. By: /s/ R. JAMES DANEHY ------------------------------------ R. James Danehy, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints R. James Danehy and R. Michael Rodgers and each of them, his attorneys-in-fact, each with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto in all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - ----------------------------------------------- ------------------------------ ------------- /s/ R. JAMES DANEHY President, Chief Executive May 23, 1996 - ----------------------------------------------- Officer and Director (R. James Danehy) (Principal Executive Officer) /s/ R. MICHAEL RODGERS Vice President and Chief May 23, 1996 - ----------------------------------------------- Financial Officer (Principal (R. Michael Rodgers) Financial and Accounting Officer) /s/ REX J. BATES Director May 23, 1996 - ----------------------------------------------- (Rex J. Bates) /s/ MICHAEL R. DANZI Director May 23, 1996 - ----------------------------------------------- (Michael R. Danzi) /s/ EDWARD M. GILES Director May 23, 1996 - ----------------------------------------------- (Edward M. Giles) /s/ THOMAS M. GROGAN, M.D. Director May 23, 1996 - ----------------------------------------------- (Thomas M. Grogan, M.D.)
II-5 126
SIGNATURE TITLE DATE - ----------------------------------------------- ------------------------------ ------------- /s/ JOHN PATIENCE Director May 23, 1996 - ----------------------------------------------- (John Patience) /s/ JACK W. SCHULER Director May 23, 1996 - ----------------------------------------------- (Jack W. Schuler) /s/ C. ANTHONY STELLAR, M.D. Director May 23, 1996 - ----------------------------------------------- (C. Anthony Stellar, M.D.) /s/ JAMES M. STRICKLAND Director May 23, 1996 - ----------------------------------------------- (James M. Strickland) /s/ JAMES R. WEERSING Director May 23, 1996 - ----------------------------------------------- (James R. Weersing)
II-6 127 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 28, 1996, except for Note 10, as to which the date is 1996, of Ventana Medical Systems, Inc. in the Registration Statement (Form S-1) and related Prospectus of Ventana Medical Systems, Inc., for the registration of 3,450,000 shares its common stock. Tucson, Arizona - -------------------------------------------------------------------------------- The foregoing consent is in the form that will be signed upon the completion of the restatement of capital accounts described in Note 10 to the consolidated financial statements. /s/ ERNST & YOUNG LLP Tucson, Arizona May 22, 1996 II-7 128 EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 2, 1996, except for Note 10, as to which the date is February 20, 1996, of BioTek Solutions, Inc. in the Registration Statement (Form S-1) and related Prospectus of Ventana Medical Systems, Inc. for the registration of 3,450,000 shares of its common stock. /s/ ERNST & YOUNG LLP Tucson, Arizona May 22, 1996 II-8 129 EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated February 2, 1996 (except with respect to the information in Note 8 as to which the date is February 20, 1996) with respect to the financial statements of BioTek Solutions, Inc. (and to all references to our Firm included in or made a part of this Registration Statement (Form S-1). /s/ ARTHUR ANDERSEN LLP Arthur Andersen LLP Los Angeles, California May 22, 1996 II-9 130 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ----------- -------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement. 3.1(i)(a) Restated Certificate of Incorporation, as amended. 3.1(i)(b)* Form of Restated Certificate of Incorporation to be filed after the closing of the offering made under this Registration Statement. 3.1(ii)(a) Bylaws. 3.1(ii)(b)* Form of Bylaws to be effective on or about the closing of the Offering made under this Registration Statement. 4.1* Specimen Common Stock Certificate. 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1(a)* DAKO Distribution Agreement dated September 27, 1994. 10.1(b)* First Amendment to DAKO Distribution Agreement dated March 24, 1995. 10.1(c)* Further amendments to First Amendment to DAKO Distribution Agreement dated March 24, 1996. 10.2(a)* Kollsman Secured Promissory Note dated December 4, 1994. 10.2(b)* Development Secured Promissory Note dated March 24, 1995. 10.3* Curtin Matheson Scientific, Inc. Distribution Agreement dated January 18, 1993. 10.4(a) Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19, 1996 -- Tranche 1 10.4(b) Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19, 1996 -- Tranche 2 10.4(c) Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19, 1996 -- Tranche 3 10.5(a) Restricted Stock Purchase Agreement with John Patience dated April 19, 1996 -- Tranche 1 10.5(b) Restricted Stock Purchase Agreement with John Patience dated April 19, 1996 -- Tranche 2 10.6* Form of Indemnification Agreement for directors and officers. 10.7(a) 1988 Stock Option Plan and forms of agreements thereunder. 10.7(b) 1996 Stock Option Plan and forms of agreements thereunder. 10.8(a) 1991 Employee Stock Purchase Plan. 10.8(b) 1996 Employee Stock Purchase Plan. 10.9 Questier Employment Agreement dated October 20, 1995. 10.10 Restated Investors Rights Agreement dated February 20, 1996. 10.11 Sublease of Premises between the Registrant and Jerry R. Jones & Associates, Inc., dated February 29, 1996, with attached Master Lease, dated October 26, 1988. 10.12 Master Lease Purchase Agreement between the Registrant and Copelco Leasing Corporation dated April 13, 1994. 10.13(a) Agreement and Plan of Reorganization dated January 19, 1996. 10.13(b) Agreement and Plan of Merger dated February 26, 1996. 10.13(c) Escrow Agreement dated February 26, 1996. 10.14(a) Form of Stock Purchase Warrant to Purchase shares of Series D Preferred Stock. 10.14(b) Form of Preferred Stock Purchase Warrant. 10.14(c) MBW and Marquette Warrants dated August 21, 1992. 10.14(d) Schuler Warrant dated September 30, 1992.
131
EXHIBIT NUMBER DESCRIPTION ----------- -------------------------------------------------------------------------- 10.15(a) Form of Convertible Unsecured Promissory Note. 10.15(b) Form of Convertible Unsecured Promissory Note. 10.17* Novocastra Laboratories Ltd. Distribution Agreement dated August 19, 1992. 10.18* LJL BioSystems, Inc. Techmate 250 Production Agreement dated May 1, 1996. 10.19* Form of Right of First Refusal. 10.20(a)* Silicon Valley Bank Loan and Security Agreement dated February 20, 1995. 10.20(b)* Amendment to Silicon Valley Bank Loan and Security Agreement dated March 28, 1996. 11.1 Statement regarding computation of Per Share Earnings. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors (see page II-7). 23.2 Consent of Ernst & Young LLP, Independent Auditors (see page II-8). 23.3 Consent of Arthur Andersen LLP, Independent Public Accountants (see page II-9). 23.4 Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-4). 27.1 Financial Data Schedule.
- --------------- * To be filed by amendment. 132 VENTANA MEDICAL SYSTEMS, INC. APPENDIX -- GRAPHIC IMAGES INSIDE FRONT COVER (1) [Image: The Ventana ES System, an automated diagnostic instrument used to perform standardized IHC testing in clinical and research laboratories.] (2) [Image: The Ventana gen II, an automated diagnostic used to perform ISH (in situ hybridization) testing in clinical and research laboratories.] BACK INSIDE COVER (3) [The BioTek TechMate 500 System, a semi-automated diagnostic instrument used to perform standardized IHC testing in clinical and research laboratories.] EX-3.1(I)(A) 2 RESTATED CERTIFICATE OF INCORPORATION, AS AMENDED 1 EXHIBIT 3.1(i)(a) RESTATED CERTIFICATE OF INCORPORATION OF VENTANA MEDICAL SYSTEMS, INC. Ventana Medical Systems, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: A. The name of the corporation is Ventana Medical Systems, Inc. The original Certificate of Incorporation of the corporation was filed with the Secretary of State of the State of Delaware on February 26, 1993. B. Pursuant to Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware, this Restated Certificate of Incorporation restates and integrates and further amends the provisions of the Certificate of Incorporation of this corporation. C. The text of the Certificate of Incorporation as heretofore amended or supplemented is hereby amended and restated in its entirety to read as follows: ONE. The name of this corporation is Ventana Medical Systems, Inc. TWO. The address of the corporation's registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such office is The Corporation Trust Company. THREE. The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOUR. This corporation is authorized to issue two classes of stock to be designated Common Stock and Preferred Stock. The total number of shares of Common Stock which this corporation is authorized to issue is 50,000,000, and the total number of shares of Preferred Stock which this corporation is authorized to issue is 24,050,000, of which 750,000 shares are designated Series A Preferred Stock, 8,300,000 shares are designated Series C Preferred Stock and 15,000,000 shares are designated Series D Preferred Stock. Each share of Common Stock and each share of Preferred Stock has a par value of $.001. The corporation shall from time to time in accordance with the laws of the State of Delaware increase the authorized amount of its Common Stock if at any time the number of shares of Common 2 Stock remaining unissued and available for issuance shall not be sufficient to permit conversion of the Preferred Stock. The relative powers, preferences, special rights, qualifications, limitations and restrictions granted to or imposed on the respective classes of the shares of capital stock or the holders thereof are as follows: 1. Dividends. (a) Cumulative Dividends. Prior to the payment of any dividend to the holders of Common Stock or Series A Preferred Stock, the holders of Series C Preferred Stock and Series D Preferred Stock shall be entitled to receive when and as declared by the board of directors, out of any funds legally available therefor, dividends at an annual rate sufficient to yield a return of 9% per annum (compounded on December 31 of each year) on the original investment at the issue prices of $.90 and $2.15, respectively. Such dividends shall accrue from day to day, whether or not earned or declared. Such dividends shall be cumulative so that if such dividends in respect of any dividend period shall not have been paid on or declared and set apart for all shares of Series C Preferred Stock and Series D Preferred Stock at the time outstanding, the deficiency shall be fully paid on or declared and set apart for such shares before the corporation makes any distribution (as hereinafter defined) to the holders of Common Stock or Series A Preferred Stock. "Distribution" in this Section 1 means the transfer of cash or property without consideration, whether by way of dividend or otherwise or the purchase or redemption of shares of the corporation for cash or property (except the purchase of shares of Common Stock from employees, directors or consultants pursuant to restricted stock purchase agreements). (b) Noncumulative Dividends. After the payment or setting apart for payment to the holders of Series C Preferred Stock and Series D Preferred Stock of the dividends referred to in Section 1(a) above, no dividend or distribution shall be declared or paid on any shares of Common Stock or Preferred Stock unless at the same time an equivalent dividend or distribution is declared or paid on all outstanding shares of Common Stock and Preferred Stock. Any dividend or distribution on Preferred Stock under this Section 1(b) shall be payable at the same rate per share as would be payable on the shares of Common Stock which the holder of Preferred Stock would be entitled to receive if he had converted the shares of Preferred Stock into Common Stock immediately prior to the record date of such distribution. The right to dividends on shares of Common Stock and Preferred Stock under this Section 1(b) shall not be cumulative, and no right shall accrue to holders of Common Stock or Preferred Stock under this Section 1(b) by reason of the fact that dividends on said shares are not declared in any prior period. 2. Liquidation Preference. In the event of any liquidation, dissolution, or winding up of the corporation, either voluntary or involuntary, distributions to the stockholders of the corporation shall be made in the following manner: (a) Preferred Stock Preference. The holders of Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the -2- 3 corporation to the holders of the Common Stock by reason of their ownership of such shares, an amount equal to $.65 per share of Series A Preferred Stock ("Series A Liquidation Preference"), $.90 plus an amount equal to any accrued but unpaid dividends per share of Series C Preferred Stock ("Series C Liquidation Preference") and $2.15 plus an amount equal to any accrued but unpaid dividends per share of Series D Preferred Stock ("Series D Liquidation Preference") with respect to such liquidation, dissolution or winding up. If the assets and funds thus distributed among the holders of the Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amount, then the entire assets and funds of the corporation legally available for distribution shall be distributed among the holders of the Preferred Stock in proportion to the aggregate liquidation preference of the shares of Preferred Stock then held by them. (b) Remaining Assets. If the assets of the corporation available for distribution to the corporation's stockholders exceed the aggregate amount payable to the holders of the Preferred Stock pursuant to Section 2(a) hereof (such assets being hereafter referred to as the "Remaining Assets"), then after the payments required by Section 2(a) shall have been made or irrevocably set apart, such Remaining Assets shall be distributed equally among the holders of the Common Stock on a per share basis; provided, however, that if the aggregate net proceeds available to the corporation for distribution to all of its stockholders upon a liquidation, dissolution or winding up of the corporation is less than an amount equal to $4.50 per share of outstanding Common Stock (as appropriately adjusted for any stock dividends, stock splits, reclassifications or recapitalizations occurring subsequent to the date of the filing of this Restated Certificate of Incorporation) treating all securities convertible into, exchangeable for or exercisable for shares of Common Stock as if converted, exchanged or exercised, then after the payments required by Section 2(a) shall have been made or irrevocably set apart such Remaining Assets shall be distributed equally among the holders of the Common Stock, Series C Preferred Stock and Series D Preferred Stock (as if the Series C and Series D Preferred Stock were fully converted into Common Stock) on a per share basis. (c) Reorganization or Merger. A merger or reorganization of the corporation with or into any other corporation or corporations or a sale of all or substantially all of the assets or outstanding stock of the corporation, in which transaction the corporation's stockholders immediately prior to such transaction own immediately after such transaction less than 50% of the equity securities of the surviving corporation or its parent, shall be deemed to be a liquidation within the meaning of this Section 2 and the proceeds payable in such transaction shall be divided among the stockholders in accordance with this Section 2; provided that the holders of Preferred Stock and Common Stock shall be paid in cash or in securities received or in a combination thereof (which combination shall be in the same proportions as the consideration received in the transaction). Any securities to be delivered to the holders of the Preferred Stock and Common Stock upon a merger, reorganization or sale of substantially all of the assets of the corporation shall be valued as follows: (i) If traded on a securities exchange, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the 30-day period ending three (3) business days prior to the closing; -3- 4 (ii) If actively traded over-the counter, the value shall be deemed to be the average of the closing bid prices over the 30-day period ending three (3) business days prior to the closing; and (iii) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the corporation and the holders of not less than a majority of the outstanding shares of Preferred Stock, provided that if the corporation and the holders of a majority of the outstanding shares of Preferred Stock are unable to reach agreement, then by independent appraisal by an investment banker hired and paid by the corporation, but acceptable to the holders of a majority of the outstanding shares of Preferred Stock. 3. Voting Rights. Except as otherwise required by law or by Sections 6 and 7 hereof, the holders of the Common Stock and Preferred Stock shall vote together as a single class on all matters presented to the Stockholders. The holder of each share of Common Stock issued and outstanding shall have one vote and the holder of each share of Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such share of Preferred Stock could be converted at the record date for determination of the stockholders entitled to vote on such matters, or, if no such record date is established, at the date such vote is taken or any written consent of stockholders is solicited, such votes to be counted together with all other shares of the corporation having general voting power and not separately as a class. Fractional votes by the holders of Preferred Stock shall not, however, be permitted and any fractional voting rights shall (after aggregating all shares into which shares of Preferred Stock held by each holder could be converted) be rounded to the nearest whole number. 4. Conversion. The holders of the Preferred Stock have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the corporation or any transfer agent for the Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Issuance Price (as hereinafter defined) by the Conversion Price, determined as hereinafter provided, in effect at the time of the conversion (the "Conversion Rate"). The Issuance Price for Series A Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be $.65, $.90 and $2.15 per share, respectively. The price at which shares of Common Stock shall be deliverable upon conversion (the "Conversion Price") for Series A Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall initially be $.65, $.90 and $2.15 per share, respectively, of Common Stock. Such initial Conversion Price shall be subject to adjustment as hereinafter provided. (b) Automatic Conversion. Each share of Preferred Stock shall automatically be converted into shares of Common Stock at the then effective Conversion Price immediately prior to the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the corporation to the public at a price per share (prior to underwriter -4- 5 commissions and offering expenses) of not less than $5.00 per share (as appropriately adjusted for any subsequent stock splits, stock dividends, reclassifications or recapitalizations occurring subsequent to the date of the filing of this Restated Certificate of Incorporation) and an aggregate offering price to the public of not less than $10,000,000. A public offering in which each share of Preferred Stock is converted into Common Stock pursuant to this paragraph, as now in effect or as hereafter amended, shall be referred to as a "Qualifying Public Offering." In the event of the automatic conversion of the Preferred Stock upon a Qualifying Public Offering as aforesaid, the person(s) entitled to receive the Common Stock issuable upon such conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. Notwithstanding the foregoing provisions of this Section 4(b), no automatic conversion of the Preferred Stock shall be effected unless and until such conversion will not violate any laws, rules, regulations, orders or other legal requirements of any governing body (such as, without limitation, compliance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) and such conversion shall be held in abeyance pending compliance with any such requirements, provided that the holders of Preferred Stock will use their best efforts to comply with such requirements. (c) Mechanics of Conversion. Before any holder of Preferred Stock shall be entitled to convert the same into full shares of Common Stock and to receive certificates therefor, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the corporation or of any transfer agent for the Preferred Stock, and shall give written notice to the corporation at such office that such holder elects to convert the same; provided, however, that in the event of an automatic conversion pursuant to Section 4(b), the outstanding shares of Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the corporation or its transfer agent, and provided further that the corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless the certificates evidencing such shares of Preferred Stock are either delivered to the corporation or its transfer agent as provided above, or the holder notifies the corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the corporation to indemnify the corporation from any loss incurred by it in connection with such certificates. The corporation shall, as soon as practicable after such delivery, or such agreement and indemnification in the case of a lost certificate, issue and deliver at such office to such holder of Preferred Stock, a certificate or certificates for the number of shares of Common Stock to which the holder shall be entitled as aforesaid and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common Stock. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, or in the case of automatic conversion on the date of closing of the offering and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. (d) Fractional Shares. In lieu of any fractional shares to which the holder of Preferred Stock would otherwise be entitled, the corporation shall pay cash equal to such fraction -5- 6 multiplied by the then effective Conversion Price. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock of each holder at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (e) Adjustment of Conversion Price. The Conversion Price of Preferred Stock shall be subject to adjustment from time to time as follows: (i) If the corporation shall issue (or, pursuant to paragraph 4(e)(i)(B)(3) hereof, shall be deemed to have issued) any Common Stock other than "Excluded Stock" (as defined below) for a consideration per share less than the Conversion Price for any series of Preferred Stock in effect immediately prior to the issuance of such Common Stock (excluding stock dividends, subdivisions, split-ups, combinations, dividends or recapitalizations which are covered by Subsections 4(e)(iii), (iv), (v) and (vi)), the Conversion Price for such series of Preferred Stock in effect immediately after each such issuance shall forthwith (except as provided in this Section 4(e)) be adjusted to a price equal to the quotient obtained by dividing: (A) an amount equal to the sum of (x) the total number of shares of Common Stock outstanding (including any shares of Common Stock issuable upon conversion of such series of Preferred Stock, or deemed to have been issued pursuant to subdivision (3) of this clause (i) and to clause (ii) below) immediately prior to such issuance multiplied by the Conversion Price for such series of Preferred Stock in effect immediately prior to such issuance, plus (y) the consideration received by the corporation upon such issuance, by (B) the total number of shares of Common Stock outstanding immediately prior to such issuance of Common Stock (including any shares of Common Stock issuable upon conversion of such series of Preferred Stock or deemed to have been issued pursuant to subdivision (3) of this clause (i) and to clause (ii) below) plus the number of shares of Common Stock actually issued in the transaction which resulted in the adjustment pursuant to this Subsection 4(e)(i). For the purposes of any adjustment of the Conversion Price for any series of Preferred Stock pursuant to this clause (i), the following provisions shall be applicable: (1) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor after deducting any discounts or commissions paid or incurred by the corporation in connection with the issuance and sale thereof. (2) In the case of the issuance of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to -6- 7 be the fair value thereof as reasonably determined by the board of directors of the corporation, in accordance with generally accepted accounting treatment. (3) In the case of the issuance of (i) options to purchase or rights to subscribe for Common Stock (other than Excluded Stock), (ii) securities by their terms convertible into or exchangeable for Common Stock (other than Excluded Stock), or (iii) options to purchase or rights to subscribe for such convertible or exchangeable securities: (A) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subdivisions (1) and (2) above), if any, received by the corporation upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby; (B) the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities, or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof, shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration received by the corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional minimum consideration, if any, to be received by the corporation upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subdivisions (1) and (2) above); (C) on any change in the number of shares of Common Stock deliverable upon exercise of any such options or rights or conversion of or exchange for such convertible or exchangeable securities, or on any change in the minimum purchase price of such options, rights or securities, other than a change resulting from the antidilution provisions of such options, rights or securities, the Conversion Price shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustment made upon (x) the issuance of such options, rights or securities not exercised, converted or exchanged prior to such change or (y) the options or rights related to such securities not converted or exchanged prior to such change, as the case may be, been made upon the basis of such change; and (D) on the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustment made upon the issuance of such options, rights, convertible or exchangeable securities or options or rights relate to such convertible or exchangeable securities, as the case may be, been made upon the basis of the -7- 8 issuance of only the number of shares of Common Stock actually issued upon the exercise of such options or rights, upon the conversion or exchange of such convertible or exchangeable securities or upon the exercise of the options or rights related to such convertible or exchangeable securities, as the case may be. (ii) "Excluded Stock" shall mean: (A) all shares of Common Stock and Preferred Stock issued and outstanding on the date this certificate is filed with the Delaware Secretary of State, and all shares of Common Stock issuable upon conversion of such Preferred Stock; (B) 45,000 shares of Series C Preferred Stock issuable upon exercise of a warrant held by Lease Management Associates, Inc. and the Common Stock into which such shares of Preferred Stock are convertible; (C) up to 5,445,000 shares of Common Stock or other securities issued or issuable to employees, directors and consultants pursuant to arrangements approved by the Board of Directors of the corporation; and (D) all shares of Series D Preferred Stock issuable upon exercise of warrants issued or issuable to certain holders of Series D Preferred Stock and the Common Stock into which such shares of Preferred Stock are convertible. All outstanding shares of Excluded Stock (including shares issuable upon conversion of the Preferred Stock) shall be deemed to be outstanding for all purposes of the computations of Subsections 4(e)(i) above. (iii) If the number of shares of Common Stock outstanding at any time after the date hereof is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, on the date such payment is made or such change is effective, the Conversion Price of Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of any shares of Preferred Stock shall be increased in proportion to such increase of outstanding shares. (iv) If the number of shares of Common Stock outstanding at any time after the date hereof is decreased by a combination of the outstanding shares of Common Stock, then, on the effective date of such combination, the Conversion Price of Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of any shares of Preferred Stock shall be decreased in proportion to such decrease in outstanding shares. (v) In case the corporation shall declare a cash dividend upon its Common Stock payable otherwise than out of retained earnings or shall distribute to holders of its Common Stock shares of its capital stock (other than Common Stock), stock or other securities of other persons, evidences of indebtedness issued by the corporation or other persons, assets (excluding cash -8- 9 dividends) or options or rights (excluding options to purchase and rights to subscribe for Common Stock or other securities of the corporation convertible into or exchangeable for Common Stock), then, in each such case, the holders of shares of Preferred Stock shall, concurrent with the distribution to holders of Common Stock, receive a like distribution based upon the number of shares of Common Stock into which Preferred Stock is then convertible. (vi) In case, at any time after the date hereof, of any capital reorganization, or any reclassification of the stock of the corporation (other than as a result of a stock dividend or subdivision, split-up or combination of shares), or the consolidation or merger of the corporation with or into another person (other than a consolidation or merger in which the corporation is the continuing entity and which does not result in any change in the Common Stock), the shares of Preferred Stock shall, after such reorganization, reclassification, consolidation, merger, sale or other disposition, be convertible into the kind and number of shares of stock or other securities or property of the corporation or otherwise to which such holder would have been entitled if immediately prior to such reorganization, reclassification, consolidation, merger, sale or other disposition such holder had converted its shares of Preferred Stock into Common Stock. The provisions of this clause (vi) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales or other dispositions. (vii) All calculations under this Section 4 shall be made to the nearest cent or to the nearest one hundredth (1/100) of a share, as the case may be. (f) Minimal Adjustments. No adjustment in the Conversion Price for any series of Preferred Stock need be made if such adjustment would result in a change in the Conversion Price of less than $0.01. Any adjustment of less than $0.01 which is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in the Conversion Price. (g) No Impairment. The corporation will not through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Preferred Stock against impairment. This provision shall not restrict the corporation's right to amend its Certificate of Incorporation with the requisite shareholder consent. (h) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Rate for any series of Preferred Stock pursuant to this Section 4, the corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of such series of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The corporation shall, upon written request at any time of any holder of any series of Preferred Stock, furnish or cause to be furnished to such holder a like -9- 10 certificate setting forth (i) all such adjustments and readjustments, (ii) the Conversion Rate at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of such holder's shares of Preferred Stock. (i) Notices of Record Date and Proposed Liquidation Distribution. In the event of any taking by the corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property or to receive any other right, the corporation shall mail to each holder of Preferred Stock at least thirty (30) days prior to such record date, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution or right, and the amount and character of such dividend, distribution or right. In the event of a liquidation distribution pursuant to Section 2 hereof, the corporation shall mail to each holder of Preferred Stock at least thirty (30) days prior to the date of such distribution a notice (i) certifying as to (x) the anticipated aggregate proceeds available for distribution to holders of Preferred Stock and Common Stock, (y) the amount expected to be distributed pursuant to Section 2 in respect of each share of each outstanding series of Preferred Stock and each share of Common Stock and (y) the amount expected to be distributed pursuant to Section 2 in respect of each share of each outstanding series of Preferred Stock if the holder of each such share of Preferred Stock converted such share of Preferred Stock into Common Stock immediately prior to the liquidation distribution and (ii) stating that in connection with such liquidation distribution the holders of shares of each series of Preferred Stock may prior to such liquidation distribution convert their shares of such series of Preferred Stock into Common Stock at the applicable Conversion Rate for such series. (j) Notices. Any notice required by the provisions of this Section 4 to be given to the holder of shares of the Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at such holder's address appearing on the corporation's books. 5. Redemption Rights. (a) Redemption at the Holders' Option. The Preferred Stock shall be redeemable in whole or in part at the option of the holders of a majority of the outstanding shares of Preferred Stock at any time and from time to time after June 30, 1997. Such redemption right may be exercised by giving at least 120 days' notice prior to the date of commencement of the redemption (the "Commencement Date") by certified or registered mail, postage prepaid, to the corporation at its principal office. After receipt of such notice of a redemption pursuant to this Section 5(a) the corporation shall, to the extent it may lawfully do so, redeem all of the outstanding shares of Preferred Stock to be redeemed in eight quarterly installments, each of which shall be sufficient to redeem an equal number of shares by paying the Redemption Price (which consists of the original purchase price plus accrued, unpaid dividends through the date of redemption) therefor, on the last day of each calendar quarter (commencing with the first calendar quarter ending after the 120 day notice period). The Redemption Price of the Series A Preferred Stock shall be $.715 per share, the Redemption Price of the Series C Preferred Stock shall be the Series C Liquidation Preference -10- 11 computed as of the dates on which the holders of Series C Preferred Stock receive payment of the Redemption Price and the Redemption Price of the Series D Preferred Stock shall be the Series D Liquidation Preference computed as of the dates on which the holders of Series D Preferred Stock receive payment of the Redemption Price. With respect to the Series C and Series D Preferred Stock, each redemption payment shall consist of that portion of the Redemption Price for the shares being redeemed that is attributable to the original purchase price for such shares plus the accrued, unpaid dividends on such shares. Any redemption of only a part of the outstanding Preferred Stock by the corporation pursuant to this Section 5 shall be pro rata as among each series of Preferred Stock based on the aggregate respective Redemption Prices payable in respect of each outstanding series of Preferred Stock and within each series as among the holders of such series of Preferred Stock based on the number of shares of such series owned by such holders. (b) Notice Regarding Redemption. At least thirty (30) but no more than sixty (60) days prior to any Redemption Date, written notice shall be mailed, postage prepaid, to each holder of record (determined at the close of business on the business day next preceding the day on which notice is given) of Preferred Stock to be redeemed, at his post office address last shown on the records of the corporation, notifying such holder of the redemption of such shares, specifying the Redemption Date, the Redemption Price and the date on which such holder's Conversion Rights (as hereinafter defined) as to such shares terminate (such Conversion Rights to expire on the day prior to the Redemption Date) and calling upon such holder to surrender to the corporation, in the manner and at the place designated in the continental United States, his certificate or certificates representing the shares to be redeemed (such notice is hereinafter referred to as the "Redemption Notice"). Unless such holder elects to convert his shares in accordance with Section 4 prior to the Redemption Date, on or after the Redemption Date, each holder of Preferred Stock to be redeemed shall surrender his certificate or certificates representing such shares to the corporation, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. If, on or prior to the Redemption Date, the funds necessary for such redemption shall have been set aside by the corporation and deposited with a bank or trust company, for the benefit of the holders of Preferred Stock whose shares are being redeemed, then from and after the close of business on the Redemption Date, all rights of the holders of such shares as holders of Preferred Stock of the corporation (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the corporation or be deemed to be outstanding for any purpose whatsoever. (c) Trust Fund. On or prior to the Redemption Date, the corporation may deposit the Redemption Price of all shares of Preferred Stock designated for redemption in the Redemption Notice and not yet redeemed or converted with a bank or trust company as a trust fund for the benefit of the respective holders of the shares designated for redemption and not yet redeemed or converted. Any monies deposited by the corporation pursuant to this Section 5(c) for the redemption of shares thereafter converted into shares of Common Stock pursuant to Section 4 hereof no later than the -11- 12 close of business on the Redemption Date shall be returned to the corporation forthwith upon such conversion. The balance of any monies deposited by the corporation pursuant to this Section 5(c) remaining unclaimed at the expiration of one (1) year following the Redemption Date shall thereafter be returned to the corporation upon its request expressed in a resolution of board of directors of the corporation, provided that the shareholder to which such monies would be payable hereunder shall be entitled, upon surrender of his certificates representing such shares of Preferred Stock to the corporation, to receive such monies but without interest from the Redemption Date. (d) Insufficient Funds. If the funds of the corporation legally available for redemption of Preferred Stock on any Redemption Date are insufficient to redeem the total number of shares of Preferred stock to be redeemed on such date, those funds which are legally available will be used to redeem the shares of Preferred Stock ratably among the holders in accordance with the last sentence of Section 5(a). At any time thereafter when additional funds of the corporation are legally available for the redemption of Preferred Stock, such funds will be immediately used to redeem the balance of the shares of Preferred Stock which the corporation became obligated to redeem on such Redemption Date but which it has not redeemed. 6. Covenants. In addition to any other rights provided by law, so long as at least 1,000,000 shares of Preferred Stock shall be outstanding (based on the Preferred Stock as constituted on the date of the filing of this Restated Certificate of Incorporation and as appropriately adjusted for any subsequent stock splits, stock dividends, reclassifications or recapitalizations), this corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than a majority of the outstanding shares of Preferred Stock (voting or consenting together as a single class): (a) Certificate and Bylaws. Amend or repeal any provision of, or add any provision to, this corporation's Certificate of Incorporation or Bylaws if such action would alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, such shares of Preferred Stock; provided, however, that any such amendment that adversely effects shares of a series of Preferred Stock in a different manner than shares of other series of Preferred Stock must also be approved by the holders of a majority of the shares of the affected series; (b) Section 305. Do any act or thing which would result in taxation of the holders of Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended (or any successor provision of such Code as such provision may be amended); (c) Authorized Shares. Increase or decrease the authorized number of shares of Preferred Stock; (d) Number of Directors. Increase or decrease the authorized number of directors of this corporation to a number other than ten (10), except pursuant to Section 7(b); (e) Merger and Reorganization. Merge or consolidate with or into any other corporation or corporations, sell or transfer all or substantially all of its assets, liquidate or dissolve or -12- 13 effect any recapitalization, reclassification or reorganization, but stockholder approval as set forth above shall only be required if the stockholders determined immediately before any such merger, consolidation, sale of assets, liquidation, dissolution, recapitalization, reclassification or reorganization hold less than 50% of the voting securities of the surviving or successor corporation or entity (or its parent) determined immediately after such transaction; or (f) Priority. Authorize or issue any shares of any class or series of stock having any preference or priority as to dividends or assets superior to or on a parity with any such preference or priority of such shares of a series of Preferred Stock; (g) New Securities. Issue any New Securities (as defined below). For purposes of Section 6(g), the term "New Securities" shall mean any capital stock of this corporation, whether or not authorized as of the date this certificate is filed with the Delaware Secretary of State, and any rights, options or warrants to purchase capital stock and securities of any type whatsoever that are, or may become, convertible into capital stock; provided that the term "New Securities" does not include (i) securities issuable upon exercise or conversion of securities outstanding as of the date this certificate is filed with the Delaware Secretary of State, (ii) securities issued pursuant to the merger of Ventana Medical Systems, Inc., a California corporation into this corporation, (iii) the Series D Preferred Stock (and the Common Stock into which it is convertible) issued to employees under the 1991 Employee Stock Purchase Plan, (iv) securities issued to employees, consultants and directors of this corporation up to a maximum of 5,445,000 shares of Common Stock or other securities, (v) securities issued in connection with any stock split or stock dividend of this corporation, and (vi) securities issued to strategic partners, lenders, equipment lessors or in connection with acquisitions of other companies or technology up to a maximum of 3,000,000 shares of Common Stock or other securities. (h) Special Series D Vote. In addition to any other rights provided by law, so long as at least 500,000 shares of the Series D Preferred Stock shall be outstanding (based on the Preferred Stock as constituted on the date of the filing of this Restated Certificate of Incorporation and as appropriately adjusted for any subsequent stock splits, stock dividends, reclassifications or recapitalizations), the corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than a majority of the outstanding shares of Series D Preferred Stock (voting or consenting together as a single series), (i) merge or consolidate with or into any other corporation or corporations or sell or transfer all or substantially all of its assets, if the aggregate per share price to be paid to the stockholders of this corporation in connection with such a transaction is less than $3.00 per share of outstanding Common Stock (as appropriately adjusted for any stock dividends, stock splits, reclassifications or recapitalizations occurring subsequent to the date of the filing of this Restated Certificate of Incorporation) treating all securities convertible into, exchangeable for or exercisable for shares of Common Stock as if converted, exchanged or exercised or (ii) acquire any corporation or other business entity if the transaction involves either (x) payment of cash consideration in excess of $10,000,000 to the owners of the equity interests in the acquired entity or (y) the issuance of equity securities of the corporation representing in excess of 20% of the outstanding voting securities of the corporation immediately prior to the closing of such transaction. -13- 14 7. Events of Noncompliance. (a) Definition. An Event of Noncompliance will be deemed to have occurred if: (i) the corporation fails to make any redemption payment with respect to the shares of Preferred Stock which the corporation is obligated to make hereunder, whether or not such payment is legally permissible; (ii) the corporation (A) breaches or otherwise fails to perform or observe any material covenant or agreement set forth herein (other than a failure to redeem the Preferred Stock), in paragraph 6.6 of the Series D Preferred Stock Purchase Agreement dated on or about September 30, 1992 or paragraph 6.6 of the Series D Preferred Stock Purchase Agreement dated on or about October 17, 1994) (collectively the "Series D Agreement") or (B) delivers financial statements under paragraph 6.1 of the Series B Preferred Stock Purchase Agreement dated June 6, 1989, the Series C Preferred Stock Purchase Agreement dated April 22, 1991, the Series C Preferred Stock Purchase Agreement dated October 13, 1991 or the Series D Agreement which are materially misleading; provided that no Event of Noncompliance will be deemed to have occurred under this subsection (ii) if the corporation establishes (to the reasonable satisfaction of the holders of a majority of the Series C and Series D Preferred Stock then outstanding) that (x) the corporation has exercised, and continues to exercise, best efforts to cure expeditiously the Event of Noncompliance (if cure is possible), (y) the Event of Noncompliance is not material to the corporation's financial condition, operating results, operations, assets or business, and (z) the Event of Noncompliance is not material to the holders' investment in the Series C and Series D Preferred Stock: (iii) any representation or warranty contained in the Series D Preferred Stock Purchase Agreement dated on or about October 17, 1994 (the "October Agreement") (including in the schedules thereto) is false or misleading in any respect on the date made or furnished so as to materially and adversely affect the holder's investment in the Series D Preferred Stock (a "Significant Breach") and the corporation receives a written claim of the existence of such Significant Breach from the holders of a majority of the outstanding Series D Preferred Stock purchased under the October Agreement on or before March 31, 1995; (iv) the corporation (or any of its subsidiaries) makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts generally as they become due; or an order, judgment or decree is entered adjudicating the corporation (or any of its subsidiaries) bankrupt or insolvent; or any order for relief with respect to the corporation (or any of its subsidiaries) is entered under the Federal Bankruptcy Code; or the corporation (or any of its subsidiaries) petitions or applies to any tribunal for the appointment of a custodian, trustee, receiver or liquidator of the corporation (or any of its subsidiaries) or of any substantial part of the assets of the corporation (or any of its subsidiaries), or commences any proceeding (other than a proceeding for the voluntary liquidation and dissolution of a subsidiary) relating to the corporation or any of its subsidiaries under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction; or any such petition or application is filed, or any such proceeding is commenced, against the corporation or any of its subsidiaries and either (a) the -14- 15 corporation or any such subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein or (b) such petition, application or proceeding is not dismissed within 60 days; (v) a judgment in excess of $250,000 is rendered against the corporation (or any of its subsidiaries) and, within 60 days after entry thereof, such judgment is not discharged or execution thereof stated pending appeal, or within 60 days after the expiration of any such stay, such judgment is not discharged; or (vi) the corporation (or any of its subsidiaries) defaults in the performance of any bond, note or other debt for money borrowed if the effect of such default is to cause an amount exceeding $250,000 to become due prior to its stated maturity. (b) Consequences of Events of Noncompliance. (i) If any Event of Noncompliance as described in Section 7(a) has occurred, the number of directors constituting the corporation's board of directors will, at the request of the holders of a majority of the shares of Preferred Stock then outstanding, be increased by such number as will constitute a minimum majority of the board of directors (based on the size of the board immediately prior to such increase), and the holders of Preferred Stock will have the special right, voting separately as a single class (with each share of Preferred Stock being entitled to one vote) and to the exclusion of all other classes of the corporation's stock, to elect individuals to fill such newly created directorships, to remove any individuals elected to such directorships and to fill any vacancies in such directorships. The special right of the holders of Preferred Stock to elect or remove members of the board of directors may be exercised at the special meeting called as provided below, at any annual or special meeting of stockholders or by written consent in lieu of a stockholders meeting. Such special right will continue until such time as there is no longer any Event of Noncompliance in existence, at which time such special right will terminate subject to revesting upon the occurrence and continuation of any Event of Noncompliance which gives rise to such special right hereunder. At any time when such special right has vested in the holders of Preferred Stock, a proper officer of the corporation will, upon the written request of the holders of at least 10% of the shares of Preferred Stock then outstanding, addressed to the secretary of the corporation, call a special meeting of the holders of Preferred Stock for the purpose of electing directors pursuant to this Section. Such meeting will be held at the earliest legally permissible date at the principal office of the corporation or at such other place designated by the holders of at least 10% of the shares of Preferred Stock then outstanding. If such meeting has not been called by a proper officer of the corporation within 10 days after personal service of such written request upon the secretary of the corporation or within 20 days after mailing the same to the secretary of the corporation at the corporation's principal office, then the holders of at least 10% of the shares of Preferred Stock then outstanding may designate in writing one of their number to call such meeting at the expense of the corporation, and such meeting may be called by such person so designated upon the shortest legally permissible notice and will be held at the corporation's principal office, or at such other place designated by the holders of at least 10% of the shares of Preferred Stock then outstanding. Any holder of Preferred Stock so -15- 16 designated will be given access to the stock record books of the corporation for the purpose of causing a meeting of stockholders to be called pursuant to this Section. At any meeting or at any adjournment thereof at which the holders of Preferred Stock have the special right to elect directors, the presence, in person or by proxy, of the holders of a majority of the shares of Preferred Stock then outstanding will be required to constitute a quorum for the election or removal of any director by the holders of the Preferred Stock exercising such special right. Any director so elected by the holders of Preferred Stock will continue to serve as a director until the expiration of the earlier of (a) a period of six months following the date on which there is no longer any Event of Noncompliance in existence or (b) the remaining period of the full term for which such director has been elected. After the expiration of such six-month period or when the full term for which such director has been elected ceases (provided that the special right to elect directors has terminated), as the case may be, the number of directors constituting the board of directors of the corporation will decrease to such number as constituted the whole board of directors of the corporation immediately prior to the occurrence of the Event or Events of Noncompliance giving rise to the special right to elect directors. (ii) If any Event of Noncompliance exists, each holder of Preferred Stock will also have any other rights which such holder may have been afforded under any contract or agreement at any time and any other rights which such holder may have pursuant to applicable law. FIVE. The corporation is to have perpetual existence. SIX. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the corporation. SEVEN. Subject to Section 6 and Section 7 of Article Four, the number of directors which constitute the whole Board of Directors of the corporation shall be as specified in the Bylaws of the corporation. EIGHT. Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the corporation may be kept (subject to any provisions contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the corporation. NINE. To the fullest extent permitted by the Delaware General Corporation Law, a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Neither any amendment nor repeal of this Article NINE, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article NINE, shall eliminate or reduce the effect of this Article NINE in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article NINE, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. -16- 17 TEN: (a) The corporation shall indemnify each of the corporation's directors and officers in each and every situation where, under Section 145 of the General Corporation Law of the State of Delaware, as amended from time to time ("Section 145"), the corporation is permitted or empowered to make such indemnification. The corporation may, in the sole discretion of the Board of Directors of the corporation, indemnify any other person who may be indemnified pursuant to Section 145 to the extent the Board of Directors deems advisable, as permitted by Section 145. The corporation shall promptly make or cause to be made any determination required to be made pursuant to Section 145. (b) No person shall be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided, however, that the foregoing shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware or (iv) for any transaction from which the director derived an improper personal benefit. If the General Corporation Law of the State of Delaware is subsequently amended to further eliminate or limit the liability of a director, then a director of the corporation, in addition to the circumstances in which a director is not personally liable as set forth in the preceding sentence, shall not be liable to the fullest extent permitted by the amended General Corporation Law of the State of Delaware. For purposes of this Article TEN, "fiduciary duty as a director" shall include any fiduciary duty arising out of serving at the corporation's request as a director of another corporation, partnership, joint venture or other enterprise, and "personal liability to the corporation or its stockholders" shall include any liability to such other corporation, partnership, joint venture, trust or other enterprise, and any liability to the corporation in its capacity as a security holder, joint venturer, partner, beneficiary, creditor or investor of or in any such other corporation, partnership, joint venture, trust or other enterprise. ELEVEN. Advance notice of new business and stockholder nominations for the election of directors shall be given in the manner and to the extent provided in the Bylaws of the corporation. TWELVE. The corporation reserves the right to amend, alter, change or repeal any provisions contained in this Certificate, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. -17- 18 IN WITNESS WHEREOF, the corporation has caused this Certificate to be signed by R. James Danehy, its President, this 20th day of February, 1996. VENTANA MEDICAL SYSTEMS, INC. By: /s/ R. JAMES DANEHY _____________________________ R. James Danehy, President -18- EX-3.1(II)(A) 3 BYLAWS 1 Exhibit 3.1(ii)(a) BYLAWS OF VENTANA MEDICAL SYSTEMS, INC. 2 TABLE OF CONTENTS Page ---- ARTICLE I - CORPORATE OFFICES............................................. 1 1.1 REGISTERED OFFICE....................................... 1 1.2 OTHER OFFICES........................................... 1 ARTICLE II - MEETINGS OF STOCKHOLDERS..................................... 1 2.1 PLACE OF MEETINGS....................................... 1 2.2 ANNUAL MEETING.......................................... 1 2.3 SPECIAL MEETING......................................... 1 2.4 NOTICE OF STOCKHOLDERS' MEETINGS........................ 2 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE............ 2 2.6 QUORUM.................................................. 2 2.7 ADJOURNED MEETING; NOTICE............................... 3 2.8 CONDUCT OF BUSINESS..................................... 3 2.9 VOTING.................................................. 3 2.10 WAIVER OF NOTICE........................................ 3 2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING................................................. 4 2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS................................................ 4 2.13 PROXIES................................................. 5 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE................... 5 ARTICLE III - DIRECTORS................................................... 6 3.1 POWERS.................................................. 6 3.2 NUMBER OF DIRECTORS..................................... 6 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS............................................... 6 3.4 RESIGNATION AND VACANCIES............................... 6 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE................ 7 3.6 REGULAR MEETINGS........................................ 8 3.7 SPECIAL MEETINGS; NOTICE................................ 8 3.8 QUORUM.................................................. 8 3.9 WAIVER OF NOTICE........................................ 9 3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING....... 9 3.11 FEES AND COMPENSATION OF DIRECTORS...................... 9 3.12 APPROVAL OF LOANS TO OFFICERS........................... 9 3.13 REMOVAL OF DIRECTORS.................................... 10 ARTICLE IV - COMMITTEES................................................... 10 -i- 3 TABLE OF CONTENTS (continued) Page ---- 4.1 COMMITTEES OF DIRECTORS................................. 10 4.2 COMMITTEE MINUTES....................................... 11 4.3 MEETINGS AND ACTION OF COMMITTEES....................... 11 ARTICLE V - OFFICERS...................................................... 11 5.1 OFFICERS................................................ 11 5.2 APPOINTMENT OF OFFICERS................................. 12 5.3 SUBORDINATE OFFICERS.................................... 12 5.4 REMOVAL AND RESIGNATION OF OFFICERS..................... 12 5.5 VACANCIES IN OFFICES.................................... 12 5.6 CHAIRMAN OF THE BOARD................................... 12 5.7 PRESIDENT............................................... 13 5.8 VICE PRESIDENTS......................................... 13 5.9 SECRETARY............................................... 13 5.10 TREASURER............................................... 14 5.11 ASSISTANT SECRETARY..................................... 14 5.12 ASSISTANT TREASURER..................................... 14 5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.......... 15 5.14 AUTHORITY AND DUTIES OF OFFICERS........................ 15 ARTICLE VI - INDEMNITY.................................................... 15 6.1 THIRD PARTY ACTIONS..................................... 15 6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION........... 16 6.3 SUCCESSFUL DEFENSE...................................... 16 6.4 DETERMINATION OF CONDUCT................................ 16 6.5 PAYMENT OF EXPENSES IN ADVANCE.......................... 17 6.6 INDEMNITY NOT EXCLUSIVE................................. 17 6.7 INSURANCE INDEMNIFICATION............................... 17 6.8 THE CORPORATION......................................... 18 6.9 EMPLOYEE BENEFIT PLANS.................................. 18 6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES................................................ 18 ARTICLE VII - RECORDS AND REPORTS......................................... 19 7.1 MAINTENANCE AND INSPECTION OF RECORDS................... 19 7.2 INSPECTION BY DIRECTORS................................. 19 7.3 ANNUAL STATEMENT TO STOCKHOLDERS........................ 20 ARTICLE VIII - GENERAL MATTERS............................................ 20 8.1 CHECKS.................................................. 20 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS........ 20 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES.................. 20 -ii- 4 TABLE OF CONTENTS (continued) Page ---- 8.4 SPECIAL DESIGNATION ON CERTIFICATES.................... 21 8.5 LOST CERTIFICATES...................................... 22 8.6 CONSTRUCTION; DEFINITIONS.............................. 22 8.7 DIVIDENDS.............................................. 22 8.8 FISCAL YEAR............................................ 22 8.9 SEAL................................................... 22 8.10 TRANSFER OF STOCK...................................... 23 8.11 STOCK TRANSFER AGREEMENTS.............................. 23 8.12 REGISTERED STOCKHOLDERS................................ 23 ARTICLE IX - AMENDMENTS.................................................. 23 -iii- 5 BYLAWS OF VENTANA MEDICAL SYSTEMS, INC. ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of the corporation at such location is The Corporation Trust Company. 1.2 OTHER OFFICES The board of directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 ANNUAL MEETING The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation the annual meeting of shareholders shall be held on the second Tuesday of May of each year at 10:00 a.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding business day. At the meeting, directors shall be elected and any other proper business may be transacted. 2.3 SPECIAL MEETING A special meeting of the stockholders may be called at any time by the board of directors, or by the chairman of the board, or 6 by the president, or by one or more stockholders holding shares in the aggregate entitled to cast not less than ten percent of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president or the secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The officer receiving the request shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of this Article II, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than ten (10) nor more than sixty (60) days after the receipt of the request. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the board of directors may be held. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the Secretary or an Assistant Secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.6 QUORUM The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise pro- -2- 7 vided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the Chairman of the meeting or (ii) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.7 ADJOURNED MEETING; NOTICE When a meeting is adjourned to another time or place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.8 CONDUCT OF BUSINESS The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of business. 2.9 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.12 of these bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). Except as may be otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.10 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of -3- 8 incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. 2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise provided in the certificate of incorporation, any action required by this Article II to be taken at any annual or special meeting of stockholders of a corporation, or any action that may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice, and without a vote if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware. 2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a -4- 9 record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the board of directors does not so fix a record date: (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the board of directors is necessary, shall be the day on which the first written consent is expressed. (iii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. 2.13 PROXIES Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(c) of the General Corporation Law of Delaware. 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE The officer who has charge of the stock ledger of a corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders enti- -5- 10 tled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Such list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS The number of directors of the corporation shall be not less than five (5) nor more than ten (10), the actual number to be determined from time to time by the Board of Directors. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS Except as provided in Section 3.4 of these bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the certificate of incorporation or these bylaws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a -6- 11 vacancy, shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Elections of directors need not be by written ballot. 3.4 RESIGNATION AND VACANCIES Any director may resign at any time upon written notice to the attention of the Secretary of the corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies. Unless otherwise provided in the certificate of incorporation or these bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to -7- 12 any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE The board of directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. 3.7 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two (2) directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least ten (10) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral -7- 13 notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.8 QUORUM At all meetings of the board of directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. 3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board -9- 14 or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. 3.11 FEES AND COMPENSATION OF DIRECTORS Unless otherwise restricted by the certificate of incorporation or these bylaws, the board of directors shall have the authority to fix the compensation of directors. 3.12 APPROVAL OF LOANS TO OFFICERS The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section con tained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.13 REMOVAL OF DIRECTORS Unless otherwise restricted by statute, by the certificate of incorporation or by these bylaws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corpo- -10- 15 ration. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the bylaws of the corporation; and, unless the board resolution establishing the committee, the bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 COMMITTEE MINUTES Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of -11- 16 these bylaws, Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS 5.1 OFFICERS The officers of the corporation shall be a president, a secretary, and a treasurer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant vice presidents, one or more assistant secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. 5.2 APPOINTMENT OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall be appointed by the board of directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or empower the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. -12- 17 5.4 REMOVAL AND RESIGNATION OF OFFICERS Any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or, except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES Any vacancy occurring in any office of the corporation shall be filled by the board of directors. 5.6 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. 5.7 PRESIDENT Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. -13- 18 5.8 VICE PRESIDENTS In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board. 5.9 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these bylaws. He shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 5.10 TREASURER The treasurer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, -14- 19 disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The treasurer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all his transactions as treasurer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. The treasurer shall be the chief financial officer of the corporation. 5.11 ASSISTANT SECRETARY The assistant secretary, or, if there is more than one, the assistant secretaries in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as may be prescribed by the board of directors or these bylaws. 5.12 ASSISTANT TREASURER The assistant treasurer, or, if there is more than one, the assistant treasurers, in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the treasurer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as may be prescribed by the board of directors or these bylaws. 5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, the president, any vice president, the treasurer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or -15- 20 corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. 5.14 AUTHORITY AND DUTIES OF OFFICERS In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors or the stockholders. ARTICLE VI INDEMNITY 6.1 THIRD PARTY ACTIONS The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the corporation, which approval shall not be unreasonably withheld) actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION -16- 21 The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) and amounts paid in settlement (if such settlement is approved in advance by the corporation, which approval shall not be unreasonably withheld) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in manner he reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. Notwithstanding any other provision of this Article VI, no person shall be indemnified hereunder for any expenses or amounts paid in settlement with respect to any action to recover short-swing profits under Section 16(b) of the Securities Exchange Act of 1934, as amended. 6.3 SUCCESSFUL DEFENSE To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 6.1 and 6.2, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. 6.4 DETERMINATION OF CONDUCT Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that the indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 6.1 and 6.2. Such determination shall be made (1) by the Board of Directors or the Executive Committee by a majority vote of a quorum consisting of directors who were not -17- 22 parties to such action, suit or proceeding or (2) or if such quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. Notwithstanding the foregoing, a director, officer, employee or agent of the Corporation shall be entitled to contest any determination that the director, officer, employee or agent has not met the applicable standard of conduct set forth in Sections 6.1 and 6.2 by petitioning a court of competent jurisdiction. 6.5 PAYMENT OF EXPENSES IN ADVANCE Expenses incurred in defending a civil or criminal action, suit or proceeding, by an individual who may be entitled to indemnification pursuant to Section 6.1 or 6.2, shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Article VI. 6.6 INDEMNITY NOT EXCLUSIVE The indemnification and advancement of expenses provided by or granted pursuant to the other sections of this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. 6.7 INSURANCE INDEMNIFICATION The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article VI. -18- 23 6.8 THE CORPORATION For purposes of this Article VI, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under and subject to the provisions of this Article VI (including, without limitation the provisions of Section 6.4) with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. 6.9 EMPLOYEE BENEFIT PLANS For purposes of this Article VI, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Article VI. 6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VI shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. -19- 24 ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent so to act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and -20- 25 records for a purpose reasonably related to his position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. ARTICLE VIII GENERAL MATTERS 8.1 CHECKS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES The shares of the corporation shall be represented by certificates, provided that the board of directors of the corporation may -21- 26 provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the chief financial officer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish -22- 27 without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 LOST CERTIFICATES Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 DIVIDENDS The directors of the corporation, subject to any restrictions contained in (i) the General Corporation Law of Delaware or (ii) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 8.8 FISCAL YEAR -23- 28 The fiscal year of the corporation shall be fixed by resolution of the board of directors and may be changed by the board of directors. 8.9 SEAL The corporation may adopt a corporate seal, which shall be adopted and which may be altered by the board of directors, and may use the same by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. 8.10 TRANSFER OF STOCK Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 STOCK TRANSFER AGREEMENTS The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 REGISTERED STOCKHOLDERS The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. -24- 29 ARTICLE IX AMENDMENTS The bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws. -25- 30 CERTIFICATE OF ADOPTION OF BYLAWS OF VENTANA MEDICAL SYSTEMS, INC. Adoption by Incorporator The undersigned person appointed in the Certificate of Incorporation to act as the Incorporator of Ventana Medical Systems, Inc. hereby adopts the foregoing Bylaws, comprising twenty-three (23) pages, as the Bylaws of the corporation. Executed this _____ day of ____________, 1993. _____________________________ Timothy Stevens, Incorporator Certificate by Secretary of Adoption by Incorporator The undersigned hereby certifies that he is the duly elected, qualified, and acting Secretary of Ventana Medical Systems, Inc. and that the foregoing Bylaws, comprising twenty-three (23) pages, were adopted as the Bylaws of the corporation on _______________, 1993, by the person appointed in the Certificate of Incorporation to act as the Incorporator of the corporation. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the corporate seal this ____ day of __________, 1993. _____________________________ J. Casey McGlynn, Secretary -26- EX-5.1 4 OPINION OF WILSON SONSINI GOODRICH & ROSATI 1 [WILSON SONSINI GOODRICH & ROSATI LETTERHEAD] EXHIBIT 5.1 May 23, 1996 Ventana Medical Systems, Inc. 3865 North Business Center Drive Tucson, Arizona 85705 Re: Registration Statement on Form S-1 ---------------------------------- Ladies and Gentlemen: We have examined the Registration Statement on Form S-1 to be filed by you with the Securities and Exchange Commission on May 24, 1996 (the "Registration Statement") in connection with the registration under the Securities Act of 1933, as amended, of 3,450,000 shares of Common Stock of Ventana Medical Systems, Inc. (the "Shares"). As your counsel in connection with this transaction, we have examined the proceedings proposed to be taken in connection with said sale and issuance of the Shares. It is our opinion that, upon completion of the proceedings being taken or contemplated by us, as your counsel, to be taken prior to the issuance of the Shares, the Shares when issued and sold in the manner referred to in the Registration Statement will be legally and validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement, and further consent to the use of our name wherever appearing in the Registration Statement, including the prospectus constituting a part hereof, and any amendment thereto and any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) and all post-effective amendments thereto. Very truly yours, /s/ WILSON SONSINI GOODRICH & ROSATI ------------------------------------- WILSON SONSINI GOODRICH & ROSATI Professional Corporation EX-10.4(A) 5 RESTRICTED STK PUR AGREE W/ SCHULER-TRANCHE 1 1 EXHIBIT 10.4(a) [SCHULER -- TRANCHE 1] VENTANA MEDICAL SYSTEMS, INC. STOCK PURCHASE AGREEMENT THIS AGREEMENT is made this 19th day of April, 1996 between Ventana Medical Systems, Inc., a Delaware corporation (the "Company"), and Jack W. Schuler (the "Purchaser"). WHEREAS the Purchaser is a director of and consultant to the Company and the Purchaser's continued participation is considered by the Company to be important for the Company's continued growth; and WHEREAS in accordance with resolutions of the Company's board of directors adopted January 12, 1996 and pursuant to a letter agreement dated February 26, 1996 among the Company and Crabtree Partners, the Company is willing to sell to the Purchaser and the Purchaser desires to purchase 262,500 shares of Common Stock according to the terms and conditions contained in the 1988 Incentive Stock Option Plan (the "Plan") and herein. THEREFORE, the parties agree as follows: 1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and the Purchaser hereby agrees to purchase an aggregate of 262,500 shares of the Company's Common Stock (the "Shares"), at the price of $0.60 per share for an aggregate purchase price of $157,500.00. 2. Payment of Purchase Price. The purchase price for the Shares shall be paid by delivery to the Company at the time of execution of this Agreement of (i) a cash payment in the amount of $15,750.00 and (ii) a a duly executed full recourse promissory note (the "Note") in the form attached hereto as Exhibit A in the amount of $141,750.00 for the purchase of the Shares. (a) With respect to the Note, the parties agree to the following: (i) The Purchaser shall deliver to the Secretary of the Company as escrow holder (the "Escrow Holder") all certificates representing the Shares and an executed blank stock assignment for use in transferring all or a portion of said Shares to the Company if, as and when required under this Section 2(b) or under any other provision of this Agreement including Section 4. (ii) As security for the payment of the Note and any renewal, extension or modification thereof, the Purchaser hereby grants to the Company a security interest in and pledges with and delivers to the Company the certificate or certificates representing the Shares. (iii) In the event of any foreclosure of the security interest, the Company may sell the Shares at a private sale or may itself repurchase any or all of the Shares. The parties acknowledge that, prior to the establishment of a public market for the Shares of the Company, the 2 securities laws applicable to the sale of the Shares make a public sale of the Shares commercially unreasonable. The parties agree that the repurchasing of said Shares by the Company, or by any person to whom the Company may have assigned its rights hereunder, is commercially reasonable if made at a price per Share determined in accordance with the following provisions: The price per Share shall be a price set by the Board of Directors of the Company which will reflect the current value of the Shares in terms of present results of operations and future prospects of the Company. The Company shall notify the Purchaser or the Purchaser's executor or administrator of the price so determined within thirty (30) days after receipt by it of written notice of the transfer or proposed transfer of the Shares. If the Purchaser or the Purchaser's executor or administrator disputes the price as set by the Board of Directors by giving notice to the Company within ten (10) days after being informed of the price, the price of the Shares shall be determined by an independent financial analyst selected by the Board of Directors of the Company, with the cost of such determination to be divided equally between the Company and the Purchaser. The Board of Directors shall select such analyst within thirty (30) days after receipt of notice that the Purchaser is disputing the price set by the Board of Directors. If the Board is not notified of any such dispute within such ten (10) day period, the decision of the Board of Directors as to the purchase price shall be final. (iv) In the event of default in payment when due of any indebtedness under the Note, the Company may elect then, or at any time thereafter, to exercise all rights available to a secured party under the Delaware Uniform Commercial Code, including the right to sell the Shares at a private or public sale or repurchase the Shares as provided above. The proceeds of any sale shall be applied in the following order: (1) To pay all reasonable expenses of the Company in enforcing this Agreement, including without limitation reasonable attorneys' fees and legal expenses incurred by the Company. (2) In satisfaction of the remaining indebtedness under the Note. (3) To the Purchaser, any remaining proceeds. (v) Upon full payment by the Purchaser of all amounts due on Purchaser's Note, the Escrow Holder shall deliver to the Purchaser the certificate or certificates representing the Shares in the Escrow Holder's possession belonging to the Purchaser, the blank stock assignment, and the executed original of the Note marked "cancelled" by the Company, and the Escrow Holder shall be discharged of all further obligations hereunder; provided, however, that the Escrow Holder shall nevertheless retain said certificate or certificates and stock assignment as escrow agent if so required pursuant to other restrictions imposed pursuant to this Agreement. 3. Issuance of Shares. Upon receipt by the Company of the purchase price, the Company shall issue a duly executed certificate evidencing the Shares in the name of the Purchaser to be held in escrow until expiration of the Company's repurchase option as described in this Agreement. -2- 3 4. Repurchase Option. (a) In connection with this Agreement (including, in particular, this Section 4 hereof), the following definitions shall apply: "Liquidity Milestone Event" shall mean (i) a merger, consolidation or reorganization involving the Company or the sale of all or substantially all of the Company's assets in which (a) the shareholders of the Company immediately prior to such transaction own immediately after such transaction less than 50% of the outstanding voting securities of the surviving entity in such transaction (or its corporate parent) and (b) the holders of the Company's outstanding shares of Series C and Series D Preferred Stock receive consideration of at least $4.00 per share (based on the Company's capital structure as of February 26, 1996 and subject to proportionate adjustment for future stock splits, dividends or combinations), (ii) the completion by the Company of a firm commitment underwritten public offering of its Common Stock pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act") at a price to public of at least $4.00 per share (based on the Company's capital structure as of February 26, 1996 and subject to proportionate adjustment for future stock splits, dividends or combinations) or (iii) the last-reported sale price or closing market price of the Company's Common Stock on the principal securities exchange or market in which the Company's Common Stock is traded or listed being at least $4.00 per share (based on the Company's capital structure as of February 26, 1996 and subject to proportionate adjustment for future stock splits, dividends or combinations) for a period of 20 consecutive trading days. "Vesting Determination Date" shall mean February 26, 2002. (b) At any time from and after the date of this Agreement until the release of the Shares from the Company's repurchase option (which release shall be as set forth in Section 5), the Company will have an irrevocable, exclusive option to repurchase all or any portion of the Shares which have not been released from the repurchase option described in this Section 4 at the original purchase price per share ($0.60). Said repurchase option shall be exercised by the Company by written notice to the Purchaser or the Purchaser's executor (with a copy to the Escrow Holder) and, at the Company's option, (i) by delivery to the Purchaser or the Purchaser's executor or administrator with such notice of a check in the amount of the repurchase price for the Shares being repurchased, or (ii) by cancellation by the Company of an amount of the Purchaser's indebtedness to the Company equal to the repurchase price for the Shares being repurchased, or (iii) by a combination of (i) and (ii) so that the combined payment and cancellation of indebtedness equals such repurchase price. Upon delivery of such notice and the payment of the repurchase price in any of the ways described above, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interests therein or relating thereto, and the Company shall have the right to retain and transfer to its own name the number of Shares being repurchased by the Company. -3- 4 In addition, the decision to exercise the foregoing repurchase right shall require the approval, at a duly-noticed and held meeting of the Company's board of directors, of a majority of the directors of the Company in office at the time of such exercise (such majority shall be determined including the Purchaser (if the Purchaser is at the time of such exercise a director of the Company)) and the board of directors shall, concurrent with delivery of the items referred to in paragraph (b) above, deliver to the Purchaser a written statement setting forth the basis for the decision of the Company's board of directors to exercise such repurchase right. If requested by the Purchaser, the Company's board of directors will meet with the Purchaser to review such written statement and the basis for the determination to repurchase Shares set forth therein. (c) In the event that the Company at any time has an option to repurchase shares of the Purchaser's Common Stock pursuant to this Agreement and such repurchase would cause the Company to cease to qualify as a Qualified Small Business (as defined in Section 1202(d) of the Internal Revenue Code of 1986, as amended), the Purchaser will extend the time period during which the Company must complete such repurchase by a period of time which will enable the Company to complete such repurchase without ceasing to qualify as a Qualified Small Business. (d) Whenever the Company shall have the right to repurchase Shares hereunder, the Company may designate and assign one or more employees, officers, directors or shareholders of the Company or other persons or organizations to exercise all or a part of the Company's repurchase rights under this Agreement and purchase all or a part of such Shares. 5. Release of Shares From Repurchase Option. (a) All of the Shares shall be released from the Company's repurchase option described in Section 4 above on the first to occur of (i) a Liquidity Milestone Event or (ii) the Vesting Determination Date. (b) Certificate(s) representing the Shares which have been released from the Company's repurchase option described in Section 4 shall be delivered to the Purchaser at the Purchaser's request (see Section 7). 6. Restriction on Transfer. Except for the escrow described in Section 7 or transfer of the Shares to the Company or its assignees contemplated by this Agreement, none of the Shares or any beneficial interest therein shall be transferred, encumbered or otherwise disposed of in any way until the release of such Shares from the Company's repurchase option in accordance with the provisions of this Agreement. 7. Escrow of Shares. (a) The Shares issued under this Agreement shall be held by the Secretary of the Company as escrow holder ("Escrow Holder"), along with a stock assignment executed by the -4- 5 Purchaser in blank, until the expiration of the Company's option to repurchase such Shares as set forth above and full payment of the Note. (b) The Escrow Holder is hereby directed to permit transfer of the Shares only in accordance with this Agreement or instructions signed by both parties. In the event further instructions are desired by the Escrow Holder, he shall be entitled to rely upon directions executed by a majority of the authorized number of the Company's Board of Directors. The Escrow Holder shall have no liability for any act or omission hereunder while acting in good faith in the exercise of his own judgment. (c) If the Company or any assignee exercises its repurchase option hereunder, the Escrow Holder, upon receipt of written notice of such option exercise from the proposed transferee, shall take all steps necessary to accomplish such transfer. (d) When the repurchase option has been exercised or expires unexercised or a portion of the Shares has been released from such repurchase option, upon Purchaser's request the Escrow Holder shall promptly cause a new certificate to be issued for such released Shares and shall deliver such certificate to the Purchaser. (e) Subject to the terms hereof, the Purchaser shall have all the rights of a shareholder with respect to such Shares while they are held in escrow, including without limitation, the right to vote the Shares and receive any cash dividends declared thereon. If, from time to time during the term of the Company's repurchase option, there is (i) any stock dividend, stock split or other change in the Shares, or (ii) any merger or sale of all or substantially all of the assets or other acquisition of the Company, any and all new, substituted or additional securities to which the Purchaser is entitled by reason of the Purchaser's ownership of the Shares shall be immediately subject to this escrow, deposited with the Escrow Holder and included thereafter as "Shares" for purposes of this Agreement and the Company's repurchase option. 8. Investment Representations; Restriction on Transfer. (a) In connection with the purchase of the Shares, the Purchaser represents to the Company the following: (i) The Purchaser is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the securities. The Purchaser is purchasing these securities for investment for the Purchaser's own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act. (ii) The Purchaser understands that the securities have not been registered under the Securities Act by reason of a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Purchaser's investment intent as expressed -5- 6 herein. In this connection, the Purchaser understands that, in view of the Securities and Exchange Commission ("Commission"), the statutory basis for such exemption may not be present if the Purchaser's representations meant that the Purchaser's present intention was to hold these securities for a minimum capital gains period under the tax statutes, for a deferred sale, for a market rise, for a sale if the market does not rise, or for a year or any other fixed period in the future. (iii) The Purchaser further acknowledges and understands that the securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. The Purchaser further acknowledges and understands that the Company is under no obligation to register the securities. The Purchaser understands that the certificate evidencing the securities will be imprinted with a legend which prohibits the transfer of the securities unless they are registered or such registration is not required in the opinion of counsel for the Company. (iv) The Purchaser is familiar with the provisions of Rule 144, promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 144 requires among other things: (i) the availability of certain public information about the Company: (ii) the resale occurring not less than two years after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and (iii) in the case of an affiliate, or of a non-affiliate who has held the securities less than three years, the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable. The Purchaser further acknowledges that the Rule 144 holding period for the Shares will not begin to run until Purchaser either repays the Note or collateralizes the Note with collateral other than the Shares. The Purchaser further acknowledges that in the event all of the requirements of Rule 144 are not met, compliance with Regulation A or some other registration exemption will be required; and that although Rule 144 is not exclusive, the staff of the Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and other than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and the brokers who participate in the transactions do so at their own risk. (b) The Purchaser agrees, in connection with the Company's initial public offering of the Company's securities, (i) not to sell, make short sales of, loan, grant any options for the purchase of, or otherwise dispose of any shares of Common Stock of the Company held by the Purchaser (other than those shares included in the registration) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company's securities for one hundred eighty (180) days from the effective date of such registration and -6- 7 (ii) further agrees to execute any agreement reflecting (i) above as may be requested by the underwriters at the time of the public offering. 9. Legends. The share certificate evidencing the Shares issued hereunder shall be endorsed with the following legends (in addition to any legends required under applicable state securities laws): (a) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. (b) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. 10. Adjustment for Stock Split. All references to the number of Shares and the purchase price of the Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend or other change in the Shares which may be made by the Company after the date of this Agreement. 11. General Provisions. (a) This Agreement shall be governed by the internal laws of the State of Delaware. This Agreement represents the entire agreement between the parties with respect to the purchase of Common Stock by the Purchaser, may only be modified or amended in writing signed by both parties and satisfies all of the Company's obligations to the Purchaser with regard to the issuance or sale of securities. (b) Any notice, demand or request required or permitted to be given by either the Company or the Purchaser pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. Any notice to the Escrow Holder shall be sent to the Company's address with a copy to the other party not sending the notice. -7- 8 (c) The rights and benefits of the Company under this Agreement shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company's successors and assigns. The rights and obligations of the Purchaser under this Agreement may only be assigned with the prior written consent of the Company. (d) Either party's failure to enforce any provision or provisions of this Agreement shall not in any way be construed as a waiver of any such provision or provisions, nor prevent that party thereafter from enforcing each and every other provision of this Agreement. The rights granted both parties herein are cumulative and shall not constitute a waiver of either party's right to assert all other legal remedies available to it under the circumstances. (e) The Purchaser agrees upon request to execute any further documents or instruments necessary or desirable to carry out the purposes or intent of this Agreement. (f) The Purchaser understands that the Purchaser (and not the Company) shall be responsible for the Purchaser's own federal, state, local or foreign tax liability and any of the Purchaser's other tax consequences that may arise as a result of the transactions contemplated by this Agreement. The Purchaser shall rely solely on the determinations of the Purchaser's tax advisors or the Purchaser's own determinations, and not on any statements or representations by the Company or any of its agents, with regard to all such tax matters. The Purchaser shall notify the Company in writing if the Purchaser files an election pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, with the Internal Revenue Service within thirty (30) days from the date of the sale of the Shares hereunder. The Company intends, in the event it does not receive from the Purchaser evidence of such filing, to claim a tax deduction for any amount which would be taxable to the Purchaser in the absence of such an election. (g) Purchaser acknowledges receipt of a copy of the Plan, a copy of which is annexed hereto, represents that Purchaser is familiar with the terms and provisions thereof, and hereby accepts this Agreement subject to all of the terms and provisions thereof. The Purchaser has reviewed the Plan and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of the Agreement. The Purchaser hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board or of the Committee upon any questions arising under the Plan. The Purchaser further agrees to notify the Company upon any change in the residence address indicated below. -8- 9 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first set forth above. VENTANA MEDICAL SYSTEMS, INC. PURCHASER: /s/ JACK W. SCHULER ________________________________ Jack W. Schuler By: /s/ R. MICHAEL RODGERS ___________________________ Title: Vice President and CFO _________________________
-9- 10 ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, Jack W. Schuler, hereby sell, assign and transfer to _______________________________________________________________ ________________________________________________________________ (________) shares of the Common Stock of VENTANA MEDICAL SYSTEMS, INC. (the "Company") standing in my name on the books of the Company represented by Certificate No. __________ and do hereby irrevocably constitute and appoint Wilson, Sonsini, Goodrich & Rosati, attorney, to transfer said stock on the books of the Company with full power of substitution in the premises. This Assignment Separate from Certificate may only be used in accordance with the Stock Purchase Agreement dated ___________, 1996. Dated:____________, 19__. Signature: ___________________________ Jack W. Schuler -10- 11 ELECTION UNDER SECTION 83(b) OF THE INTERNAL REVENUE CODE OF 1986 The undersigned taxpayer hereby elects, pursuant to the above-referenced Federal Tax Code, to include in his gross income for the current taxable year, the amount of any compensation taxable to him in connection with his receipt of the property described below: 1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows: NAME : TAXPAYER: Jack W. Schuler SPOUSE: ADDRESS : IDENTIFICATION NO. : TAXPAYER: SPOUSE: TAXABLE YEAR : 1996 2. The property with respect to which the election is made is described as follows: 262,500 shares of Common Stock (the "Shares"), with par value $0.001 per share, of VENTANA MEDICAL SYSTEMS, INC., a Delaware corporation (the "Company"). 3. The date on which the property was transferred is: ____________________. 4. The property is subject to the following restrictions: The Company has the right to repurchase a portion of the Shares upon the happening of certain events. This right of repurchase lapses with regard to a portion of the Shares over time. 5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $157,500.00. 6. The amount (if any) paid for such property: $157,500.00. The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property. The undersigned understands that the foregoing election may not be revoked except with the consent of the Commissioner. ________________________________ Dated: _________________________ Jack W. Schuler The undersigned spouse of taxpayer joins in this election. Dated: _________________________ ________________________________ Spouse of Taxpayer 12 EXHIBIT A PROMISSORY NOTE $141,750.00 ________, 1996 For value received, the undersigned promises to pay to Ventana Medical Systems, Inc., a Delaware corporation (the "Company"), or order, at its principal office the principal sum of $141,750.00 with interest thereon at the rate of 6.0% per annum compounded annually on the unpaid balance of the principal sum. Said principal and interest shall be due on February 26, 1998. Principal payable in lawful money of the United States of America. THE PRIVILEGE IS RESERVED TO PREPAY ANY PORTION OF THE NOTE AT ANY TIME. Should suit be commenced to collect this Note or any portion thereof, such sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The maker waives presentment for payment, protest, notice of protest, and notice of non-payment of this Note. This Note is secured by a pledge of certain shares of Common Stock of the Company, pursuant to the provisions of the Stock Purchase Agreement between the Company and the undersigned executed contemporaneously with this Note. The holder of this Note shall have full recourse against the maker, and shall not be required to proceed against the Shares or other collateral securing this Note in the event of default. ________________________________ Jack W. Schuler EX-10.4(B) 6 RESTRICTED STK PUR AGREE W/ SCHULER - TRANCHE 2 1 EXHIBIT 10.4(b) [SCHULER -- TRANCHE 2] VENTANA MEDICAL SYSTEMS, INC. STOCK PURCHASE AGREEMENT THIS AGREEMENT is made this 19th day of April, 1996 between Ventana Medical Systems, Inc., a Delaware corporation (the "Company"), and Jack W. Schuler (the "Purchaser"). WHEREAS the Purchaser is a director of and consultant to the Company and the Purchaser's continued participation is considered by the Company to be important for the Company's continued growth; and WHEREAS in accordance with resolutions of the Company's board of directors adopted January 12, 1996 and pursuant to a letter agreement dated February 26, 1996 among the Company and Crabtree Partners, the Company is willing to sell to the Purchaser and the Purchaser desires to purchase 466,667 shares of Common Stock according to the terms and conditions contained in the 1988 Incentive Stock Option Plan (the "Plan") and herein. THEREFORE, the parties agree as follows: 1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and the Purchaser hereby agrees to purchase an aggregate of 466,667 shares of the Company's Common Stock (the "Shares"), at the price of $0.60 per share for an aggregate purchase price of $280,000.20. 2. Payment of Purchase Price. The purchase price for the Shares shall be paid by delivery to the Company at the time of execution of this Agreement of (i) a cash payment in the amount of $28,000.00 and (ii) a a duly executed full recourse promissory note (the "Note") in the form attached hereto as Exhibit A in the amount of $252,000.20 for the purchase of the Shares. (a) With respect to the Note, the parties agree to the following: (i) The Purchaser shall deliver to the Secretary of the Company as escrow holder (the "Escrow Holder") all certificates representing the Shares and an executed blank stock assignment for use in transferring all or a portion of said Shares to the Company if, as and when required under this Section 2(b) or under any other provision of this Agreement including Section 4. (ii) As security for the payment of the Note and any renewal, extension or modification thereof, the Purchaser hereby grants to the Company a security interest in and pledges with and delivers to the Company the certificate or certificates representing the Shares. (iii) In the event of any foreclosure of the security interest, the Company may sell the Shares at a private sale or may itself repurchase any or all of the Shares. The parties acknowledge that, prior to the establishment of a public market for the Shares of the Company, the 2 securities laws applicable to the sale of the Shares make a public sale of the Shares commercially unreasonable. The parties agree that the repurchasing of said Shares by the Company, or by any person to whom the Company may have assigned its rights hereunder, is commercially reasonable if made at a price per Share determined in accordance with the the following provisions: The price per Share shall be a price set by the Board of Directors of the Company which will reflect the current value of the Shares in terms of present results of operations and future prospects of the Company. The Company shall notify the Purchaser or the Purchaser's executor or administrator of the price so determined within thirty (30) days after receipt by it of written notice of the transfer or proposed transfer of the Shares. If the Purchaser or the Purchaser's executor or administrator disputes the price as set by the Board of Directors by giving notice to the Company within ten (10) days after being informed of the price, the price of the Shares shall be determined by an independent financial analyst selected by the Board of Directors of the Company, with the cost of such determination to be divided equally between the Company and the Purchaser. The Board of Directors shall select such analyst within thirty (30) days after receipt of notice that the Purchaser is disputing the price set by the Board of Directors. If the Board is not notified of any such dispute within such ten (10) day period, the decision of the Board of Directors as to the purchase price shall be final. (iv) In the event of default in payment when due of any indebtedness under the Note, the Company may elect then, or at any time thereafter, to exercise all rights available to a secured party under the Delaware Uniform Commercial Code, including the right to sell the Shares at a private or public sale or repurchase the Shares as provided above. The proceeds of any sale shall be applied in the following order: (1) To pay all reasonable expenses of the Company in enforcing this Agreement, including without limitation reasonable attorneys' fees and legal expenses incurred by the Company. (2) In satisfaction of the remaining indebtedness under the Note. (3) To the Purchaser, any remaining proceeds. (v) Upon full payment by the Purchaser of all amounts due on Purchaser's Note, the Escrow Holder shall deliver to the Purchaser the certificate or certificates representing the Shares in the Escrow Holder's possession belonging to the Purchaser, the blank stock assignment, and the executed original of the Note marked "cancelled" by the Company, and the Escrow Holder shall be discharged of all further obligations hereunder; provided, however, that the Escrow Holder shall nevertheless retain said certificate or certificates and stock assignment as escrow agent if so required pursuant to other restrictions imposed pursuant to this Agreement. 3. Issuance of Shares. Upon receipt by the Company of the purchase price, the Company shall issue a duly executed certificate evidencing the Shares in the name of the Purchaser to be held in escrow until expiration of the Company's repurchase option as described in this Agreement. -2- 3 4. Repurchase Option. (a) In connection with this Agreement (including, in particular, this Section 4 hereof), the following definitions shall apply: "Liquidity Milestone Event" shall mean (i) a merger, consolidation or reorganization involving the Company or the sale of all or substantially all of the Company's assets in which (a) the shareholders of the Company immediately prior to such transaction own immediately after such transaction less than 50% of the outstanding voting securities of the surviving entity in such transaction (or its corporate parent) and (b) the holders of the Company's outstanding shares of Series C and Series D Preferred Stock receive consideration of at least $4.00 per share (based on the Company's capital structure as of February 26, 1996 and subject to proportionate adjustment for future stock splits, dividends or combinations), (ii) the completion by the Company of a firm commitment underwritten public offering of its Common Stock pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act") at a price to public of at least $4.00 per share (based on the Company's capital structure as of February 26, 1996 and subject to proportionate adjustment for future stock splits, dividends or combinations) or (iii) the last-reported sale price or closing market price of the Company's Common Stock on the principal securities exchange or market in which the Company's Common Stock is traded or listed being at least $4.00 per share (based on the Company's capital structure as of February 26, 1996 and subject to proportionate adjustment for future stock splits, dividends or combinations) for a period of 20 consecutive trading days. "Vesting Commencement Date" shall mean February 26, 1996. "Vesting Determination Date" shall mean February 26, 2002. (b) At any time from and after the date of this Agreement until the release of the Shares from the Company's repurchase option (which release shall be as set forth in Section 5), the Company will have an irrevocable, exclusive option to repurchase all or any portion of the Shares which have not been released from the repurchase option described in this Section 4 at the original purchase price per share ($0.60). Said repurchase option shall be exercised by the Company by written notice to the Purchaser or the Purchaser's executor (with a copy to the Escrow Holder) and, at the Company's option, (i) by delivery to the Purchaser or the Purchaser's executor or administrator with such notice of a check in the amount of the repurchase price for the Shares being repurchased, or (ii) by cancellation by the Company of an amount of the Purchaser's indebtedness to the Company equal to the repurchase price for the Shares being repurchased, or (iii) by a combination of (i) and (ii) so that the combined payment and cancellation of indebtedness equals such repurchase price. Upon delivery of such notice and the payment of the repurchase price in any of the ways described above, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interests therein or relating thereto, and the Company shall have the right to retain and transfer to its own name the number of Shares being repurchased by the Company. -3- 4 In addition, the decision to exercise the foregoing repurchase right shall require the approval, at a duly-noticed and held meeting of the Company's board of directors, of a majority of the directors of the Company in office at the time of such exercise (such majority shall be determined including the Purchaser (if the Purchaser is at the time of such exercise a director of the Company)) and the board of directors shall, concurrent with delivery of the items referred to in paragraph (b) above, deliver to the Purchaser a written statement setting forth the basis for the decision of the Company's board of directors to exercise such repurchase right. If requested by the Purchaser, the Company's board of directors will meet with the Purchaser to review such written statement and the basis for the determination to repurchase Shares set forth therein. (c) In the event that the Company at any time has an option to repurchase shares of the Purchaser's Common Stock pursuant to this Agreement and such repurchase would cause the Company to cease to qualify as a Qualified Small Business (as defined in Section 1202(d) of the Internal Revenue Code of 1986, as amended), the Purchaser will extend the time period during which the Company must complete such repurchase by a period of time which will enable the Company to complete such repurchase without ceasing to qualify as a Qualified Small Business. (d) Whenever the Company shall have the right to repurchase Shares hereunder, the Company may designate and assign one or more employees, officers, directors or shareholders of the Company or other persons or organizations to exercise all or a part of the Company's repurchase rights under this Agreement and purchase all or a part of such Shares. 5. Release of Shares From Repurchase Option. (a) Upon the occurrence of a Liquidity Milestone Event, an amount of Shares equal to 9,722 Shares for each full month since the Vesting Commencement Date that the Purchaser has served as Chairman of the Board of Directors of the Company shall be released from the Company's repurchase option described in Section 4 hereof. Thereafter, an additional 9,722 Shares shall be released from the Company's repurchase option described in Section 4 above at the end of full month until all Shares have been released; provided that on each such date of release of Shares from the Company's repurchase option the Purchaser is continuing to serve as Chairman of the Board of Directors of the Company. (b) On the Vesting Determination Date, any Shares not previously repurchased by the Company upon exercise of its repurchase option or not released from the Company's repurchase option shall thereupon be released from such repurchase option. (c) Certificate(s) representing the Shares which have been released from the Company's repurchase option described in Section 4 shall be delivered to the Purchaser at the Purchaser's request (see Section 7). -4- 5 6. Restriction on Transfer. Except for the escrow described in Section 7 or transfer of the Shares to the Company or its assignees contemplated by this Agreement, none of the Shares or any beneficial interest therein shall be transferred, encumbered or otherwise disposed of in any way until the release of such Shares from the Company's repurchase option in accordance with the provisions of this Agreement. 7. Escrow of Shares. (a) The Shares issued under this Agreement shall be held by the Secretary of the Company as escrow holder ("Escrow Holder"), along with a stock assignment executed by the Purchaser in blank, until the expiration of the Company's option to repurchase such Shares as set forth above and full payment of the Note. (b) The Escrow Holder is hereby directed to permit transfer of the Shares only in accordance with this Agreement or instructions signed by both parties. In the event further instructions are desired by the Escrow Holder, he shall be entitled to rely upon directions executed by a majority of the authorized number of the Company's Board of Directors. The Escrow Holder shall have no liability for any act or omission hereunder while acting in good faith in the exercise of his own judgment. (c) If the Company or any assignee exercises its repurchase option hereunder, the Escrow Holder, upon receipt of written notice of such option exercise from the proposed transferee, shall take all steps necessary to accomplish such transfer. (d) When the repurchase option has been exercised or expires unexercised or a portion of the Shares has been released from such repurchase option, upon Purchaser's request the Escrow Holder shall promptly cause a new certificate to be issued for such released Shares and shall deliver such certificate to the Purchaser. (e) Subject to the terms hereof, the Purchaser shall have all the rights of a shareholder with respect to such Shares while they are held in escrow, including without limitation, the right to vote the Shares and receive any cash dividends declared thereon. If, from time to time during the term of the Company's repurchase option, there is (i) any stock dividend, stock split or other change in the Shares, or (ii) any merger or sale of all or substantially all of the assets or other acquisition of the Company, any and all new, substituted or additional securities to which the Purchaser is entitled by reason of the Purchaser's ownership of the Shares shall be immediately subject to this escrow, deposited with the Escrow Holder and included thereafter as "Shares" for purposes of this Agreement and the Company's repurchase option. 8. Investment Representations; Restriction on Transfer. (a) In connection with the purchase of the Shares, the Purchaser represents to the Company the following: -5- 6 (i) The Purchaser is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the securities. The Purchaser is purchasing these securities for investment for the Purchaser's own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act. (ii) The Purchaser understands that the securities have not been registered under the Securities Act by reason of a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Purchaser's investment intent as expressed herein. In this connection, the Purchaser understands that, in view of the Securities and Exchange Commission ("Commission"), the statutory basis for such exemption may not be present if the Purchaser's representations meant that the Purchaser's present intention was to hold these securities for a minimum capital gains period under the tax statutes, for a deferred sale, for a market rise, for a sale if the market does not rise, or for a year or any other fixed period in the future. (iii) The Purchaser further acknowledges and understands that the securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. The Purchaser further acknowledges and understands that the Company is under no obligation to register the securities. The Purchaser understands that the certificate evidencing the securities will be imprinted with a legend which prohibits the transfer of the securities unless they are registered or such registration is not required in the opinion of counsel for the Company. (iv) The Purchaser is familiar with the provisions of Rule 144, promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 144 requires among other things: (i) the availability of certain public information about the Company: (ii) the resale occurring not less than two years after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and (iii) in the case of an affiliate, or of a non-affiliate who has held the securities less than three years, the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable. The Purchaser further acknowledges that the Rule 144 holding period for the Shares will not begin to run until Purchaser either repays the Note or collateralizes the Note with collateral other than the Shares. The Purchaser further acknowledges that in the event all of the requirements of Rule 144 are not met, compliance with Regulation A or some other registration exemption will be required; and that although Rule 144 is not exclusive, the staff of the Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and other than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption -6- 7 from registration is available for such offers or sales and that such persons and the brokers who participate in the transactions do so at their own risk. (b) The Purchaser agrees, in connection with the Company's initial public offering of the Company's securities, (i) not to sell, make short sales of, loan, grant any options for the purchase of, or otherwise dispose of any shares of Common Stock of the Company held by the Purchaser (other than those shares included in the registration) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company's securities for one hundred eighty (180) days from the effective date of such registration and (ii) further agrees to execute any agreement reflecting (i) above as may be requested by the underwriters at the time of the public offering. 9. Legends. The share certificate evidencing the Shares issued hereunder shall be endorsed with the following legends (in addition to any legends required under applicable state securities laws): (a) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. (b) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. 10. Adjustment for Stock Split. All references to the number of Shares and the purchase price of the Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend or other change in the Shares which may be made by the Company after the date of this Agreement. 11. General Provisions. (a) This Agreement shall be governed by the internal laws of the State of Delaware. This Agreement represents the entire agreement between the parties with respect to the purchase of Common Stock by the Purchaser, may only be modified or amended in writing signed by both parties and satisfies all of the Company's obligations to the Purchaser with regard to the issuance or sale of securities. -7- 8 (b) Any notice, demand or request required or permitted to be given by either the Company or the Purchaser pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. Any notice to the Escrow Holder shall be sent to the Company's address with a copy to the other party not sending the notice. (c) The rights and benefits of the Company under this Agreement shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company's successors and assigns. The rights and obligations of the Purchaser under this Agreement may only be assigned with the prior written consent of the Company. (d) Either party's failure to enforce any provision or provisions of this Agreement shall not in any way be construed as a waiver of any such provision or provisions, nor prevent that party thereafter from enforcing each and every other provision of this Agreement. The rights granted both parties herein are cumulative and shall not constitute a waiver of either party's right to assert all other legal remedies available to it under the circumstances. (e) The Purchaser agrees upon request to execute any further documents or instruments necessary or desirable to carry out the purposes or intent of this Agreement. (f) The Purchaser understands that the Purchaser (and not the Company) shall be responsible for the Purchaser's own federal, state, local or foreign tax liability and any of the Purchaser's other tax consequences that may arise as a result of the transactions contemplated by this Agreement. The Purchaser shall rely solely on the determinations of the Purchaser's tax advisors or the Purchaser's own determinations, and not on any statements or representations by the Company or any of its agents, with regard to all such tax matters. The Purchaser shall notify the Company in writing if the Purchaser files an election pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, with the Internal Revenue Service within thirty (30) days from the date of the sale of the Shares hereunder. The Company intends, in the event it does not receive from the Purchaser evidence of such filing, to claim a tax deduction for any amount which would be taxable to the Purchaser in the absence of such an election. (g) Purchaser acknowledges receipt of a copy of the Plan, a copy of which is annexed hereto, represents that Purchaser is familiar with the terms and provisions thereof, and hereby accepts this Agreement subject to all of the terms and provisions thereof. The Purchaser has reviewed the Plan and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of the Agreement. The Purchaser hereby agrees to accept as binding, conclusive and final all decisions or interpretations of -8- 9 the Board or of the Committee upon any questions arising under the Plan. The Purchaser further agrees to notify the Company upon any change in the residence address indicated below. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first set forth above. VENTANA MEDICAL SYSTEMS, INC. PURCHASER: /s/ Jack W. Schuler ________________________________ Jack W. Schuler By: /s/ R. Michael Rodgers ___________________________ Title: Vice President and CFO ________________________
-9- 10 ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, Jack W. Schuler, hereby sell, assign and transfer to __________________________________________________________________ __________________________________________________________ (________) shares of the Common Stock of VENTANA MEDICAL SYSTEMS, INC. (the "Company") standing in my name on the books of the Company represented by Certificate No. __________ and do hereby irrevocably constitute and appoint Wilson, Sonsini, Goodrich & Rosati, attorney, to transfer said stock on the books of the Company with full power of substitution in the premises. This Assignment Separate from Certificate may only be used in accordance with the Stock Purchase Agreement dated ___________, 1996. Dated:____________, 19__. Signature: ___________________________ Jack W. Schuler -10- 11 ELECTION UNDER SECTION 83(b) OF THE INTERNAL REVENUE CODE OF 1986 The undersigned taxpayer hereby elects, pursuant to the above-referenced Federal Tax Code, to include in his gross income for the current taxable year, the amount of any compensation taxable to him in connection with his receipt of the property described below: 1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows: NAME : TAXPAYER: Jack W. Schuler SPOUSE: ADDRESS : IDENTIFICATION NO. : TAXPAYER: SPOUSE: TAXABLE YEAR : 1996 2. The property with respect to which the election is made is described as follows: 466,667 shares of Common Stock (the "Shares"), with par value $0.001 per share, of VENTANA MEDICAL SYSTEMS, INC., a Delaware corporation (the "Company"). 3. The date on which the property was transferred is: ____________________. 4. The property is subject to the following restrictions: The Company has the right to repurchase a portion of the Shares upon the happening of certain events. This right of repurchase lapses with regard to a portion of the Shares over time. 5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $280,200.20. 6. The amount (if any) paid for such property: $280,200.20. The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property. The undersigned understands that the foregoing election may not be revoked except with the consent of the Commissioner. ______________________________ Dated: _________________________ Jack W. Schuler The undersigned spouse of taxpayer joins in this election. Dated: _________________________ _______________________________ Spouse of Taxpayer 12 EXHIBIT A PROMISSORY NOTE $252,000.20 ________, 1996 For value received, the undersigned promises to pay to Ventana Medical Systems, Inc., a Delaware corporation (the "Company"), or order, at its principal office the principal sum of $252,000.20 with interest thereon at the rate of 6.0% per annum compounded annually on the unpaid balance of the principal sum. Said principal and interest shall be due on February 26, 1998. Principal payable in lawful money of the United States of America. THE PRIVILEGE IS RESERVED TO PREPAY ANY PORTION OF THE NOTE AT ANY TIME. Should suit be commenced to collect this Note or any portion thereof, such sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The maker waives presentment for payment, protest, notice of protest, and notice of non-payment of this Note. This Note is secured by a pledge of certain shares of Common Stock of the Company, pursuant to the provisions of the Stock Purchase Agreement between the Company and the undersigned executed contemporaneously with this Note. The holder of this Note shall have full recourse against the maker, and shall not be required to proceed against the Shares or other collateral securing this Note in the event of default. ______________________________ Jack W. Schuler EX-10.4(C) 7 RESTRICTED STK PUR AGREE- W/ SCHULER- TRANCHE 3 1 EXHIBIT 10.4(c) [SCHULER -- TRANCHE 3] VENTANA MEDICAL SYSTEMS, INC. STOCK PURCHASE AGREEMENT THIS AGREEMENT is made this 19th day of April, 1996 between Ventana Medical Systems, Inc., a Delaware corporation (the "Company"), and Jack W. Schuler (the "Purchaser"). WHEREAS the Purchaser is a director of and consultant to the Company and the Purchaser's continued participation is considered by the Company to be important for the Company's continued growth; and WHEREAS in accordance with resolutions of the Company's board of directors adopted January 12, 1996 and pursuant to a letter agreement dated February 26, 1996 among the Company and Crabtree Partners, the Company is willing to sell to the Purchaser and the Purchaser desires to purchase 408,333 shares of Common Stock according to the terms and conditions contained in the 1988 Incentive Stock Option Plan (the "Plan") and herein. THEREFORE, the parties agree as follows: 1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and the Purchaser hereby agrees to purchase an aggregate of 408,333 shares of the Company's Common Stock (the "Shares"), at the price of $0.60 per share for an aggregate purchase price of $244,999.80. 2. Payment of Purchase Price. The purchase price for the Shares shall be paid by delivery to the Company at the time of execution of this Agreement of (i) a cash payment in the amount of $24,500.00 and (ii) a duly executed full recourse promissory note (the "Note") in the form attached hereto as Exhibit A in the amount of $219,999.80 for the purchase of the Shares. (a) With respect to the Note, the parties agree to the following: (i) The Purchaser shall deliver to the Secretary of the Company as escrow holder (the "Escrow Holder") all certificates representing the Shares and an executed blank stock assignment for use in transferring all or a portion of said Shares to the Company if, as and when required under this Section 2(b) or under any other provision of this Agreement including Section 4. (ii) As security for the payment of the Note and any renewal, extension or modification thereof, the Purchaser hereby grants to the Company a security interest in and pledges with and delivers to the Company the certificate or certificates representing the Shares. (iii) In the event of any foreclosure of the security interest, the Company may sell the Shares at a private sale or may itself repurchase any or all of the Shares. The parties acknowledge that, prior to the establishment of a public market for the Shares of the Company, the 2 securities laws applicable to the sale of the Shares make a public sale of the Shares commercially unreasonable. The parties agree that the repurchasing of said Shares by the Company, or by any person to whom the Company may have assigned its rights hereunder, is commercially reasonable if made at a price per Share determined in accordance with the the following provisions: The price per Share shall be a price set by the Board of Directors of the Company which will reflect the current value of the Shares in terms of present results of operations and future prospects of the Company. The Company shall notify the Purchaser or the Purchaser's executor or administrator of the price so determined within thirty (30) days after receipt by it of written notice of the transfer or proposed transfer of the Shares. If the Purchaser or the Purchaser's executor or administrator disputes the price as set by the Board of Directors by giving notice to the Company within ten (10) days after being informed of the price, the price of the Shares shall be determined by an independent financial analyst selected by the Board of Directors of the Company, with the cost of such determination to be divided equally between the Company and the Purchaser. The Board of Directors shall select such analyst within thirty (30) days after receipt of notice that the Purchaser is disputing the price set by the Board of Directors. If the Board is not notified of any such dispute within such ten (10) day period, the decision of the Board of Directors as to the purchase price shall be final. (iv) In the event of default in payment when due of any indebtedness under the Note, the Company may elect then, or at any time thereafter, to exercise all rights available to a secured party under the Delaware Uniform Commercial Code, including the right to sell the Shares at a private or public sale or repurchase the Shares as provided above. The proceeds of any sale shall be applied in the following order: (1) To pay all reasonable expenses of the Company in enforcing this Agreement, including without limitation reasonable attorneys' fees and legal expenses incurred by the Company. (2) In satisfaction of the remaining indebtedness under the Note. (3) To the Purchaser, any remaining proceeds. (v) Upon full payment by the Purchaser of all amounts due on Purchaser's Note, the Escrow Holder shall deliver to the Purchaser the certificate or certificates representing the Shares in the Escrow Holder's possession belonging to the Purchaser, the blank stock assignment, and the executed original of the Note marked "cancelled" by the Company, and the Escrow Holder shall be discharged of all further obligations hereunder; provided, however, that the Escrow Holder shall nevertheless retain said certificate or certificates and stock assignment as escrow agent if so required pursuant to other restrictions imposed pursuant to this Agreement. 3. Issuance of Shares. Upon receipt by the Company of the purchase price, the Company shall issue a duly executed certificate evidencing the Shares in the name of the Purchaser to be held in escrow until expiration of the Company's repurchase option as described in this Agreement. -2- 3 4. Repurchase Option. (a) In connection with this Agreement (including, in particular, Sections 4 and 5 hereof), the following definitions shall apply: "Liquidity Milestone Event" shall mean (i) a merger, consolidation or reorganization involving the Company or the sale of all or substantially all of the Company's assets in which (a) the shareholders of the Company immediately prior to such transaction own immediately after such transaction less than 50% of the outstanding voting securities of the surviving entity in such transaction (or its corporate parent) and (b) the holders of the Company's outstanding shares of Series C and Series D Preferred Stock receive consideration of at least $4.00 per share (based on the Company's capital structure as of February 26, 1996 and subject to proportionate adjustment for future stock splits, dividends or combinations), (ii) the completion by the Company of a firm commitment underwritten public offering of its Common Stock pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act") at a price to public of at least $4.00 per share (based on the Company's capital structure as of February 26, 1996 and subject to proportionate adjustment for future stock splits, dividends or combinations) or (iii) the last-reported sale price or closing market price of the Company's Common Stock on the principal securities exchange or market in which the Company's Common Stock is traded or listed being at least $4.00 per share (based on the Company's capital structure as of February 26, 1996 and subject to proportionate adjustment for future stock splits, dividends or combinations) for a period of 20 consecutive trading days. "Vesting Commencement Date" shall mean February 26, 1996. "Vesting Determination Date" shall mean February 26, 2002. "Working Time Requirement" shall mean the devotion by the Purchaser of at least 50% of the Purchaser's professional working time to matters related to the Company on a cumulative average basis during each time period commencing on the Vesting Commencement Date and ending on each date that Shares are to be released from the Company's repurchase option pursuant to Section 5 hereof. (b) At any time from and after the date of this Agreement until the release of the Shares from the Company's repurchase option (which release shall be as set forth in Section 5), the Company will have an irrevocable, exclusive option to repurchase all or any portion of the Shares which have not been released from the repurchase option described in this Section 4 at the original purchase price per share ($0.60). Said repurchase option shall be exercised by the Company by written notice to the Purchaser or the Purchaser's executor (with a copy to the Escrow Holder) and, at the Company's option, (i) by delivery to the Purchaser or the Purchaser's executor or administrator with such notice of a check in the amount of the repurchase price for the Shares being repurchased, or (ii) by cancellation by the Company of an amount of the Purchaser's indebtedness to the Company equal to the repurchase price for the Shares being repurchased, or (iii) by a combination of (i) and (ii) -3- 4 so that the combined payment and cancellation of indebtedness equals such repurchase price. Upon delivery of such notice and the payment of the repurchase price in any of the ways described above, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interests therein or relating thereto, and the Company shall have the right to retain and transfer to its own name the number of Shares being repurchased by the Company. In addition, the decision to exercise the foregoing repurchase right shall require the approval, at a duly-noticed and held meeting of the Company's board of directors, of a majority of the directors of the Company in office at the time of such exercise (such majority shall be determined including the Purchaser (if the Purchaser is at the time of such exercise a director of the Company)) and the board of directors shall, concurrent with delivery of the items referred to in paragraph (b) above, deliver to the Purchaser a written statement setting forth the basis for the decision of the Company's board of directors to exercise such repurchase right. If requested by the Purchaser, the Company's board of directors will meet with the Purchaser to review such written statement and the basis for the determination to repurchase Shares set forth therein. (c) In the event that the Company at any time has an option to repurchase shares of the Purchaser's Common Stock pursuant to this Agreement and such repurchase would cause the Company to cease to qualify as a Qualified Small Business (as defined in Section 1202(d) of the Internal Revenue Code of 1986, as amended), the Purchaser will extend the time period during which the Company must complete such repurchase by a period of time which will enable the Company to complete such repurchase without ceasing to qualify as a Qualified Small Business. (d) Whenever the Company shall have the right to repurchase Shares hereunder, the Company may designate and assign one or more employees, officers, directors or shareholders of the Company or other persons or organizations to exercise all or a part of the Company's repurchase rights under this Agreement and purchase all or a part of such Shares. 5. Release of Shares From Repurchase Option. (a) Upon the occurrence of a Liquidity Milestone Event, an amount of Shares equal to 17,014 Shares for each full month since the Vesting Commencement Date that the Purchaser has satisfied the Working Time Requirement shall be released from the Company's repurchase option described in Section 4 hereof. Thereafter, an additional 17,014 Shares shall be released from the Company's repurchase option described in Section 4 above at the end of full month until all Shares have been released; provided that on each such date of release of Shares from the Company's repurchase option the Purchaser has satisfied the Working Time Requirement. (b) On the Vesting Determination Date, any Shares not previously repurchased by the Company upon exercise of its repurchase option or not released from the Company's repurchase option shall thereupon be released from such repurchase option. -4- 5 (c) Certificate(s) representing the Shares which have been released from the Company's repurchase option described in Section 4 shall be delivered to the Purchaser at the Purchaser's request (see Section 7). 6. Restriction on Transfer. Except for the escrow described in Section 7 or transfer of the Shares to the Company or its assignees contemplated by this Agreement, none of the Shares or any beneficial interest therein shall be transferred, encumbered or otherwise disposed of in any way until the release of such Shares from the Company's repurchase option in accordance with the provisions of this Agreement. 7. Escrow of Shares. (a) The Shares issued under this Agreement shall be held by the Secretary of the Company as escrow holder ("Escrow Holder"), along with a stock assignment executed by the Purchaser in blank, until the expiration of the Company's option to repurchase such Shares as set forth above and full payment of the Note. (b) The Escrow Holder is hereby directed to permit transfer of the Shares only in accordance with this Agreement or instructions signed by both parties. In the event further instructions are desired by the Escrow Holder, he shall be entitled to rely upon directions executed by a majority of the authorized number of the Company's Board of Directors. The Escrow Holder shall have no liability for any act or omission hereunder while acting in good faith in the exercise of his own judgment. (c) If the Company or any assignee exercises its repurchase option hereunder, the Escrow Holder, upon receipt of written notice of such option exercise from the proposed transferee, shall take all steps necessary to accomplish such transfer. (d) When the repurchase option has been exercised or expires unexercised or a portion of the Shares has been released from such repurchase option, upon Purchaser's request the Escrow Holder shall promptly cause a new certificate to be issued for such released Shares and shall deliver such certificate to the Purchaser. (e) Subject to the terms hereof, the Purchaser shall have all the rights of a shareholder with respect to such Shares while they are held in escrow, including without limitation, the right to vote the Shares and receive any cash dividends declared thereon. If, from time to time during the term of the Company's repurchase option, there is (i) any stock dividend, stock split or other change in the Shares, or (ii) any merger or sale of all or substantially all of the assets or other acquisition of the Company, any and all new, substituted or additional securities to which the Purchaser is entitled by reason of the Purchaser's ownership of the Shares shall be immediately subject to this escrow, deposited with the Escrow Holder and included thereafter as "Shares" for purposes of this Agreement and the Company's repurchase option. -5- 6 8. Investment Representations; Restriction on Transfer. (a) In connection with the purchase of the Shares, the Purchaser represents to the Company the following: (i) The Purchaser is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the securities. The Purchaser is purchasing these securities for investment for the Purchaser's own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act. (ii) The Purchaser understands that the securities have not been registered under the Securities Act by reason of a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Purchaser's investment intent as expressed herein. In this connection, the Purchaser understands that, in view of the Securities and Exchange Commission ("Commission"), the statutory basis for such exemption may not be present if the Purchaser's representations meant that the Purchaser's present intention was to hold these securities for a minimum capital gains period under the tax statutes, for a deferred sale, for a market rise, for a sale if the market does not rise, or for a year or any other fixed period in the future. (iii) The Purchaser further acknowledges and understands that the securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. The Purchaser further acknowledges and understands that the Company is under no obligation to register the securities. The Purchaser understands that the certificate evidencing the securities will be imprinted with a legend which prohibits the transfer of the securities unless they are registered or such registration is not required in the opinion of counsel for the Company. (iv) The Purchaser is familiar with the provisions of Rule 144, promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 144 requires among other things: (i) the availability of certain public information about the Company: (ii) the resale occurring not less than two years after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and (iii) in the case of an affiliate, or of a non-affiliate who has held the securities less than three years, the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable. The Purchaser further acknowledges that the Rule 144 holding period for the Shares will not begin to run until Purchaser either repays the Note or collateralizes the Note with collateral other than the Shares. -6- 7 The Purchaser further acknowledges that in the event all of the requirements of Rule 144 are not met, compliance with Regulation A or some other registration exemption will be required; and that although Rule 144 is not exclusive, the staff of the Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and other than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and the brokers who participate in the transactions do so at their own risk. (b) The Purchaser agrees, in connection with the Company's initial public offering of the Company's securities, (i) not to sell, make short sales of, loan, grant any options for the purchase of, or otherwise dispose of any shares of Common Stock of the Company held by the Purchaser (other than those shares included in the registration) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company's securities for one hundred eighty (180) days from the effective date of such registration and (ii) further agrees to execute any agreement reflecting (i) above as may be requested by the underwriters at the time of the public offering. 9. Legends. The share certificate evidencing the Shares issued hereunder shall be endorsed with the following legends (in addition to any legends required under applicable state securities laws): (a) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. (b) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. 10. Adjustment for Stock Split. All references to the number of Shares and the purchase price of the Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend or other change in the Shares which may be made by the Company after the date of this Agreement. 11. General Provisions. (a) This Agreement shall be governed by the internal laws of the State of Delaware. This Agreement represents the entire agreement between the parties with respect to the -7- 8 purchase of Common Stock by the Purchaser, may only be modified or amended in writing signed by both parties and satisfies all of the Company's obligations to the Purchaser with regard to the issuance or sale of securities. (b) Any notice, demand or request required or permitted to be given by either the Company or the Purchaser pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. Any notice to the Escrow Holder shall be sent to the Company's address with a copy to the other party not sending the notice. (c) The rights and benefits of the Company under this Agreement shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company's successors and assigns. The rights and obligations of the Purchaser under this Agreement may only be assigned with the prior written consent of the Company. (d) Either party's failure to enforce any provision or provisions of this Agreement shall not in any way be construed as a waiver of any such provision or provisions, nor prevent that party thereafter from enforcing each and every other provision of this Agreement. The rights granted both parties herein are cumulative and shall not constitute a waiver of either party's right to assert all other legal remedies available to it under the circumstances. (e) The Purchaser agrees upon request to execute any further documents or instruments necessary or desirable to carry out the purposes or intent of this Agreement. (f) The Purchaser understands that the Purchaser (and not the Company) shall be responsible for the Purchaser's own federal, state, local or foreign tax liability and any of the Purchaser's other tax consequences that may arise as a result of the transactions contemplated by this Agreement. The Purchaser shall rely solely on the determinations of the Purchaser's tax advisors or the Purchaser's own determinations, and not on any statements or representations by the Company or any of its agents, with regard to all such tax matters. The Purchaser shall notify the Company in writing if the Purchaser files an election pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, with the Internal Revenue Service within thirty (30) days from the date of the sale of the Shares hereunder. The Company intends, in the event it does not receive from the Purchaser evidence of such filing, to claim a tax deduction for any amount which would be taxable to the Purchaser in the absence of such an election. (g) Purchaser acknowledges receipt of a copy of the Plan, a copy of which is annexed hereto, represents that Purchaser is familiar with the terms and provisions thereof, and hereby accepts this Agreement subject to all of the terms and provisions thereof. The Purchaser has -8- 9 reviewed the Plan and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of the Agreement. The Purchaser hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board or of the Committee upon any questions arising under the Plan. The Purchaser further agrees to notify the Company upon any change in the residence address indicated below. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first set forth above. VENTANA MEDICAL SYSTEMS, INC. PURCHASER: /s/JACK W. SCHULER ________________________________ Jack W. Schuler By: /s/ R. MICHAEL RODGERS ___________________________ Title: Vice President and CFO _________________________
-9- 10 ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, Jack W. Schuler, hereby sell, assign and transfer to _______________________________________________________________ ________________________________________________________________ (________) shares of the Common Stock of VENTANA MEDICAL SYSTEMS, INC. (the "Company") standing in my name on the books of the Company represented by Certificate No. __________ and do hereby irrevocably constitute and appoint Wilson, Sonsini, Goodrich & Rosati, attorney, to transfer said stock on the books of the Company with full power of substitution in the premises. This Assignment Separate from Certificate may only be used in accordance with the Stock Purchase Agreement dated ___________, 1996. Dated:____________, 19__. Signature: ___________________________ Jack W. Schuler -10- 11 ELECTION UNDER SECTION 83(b) OF THE INTERNAL REVENUE CODE OF 1986 The undersigned taxpayer hereby elects, pursuant to the above-referenced Federal Tax Code, to include in his gross income for the current taxable year, the amount of any compensation taxable to him in connection with his receipt of the property described below: 1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows: NAME : TAXPAYER: Jack W. Schuler SPOUSE: ADDRESS : IDENTIFICATION NO. : TAXPAYER: SPOUSE: TAXABLE YEAR : 1996 2. The property with respect to which the election is made is described as follows: 408,333 shares of Common Stock (the "Shares"), with par value $0.001 per share, of VENTANA MEDICAL SYSTEMS, INC., a Delaware corporation (the "Company"). 3. The date on which the property was transferred is: ____________________. 4. The property is subject to the following restrictions: The Company has the right to repurchase a portion of the Shares upon the happening of certain events. This right of repurchase lapses with regard to a portion of the Shares over time. 5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $244,999.80. 6. The amount (if any) paid for such property: $244,999.80. The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property. The undersigned understands that the foregoing election may not be revoked except with the consent of the Commissioner. ________________________________ Dated: _________________________ Jack W. Schuler The undersigned spouse of taxpayer joins in this election. Dated: _________________________ __________________ Spouse of Taxpayer 12 EXHIBIT A PROMISSORY NOTE $219,999.80 ________, 1996 For value received, the undersigned promises to pay to Ventana Medical Systems, Inc., a Delaware corporation (the "Company"), or order, at its principal office the principal sum of $219,999.80 with interest thereon at the rate of 6.0% per annum compounded annually on the unpaid balance of the principal sum. Said principal and interest shall be due on February 26, 1998. Principal payable in lawful money of the United States of America. THE PRIVILEGE IS RESERVED TO PREPAY ANY PORTION OF THE NOTE AT ANY TIME. Should suit be commenced to collect this Note or any portion thereof, such sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The maker waives presentment for payment, protest, notice of protest, and notice of non-payment of this Note. This Note is secured by a pledge of certain shares of Common Stock of the Company, pursuant to the provisions of the Stock Purchase Agreement between the Company and the undersigned executed contemporaneously with this Note. The holder of this Note shall have full recourse against the maker, and shall not be required to proceed against the Shares or other collateral securing this Note in the event of default. ________________________________ Jack W. Schuler EX-10.5(A) 8 RESTRICTED STK PUR AGREE W/ PATIENCE - TRANCHE 1 1 EXHIBIT 10.5(a) [PATIENCE -- TRANCHE 1] VENTANA MEDICAL SYSTEMS, INC. STOCK PURCHASE AGREEMENT THIS AGREEMENT is made this 19th day of April, 1996 between Ventana Medical Systems, Inc., a Delaware corporation (the "Company"), and John Patience (the "Purchaser"). WHEREAS the Purchaser is a director of and consultant to the Company and the Purchaser's continued participation is considered by the Company to be important for the Company's continued growth; and WHEREAS in accordance with resolutions of the Company's board of directors adopted January 12, 1996 and pursuant to a letter agreement dated February 26, 1996 among the Company and Crabtree Partners, the Company is willing to sell to the Purchaser and the Purchaser desires to purchase 180,627 shares of Common Stock according to the terms and conditions contained in the 1988 Incentive Stock Option Plan (the "Plan") and herein. THEREFORE, the parties agree as follows: 1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and the Purchaser hereby agrees to purchase an aggregate of 180,627 shares of the Company's Common Stock (the "Shares"), at the price of $0.60 per share for an aggregate purchase price of $108,376.20. 2. Payment of Purchase Price. The purchase price for the Shares shall be paid by delivery to the Company at the time of execution of this Agreement of (i) a cash payment in the amount of $10,838.00 and (ii) a a duly executed full recourse promissory note (the "Note") in the form attached hereto as Exhibit A in the amount of $97,538.20 for the purchase of the Shares. (a) With respect to the Note, the parties agree to the following: (i) The Purchaser shall deliver to the Secretary of the Company as escrow holder (the "Escrow Holder") all certificates representing the Shares and an executed blank stock assignment for use in transferring all or a portion of said Shares to the Company if, as and when required under this Section 2(b) or under any other provision of this Agreement including Section 4. (ii) As security for the payment of the Note and any renewal, extension or modification thereof, the Purchaser hereby grants to the Company a security interest in and pledges with and delivers to the Company the certificate or certificates representing the Shares. (iii) In the event of any foreclosure of the security interest, the Company may sell the Shares at a private sale or may itself repurchase any or all of the Shares. The parties acknowledge that, prior to the establishment of a public market for the Shares of the Company, the 2 securities laws applicable to the sale of the Shares make a public sale of the Shares commercially unreasonable. The parties agree that the repurchasing of said Shares by the Company, or by any person to whom the Company may have assigned its rights hereunder, is commercially reasonable if made at a price per Share determined in accordance with the following provisions: The price per Share shall be a price set by the Board of Directors of the Company which will reflect the current value of the Shares in terms of present results of operations and future prospects of the Company. The Company shall notify the Purchaser or the Purchaser's executor or administrator of the price so determined within thirty (30) days after receipt by it of written notice of the transfer or proposed transfer of the Shares. If the Purchaser or the Purchaser's executor or administrator disputes the price as set by the Board of Directors by giving notice to the Company within ten (10) days after being informed of the price, the price of the Shares shall be determined by an independent financial analyst selected by the Board of Directors of the Company, with the cost of such determination to be divided equally between the Company and the Purchaser. The Board of Directors shall select such analyst within thirty (30) days after receipt of notice that the Purchaser is disputing the price set by the Board of Directors. If the Board is not notified of any such dispute within such ten (10) day period, the decision of the Board of Directors as to the purchase price shall be final. (iv) In the event of default in payment when due of any indebtedness under the Note, the Company may elect then, or at any time thereafter, to exercise all rights available to a secured party under the Delaware Uniform Commercial Code, including the right to sell the Shares at a private or public sale or repurchase the Shares as provided above. The proceeds of any sale shall be applied in the following order: (1) To pay all reasonable expenses of the Company in enforcing this Agreement, including without limitation reasonable attorneys' fees and legal expenses incurred by the Company. (2) In satisfaction of the remaining indebtedness under the Note. (3) To the Purchaser, any remaining proceeds. (v) Upon full payment by the Purchaser of all amounts due on Purchaser's Note, the Escrow Holder shall deliver to the Purchaser the certificate or certificates representing the Shares in the Escrow Holder's possession belonging to the Purchaser, the blank stock assignment, and the executed original of the Note marked "cancelled" by the Company, and the Escrow Holder shall be discharged of all further obligations hereunder; provided, however, that the Escrow Holder shall nevertheless retain said certificate or certificates and stock assignment as escrow agent if so required pursuant to other restrictions imposed pursuant to this Agreement. 3. Issuance of Shares. Upon receipt by the Company of the purchase price, the Company shall issue a duly executed certificate evidencing the Shares in the name of the Purchaser to be held in escrow until expiration of the Company's repurchase option as described in this Agreement. -2- 3 4. Repurchase Option. (a) In connection with this Agreement (including, in particular, this Section 4 hereof), the following definitions shall apply: "Liquidity Milestone Event" shall mean (i) a merger, consolidation or reorganization involving the Company or the sale of all or substantially all of the Company's assets in which (a) the shareholders of the Company immediately prior to such transaction own immediately after such transaction less than 50% of the outstanding voting securities of the surviving entity in such transaction (or its corporate parent) and (b) the holders of the Company's outstanding shares of Series C and Series D Preferred Stock receive consideration of at least $4.00 per share (based on the Company's capital structure as of February 26, 1996 and subject to proportionate adjustment for future stock splits, dividends or combinations), (ii) the completion by the Company of a firm commitment underwritten public offering of its Common Stock pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act") at a price to public of at least $4.00 per share (based on the Company's capital structure as of February 26, 1996 and subject to proportionate adjustment for future stock splits, dividends or combinations) or (iii) the last-reported sale price or closing market price of the Company's Common Stock on the principal securities exchange or market in which the Company's Common Stock is traded or listed being at least $4.00 per share (based on the Company's capital structure as of February 26, 1996 and subject to proportionate adjustment for future stock splits, dividends or combinations) for a period of 20 consecutive trading days. "Vesting Determination Date" shall mean February 26, 2002. (b) At any time from and after the date of this Agreement until the release of the Shares from the Company's repurchase option (which release shall be as set forth in Section 5), the Company will have an irrevocable, exclusive option to repurchase all or any portion of the Shares which have not been released from the repurchase option described in this Section 4 at the original purchase price per share ($0.60). Said repurchase option shall be exercised by the Company by written notice to the Purchaser or the Purchaser's executor (with a copy to the Escrow Holder) and, at the Company's option, (i) by delivery to the Purchaser or the Purchaser's executor or administrator with such notice of a check in the amount of the repurchase price for the Shares being repurchased, or (ii) by cancellation by the Company of an amount of the Purchaser's indebtedness to the Company equal to the repurchase price for the Shares being repurchased, or (iii) by a combination of (i) and (ii) so that the combined payment and cancellation of indebtedness equals such repurchase price. Upon delivery of such notice and the payment of the repurchase price in any of the ways described above, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interests therein or relating thereto, and the Company shall have the right to retain and transfer to its own name the number of Shares being repurchased by the Company. -3- 4 In addition, the decision to exercise the foregoing repurchase right shall require the approval, at a duly-noticed and held meeting of the Company's board of directors, of a majority of the directors of the Company in office at the time of such exercise (such majority shall be determined including the Purchaser (if the Purchaser is at the time of such exercise a director of the Company)) and the board of directors shall, concurrent with delivery of the items referred to in paragraph (b) above, deliver to the Purchaser a written statement setting forth the basis for the decision of the Company's board of directors to exercise such repurchase right. If requested by the Purchaser, the Company's board of directors will meet with the Purchaser to review such written statement and the basis for the determination to repurchase Shares set forth therein. (c) In the event that the Company at any time has an option to repurchase shares of the Purchaser's Common Stock pursuant to this Agreement and such repurchase would cause the Company to cease to qualify as a Qualified Small Business (as defined in Section 1202(d) of the Internal Revenue Code of 1986, as amended), the Purchaser will extend the time period during which the Company must complete such repurchase by a period of time which will enable the Company to complete such repurchase without ceasing to qualify as a Qualified Small Business. (d) Whenever the Company shall have the right to repurchase Shares hereunder, the Company may designate and assign one or more employees, officers, directors or shareholders of the Company or other persons or organizations to exercise all or a part of the Company's repurchase rights under this Agreement and purchase all or a part of such Shares. 5. Release of Shares From Repurchase Option. (a) All of the Shares shall be released from the Company's repurchase option described in Section 4 above on the first to occur of (i) a Liquidity Milestone Event or (ii) the Vesting Determination Date. (b) Certificate(s) representing the Shares which have been released from the Company's repurchase option described in Section 4 shall be delivered to the Purchaser at the Purchaser's request (see Section 7). 6. Restriction on Transfer. Except for the escrow described in Section 7 or transfer of the Shares to the Company or its assignees contemplated by this Agreement, none of the Shares or any beneficial interest therein shall be transferred, encumbered or otherwise disposed of in any way until the release of such Shares from the Company's repurchase option in accordance with the provisions of this Agreement. 7. Escrow of Shares. (a) The Shares issued under this Agreement shall be held by the Secretary of the Company as escrow holder ("Escrow Holder"), along with a stock assignment executed by the -4- 5 Purchaser in blank, until the expiration of the Company's option to repurchase such Shares as set forth above and full payment of the Note. (b) The Escrow Holder is hereby directed to permit transfer of the Shares only in accordance with this Agreement or instructions signed by both parties. In the event further instructions are desired by the Escrow Holder, he shall be entitled to rely upon directions executed by a majority of the authorized number of the Company's Board of Directors. The Escrow Holder shall have no liability for any act or omission hereunder while acting in good faith in the exercise of his own judgment. (c) If the Company or any assignee exercises its repurchase option hereunder, the Escrow Holder, upon receipt of written notice of such option exercise from the proposed transferee, shall take all steps necessary to accomplish such transfer. (d) When the repurchase option has been exercised or expires unexercised or a portion of the Shares has been released from such repurchase option, upon Purchaser's request the Escrow Holder shall promptly cause a new certificate to be issued for such released Shares and shall deliver such certificate to the Purchaser. (e) Subject to the terms hereof, the Purchaser shall have all the rights of a shareholder with respect to such Shares while they are held in escrow, including without limitation, the right to vote the Shares and receive any cash dividends declared thereon. If, from time to time during the term of the Company's repurchase option, there is (i) any stock dividend, stock split or other change in the Shares, or (ii) any merger or sale of all or substantially all of the assets or other acquisition of the Company, any and all new, substituted or additional securities to which the Purchaser is entitled by reason of the Purchaser's ownership of the Shares shall be immediately subject to this escrow, deposited with the Escrow Holder and included thereafter as "Shares" for purposes of this Agreement and the Company's repurchase option. 8. Investment Representations; Restriction on Transfer. (a) In connection with the purchase of the Shares, the Purchaser represents to the Company the following: (i) The Purchaser is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the securities. The Purchaser is purchasing these securities for investment for the Purchaser's own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act. (ii) The Purchaser understands that the securities have not been registered under the Securities Act by reason of a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Purchaser's investment intent as expressed -5- 6 herein. In this connection, the Purchaser understands that, in view of the Securities and Exchange Commission ("Commission"), the statutory basis for such exemption may not be present if the Purchaser's representations meant that the Purchaser's present intention was to hold these securities for a minimum capital gains period under the tax statutes, for a deferred sale, for a market rise, for a sale if the market does not rise, or for a year or any other fixed period in the future. (iii) The Purchaser further acknowledges and understands that the securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. The Purchaser further acknowledges and understands that the Company is under no obligation to register the securities. The Purchaser understands that the certificate evidencing the securities will be imprinted with a legend which prohibits the transfer of the securities unless they are registered or such registration is not required in the opinion of counsel for the Company. (iv) The Purchaser is familiar with the provisions of Rule 144, promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 144 requires among other things: (i) the availability of certain public information about the Company: (ii) the resale occurring not less than two years after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and (iii) in the case of an affiliate, or of a non-affiliate who has held the securities less than three years, the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable. The Purchaser further acknowledges that the Rule 144 holding period for the Shares will not begin to run until Purchaser either repays the Note or collateralizes the Note with collateral other than the Shares. The Purchaser further acknowledges that in the event all of the requirements of Rule 144 are not met, compliance with Regulation A or some other registration exemption will be required; and that although Rule 144 is not exclusive, the staff of the Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and other than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and the brokers who participate in the transactions do so at their own risk. (b) The Purchaser agrees, in connection with the Company's initial public offering of the Company's securities, (i) not to sell, make short sales of, loan, grant any options for the purchase of, or otherwise dispose of any shares of Common Stock of the Company held by the Purchaser (other than those shares included in the registration) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company's securities for one hundred eighty (180) days from the effective date of such registration and -6- 7 (ii) further agrees to execute any agreement reflecting (i) above as may be requested by the underwriters at the time of the public offering. 9. Legends. The share certificate evidencing the Shares issued hereunder shall be endorsed with the following legends (in addition to any legends required under applicable state securities laws): (a) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. (b) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. 10. Adjustment for Stock Split. All references to the number of Shares and the purchase price of the Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend or other change in the Shares which may be made by the Company after the date of this Agreement. 11. General Provisions. (a) This Agreement shall be governed by the internal laws of the State of Delaware. This Agreement represents the entire agreement between the parties with respect to the purchase of Common Stock by the Purchaser, may only be modified or amended in writing signed by both parties and satisfies all of the Company's obligations to the Purchaser with regard to the issuance or sale of securities. (b) Any notice, demand or request required or permitted to be given by either the Company or the Purchaser pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. Any notice to the Escrow Holder shall be sent to the Company's address with a copy to the other party not sending the notice. -7- 8 (c) The rights and benefits of the Company under this Agreement shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company's successors and assigns. The rights and obligations of the Purchaser under this Agreement may only be assigned with the prior written consent of the Company. (d) Either party's failure to enforce any provision or provisions of this Agreement shall not in any way be construed as a waiver of any such provision or provisions, nor prevent that party thereafter from enforcing each and every other provision of this Agreement. The rights granted both parties herein are cumulative and shall not constitute a waiver of either party's right to assert all other legal remedies available to it under the circumstances. (e) The Purchaser agrees upon request to execute any further documents or instruments necessary or desirable to carry out the purposes or intent of this Agreement. (f) The Purchaser understands that the Purchaser (and not the Company) shall be responsible for the Purchaser's own federal, state, local or foreign tax liability and any of the Purchaser's other tax consequences that may arise as a result of the transactions contemplated by this Agreement. The Purchaser shall rely solely on the determinations of the Purchaser's tax advisors or the Purchaser's own determinations, and not on any statements or representations by the Company or any of its agents, with regard to all such tax matters. The Purchaser shall notify the Company in writing if the Purchaser files an election pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, with the Internal Revenue Service within thirty (30) days from the date of the sale of the Shares hereunder. The Company intends, in the event it does not receive from the Purchaser evidence of such filing, to claim a tax deduction for any amount which would be taxable to the Purchaser in the absence of such an election. (g) Purchaser acknowledges receipt of a copy of the Plan, a copy of which is annexed hereto, represents that Purchaser is familiar with the terms and provisions thereof, and hereby accepts this Agreement subject to all of the terms and provisions thereof. The Purchaser has reviewed the Plan and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of the Agreement. The Purchaser hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board or of the Committee upon any questions arising under the Plan. The Purchaser further agrees to notify the Company upon any change in the residence address indicated below. -8- 9 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first set forth above. VENTANA MEDICAL SYSTEMS, INC. PURCHASER: /s/ JOHN PATIENCE ________________________________ John Patience By: /s/ R. MICHAEL RODGERS ___________________________ Title: Vice President and CFO _________________________
-9- 10 ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, John Patience, hereby sell, assign and transfer to _______________________________________________________________________ ________________________________________________________________ (________) shares of the Common Stock of VENTANA MEDICAL SYSTEMS, INC. (the "Company") standing in my name on the books of the Company represented by Certificate No. __________ and do hereby irrevocably constitute and appoint Wilson, Sonsini, Goodrich & Rosati, attorney, to transfer said stock on the books of the Company with full power of substitution in the premises. This Assignment Separate from Certificate may only be used in accordance with the Stock Purchase Agreement dated ___________, 1996. Dated:____________, 19__. Signature: ___________________________ John Patience -10- 11 ELECTION UNDER SECTION 83(b) OF THE INTERNAL REVENUE CODE OF 1986 The undersigned taxpayer hereby elects, pursuant to the above-referenced Federal Tax Code, to include in his gross income for the current taxable year, the amount of any compensation taxable to him in connection with his receipt of the property described below: 1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows: NAME : TAXPAYER: John Patience SPOUSE: ADDRESS : IDENTIFICATION NO. : TAXPAYER: SPOUSE: TAXABLE YEAR : 1996 2. The property with respect to which the election is made is described as follows: 180,627 shares of Common Stock (the "Shares"), with par value $0.001 per share, of VENTANA MEDICAL SYSTEMS, INC., a Delaware corporation (the "Company"). 3. The date on which the property was transferred is: ____________________. 4. The property is subject to the following restrictions: The Company has the right to repurchase a portion of the Shares upon the happening of certain events. This right of repurchase lapses with regard to a portion of the Shares over time. 5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $108,376.20. 6. The amount (if any) paid for such property: $108,376.20. The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property. The undersigned understands that the foregoing election may not be revoked except with the consent of the Commissioner. ________________________________ Dated: _________________________ John Patience The undersigned spouse of taxpayer joins in this election. Dated: _________________________ ______________________________ Spouse of Taxpayer 12 EXHIBIT A PROMISSORY NOTE $97,538.20 ________, 1996 For value received, the undersigned promises to pay to Ventana Medical Systems, Inc., a Delaware corporation (the "Company"), or order, at its principal office the principal sum of $97,538.20 with interest thereon at the rate of 6.0% per annum compounded annually on the unpaid balance of the principal sum. Said principal and interest shall be due on February 26, 1998. Principal payable in lawful money of the United States of America. THE PRIVILEGE IS RESERVED TO PREPAY ANY PORTION OF THE NOTE AT ANY TIME. Should suit be commenced to collect this Note or any portion thereof, such sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The maker waives presentment for payment, protest, notice of protest, and notice of non-payment of this Note. This Note is secured by a pledge of certain shares of Common Stock of the Company, pursuant to the provisions of the Stock Purchase Agreement between the Company and the undersigned executed contemporaneously with this Note. The holder of this Note shall have full recourse against the maker, and shall not be required to proceed against the Shares or other collateral securing this Note in the event of default. ________________________________ John Patience EX-10.5(B) 9 RESTRICTED STK PUR AGREE W/ PATIENCE - TRANCHE 2 1 EXHIBIT 10.5(b) [PATIENCE -- TRANCHE 3] VENTANA MEDICAL SYSTEMS, INC. STOCK PURCHASE AGREEMENT THIS AGREEMENT is made this 19th day of April, 1996 between Ventana Medical Systems, Inc., a Delaware corporation (the "Company"), and John Patience (the "Purchaser"). WHEREAS the Purchaser is a director of and consultant to the Company and the Purchaser's continued participation is considered by the Company to be important for the Company's continued growth; and WHEREAS in accordance with resolutions of the Company's board of directors adopted January 12, 1996 and pursuant to a letter agreement dated February 26, 1996 among the Company and Crabtree Partners, the Company is willing to sell to the Purchaser and the Purchaser desires to purchase 350,000 shares of Common Stock according to the terms and conditions contained in the 1988 Incentive Stock Option Plan (the "Plan") and herein. THEREFORE, the parties agree as follows: 1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and the Purchaser hereby agrees to purchase an aggregate of 350,000 shares of the Company's Common Stock (the "Shares"), at the price of $0.60 per share for an aggregate purchase price of $210,000.00. 2. Payment of Purchase Price. The purchase price for the Shares shall be paid by delivery to the Company at the time of execution of this Agreement of (i) a cash payment in the amount of $21,000.00 and (ii) a duly executed full recourse promissory note (the "Note") in the form attached hereto as Exhibit A in the amount of $189,000.00 for the purchase of the Shares. (a) With respect to the Note, the parties agree to the following: (i) The Purchaser shall deliver to the Secretary of the Company as escrow holder (the "Escrow Holder") all certificates representing the Shares and an executed blank stock assignment for use in transferring all or a portion of said Shares to the Company if, as and when required under this Section 2(b) or under any other provision of this Agreement including Section 4. (ii) As security for the payment of the Note and any renewal, extension or modification thereof, the Purchaser hereby grants to the Company a security interest in and pledges with and delivers to the Company the certificate or certificates representing the Shares. (iii) In the event of any foreclosure of the security interest, the Company may sell the Shares at a private sale or may itself repurchase any or all of the Shares. The parties acknowledge that, prior to the establishment of a public market for the Shares of the Company, the 2 securities laws applicable to the sale of the Shares make a public sale of the Shares commercially unreasonable. The parties agree that the repurchasing of said Shares by the Company, or by any person to whom the Company may have assigned its rights hereunder, is commercially reasonable if made at a price per Share determined in accordance with the the following provisions: The price per Share shall be a price set by the Board of Directors of the Company which will reflect the current value of the Shares in terms of present results of operations and future prospects of the Company. The Company shall notify the Purchaser or the Purchaser's executor or administrator of the price so determined within thirty (30) days after receipt by it of written notice of the transfer or proposed transfer of the Shares. If the Purchaser or the Purchaser's executor or administrator disputes the price as set by the Board of Directors by giving notice to the Company within ten (10) days after being informed of the price, the price of the Shares shall be determined by an independent financial analyst selected by the Board of Directors of the Company, with the cost of such determination to be divided equally between the Company and the Purchaser. The Board of Directors shall select such analyst within thirty (30) days after receipt of notice that the Purchaser is disputing the price set by the Board of Directors. If the Board is not notified of any such dispute within such ten (10) day period, the decision of the Board of Directors as to the purchase price shall be final. (iv) In the event of default in payment when due of any indebtedness under the Note, the Company may elect then, or at any time thereafter, to exercise all rights available to a secured party under the Delaware Uniform Commercial Code, including the right to sell the Shares at a private or public sale or repurchase the Shares as provided above. The proceeds of any sale shall be applied in the following order: (1) To pay all reasonable expenses of the Company in enforcing this Agreement, including without limitation reasonable attorneys' fees and legal expenses incurred by the Company. (2) In satisfaction of the remaining indebtedness under the Note. (3) To the Purchaser, any remaining proceeds. (v) Upon full payment by the Purchaser of all amounts due on Purchaser's Note, the Escrow Holder shall deliver to the Purchaser the certificate or certificates representing the Shares in the Escrow Holder's possession belonging to the Purchaser, the blank stock assignment, and the executed original of the Note marked "cancelled" by the Company, and the Escrow Holder shall be discharged of all further obligations hereunder; provided, however, that the Escrow Holder shall nevertheless retain said certificate or certificates and stock assignment as escrow agent if so required pursuant to other restrictions imposed pursuant to this Agreement. 3. Issuance of Shares. Upon receipt by the Company of the purchase price, the Company shall issue a duly executed certificate evidencing the Shares in the name of the Purchaser to be held in escrow until expiration of the Company's repurchase option as described in this Agreement. -2- 3 4. Repurchase Option. (a) In connection with this Agreement (including, in particular, Sections 4 and 5 hereof), the following definitions shall apply: "Liquidity Milestone Event" shall mean (i) a merger, consolidation or reorganization involving the Company or the sale of all or substantially all of the Company's assets in which (a) the shareholders of the Company immediately prior to such transaction own immediately after such transaction less than 50% of the outstanding voting securities of the surviving entity in such transaction (or its corporate parent) and (b) the holders of the Company's outstanding shares of Series C and Series D Preferred Stock receive consideration of at least $4.00 per share (based on the Company's capital structure as of February 26, 1996 and subject to proportionate adjustment for future stock splits, dividends or combinations), (ii) the completion by the Company of a firm commitment underwritten public offering of its Common Stock pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act") at a price to public of at least $4.00 per share (based on the Company's capital structure as of February 26, 1996 and subject to proportionate adjustment for future stock splits, dividends or combinations) or (iii) the last-reported sale price or closing market price of the Company's Common Stock on the principal securities exchange or market in which the Company's Common Stock is traded or listed being at least $4.00 per share (based on the Company's capital structure as of February 26, 1996 and subject to proportionate adjustment for future stock splits, dividends or combinations) for a period of 20 consecutive trading days. "Vesting Commencement Date" shall mean February 26, 1996. "Vesting Determination Date" shall mean February 26, 2002. "Working Time Requirement" shall mean the devotion by the Purchaser of at least 50% of the Purchaser's professional working time to matters related to the Company on a cumulative average basis during each time period commencing on the Vesting Commencement Date and ending on each date that Shares are to be released from the Company's repurchase option pursuant to Section 5 hereof. (b) At any time from and after the date of this Agreement until the release of the Shares from the Company's repurchase option (which release shall be as set forth in Section 5), the Company will have an irrevocable, exclusive option to repurchase all or any portion of the Shares which have not been released from the repurchase option described in this Section 4 at the original purchase price per share ($0.60). Said repurchase option shall be exercised by the Company by written notice to the Purchaser or the Purchaser's executor (with a copy to the Escrow Holder) and, at the Company's option, (i) by delivery to the Purchaser or the Purchaser's executor or administrator with such notice of a check in the amount of the repurchase price for the Shares being repurchased, or (ii) by cancellation by the Company of an amount of the Purchaser's indebtedness to the Company equal to the repurchase price for the Shares being repurchased, or (iii) by a combination of (i) and (ii) -3- 4 so that the combined payment and cancellation of indebtedness equals such repurchase price. Upon delivery of such notice and the payment of the repurchase price in any of the ways described above, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interests therein or relating thereto, and the Company shall have the right to retain and transfer to its own name the number of Shares being repurchased by the Company. In addition, the decision to exercise the foregoing repurchase right shall require the approval, at a duly-noticed and held meeting of the Company's board of directors, of a majority of the directors of the Company in office at the time of such exercise (such majority shall be determined including the Purchaser (if the Purchaser is at the time of such exercise a director of the Company)) and the board of directors shall, concurrent with delivery of the items referred to in paragraph (b) above, deliver to the Purchaser a written statement setting forth the basis for the decision of the Company's board of directors to exercise such repurchase right. If requested by the Purchaser, the Company's board of directors will meet with the Purchaser to review such written statement and the basis for the determination to repurchase Shares set forth therein. (c) In the event that the Company at any time has an option to repurchase shares of the Purchaser's Common Stock pursuant to this Agreement and such repurchase would cause the Company to cease to qualify as a Qualified Small Business (as defined in Section 1202(d) of the Internal Revenue Code of 1986, as amended), the Purchaser will extend the time period during which the Company must complete such repurchase by a period of time which will enable the Company to complete such repurchase without ceasing to qualify as a Qualified Small Business. (d) Whenever the Company shall have the right to repurchase Shares hereunder, the Company may designate and assign one or more employees, officers, directors or shareholders of the Company or other persons or organizations to exercise all or a part of the Company's repurchase rights under this Agreement and purchase all or a part of such Shares. 5. Release of Shares From Repurchase Option. (a) Upon the occurrence of a Liquidity Milestone Event, an amount of Shares equal to 17,014 Shares for each full month since the Vesting Commencement Date that the Purchaser has satisfied the Working Time Requirement shall be released from the Company's repurchase option described in Section 4 hereof. Thereafter, an additional 17,014 Shares shall be released from the Company's repurchase option described in Section 4 above at the end of full month until all Shares have been released; provided that on each such date of release of Shares from the Company's repurchase option the Purchaser has satisfied the Working Time Requirement. (b) On the Vesting Determination Date, any Shares not previously repurchased by the Company upon exercise of its repurchase option or not released from the Company's repurchase option shall thereupon be released from such repurchase option. -4- 5 (c) Certificate(s) representing the Shares which have been released from the Company's repurchase option described in Section 4 shall be delivered to the Purchaser at the Purchaser's request (see Section 7). 6. Restriction on Transfer. Except for the escrow described in Section 7 or transfer of the Shares to the Company or its assignees contemplated by this Agreement, none of the Shares or any beneficial interest therein shall be transferred, encumbered or otherwise disposed of in any way until the release of such Shares from the Company's repurchase option in accordance with the provisions of this Agreement. 7. Escrow of Shares. (a) The Shares issued under this Agreement shall be held by the Secretary of the Company as escrow holder ("Escrow Holder"), along with a stock assignment executed by the Purchaser in blank, until the expiration of the Company's option to repurchase such Shares as set forth above and full payment of the Note. (b) The Escrow Holder is hereby directed to permit transfer of the Shares only in accordance with this Agreement or instructions signed by both parties. In the event further instructions are desired by the Escrow Holder, he shall be entitled to rely upon directions executed by a majority of the authorized number of the Company's Board of Directors. The Escrow Holder shall have no liability for any act or omission hereunder while acting in good faith in the exercise of his own judgment. (c) If the Company or any assignee exercises its repurchase option hereunder, the Escrow Holder, upon receipt of written notice of such option exercise from the proposed transferee, shall take all steps necessary to accomplish such transfer. (d) When the repurchase option has been exercised or expires unexercised or a portion of the Shares has been released from such repurchase option, upon Purchaser's request the Escrow Holder shall promptly cause a new certificate to be issued for such released Shares and shall deliver such certificate to the Purchaser. (e) Subject to the terms hereof, the Purchaser shall have all the rights of a shareholder with respect to such Shares while they are held in escrow, including without limitation, the right to vote the Shares and receive any cash dividends declared thereon. If, from time to time during the term of the Company's repurchase option, there is (i) any stock dividend, stock split or other change in the Shares, or (ii) any merger or sale of all or substantially all of the assets or other acquisition of the Company, any and all new, substituted or additional securities to which the Purchaser is entitled by reason of the Purchaser's ownership of the Shares shall be immediately subject to this escrow, deposited with the Escrow Holder and included thereafter as "Shares" for purposes of this Agreement and the Company's repurchase option. -5- 6 8. Investment Representations; Restriction on Transfer. (a) In connection with the purchase of the Shares, the Purchaser represents to the Company the following: (i) The Purchaser is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the securities. The Purchaser is purchasing these securities for investment for the Purchaser's own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act. (ii) The Purchaser understands that the securities have not been registered under the Securities Act by reason of a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Purchaser's investment intent as expressed herein. In this connection, the Purchaser understands that, in view of the Securities and Exchange Commission ("Commission"), the statutory basis for such exemption may not be present if the Purchaser's representations meant that the Purchaser's present intention was to hold these securities for a minimum capital gains period under the tax statutes, for a deferred sale, for a market rise, for a sale if the market does not rise, or for a year or any other fixed period in the future. (iii) The Purchaser further acknowledges and understands that the securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. The Purchaser further acknowledges and understands that the Company is under no obligation to register the securities. The Purchaser understands that the certificate evidencing the securities will be imprinted with a legend which prohibits the transfer of the securities unless they are registered or such registration is not required in the opinion of counsel for the Company. (iv) The Purchaser is familiar with the provisions of Rule 144, promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 144 requires among other things: (i) the availability of certain public information about the Company: (ii) the resale occurring not less than two years after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and (iii) in the case of an affiliate, or of a non-affiliate who has held the securities less than three years, the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable. The Purchaser further acknowledges that the Rule 144 holding period for the Shares will not begin to run until Purchaser either repays the Note or collateralizes the Note with collateral other than the Shares. -6- 7 The Purchaser further acknowledges that in the event all of the requirements of Rule 144 are not met, compliance with Regulation A or some other registration exemption will be required; and that although Rule 144 is not exclusive, the staff of the Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and other than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and the brokers who participate in the transactions do so at their own risk. (b) The Purchaser agrees, in connection with the Company's initial public offering of the Company's securities, (i) not to sell, make short sales of, loan, grant any options for the purchase of, or otherwise dispose of any shares of Common Stock of the Company held by the Purchaser (other than those shares included in the registration) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company's securities for one hundred eighty (180) days from the effective date of such registration and (ii) further agrees to execute any agreement reflecting (i) above as may be requested by the underwriters at the time of the public offering. 9. Legends. The share certificate evidencing the Shares issued hereunder shall be endorsed with the following legends (in addition to any legends required under applicable state securities laws): (a) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. (b) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. 10. Adjustment for Stock Split. All references to the number of Shares and the purchase price of the Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend or other change in the Shares which may be made by the Company after the date of this Agreement. 11. General Provisions. (a) This Agreement shall be governed by the internal laws of the State of Delaware. This Agreement represents the entire agreement between the parties with respect to the -7- 8 purchase of Common Stock by the Purchaser, may only be modified or amended in writing signed by both parties and satisfies all of the Company's obligations to the Purchaser with regard to the issuance or sale of securities. (b) Any notice, demand or request required or permitted to be given by either the Company or the Purchaser pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. Any notice to the Escrow Holder shall be sent to the Company's address with a copy to the other party not sending the notice. (c) The rights and benefits of the Company under this Agreement shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company's successors and assigns. The rights and obligations of the Purchaser under this Agreement may only be assigned with the prior written consent of the Company. (d) Either party's failure to enforce any provision or provisions of this Agreement shall not in any way be construed as a waiver of any such provision or provisions, nor prevent that party thereafter from enforcing each and every other provision of this Agreement. The rights granted both parties herein are cumulative and shall not constitute a waiver of either party's right to assert all other legal remedies available to it under the circumstances. (e) The Purchaser agrees upon request to execute any further documents or instruments necessary or desirable to carry out the purposes or intent of this Agreement. (f) The Purchaser understands that the Purchaser (and not the Company) shall be responsible for the Purchaser's own federal, state, local or foreign tax liability and any of the Purchaser's other tax consequences that may arise as a result of the transactions contemplated by this Agreement. The Purchaser shall rely solely on the determinations of the Purchaser's tax advisors or the Purchaser's own determinations, and not on any statements or representations by the Company or any of its agents, with regard to all such tax matters. The Purchaser shall notify the Company in writing if the Purchaser files an election pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, with the Internal Revenue Service within thirty (30) days from the date of the sale of the Shares hereunder. The Company intends, in the event it does not receive from the Purchaser evidence of such filing, to claim a tax deduction for any amount which would be taxable to the Purchaser in the absence of such an election. (g) Purchaser acknowledges receipt of a copy of the Plan, a copy of which is annexed hereto, represents that Purchaser is familiar with the terms and provisions thereof, and hereby accepts this Agreement subject to all of the terms and provisions thereof. The Purchaser has -8- 9 reviewed the Plan and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of the Agreement. The Purchaser hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board or of the Committee upon any questions arising under the Plan. The Purchaser further agrees to notify the Company upon any change in the residence address indicated below. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first set forth above. VENTANA MEDICAL SYSTEMS, INC. PURCHASER: /s/ JOHN PATIENCE -------------------------------- John Patience By: /s/ MICHAEL RODGERS --------------------------- Michael Rodgers Title: Vice President and CFO ------------------------
-9- 10 ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, John Patience, hereby sell, assign and transfer to _______________________________________________________________________ ________________________________________________________________ (________) shares of the Common Stock of VENTANA MEDICAL SYSTEMS, INC. (the "Company") standing in my name on the books of the Company represented by Certificate No. __________ and do hereby irrevocably constitute and appoint Wilson, Sonsini, Goodrich & Rosati, attorney, to transfer said stock on the books of the Company with full power of substitution in the premises. This Assignment Separate from Certificate may only be used in accordance with the Stock Purchase Agreement dated ___________, 1996. Dated:____________, 19__. Signature: ___________________________ John Patience -10- 11 ELECTION UNDER SECTION 83(b) OF THE INTERNAL REVENUE CODE OF 1986 The undersigned taxpayer hereby elects, pursuant to the above-referenced Federal Tax Code, to include in his gross income for the current taxable year, the amount of any compensation taxable to him in connection with his receipt of the property described below: 1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows: NAME : TAXPAYER: John Patience SPOUSE: ADDRESS : IDENTIFICATION NO. : TAXPAYER: SPOUSE: TAXABLE YEAR : 1996 2. The property with respect to which the election is made is described as follows: 350,000 shares of Common Stock (the "Shares"), with par value $0.001 per share, of VENTANA MEDICAL SYSTEMS, INC., a Delaware corporation (the "Company"). 3. The date on which the property was transferred is: ____________________. 4. The property is subject to the following restrictions: The Company has the right to repurchase a portion of the Shares upon the happening of certain events. This right of repurchase lapses with regard to a portion of the Shares over time. 5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $210,000.00. 6. The amount (if any) paid for such property: $210,000.00. The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property. The undersigned understands that the foregoing election may not be revoked except with the consent of the Commissioner. ________________________________ Dated: _________________________ John Patience The undersigned spouse of taxpayer joins in this election. Dated: _________________________ ______________________________ Spouse of Taxpayer 12 EXHIBIT A PROMISSORY NOTE $189,000.00 ________, 1996 For value received, the undersigned promises to pay to Ventana Medical Systems, Inc., a Delaware corporation (the "Company"), or order, at its principal office the principal sum of $189,000.00 with interest thereon at the rate of 6.0% per annum compounded annually on the unpaid balance of the principal sum. Said principal and interest shall be due on February 26, 1998. Principal payable in lawful money of the United States of America. THE PRIVILEGE IS RESERVED TO PREPAY ANY PORTION OF THE NOTE AT ANY TIME. Should suit be commenced to collect this Note or any portion thereof, such sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The maker waives presentment for payment, protest, notice of protest, and notice of non-payment of this Note. This Note is secured by a pledge of certain shares of Common Stock of the Company, pursuant to the provisions of the Stock Purchase Agreement between the Company and the undersigned executed contemporaneously with this Note. The holder of this Note shall have full recourse against the maker, and shall not be required to proceed against the Shares or other collateral securing this Note in the event of default. ________________________________ John Patience EX-10.7(A) 10 1988 STOCK OPTION PLAN FORMS AND AGREEMENTS 1 EXHIBIT 10.7(a) VENTANA MEDICAL SYSTEMS, INC. 1988 STOCK OPTION PLAN 1. Purposes of the Plan. The purposes of this Stock Option Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to the Employees of the Company and to promote the success of the Company's business. All Options granted hereunder shall be Incentive Stock Options, as reflected in the terms of the written option agreement. 2. Definitions. As used herein, the following definitions shall apply: (a) "Board" shall mean the Committee, if one has been appointed, or the Board of Directors of the Company, if no Committee is appointed. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Committee" shall mean the Committee appointed by the Board of Directors in accordance with paragraph (a) of Section 4 of the Plan, if one is appointed. (d) "Common Stock" shall mean the Common Stock of the Company. (e) "Company" shall mean Ventana Medical Systems, Inc., a Delaware corporation. (f) "Continuous Status as an Employee" shall mean the absence of any interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of sick leave, military leave, or any other leave of absence approved by the Board; provided that such leave is for a period of not more than 90 days or reemployment upon the expiration of such leave is guaranteed by contract or statute. (g) "Employee" shall mean any person, including officers and directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. (h) "Incentive Stock Option" shall mean an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. (i) "Option" shall mean a stock option granted pursuant to the Plan. (j) "Optioned Stock" shall mean the Common Stock subject to an Option. (k) "Optionee" shall mean an Employee who receives an Option. 2 (l) "Parent" shall mean a "parent corporation", whether now or hereafter existing, as defined in Section 424(e) of the Code. (m) "Plan" shall mean this 1988 Stock Option Plan. (n) "Share" shall mean a share of the Common Stock, as adjusted in accordance with Section 11 of the Plan. (o) "Subsidiary" shall mean a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 11 of the Plan, the maximum aggregate number of shares which may be optioned and sold under the Plan is 3,625,000 shares of Common Stock. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. Notwithstanding any other provision of the Plan, shares issued under the Plan and later repurchased by the Company shall not become available for future grant or sale under the Plan. 4. Administration of the Plan. (a) Procedure. The Plan shall be administered by the Board of Directors of the Company. (i) Subject to subparagraph (ii), the Board of Directors may appoint a Committee consisting of not less than two members of the Board of Directors to administer the Plan on behalf of the Board of Directors, subject to such terms and conditions as the Board of Directors may prescribe. Once appointed, the Committee shall continue to serve until otherwise directed by the Board of Directors. Members of the Board who are either eligible for Options or have been granted Options may vote on any matters affecting the administration of the Plan or the grant of any Options pursuant to the Plan, except that no such member shall act upon the granting of an Option to himself, but any such member may be counted in determining the existence of a quorum at any meeting of the Board during which action is taken with respect to the granting of Options to him. (ii) Notwithstanding the foregoing subparagraph (i), if and in any event the Company registers any class of any equity security pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from the effective date of such registration until six months after the termination of such registration, any grants of Options to officers or directors shall only be made by the Board of Directors; provided, however, that if a majority of the Board of Directors is eligible to participate in this Plan or any other stock option or other stock plan of the Company or any of its affiliates, or has been eligible at any time within the preceding year, any grants of Options to directors must be made by, or only in accordance with the recommendation of, a -2- 3 Committee consisting of three or more persons, who may but need not be directors or employees of the Company, appointed by the Board of Directors and having full authority to act in the matter, none of whom is eligible to participate in this Plan or any other stock option or other stock plan of the Company or any of its affiliates, or has been eligible at any time within the preceding year. Any Committee administering the Plan with respect to grants to officers who are not also directors shall conform to the requirements of the preceding sentence. Once appointed, the Committee shall continue to serve until otherwise directed by the Board of Directors. (iii) Subject to the foregoing subparagraphs (i) and (ii), from time to time the Board of Directors may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. (b) Powers of the Board. Subject to the provisions of the Plan, the Board shall have the authority, in its discretion: (i) to grant Incentive Stock Options; (ii) to determine, upon review of relevant information and in accordance with Section 8(b) of the Plan, the fair market value of the Common Stock; (iii) to determine the exercise price per share of Options to be granted, which exercise price shall be determined in accordance with Section 8(a) of the Plan; (iv) to determine the Employees to whom, and the time or times at which, Options shall be granted and the number of shares to be represented by each Option; (v) to interpret the Plan; (vi) to prescribe, amend and rescind rules and regulations relating to the Plan; (vii) to determine the terms and provisions of each Option granted (which need not be identical) and, with the consent of the holder thereof, modify or amend each Option; (viii) to accelerate or defer (with the consent of the Optionee) the exercise date of any Option, consistent with the provisions of Section 5 of the Plan; (ix) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted by the Board; and (x) to make all other determinations deemed necessary or advisable for the administration of the Plan. (c) Effect of Board's Decision. All decisions, determinations and interpretations of the Board shall be final and binding on all Optionees and any other holders of any Options granted under the Plan. 5. Eligibility. (a) Incentive Stock Options may be granted only to Employees. An Employee who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options. (b) No Incentive Stock Option may be granted to an Employee which, when aggregated with all other incentive stock options granted to such Employee by the Company or any Parent or Subsidiary, would result in Shares having an aggregate fair market value (determined for each Share as of the date of grant of the Option covering such Share) in excess of $100,000 becoming first available for purchase upon exercise of one or more incentive stock options during any calendar year. -3- 4 (c) Section 5(b) of the Plan shall apply only to an Incentive Stock Option evidenced by an "Incentive Stock Option Agreement" which sets forth the intention of the Company and the Optionee that such Option shall qualify as an incentive stock option. (d) The Plan shall not confer upon any Optionee any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with his right or the Company's right to terminate his employment or consulting relationship at any time, with or without cause. 6. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Company as described in Section 17 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 13 of the Plan. 7. Term of Option. The term of each Incentive Stock Option shall be ten (10) years from the date of grant thereof or such shorter term as may be provided in the Incentive Stock Option Agreement. However, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Incentive Stock Option Agreement. 8. Exercise Price and Consideration. (a) The per Share exercise price for the Shares to be issued pursuant to exercise of an Incentive Stock Option shall be such price as is determined by the Board, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the fair market value per Share on the date of grant. (B) granted to any Employee, the per Share exercise price shall be no less than 100% of the fair market value per Share on the date of grant. (ii) In the case of an Option granted on or after the effective date of registration of any class of equity security of the Company pursuant to Section 12 of the Exchange Act and prior to six months after the termination of such registration, the per Share exercise price shall be no less than 100% of the fair market value per Share on the date of grant. (b) The fair market value shall be determined by the Board in its discretion; provided, however, that where there is a public market for the Common Stock, the fair market value -4- 5 per Share shall be the mean of the bid and asked prices (or the closing price per share if the Common Stock is listed on the National Association of Securities Dealers Automated Quotation ("NASDAQ") National Market System) of the Common Stock for the date of grant, as reported in The Wall Street Journal (or, if not so reported, as otherwise reported by the NASDAQ System) or, in the event the Common Stock is listed on a stock exchange, the fair market value per Share shall be the closing price on such exchange on the date of grant of the Option, as reported in The Wall Street Journal. (c) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Board and may consist entirely of cash, check, promissory note, other Shares of Common Stock having a fair market value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, or any combination of such methods of payment, or such other consideration and method of payment for the issuance of Shares to the extent permitted under Section 153 of the Delaware General Corporation Law. 9. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Board, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Board, consist of any consideration and method of payment allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Status as an Employee. (i) In the event of termination of an Optionee's Continuous Status as an Employee, such Optionee may, but only within thirty (30) days (or such other period of time, not -5- 6 exceeding three (3) months in the case of an Incentive Stock Option, as is determined by the Board, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) after the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise the Optionee's Option to the extent that the Optionee was entitled to exercise it at the date of such termination. To the extent that the Optionee was not entitled to exercise the Option at the date of such termination, or if the Optionee does not exercise such Option (which the Optionee was entitled to exercise) within the time specified herein, the Option shall terminate. (ii) In the event of any voluntary or involuntary termination of an Optionee's Continuous Status as an Employee, for any reason or no reason, the Company shall have, upon the date of such termination (as reasonably fixed and determined by the Company), an irrevocable, exclusive option ("Repurchase Option") for a period of one hundred and twenty (120) days from such date to repurchase at fair market value (as determined in accordance with Section 8(b) above) all or any portion of the Shares then or thereafter issued to such Optionee upon exercise of an Option. The Company may exercise its Repurchase Option by giving written notice to the Optionee and, at the option of the Company, (A) by delivering to Optionee a check in the amount of the repurchase price for the Shares being repurchased, or (B) by cancelling such of Optionee's indebtedness to the Company equal to the repurchase price for the Shares being repurchased, or (C) a combination of (A) and (B) equal to the repurchase price for the Shares being repurchased. Upon delivery of such notice and payment of the repurchase price, the Company shall become the legal and beneficial owner of the Shares being repurchased (and all rights and interests relating thereto) and shall have the right to transfer to its own name the number of Shares being repurchased. Notwithstanding the foregoing, whenever the Company shall have the right to repurchase Shares under this paragraph, the Company may designate and assign one or more employees, officers, directors or shareholders of the Company or other persons or organizations to exercise all or a part of the Repurchase Option and purchase all or a part of such Shares. (c) Disability of Optionee. Notwithstanding the provisions of Section 9(b) above, in the event of termination of an Optionee's Continuous Status as an Employee as a result of the Optionee's total and permanent disability (as defined in Section 22(e)(3) of the Code), the Optionee may, but only within six (6) months (or such other period of time not exceeding twelve (12) months as is determined by the Board, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) from the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent the Optionee was entitled to exercise it at the date of such termination. To the extent that the Optionee was not entitled to exercise the Option at the date of termination, or if the Optionee does not exercise such Option (which the Optionee was entitled to exercise) within the time specified herein, the Option shall terminate. (d) Death of Optionee. In the event of the death of an Optionee: (i) during the term of the Option who is at the time of death an Employee of the Company and who shall have been in Continuous Status as an Employee since the date of grant of the Option, the Option may be exercised, at any time within six (6) months following the date of -6- 7 death (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had the Optionee continued living and remained in Continuous Status as an Employee six (6) months after the date of death, subject to the limitation set forth in Section 5(b); or (ii) within thirty (30) days (or such other period of time not exceeding three (3) months as is determined by the Board, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) after the termination of Continuous Status as an Employee, the Option may be exercised, at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. (e) Forfeiture of Option. Should (i) an Optionee's Continuous Status as an Employee be terminated for misconduct (which includes, but is not limited to, any act of dishonesty, moral turpitude, fraud or embezzlement), (ii) an Optionee make any unauthorized use or disclosure of confidential information or trade secrets of the Company, its Parent or any Subsidiary, or (iii) an Optionee otherwise act in such a manner not in the best interests of the Company (as reasonably determined by the Company's Board of Directors), then, notwithstanding any other provision in this Plan to the contrary, in any such event all outstanding Options held by such Optionee shall terminate immediately and cease to be outstanding. 10. Non-Transferability of Options. The Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 11. Adjustments Upon Changes in Capitalization or Merger. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. -7- 8 In the event of the proposed dissolution or liquidation of the Company, the Option will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Board and give each Optionee the right to exercise the Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, the Option shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the Optionee shall have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. If the Board makes an Option fully exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify the Optionee that the Option shall be fully exercisable for a period of thirty (30) days from the date of such notice, and the Option will terminate upon the expiration of such period. 12. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date on which the Board makes the determination granting such Option. Notice of the determination shall be given to each Employee to whom an Option is so granted within a reasonable time after the date of such grant. 13. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable; provided that, the following revisions or amendments shall require approval of the shareholders of the Company in the manner described in Section 17 of the Plan: (i) any increase in the number of Shares subject to the Plan, other than in connection with an adjustment under Section 11 of the Plan; (ii) any change in the designation of the class of persons eligible to be granted Options; or (iii) if the Company has a class of equity securities registered under Section 12 of the Exchange Act at the time of such revision or amendment, any material increase in the benefits accruing to participants under the Plan. (b) Shareholder Approval. If any amendment requiring shareholder approval under Section 13(a) of the Plan is made subsequent to the first registration of any class of equity securities by the Company under Section 12 of the Exchange Act, such shareholder approval shall be solicited as described in Section 17 of the Plan. (c) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect -8- 9 as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 15. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 16. Option Agreement. Options shall be evidenced by written option agreements in such form as the Board shall approve. 17. Shareholder Approval. (a) Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. If such shareholder approval is obtained at a duly held shareholders' meeting, it must be obtained by the affirmative vote of the holders of a majority of the outstanding shares of the Company, or if such shareholder approval is obtained by written consent, it must be obtained by written consent of a majority of all shareholders of the Company; provided, however, that approval at a meeting or by written consent may be obtained by a lesser degree of shareholder approval if the Board determines, in its discretion after consultation with the Company's legal counsel, that such a lesser degree of shareholder approval will comply with all applicable laws and will not adversely affect the qualification of the Plan under Section 422A of the Code. (b) If and in the event that the Company registers any class of equity securities pursuant to Section 12 of the Exchange Act, any required approval of the shareholders of the -9- 10 Company obtained after such registration shall be solicited substantially in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder. (c) If any required approval by the shareholders of the Plan itself or of any amendment thereto is solicited at any time otherwise than in the manner described in Section 17(b) hereof, then the Company shall, at or prior to the first annual meeting of shareholders held subsequent to the later of (1) the first registration of any class of equity securities of the Company under Section 12 of the Exchange Act or (2) the granting of an Option hereunder to an officer or director after such registration, do the following: (i) furnish in writing to the holders entitled to vote for the Plan substantially the same information which would be required (if proxies to be voted with respect to approval or disapproval of the Plan or amendment were then being solicited) by the rules and regulations in effect under Section 14(a) of the Exchange Act at the time such information is furnished; and (ii) file with, or mail for filing to, the Securities and Exchange Commission four copies of the written information referred to in subsection (i) hereof not later than the date on which such information is first sent or given to shareholders. 18. Information to Optionees. The Company shall provide to each Optionee, during the period for which such Optionee has one or more Options outstanding, copies of all annual reports and other information which are provided to all shareholders of the Company. The Company shall not be required to provide such information if the issuance of Options under the Plan is limited to key employees whose duties in connection with the Company assure their access to equivalent information. -10- 11 THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. INCENTIVE STOCK OPTION AGREEMENT VENTANA MEDICAL SYSTEMS, INC., a Delaware corporation (the "Company"), hereby grants to ___________ (the "Optionee") an Option to purchase a total of ___________ shares of Common Stock (the "Shares"), at the price determined as provided herein, and in all respects subject to the terms, definitions and provisions of the 1988 Stock Option Plan (the "Plan") adopted by the Company, which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings herein. 1. Nature of the Option. This Option is intended to qualify as a Incentive Stock Option as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Exercise Price. The exercise price is $__________ for each share of Common Stock, which price is not less than the fair market value per share of Common Stock on the date of grant, as determined by the Board; provided, however, in the event Optionee is an Employee and owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of its Parent or Subsidiary corporations immediately before this Option is granted, said exercise price is not less than one hundred ten percent (110%) of the fair market value per share of Common Stock on the date of grant as determined by the Board. 3. Exercise of Option. This Option shall be exercisable during its term in accordance with the provisions of Section 9 of the Plan as follows. (i) Right to Exercise (a) Subject to Subsections 3(i)(b), (c), (d) and (e) below, twelve forty-eighths (12/48ths) of the total number of shares subject to this Option shall become exercisable one year following __________ and an additional one forty-eighth (1/48th) of the shares shall become exercisable each full month thereafter until all of such shares are exercisable. (b) This Option may not be exercised for a fraction of a Share. (c) In the event of Optionee's death, disability or other termination of employment, the exercisability of the Option is governed by Sections 7, 8 and 9 below, subject to the limitations contained in subsections 3(i)(d) and (e). (d) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in Section 12 below. 12 (e) In no event may this Option become exercisable at a time or times which, when this Option is aggregated with all other incentive stock options granted to Optionee by the Company or any Parent or Subsidiary, would result in Shares having an aggregate fair market value (determined for each Share as of the date of grant of the option covering such share) in excess of $100,000 becoming first available for purchase upon exercise of one or more incentive stock options during any calendar year. (f) Should (i) Optionee's Continuous Status as an Employee be terminated for misconduct (which includes, but is not limited to, any act of dishonesty, moral turpitude, fraud or embezzlement), (ii) Optionee make any unauthorized use or disclosure of confidential information or trade secrets of the Company, its Parent or any Subsidiary, or (iii) Optionee otherwise act in such a manner not in the best interests of the Company (as reasonably determined by the Company's Board of Directors), then, notwithstanding any other provision in this Agreement or the Plan to the contrary, in any such event this Option shall terminate immediately and cease to be outstanding. (ii) Method of Exercise. This Option shall be exercisable by written notice which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by Optionee and shall be delivered in person or by certified mail to the President, Secretary or Chief Financial Officer of the Company. The written notice shall be accompanied by payment of the exercise price. No shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. 4. Investment Representations; Restrictions on Transfer. (i) By receipt of this Option, by its execution and by its exercise in whole or in part, Optionee represents to the Company the following: (a) Optionee understands that this Option and any Shares purchased upon its exercise are securities, the issuance of which requires compliance with federal and state securities laws. (b) Optionee is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the securities. Optionee is acquiring these securities for investment for Optionee's own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). (c) Optionee acknowledges and understands that the securities constitute "restricted securities" under the Securities Act and must be held indefinitely unless they are subsequently -2- 13 registered under the Securities Act or an exemption from such registration is available. Optionee further acknowledges and understands that the Company is under no obligation to register the securities. Optionee understands that the certificate evidencing the securities will be imprinted with a legend which prohibits the transfer of the securities unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company and any other legend required under applicable state securities laws. (d) Optionee is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of exercise of the Option by the Optionee, such exercise will be exempt from registration under the Securities Act. In the event the Company later becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter the securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including among other things: (1) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about the Company, and the amount of securities being sold during any three month period not exceeding the limitations specified in Rule 144(e), if applicable. Notwithstanding this paragraph 4(i)(d), the Optionee acknowledges and agrees to the restrictions set forth in paragraph 4(ii). In the event that the Company does not qualify under Rule 701 at the time of exercise of the Option, then the securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires among other things: (1) the availability of certain public information about the Company: (2) the resale occurring not less than two years after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and (3) in the case of an affiliate, or of a non-affiliate who has held the securities less than three years, the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable. (ii) Optionee agrees, in connection with the Company's initial underwritten public offering of the Company's securities, (1) not to sell, make short sale of, loan, grant any options for the purchase of, or otherwise dispose of any shares of Common Stock of the Company held by Optionee (other than those shares included in the registration) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company's securities for one hundred eighty (180) days from the effective date of such registration, and (2) further agrees to execute any agreement reflecting (1) above as may be requested by the underwriters at the time of the public offering. 5. Method of Payment. Payment of the purchase price shall be made by cash or check. 6. Restrictions on Exercise. This Option may not be exercised if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a -3- 14 violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations (Regulation G) as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 7. Termination of Status as an Employee. In the event of termination of Optionee's Continuous Status as an Employee, Optionee may, but only within thirty (30) days after the date of such termination (but in no event later than the date of expiration of the term of this Option as set forth in Section 12 below), exercise this Option to the extent that Optionee was entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise this Option at the date of such termination, or if Optionee does not exercise this Option within the time specified herein, this Option shall terminate. 8. Disability of Optionee. Notwithstanding the provisions of Section 7 above, in the event of termination of Optionee's Continuous Status as an Employee as a result of Optionee's permanent and total disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only within six (6) months from the date of termination of employment (but in no event later than the date of expiration of the term of this Option as set forth in Section 12 below), exercise this Option to the extent Optionee was entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise this Option at the date of termination, or if Optionee does not exercise such Option (which Optionee was entitled to exercise) within the time specified herein, this Option shall terminate. 9. Death of Optionee. In the event of the death of Optionee: (i) during the term of this Option while an Employee or the Company and having been in Continuous Status as an Employee since the date of grant of this Option, this Option may be exercised, at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 12 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had Optionee continued living and remained in Continuous Status as an Employee six (6) months after the date of death, subject to the limitations contained in Section 3(i)(e) above; or (ii) within thirty (30) days after the termination of Optionee's Continuous Status as an Employee, this Option may be exercised, at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 12 below), by Optionee's estate or by a person who acquired the right to exercise this Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. 10. Repurchase Option. In the event of any voluntary or involuntary termination of Optionee's Continuous Status as an Employee, for any reason or no reason, the Company shall have, upon the date of such termination (as reasonably fixed and determined by the Company), an irrevocable, exclusive option ("Repurchase Option") for a period of one hundred and twenty (120) days from such date to repurchase at fair market value (as determined in accordance with Section 9(b) of the Plan) all or any -4- 15 portion of the Shares then or thereafter issued to the Optionee upon exercise of this Option. The Company may exercise its Repurchase Option by giving written notice to the Optionee and, at the option of the Company, (A) by delivering to Optionee a check in the amount of the repurchase price for the Shares being repurchased, or (B) by cancelling such of Optionee's indebtedness to the Company equal to the repurchase price for the Shares being repurchased, or (C) a combination of (A) and (B) equal to the repurchase price for the Shares being repurchased. Upon delivery of such notice and payment of the repurchase price, the Company shall become the legal and beneficial owner of the Shares being repurchased (and all rights and interests relating thereto) and shall have the right to transfer to its own name the number of Shares being repurchased (and Optionee shall sign all documents and otherwise take all actions requested by the Company to evidence the transfer of such Shares). Notwithstanding the foregoing, whenever the Company shall have the right to repurchase Shares under this paragraph, the Company may designate and assign one or more employees, officers, directors or shareholders of the Company or other persons or organizations to exercise all or a part of the Repurchase Option and purchase all or a part of such Shares. 11. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of Optionee. 12. Term of Option. Notwithstanding anything to the contrary set forth herein, this Option may not be exercised more than ten (10) years from the date of grant of this Option, and may be exercised during such term only in accordance with the Plan and the terms of this Option. 13. Early Disposition of Stock. Optionee understands that, if Optionee disposes of any Shares received under this Option within two (2) years after the date of this Agreement or within one (1) year after such Shares were transferred to Optionee, Optionee will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount generally measured as the difference between the price paid for the Shares and the lower of the fair market value of the Shares at the date of exercise or the fair market value of the Shares at the date of disposition. Any gain recognized on such a premature sale of the Shares in excess of the amount treated as ordinary income will be characterized as capital gain. Optionee hereby agrees to notify the Company in writing within thirty (30) days after the date of any such disposition. Optionee understands that if Optionee disposes of such Shares at any time after the expiration of such two-year and one-year holding periods, any gain on such sale will be treated as long-term capital gain. 14. Tax Consequences. If Optionee understands that any of the foregoing references to taxation are based on federal income tax laws and regulations now in effect. The Optionee has reviewed with the Optionee's own tax advisors the federal, state, local and foreign tax consequences of the transactions contemplated by this Agreement. The Optionee is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. The Optionee understands that the Optionee (and not the Company) shall be responsible for the Optionee's own tax liability that may arise as a result of the transactions contemplated by this Agreement. -5- 16 DATE OF GRANT: ______________________ VENTANA MEDICAL SYSTEMS, INC. By:___________________________________ Title:________________________________ OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS OPTION, THE COMPANY'S PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT AT ANY TIME, WITH OR WITHOUT CAUSE. Optionee acknowledges receipt of a copy of the Plan, a copy of which is annexed hereto, represents that Optionee is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board or of the Committee upon any questions arising under the Plan. Dated: ____________________ ________________________________________ _________ Optionee Residence Address: ________________________________________ ________________________________________ Social Security No._____________________ -6- 17 EXHIBIT A NOTICE OF EXERCISE OF STOCK OPTION TO: FROM: DATE: RE: Exercise of Stock Option I hereby exercise my option to purchase __________ shares of Common Stock at $_______ per share (total exercise price of $_________), effective today's date. This notice is given in accordance with the terms of my Stock Option Agreement dated _________________, 19_____. The option price and vested amount is in accordance with Sections 2 and 3 of the Stock Option Agreement. Attached is a check payable to Ventana Medical Systems, Inc. for the total exercise price of the shares being purchased. The undersigned confirms the representations made in Section 4 of the Stock Option Agreement. Please prepare the stock certificate in the following name(s): ___________________________________________ ___________________________________________ If the stock is to be registered in a name other than your name, please so advise the Company. The Stock Option Agreement requires the Company's approval for registration in a name other than your name and requires certain agreements from any joint owner. Sincerely, ________________________________________ (Signature) ________________________________________ (Print or Type Name) Letter and consideration received on ____________, 19__ By:__________________________ EX-10.7(B) 11 1996 STOCK OPTION PLAN AND FORM AND AGREEMENTS 1 EXHIBIT 10.7(b) VENTANA MEDICAL SYSTEMS, INC. 1996 STOCK OPTION PLAN 1. Purposes of the Plan. The purposes of this Stock Option Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to the Employees and Consultants of the Company and to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the legal requirements relating to the administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code and the applicable laws of any foreign country or jurisdiction where Options are, or will be, granted under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means the Committee appointed by the Board of Directors in accordance with Section 4 of the Plan. (f) "Common Stock" means the Common Stock of the Company. (g) "Company" shall mean Ventana Medical Systems, Inc., a Delaware corporation. (h) "Consultant" means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services and who is compensated for such services. The term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors. (i) "Continuous Status as an Employee or Consultant" means that the employment or consulting relationship with the Company, any Parent or Subsidiary is not interrupted or terminated. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. A leave of 2 absence approved by the Company shall include sick leave, military leave, or any other personal leave. For purposes of Incentive Stock Options, no such leave may exceed 90 days, unless reemployment upon expiration of such leave is guaranteed by statute or contract, including Company policies. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 91st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. (j) "Director" means a member of the Board. (k) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code. (l) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (m) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (n) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (o) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and regulations promulgated thereunder. (p) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. -2- 3 (q) "Notice of Grant" means a written notice evidencing certain terms and conditions of an individual Option grant. The Notice of Grant is part of the Option Agreement. (r) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (s) "Option" means a stock option granted pursuant to the Plan. (t) "Option Agreement" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (u) "Option Exchange Program" means a program whereby outstanding options are surrendered in exchange for options with a lower exercise price. (v) "Optioned Stock" means the Common Stock subject to an Option. (w) "Optionee" means an Employee or Consultant who holds an outstanding Option. (x) "Parent" means a "parent corporation", whether now or hereafter existing, as defined in Section 424(e) of the Code. (y) "Plan"means this 1996 Stock Option Plan. (z) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (aa) "Share" means a share of the Common Stock, as adjusted in accordance with 12 of the Plan. (bb) "Subsidiary" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of shares which may be optioned and sold under the Plan is 1,000,000 shares. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, or surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. Notwithstanding any other provision of the Plan, shares issued under -3- 4 the Plan and later repurchased by the Company shall not become available for future grant or sale under the Plan. 4. Administration of the Plan. (a) Procedure. (i) Multiple Administrative Bodies. If permitted by Rule 16b-3, the Plan may be administered by different bodies with respect to Directors, Officers who are not Directors, and other persons who are neither Directors nor Officers. (ii) Administration With Respect to Directors and Officers Subject to Section 16(b). With respect to Option grants made to Employees who are also Officers or Directors subject to Section 16(b) of the Exchange Act, the Plan shall be administered by (A) the Board, if the Board may administer the Plan in compliance with the rules governing a plan intended to qualify as a discretionary plan under Rule 16b-3, or (B) a committee designated by the Board to administer the Plan, which committee shall be constituted to comply with the rules governing a plan intended to qualify as a discretionary plan under Rule 16b-3. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the rules governing a plan intended to qualify as a discretionary plan under Rule 16b-3. (iii) Administration With Respect to Other Persons. With respect to Option grants made to Employees or Consultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a committee designated by the Board, which committee shall be constituted to satisfy Applicable Laws. Once appointed, such Committee shall serve in its designated capacity until otherwise directed by the Board. The Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(n) of the Plan; (ii) to select the Consultants and Employees to whom Options may be granted hereunder; -4- 5 (iii) to determine whether and to what extent Options are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each Option granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder. Such terms and conditions need not be identical and include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted; (viii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws. (x) to modify or amend each Option (subject to 14(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (xi) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option previously granted by the Administrator; (xii) to institute an Option Exchange Program; (xiii) to make all other determinations deemed necessary or advisable for administering the Plan; (c) Effect of Administrator's Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of Options. -5- 6 5. Eligibility. Nonstatutory Stock Options may be granted to Employees and Consultants. Incentive Stock Options may be granted only to Employees. If otherwise eligible, an Employee or Consultant who has been granted an Option may be granted additional Option or Options. 6. Limitations. (a) Each Option shall be designated in the written option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. If an Option is granted hereunder that is part Incentive Stock Option and part Nonstatutory Stock Option due to becoming first exercisable in any calendar year in excess of $100,000, the Incentive Stock Option portion of such Option shall become exercisable first in such calendar year, and the Nonstatutory Stock Option portion shall commence becoming exercisable once the $100,000 limit has been reached. (b) Neither the Plan nor any Option shall confer upon an Optionee any right with respect to continuing the Optionee's employment or consulting relationship with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such employment or consulting relationship at any time, with or without cause. (c) The following limitations shall apply to grants of Options to Employees: (i) No Employee shall be granted, in any fiscal year of the Company, Options to purchase more than [ ] Shares. (ii) In connection with his or her initial employment, an Employee may be granted Options to purchase up to an additional [ ] Shares which shall not count against the limit set forth in subsection (i) above. (iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 12. (iv) If an Option is cancelled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 12), the cancelled Option will be counted against the limits set forth in subsections (i) and (ii) above. For this -6- 7 purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 7. Term of Plan. Subject to Section 18 of the Plan, the Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the shareholders of the Company as described in Section 18 of the Plan. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 14 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Notice of Grant; provided, however, that in the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Notice of Grant. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Notice of Grant. 9. Exercise Price and Consideration. (a) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. (b) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. In so doing, the Administrator may specify that an Option may not be exercised until the completion of a service period. -7- 8 (c) Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (v) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. Exercise of Option. (a) Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall -8- 9 be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Employment or Consulting Relationship. Upon termination of an Optionee's Continuous Status as an Employee or Consultant, other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Notice of Grant to the extent that he or she is entitled to exercise it on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant). In the absence of a specified time in the Notice of Grant, the Option shall remain exercisable for three (3) months following the Optionee's termination. In the case of an Incentive Stock Option, such period of time for exercise shall not exceed three (3) months from the date of termination. If, on the date of termination, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. Notwithstanding the above, in the event of an Optionee's change in status from Consultant to Employee or Employee to Consultant, the Optionee's Continuous Status as an Employee or Consultant shall not automatically terminate solely as a result of such change in status. In such event, an Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option three months and one day following such change of status. (c) Disability of Optionee. Upon termination of an Optionee's Continuous Status as an Employee or Consultant as a result of the Optionee's Disability, the Optionee may exercise his or her Option at any time within twelve (12) months from the date of termination, but only to the extent that the Optionee is entitled to exercise it on the date of termination (and in no event later than the expiration of the term of the Option as set forth in the Notice of Grant). If, on the date of termination, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. -9- 10 (d) Death of Optionee. Upon the death of an Optionee, the Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Optionee would have been entitled to exercise the Option on the date of death. If, at the time of death, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall immediately revert to the Plan. If the Optionee's estate or the person who acquires the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. (f) Rule 16b-3. Options granted to individuals subject to Section 16 of the Exchange Act ("Insiders") must comply with the applicable provisions of Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. 11. Non-Transferability of Options. An Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 12. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. -10- 11 (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, the Optionee shall have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be exercisable. If an Option is exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee that the Option shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 13. Date of Grant. The date of grant of an Option shall be, for all purposes, the date on which the Administrator makes the determination granting such Option, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 14. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. -11- 12 (b) Shareholder Approval. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Rule 16b-3 or with Section 422 of the Code (or any successor rule or statute or other applicable law, rule or regulation, including the requirements of any exchange or quotation system on which the Common Stock is listed or quoted). Such shareholder approval, if required, shall be obtained in such a manner and to such a degree as is required by the applicable law, rule or regulation. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. 15. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, Applicable Laws, and the requirements of any stock exchange or quotation system upon which the Shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 16. Liability of Company. (a) Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. (b) Grants Exceeding Allotted Shares. If the Optioned Stock covered by an Option exceeds, as of the date of grant, the number of Shares which may be issued under the Plan without additional shareholder approval, such Option shall be void with respect to such excess Optioned Stock, unless shareholder approval of an amendment sufficiently increasing the number of Shares subject to the Plan is timely obtained in accordance with Section 12(b) of the Plan. -12- 13 17. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 18. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws and the rules of any stock exchange upon which the Common Stock is listed. -13- 14 VENTANA MEDICAL SYSTEMS, INC. 1996 STOCK OPTION PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. I. NOTICE OF STOCK OPTION GRANT [Optionee's Name and Address] You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number _________________________ Date of Grant _________________________ Vesting Commencement Date _________________________ Exercise Price per Share $________________________ Total Number of Shares Granted _________________________ Total Exercise Price $________________________ Type of Option: ___ Incentive Stock Option ___ Nonstatutory Stock Option Term/Expiration Date: _________________________ Vesting Schedule: This Option may be exercised, in whole or in part, in accordance with the following schedule: 25% of the Shares subject to the Option shall vest twelve months after the Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall vest each month thereafter. 15 Termination Period: This Option may be exercised for 30 days after termination of the Optionee's employment or consulting relationship with the Company. Upon the death or Disability of the Optionee, this Option may be exercised for such longer period as provided in the Plan. In the event of the Optionee's change in status from Employee to Consultant or Consultant to Employee, this Option Agreement shall remain in effect. In no event shall this Option be exercised later than the Term/Expiration Date as provided above. II. AGREEMENT 1. Grant of Option. The Plan Administrator of the Company hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the "Optionee"), an option (the "Option") to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price"), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 14(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option ("NSO"). 2. Exercise of Option. (a) Right to Exercise. (i) This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement. In the event of Optionee's death, Disability or other termination of Optionee's employment or consulting relationship, the exercisability of the Option is governed by the applicable provisions of the Plan and this Option Agreement. (ii) Should (i) Optionee's Continuous Status as an Employee be terminated for misconduct (which includes, but is not limited to, any act of dishonesty, moral turpitude, fraud or embezzlement), (ii) Optionee make any unauthorized use or disclosure of confidential information or trade secrets of the Company, its Parent or any Subsidiary, or (iii) Optionee otherwise act in such a manner not in the best interests of the Company (as reasonably determined by the Company's Board of Directors), then, notwithstanding any other provision in this Agreement or the Plan to the contrary, in any such event this Option shall terminate immediately and cease to be outstanding. -2- 16 (b) Method of Exercise. This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with all relevant provisions of law and the requirements of any stock exchange or quotation service upon which the Shares are then listed. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. 3. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: (a) cash; (b) check; (c) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price; or (d) surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, AND (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares. 4. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 5. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. -3- 17 6. Tax Consequences. Some of the federal and state tax consequences relating to this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Exercising the Option. (i) Nonstatutory Stock Option. The Optionee may incur regular federal income tax and state income tax liability upon exercise of a NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Optionee is an Employee or a former Employee, the Company will be required to withhold from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (ii) Incentive Stock Option. If this Option qualifies as an ISO, the Optionee will have no regular federal income tax or state income tax liability upon its exercise, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price will be treated as an adjustment to alternative minimum taxable income for federal tax purposes and may subject the Optionee to alternative minimum tax in the year of exercise. In the event that the Optionee undergoes a change of status from Employee to Consultant, any Incentive Stock Option of the Optionee that remains unexercised shall cease to qualify as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option on the ninety-first (91st) day following such change of status. (b) Disposition of Shares. (i) NSO. If the Optionee holds NSO Shares for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. (ii) ISO. If the Optionee holds ISO Shares for at least one year after exercise AND two years after the grant date, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If the Optionee disposes of ISO Shares within one year after exercise or two years after the grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the LESSER OF (A) the difference between the Fair Market Value of the Shares acquired on the date of exercise and the aggregate Exercise Price, or (B) the difference between the SALE PRICE of such Shares and the aggregate Exercise Price. -4- 18 (c) Notice of Disqualifying Disposition of ISO Shares. If the Optionee sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year after the exercise date, the Optionee shall immediately notify the Company in writing of such disposition. The Optionee agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized from such early disposition of ISO Shares by payment in cash or out of the current earnings paid to the Optionee. 7. Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. This agreement is governed by California law except for that body of law pertaining to conflict of laws. 8. NO GUARANTEE OF EMPLOYMENT. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR CONSULTANT AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE OR CONSULTANT FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE. By your signature and the signature of the Company's representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below. -5- 19 OPTIONEE: VENTANA MEDICAL SYSTEMS, INC. ____________________________________ By:__________________________________ Signature ____________________________________ Title:_______________________________ Print Name ____________________________________ Residence Address ____________________________________ -6- 20 CONSENT OF SPOUSE The undersigned spouse of Optionee has read and hereby approves the terms and conditions of the Plan and this Option Agreement. In consideration of the Company's granting his or her spouse the right to purchase Shares as set forth in the Plan and this Option Agreement, the undersigned hereby agrees to be irrevocably bound by the terms and conditions of the Plan and this Option Agreement and further agrees that any community property interest shall be similarly bound. The undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Plan or this Option Agreement. _______________________________________ Spouse of Optionee -7- 21 EXHIBIT A VENTANA MEDICAL SYSTEMS, INC. 1996 STOCK OPTION PLAN EXERCISE NOTICE Ventana Medical Systems, Inc. 3865 N. Business Center Drive Tucson, Arizona 85705 Attention: Corporate Secretary 1. Exercise of Option. Effective as of today, ________________, 199__, the undersigned ("Purchaser") hereby elects to purchase ______________ shares (the "Shares") of the Common Stock of Ventana Medical Systems, Inc. (the "Company") under and pursuant to the 1996 Stock Option Plan (the "Plan") and the Stock Option Agreement dated , 19___ (the "Option Agreement"). The purchase price for the Shares shall be $ , as required by the Option Agreement. 2. Delivery of Payment. Purchaser herewith delivers to the Company the full purchase price for the Shares. 3. Representations of Purchaser. Purchaser acknowledges that Purchaser has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. Rights as Stockholder. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan. 5. Tax Consultation. Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser's purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice. 22 6. Entire Agreement; Governing Law. The Plan and Option Agreement are incorporated herein by reference. This Agreement, the Plan and the Option Agreement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser's interest except by means of a writing signed by the Company and Purchaser. This agreement is governed by California law except for that body of law pertaining to conflict of laws. Submitted by: Accepted by: PURCHASER: VENTANA MEDICAL SYSTEMS, INC. __________________________________ By: _________________________________ Signature __________________________________ Its: ________________________________ Print Name Address: Address: ___________________________ 3865 N. Business Center Drive Tucson, Arizona 85705 ___________________________ -2- EX-10.8(A) 12 1991 EMPLOYEE STOCK PURCHASE PLAN 1 Exhibit 10.8(a) VENTANA MEDICAL SYSTEMS, INC. 1991 EMPLOYEE STOCK PURCHASE PLAN As Amended Effective January 1, 1993 The following constitute the provisions of the Employee Stock Purchase Plan of Ventana Medical Systems, Inc. 1. Purpose. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Series D Preferred Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. (a) "Board" shall mean the Board of Directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Company" shall mean Ventana Medical Systems, Inc. (d) "Compensation" shall mean all regular straight time gross earnings, but excluding variable compensation for field sales personnel, incentive bonuses, overtime, shift premium, lead pay and automobile allowances and other compensation. (e) "Continuous Status as an Employee" shall mean the absence of any interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of a leave of absence agreed to in writing by the Company, provided that such leave is for a period of not more than 90 days or reemployment upon the expiration of such leave is guaranteed by contract or statute. (f) "Designated Subsidiaries" shall mean the Subsidiaries which have been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "Employee" shall mean any person, including an officer, whose customary employment with the Company is at least twenty (20) hours per week by the Company or one of its Designated Subsidiaries and more than five (5) months in any calendar year. -1- 2 (h) "Enrollment Date" shall mean the first day of each Offering Period. (i) "Exercise Date" shall mean the last day of each Offering Period. (j) "Offering Period" shall mean, except with respect to the first Offering Period as described herein, a period of six (6) months during which an option granted pursuant to the Plan may be exercised. The first Offering Period shall commence February 1, 1992, and end June 30, 1992. (k) "Plan" shall mean this Employee Stock Purchase Plan. (l) "Series D Preferred Stock" shall mean Series D Preferred Stock of the Company. (m) "Subsidiary" shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. 3. Eligibility. (a) Any Employee who is employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) if, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own stock and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any subsidiary of the Company, or (ii) which permits his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries to accrue at a rate which exceeds $25,000 worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by consecutive Offering Periods with a new Offering Period commencing on or about January 1 and July 1 of each year; provided, however, that the first Offering Period shall commence on or about February 1, 1992. The Plan shall continue thereafter until terminated in accordance with paragraph 19 hereof. Subject to the shareholder approval requirements of paragraph 19, the Board of Directors of the Company shall have the power to change the duration of Offering -2- 3 Periods with respect to future offerings without shareholder approval if such change is announced at least fifteen (15) days prior to the scheduled beginning of the first Offering Period to be affected. 5. Participation. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A and filing it with the Company's payroll office at least five (5) business days prior to the applicable Enrollment Date, unless a later time for filing the subscription agreement is set by the Board for all eligible Employees with respect to a given Offering Period; provided, however, that for purposes of the first Offering Period, eligible Employees may file their completed subscription agreements at any time prior to February 15, 1992. (b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in paragraph 10. 6. Payroll Deductions. (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each payday during the Offering Period in an amount not exceeding fifteen percent (15%) of the Compensation which he receives on each payday during the Offering Period, and the aggregate of such payroll deductions during the Offering Period shall not exceed fifteen percent (15%) of the participant's aggregate Compensation during said Offering Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in paragraph 10, or may decrease, but not increase, the rate of his or her payroll deductions during the Offering Period (within the limitations of Section 6(a)) by completing or filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company's receipt of the new subscription agreement. A participant's subscription agreement shall remain in effect for successive Offering Periods unless revised as provided herein or terminated as provided in paragraph 10. -3- 4 (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and paragraph 3(b) herein, a participant's payroll deductions may be decreased to 0% at such time during any Offering Period which is scheduled to end during the current calendar year (the "Current Offering Period") that the aggregate of all payroll deductions which were previously used to purchase stock under the Plan in a prior Offering Period which ended during that calendar year plus all payroll deductions accumulated with respect to the Current Offering Period equal $25,000. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Offering Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in paragraph 10. 7. Grant of Option. On the Enrollment Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on each Exercise Date during such Offering Period up to a number of shares of the Company's Series D Preferred Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by $2.15, the fair market value of a share of the Company's Series D Preferred Stock as previously determined by the Board; provided that in no event shall an Employee be permitted to purchase during each Offering Period more than a number of shares determined by dividing $12,500 by $2.15, and provided further that such purchase shall be subject to the limitations set forth in Section 3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8, unless the participant has withdrawn pursuant to Section 10, and shall expire on the last day of the Offering Period. 8. Exercise of Option. Unless a participant withdraws from the Plan as provided in paragraph 10 below, his or her option for the purchase of shares will be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable option price with the accumulated payroll deductions in his or her account. No fractional shares will be purchased and any payroll deductions accumulated in a participant's account which are not used to purchase shares shall remain in the participant's account for the subsequent Offering Period, subject to an earlier withdrawal as provided in paragraph 10. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. Delivery. As promptly as practicable after each Exercise Date on which a purchase of shares occurs, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his or her option. However, a participant may make an election to delay -4- 5 the issuance of stock certificates representing shares purchased under the Plan by giving written notice to the Company in the form of Exhibit D to this Plan. Any such election shall remain in effect until it is revoked by the participant or, if earlier, upon the termination of the participant's Continuous Status as an Employee. The Company may limit the time or times during which participants may revoke such elections, except that a participant shall automatically receive a certificate as soon as practicable following termination of his or her Continuous Status as an Employee and that participants shall be given the opportunity to revoke such elections at least once each calendar year. 10. Withdrawal; Termination of Employment. (a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the participant's payroll deductions credited to his or her account will be paid to such participant promptly after receipt of notice of withdrawal and such participant's option for the Offering Period will be automatically terminated, and no further payroll deductions for the purchase of shares will be made during the Offering Period. If a participant withdraws from an Offering Period, payroll deductions will not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new subscription agreement. (b) Upon termination of the participant's Continuous Status as an Employee prior to the Exercise Date for any reason, including retirement or death, the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option will be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under paragraph 14, and such participant's option will be automatically terminated. (c) In the event an Employee fails to remain in Continuous Status as an Employee of the Company for at least twenty (20) hours per week during an Offering Period in which the Employee is a participant, he or she will be deemed to have elected to withdraw from the Plan and the payroll deductions credited to his or her account will be returned to such participant and such participant's option terminated. (d) A participant's withdrawal from an Offering Period will not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws. -5- 6 11. Interest. No interest shall accrue on the payroll deductions of a participant in the Plan. 12. Stock. (a) The maximum number of shares of the Company's Series D Preferred Stock which shall be made available for sale under the Plan shall be 159,893 shares, subject to adjustment upon changes in capitalization of the Company as provided in paragraph 18. If on a given Exercise Date the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. (b) The participant will have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan will be registered in the name of the participant or in the name of the participant and his or her spouse. 13. Administration. The Plan shall be administered by the Board or a committee of members of the Board appointed by the Board. The administration, interpretation or application of the Plan by the Board or its committee shall be final, conclusive and binding upon all participants. Members of the Board who are eligible Employees are permitted to participate in the Plan, provided that: (a) Members of the Board who are eligible to participate in the Plan may not vote on any matter affecting the administration of the Plan or the grant of any option pursuant to the Plan. (b) If a Committee is established to administer the Plan, no member of the Board who is eligible to participate in the Plan may be a member of the Committee. 14. Designation of Beneficiary. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. -6- 7 (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 15. Transferability. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in paragraph 14 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with paragraph 10. 16. Use of Funds. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 17. Reports. Individual accounts will be maintained for each participant in the Plan. Statements of account will be given to participating Employees semi-annually promptly following the Exercise Date, which statements will set forth the amounts of payroll deductions, the per share purchase price, the number of shares purchased and the remaining cash balance, if any. 18. Adjustments Upon Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Series D Preferred Stock covered by each option under the Plan which has not yet been exercised and the number of shares of Series D Preferred Stock which have been authorized for issuance under the Plan but have not yet been placed under option (collectively, the "Reserves"), as well as the price per share of Series D Preferred Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Series D Preferred Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Series D Preferred Stock, or any other increase or decrease in the number of shares of Series D Preferred Stock effected without receipt of consideration by the Company. Such adjustment shall be made by the -7- 8 Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Series D Preferred Stock subject to an option. In the event of the proposed dissolution or liquidation of the Company, the Offering Period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each option under the Plan shall be assumed or an equivalent option shall be assumed or substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the participant shall have the right to exercise the option as to all of the optioned stock, including shares as to which the option would not otherwise be exercisable. If the Board makes an option fully exercisable in lieu of assumption or substituition in the event of a merger or sale of assets, the Board shall notify the participant that the option shall be fully exercisable for a period of thirty (30) days from the date of such notice, and the option will terminate upon the expiration of such period. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Series D Preferred Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalization, rights offerings or other increases or reductions of shares of its outstanding Series D Preferred Stock, and in the event of the Company being consolidated with or merged into any other corporation. 19. Amendment or Termination. The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in paragraph 18, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board of Directors on any Exercise Date if the Board determines that the termination of the Plan is in the best interests of the Company and its shareholders. Except as provided in paragraph 18, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant, nor may an amendment be made without prior approval of the shareholders of the Company (obtained in the manner described in paragraph 21) (unless such amendment is contingent upon receipt of such shareholder approval at the next annual meeting of shareholders) if such amendment would: -8- 9 (a) Increase the number of shares that may be issued under the Plan; (b) Permit payroll deductions at a rate in excess of fifteen percent (15%) of the participant's Compensation; (c) Change the designation of the employees (or class of employees) eligible for participation in the Plan; or (d) Materially increase the benefits which may accrue to participants under the Plan. 20. Notices. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve months before or after the date the Plan is adopted. If such shareholder approval is obtained at a duly held shareholders' meeting, it may be obtained by the affirmative vote of the holders of a majority of the outstanding shares of the Company present or represented and entitled to vote thereon. In the case of approval by written consent, it must be obtained by the unanimous written consent of all shareholders of the Company, or by written consent of a smaller percentage of shareholders but only if the Board determines, on the basis of advice of the Company's legal counsel, that the written consent of such a smaller percentage of shareholders will comply with all applicable laws and will not adversely affect the qualifications of the Plan under Section 423 of the Code. 22. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for -9- 10 the Company, such a representation is required by any of the aforementioned applicable provisions of law. 23. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Company as described in paragraph 21. It shall continue in effect for a term of twenty (20) years unless sooner terminated under paragraph 19. -10- 11 EXHIBIT A VENTANA MEDICAL SYSTEMS, INC. EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT _____ Original Application Enrollment Date: ___________ _____ Change in Payroll Deduction Rate _____ Change of Beneficiary(ies) 1. ____________ hereby elects to participate in the Ventana Medical Systems, Inc. Employee Stock Purchase Plan (as amended effective January 1, 1993) (the "Stock Purchase Plan") and subscribes to purchase shares of the Company's Series D Preferred Stock in accordance with this Subscription Agreement and the Stock Purchase Plan. 2. I hereby authorize payroll deductions from each paycheck in the amount of ____% of my Compensation on each payday (not to exceed 15%) during the Offering Period in accordance with the Stock Purchase Plan. 3. I understand that said payroll deductions shall be accumulated for the purchase of shares of Series D Preferred Stock at the applicable purchase price determined in accordance with the Stock Purchase Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. 4. I have received a copy of the complete "Ventana Medical Systems, Inc. Employee Stock Purchase Plan (as amended effective January 1, 1993)." I understand that my participation in the Stock Purchase Plan is in all respects subject to the terms of the Plan. I understand that the grant of the option by the Company under this Subscription Agreement is subject to obtaining shareholder approval of the Stock Purchase Plan. 5. Shares purchased for me under the Stock Purchase Plan should be issued in the name(s) of: ___________________________________________________ ____________________________________________________________________. 6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Enrollment Date (the first day of the Offering Period during which I purchased such shares), I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were delivered 12 to me over the price which I paid for the shares. I hereby agree to notify the Company in writing within 30 days after the date of any such disposition. However, if I dispose of such shares at any time after the expiration of the 2-year holding period, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares under the option, or (2) the excess of the fair market value of the shares over the option price, measured as if the option had been exercised on the Enrollment Date. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain. 7. I hereby agree to be bound by the terms of the Stock Purchase Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Stock Purchase Plan. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Stock Purchase Plan: NAME: (Please print)__________________________________________________________ (First) (Middle) (Last) _____________________________ _____________________________________________ Relationship _____________________________________________ (Address) NAME: (Please print)__________________________________________________________ (First) (Middle) (Last) _____________________________ _____________________________________________ Relationship _____________________________________________ (Address) -2- 13 Employee's Social Security Number: ________________________________________ Employee's Address: ________________________________________ ________________________________________ ________________________________________ I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Dated:__________________________ ________________________________________ Signature of Employee -3- 14 EXHIBIT B VENTANA MEDICAL SYSTEMS, INC. EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL The undersigned participant in the Offering Period of the Ventana Medical Systems, Inc. Employee Stock Purchase Plan (as amended effective January 1, 1993) which began on ________________, 19____ (the "Enrollment Date") hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned as promptly as possible all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be automatically terminated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement. Name and Address of Participant ___________________________________ ___________________________________ ___________________________________ Signature ___________________________________ Date: _____________________________ 15 EXHIBIT C VENTANA MEDICAL SYSTEMS, INC. EMPLOYEE STOCK PURCHASE PLAN NOTICE TO RESUME PAYROLL DEDUCTIONS The undersigned participant in the Offering Period of the Ventana Medical Systems, Inc. Employee Stock Purchase Plan (as amended effective January 1, 1993) which began on ______________, 19___ hereby notifies the Company to resume payroll deductions for his or her account at the beginning of the next Exercise Period within such Offering Period in accordance with the terms of the Subscription Agreement executed by the undersigned at the beginning of the Offering Period. The undersigned understands that he or she may change the payroll deduction rate or the beneficiaries named in such Subscription Agreement by submitting a revised Subscription Agreement. Name and Address of Participant ___________________________________ ___________________________________ ___________________________________ Signature ___________________________________ Date: _____________________________ 16 EXHIBIT D VENTANA MEDICAL SYSTEMS, INC. EMPLOYEE STOCK PURCHASE PLAN ELECTION/REVOCATION OF ELECTION TO DELAY ISSUANCE OF CERTIFICATE The undersigned participant in the Ventana Medical Systems, Inc. Employee Stock Purchase Plan (as amended effective January 1, 1993) (the "Stock Purchase Plan"), hereby elects to allow Ventana Medical Systems, Inc. (the "Company") or its agent to delay issuance of a certificate representing shares purchased under the Plan in accordance with the provisions of the Stock Purchase Plan. This election shall continue in effect until the termination of the undersigned's Continuous Status as an Employee or until revoked pursuant to such Stock Purchase Plan. This election shall not otherwise affect the participant's rights as a shareholder of the Company. -OR- ________________________________ hereby revokes his or her prior election to allow the Company to delay issuance of a certificate pursuant to the terms of the Stock Purchase Plan. The Company shall deliver to participant as promptly as practicable a certificate representing all shares purchased thereby. Name and Address of Participant ___________________________________ ___________________________________ ___________________________________ Signature ___________________________________ Date: _____________________________ EX-10.8(B) 13 1996 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.8(b) VENTANA MEDICAL SYSTEMS, INC. 1996 EMPLOYEE STOCK PURCHASE PLAN The following constitute the provisions of the 1996 Employee Stock Purchase Plan of Ventana Medical Systems, Inc. 1. Purpose. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. (a) "Board" shall mean the Board of Directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Common Stock" shall mean the Common Stock of the Company. (d) "Company" shall mean Ventana Medical Systems, Inc. and any Designated Subsidiary of the Company. (e) "Compensation" shall mean all base straight time gross earnings and commissions, but exclusive of payments for overtime, shift premium, incentive compensation, incentive payments, bonuses and other compensation. (f) "Designated Subsidiaries" shall mean the Subsidiaries which have been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "Employee" shall mean any individual who is an Employee of the Company for tax purposes whose customary employment with the Company is at least twenty (20) hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. (h) "Enrollment Date" shall mean the first day of each Offering Period. 2 (i) "Exercise Date" shall mean the last day of each Purchase Period. (j) "Fair Market Value" shall mean, as of any date, the value of Common Stock determined as follows: (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable, or; (2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock on the date of such determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; (3) For the purposes of the Enrollment Date under the first Offering Period under the Plan, the Fair Market Value of the Common Stock shall be the price to public as set forth in the final prospectus included within the Registration Statement on Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Common Stock. (4) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board. (k) "Offering Periods" shall mean the periods of approximately twenty-four (24) months during which an option granted pursuant to the Plan may be exercised, commencing on the first Trading Day on or after _______________ and _______________of each year and terminating on the last Trading Day in the periods ending twenty-four months later. The first Offering Period shall be the period commencing with the first Trading Day on or after the date on which the Company's registration statement on Form S-1 is declared effective by the Securities and Exchange Commission and terminating on the last Trading Day on or before _____________, 1998. The duration and timing of Offering Periods may be changed pursuant to Section 4 of this Plan. (l) "Plan" shall mean this Employee Stock Purchase Plan. (m) "Purchase Price" shall mean an amount equal to 85% of the Fair Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower. (n) "Purchase Period" shall mean the approximately six month period commencing after one Exercise Date and ending with the next Exercise Date, except that the first Purchase Period of any Offering Period shall commence on the Enrollment Date and end with the next Exercise Date. -2- 3 (o) "Reserves" shall mean the number of shares of Common Stock covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. (p) "Subsidiary" shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (q) "Trading Day" shall mean a day on which national stock exchanges and the Nasdaq System are open for trading. 3. Eligibility. (a) Any Employee (as defined in Section 2(g)), who shall be employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by consecutive, overlapping Offering Periods with a new Offering Period commencing on the first Trading Day on or after _______________and _______________ each year, or on such other date as the Board shall determine, and continuing thereafter until terminated in accordance with Section 19 hereof. The first Offering Period shall begin on the effective date of the initial public offering of the Company's Common Stock that is filed with the Securities and Exchange Commission and shall end on the last Trading Day on or before ______________, 1998. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offer ings without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected thereafter. 5. Participation. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the Company's payroll office prior to the applicable Enrollment Date. -3- 4 (b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 10 hereof. 6. Payroll Deductions. (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each pay day during the Offering Period in an amount not exceeding _______________ (___%) of the Compensation which he or she receives on each pay day during the Offering Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may increase or decrease the rate of his or her payroll deductions during the Offering Period by completing or filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. The Board may, in its discretion, limit the number of participation rate changes during any Offering Period. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company's receipt of the new subscription agreement unless the Company elects to process a given change in participation more quickly. A participant's subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at such time during any Purchase Period which is scheduled to end during the current calendar year (the "Current Purchase Period") that the aggregate of all payroll deductions which were previously used to purchase stock under the Plan in a prior Purchase Period which ended during that calendar year plus all payroll deductions accumulated with respect to the Current Purchase Period equal $21,250. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding -4- 5 required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. Grant of Option. On the Enrollment Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on each Exercise Date during such Offering Period (at the applicable Purchase Price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price; provided that in no event shall an Employee be permitted to purchase during each Purchase Period more than a number of shares determined by dividing $12,500 by the Fair Market Value of a share of the Company's Common Stock on the Enrollment Date, and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The option shall expire on the last day of the Offering Period. 8. Exercise of Option. Unless a participant withdraws from the Plan as provided in Section 10 hereof, his or her option for the purchase of shares shall be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Purchase Period or Offering Period, subject to earlier with drawal by the participant as provided in Section 10 hereof. Any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. Delivery. As promptly as practicable after each Exercise Date on which a purchase of shares occurs, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his or her option. 10. Withdrawal; Termination of Employment. (a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the participant's payroll deductions credited to his or her account shall be paid to such participant promptly after receipt of notice of withdrawal and such participant's option for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of shares shall be made for such Offering Period. If a participant withdraws from an Offering Period, payroll deductions shall not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new subscription agreement. -5- 6 (b) Upon a participant's ceasing to be an Employee (as defined in Section 2(g) hereof), for any reason, he or she shall be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option shall be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 14 hereof, and such participant's option shall be automatically terminated. The preceding sentence notwithstanding, a participant who receives payment in lieu of notice of termination of employment shall be treated as continuing to be an Employee for the participant's customary number of hours per week of employment during the period in which the participant is subject to such payment in lieu of notice. (c) A participant's withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws. 11. Interest. No interest shall accrue on the payroll deductions of a participant in the Plan. 12. Stock. (a) The maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be Two Hundred Thousand (200,000) shares, subject to adjustment upon changes in capitalization of the Company as provided in Section 18 hereof. If, on a given Exercise Date, the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. (b) The participant shall have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan shall be registered in the name of the participant or in the name of the participant and his or her spouse. 13. Administration. (a) Administrative Body. The Plan shall be administered by the Board or a committee of members of the Board appointed by the Board. The Board or its committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties. -6- 7 (b) Rule 16b-3 Limitations. Notwithstanding the provisions of Subsection (a) of this Section 13, in the event that Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor provision ("Rule 16b-3") provides specific requirements for the administrators of plans of this type, the Plan shall be administered only by such a body and in such a manner as shall comply with the applicable requirements of Rule 16b-3. Unless permitted by Rule 16b-3, no discretion concerning decisions regarding the Plan shall be afforded to any committee or person that is not "disinterested" as that term is used in Rule 16b-3. 14. Designation of Beneficiary. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such partici pant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 15. Transferability. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 14 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof. 16. Use of Funds. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 17. Reports. Individual accounts shall be maintained for each participant in the Plan. Statements of account shall be given to participating Employees at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. -7- 8 18. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the Reserves, as well as the price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Offering Periods shall terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. (c) Merger or Asset Sale. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, any Purchase Periods then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date") and any Offering Periods then in progress shall end on the New Exercise Date. The New Exercise Date shall be before the date of the Company's proposed sale or merger. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. 19. Amendment or Termination. (a) The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in Section 18 hereof, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board of Directors on any Exercise Date if the Board determines that the termination of the Plan is in the best interests of the Company and its stockholders. Except as provided in Section 18 hereof, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Rule 16b-3 or under Section 423 of the -8- 9 Code (or any successor rule or provision or any other applicable law or regulation), the Company shall obtain stockholder approval in such a manner and to such a degree as required. (b) Without stockholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 20. Notices. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 22. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 19 hereof. 23. Automatic Transfer to Low Price Offering Period. To the extent permitted by Rule 16b-3 of the Exchange Act, if the Fair Market Value of the Common Stock on any Exercise Date in an Offering Period is lower than the Fair Market Value of the Common Stock on the Enrollment Date of such Offering Period, then all participants in such Offering Period shall be automatically withdrawn from such Offering Period immediately after the exercise of their option on -9- 10 such Exercise Date and automatically re-enrolled in the immediately following Offering Period as of the first day thereof. -10- 11 EXHIBIT A VENTANA MEDICAL SYSTEMS, INC. 1996 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT _____ Original Application Enrollment Date: ___________ _____ Change in Payroll Deduction Rate _____ Change of Beneficiary(ies) 1. ________________________________ hereby elects to participate in the Ventana Medical Systems, Inc. 1996 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to purchase shares of the Company's Common Stock in accordance with this Sub scription Agreement and the Employee Stock Purchase Plan. 2. I hereby authorize payroll deductions from each paycheck in the amount of ____% of my Compensation on each payday (from 1 to _____%) during the Offering Period in accordance with the Employee Stock Purchase Plan. (Please note that no fractional percentages are permitted.) 3. I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock at the applicable Purchase Price determined in accordance with the Employee Stock Purchase Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. 4. I have received a copy of the complete Employee Stock Purchase Plan. I understand that my participation in the Employee Stock Purchase Plan is in all respects subject to the terms of the Plan. I understand that my ability to exercise the option under this Subscription Agreement is subject to stockholder approval of the Employee Stock Purchase Plan. 5. Shares purchased for me under the Employee Stock Purchase Plan should be issued in the name(s) of (Employee or Employee and Spouse only):___ _______________________. 6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Enrollment Date (the first day of the Offering Period during which I purchased such shares) or one year after the Exercise Date, I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased by me over the price which I paid for the shares. I hereby agree to notify the Company in writing 12 within 30 days after the date of any disposition of my shares and I will make adequate provision for Federal, state or other tax withholding obligations, if any, which arise upon the disposition of the Common Stock. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day of the Offering Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain. 7. I hereby agree to be bound by the terms of the Employee Stock Purchase Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Employee Stock Purchase Plan: NAME: (Please print)__________________________________________________________ (First) (Middle) (Last) _______________________________ __________________________ Relationship __________________________ (Address) -2- 13 Employee's Social Security Number: ____________________________________ Employee's Address: ____________________________________ ____________________________________ ____________________________________ I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Dated:_________________________ _____________________________________ Signature of Employee _______________________________________ Spouse's Signature (If beneficiary other than spouse) -3- 14 EXHIBIT B VENTANA MEDICAL SYSTEMS, INC. 1996 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL The undersigned participant in the Offering Period of the Ventana Medical Systems, Inc. 1996 Employee Stock Purchase Plan which began on ____________, 19____ (the "Enrollment Date") hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be automatically termi nated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement. Name and Address of Participant: ________________________________ ________________________________ ________________________________ Signature: ________________________________ Date:____________________________ EX-10.9 14 QUESTIER EMPLOYMENT AGREEMENT DATED 10-20-95 1 EXHIBIT 10.9 [VENTANA LETTERHEAD] October 20, 1995 Mr. Bernard O.C. Questier DuPont Strasse #1 61343 Bad Homberg, Germany Dear Bernard: This Agreement confirms the Company's offer of employment to join Ventana Medical Systems, Inc. as Vice President of European Operations. The Board and I are excited about the prospect of you joining the Company and making a significant long term contribution to the development of the Company's business in Europe. REPORTING RELATIONSHIPS AND RESPONSIBILITIES: In your capacity as Vice President European Operations, you will report directly to the President of Ventana Medical Systems, Inc. In this capacity, all operational and tactical activities for the European operation shall be your responsibility and you shall actively work with the President on all strategic matters having to do with the European Operation. You will be located at the European Corporate Headquarters in Strasbourg France. See Exhibit 1, Principle Responsibilities, attached for a detailed description of the Vice President-European Operations key duties and responsibilities: COMPENSATION: Your annual compensation shall be US$150,000, which shall be exchange protected against the French Franc to ensure that, should the U.S. Dollar depreciate versus the French Franc, you shall will not suffer the economic consequences of such an event. This exchange protection shall be established based on the U.S. Dollar/French Franc exchange rate, at the date of your acceptance, as published in the Wall Street Journal as of your date of acceptance or the first business day thereafter. If, however, the US Dollar appreciates in value against the French Franc, the Company will continue to pay the same US Dollar amount for salary, bonus, car allowance and other related compensation. Your starting date shall be as soon as practical, but no later than December 1, 1995. Annually, during February or March, after one year service with the Company, your compensation shall be reviewed by the Compensation Committee of the Board of Directors. The Committee's practice is to make annual adjustments based on individual and Company performance and contribution. Senior Executives, which include the Vice President - European Operations, are generally awarded cost of living/inflation adjustments to their respective base salaries on an annual basis. 2 Performance based bonuses, upon the Company reaching profitability, are used to provide Senior Managers with significant upside potential in terms of additional cash compensation. The Company expects to reach profitable operations during 1996 and expects the Board to institute such a bonus program accordingly. In order to encourage you to join the Company at this time, the Company will guarantee to pay you a bonus of $7,500, paid in French Franc's, assuming satisfactory performance during 1996. During the first year of employment, the Company shall provide additional assistance in the relocation of your family to Strasbourg, France to cover reasonable moving and relocation expenses not to exceed US$55,000, paid in French Franc's. These funds shall be provided to cover the cost of moving, temporary living, household items such as window treatments, carpeting, kitchen and other housing necessities that create a hardship in relocation. Upon joining the Company, you shall be granted an option to purchase 100,000 shares of the Company's currently authorized Common Stock at an exercise price of $.31 per share. The options vest equally over four years, with the first 25% of the granted options becoming exercisable after one full year of service with the Company. The remainder of the options shall vest at the rate of 1/48th per month and shall expire the day after the initial 48 month vesting period is over. Your stock options shall be subject to all the rights, provisions and restrictions as set forth in the Company's 1988 Incentive Stock Option Plan, as amended through June 1995. Additionally, the Company shall provide, upon acceptance of this offer and continued employment with the Company, an annual all inclusive automobile allowance of $8,800, paid in French Franc's, which shall be used to reimburse you for monthly lease costs, automobile and liability insurance and associated costs. Monthly automobile operating costs shall be reimbursable to you through the proper submission of periodic expense reports. Within the first 30 days of your employment with the Company, the Company at its expense, shall draft and execute an employment contract with you and its wholly owned subsidiary, Ventana Medical Systems, SA. This employment contract shall comply with French Labor Regulations, shall reflect the substantive issues outlined in this letter agreement and otherwise to be acceptable to both parties. BENEFITS: The Company will ensure that health benefits for you, your wife and your dependent children are in place as prescribed by French Law and under the regulations of the French Social Welfare System. Statutory withholding deductions, as prescribed by French Law, shall be withheld from your salary as it is paid to you. Any of these costs or additional contributions required to be paid to the applicable agency by the Company on your behalf shall be so paid by the Company as prescribed by Law. Additionally, in the event that you should become sick or disabled while employed by the Company, Ventana shall continue to pay your salary and any social welfare cost differential for a six month period. Be advised that this is in addition to the six weeks salary continuation program stipulated by French Law, which covers an individual during the first six weeks of their sickness or disability. You shall receive 30 days of paid vacation and 12 days of paid holiday annually, consistent with standard practice under French Law, as commonly referred to as Bank Holidays. -2- 3 At present, Ventana does not have a defined benefit or contribution pension plan in place in Europe. Current practice is to utilize the Incentive Stock Option Plan of the Company in place of these plans as a potential capital appreciation vehicle. Additionally, the Company has a Employee Stock Purchase Plan which is currently being modified to include European employee participation. As soon as this Plan has been modified and approved by the Board of Directors and Shareholders, you will be allowed to participate in said Plan in accordance with its provisions. Upon reaching profitable operations, the Company shall explore the feasibility of instituting a defined benefit or contribution plan for its employees. To the extent that these plans are instituted and European employees are covered by such plan or plans, you shall be allowed to participate in them in accordance with their provisions. Ernst & Young, the Company's public accounting firm, shall be contacted, upon your acceptance of this offer, to administer your payroll, benefit taxes, government reports, tax returns and related activities at no cost to you. Upon acceptance of this offer, you shall provide the Company with the name of the bank, your account number and wire transfer instructions so the administration of your cash compensation, et al, can be properly effectuated. Should you be terminated from the employ of the Company, for any reason, you shall be provided with an appropriate notice and continuing compensation through the quarter of notice and one full additional quarter as your full termination benefit with the Company. No other termination provisions shall apply if such an event should occur. The Company's Management, its Board and I are enthusiastic about Ventana's future and its long term prospects for the European Operation under your leadership. The Company has the technology, products and determination to become the dominant player in this fastest growing segment of the medical diagnostic device industry. The Company looks forward to your participation and contribution to the continued growth and development of the business. Please indicate your acceptance of this offer, in the place provided below, by signing a returning one copy of this Agreement. Please keep one executed copy of this Agreement for your records. Sincerely, /s/ R. MICHAEL RODGERS R. Michael Rodgers Vice President and Secretary Accepted this_______________day of October, 1995. By:__________________________________ Bernard O.C. Questier -3- 4 EXHIBIT I Ventana Medical Systems, Inc. Job Description TITLE: VICE PRESIDENT EUROPEAN OPERATIONS OVERVIEW European in nationality, multilingual with French, German and English minimally. Technical background ideal with previous experience and record of excellence in sales and marketing. Must have hired, trained, motivated own sales force for 5 years. General management experience either as running a small business in Europe or as country manager for a larger company, minimally 3-5 years. Ideally would have worked during a high growth period or a start up period. Either general management experience or minimally sales experience to have been with an American company. Ideal candidate would have had some tenure in the USA. Must have selling and management experience outside native country. 5 GENERAL MANAGEMENT RESPONSIBILITIES EXHIBIT I Set into place the infrastructure needed to establish a commercial base in Europe in the most cost effective method and place, including considerations such as tax implications, distribution costs, training costs, travel costs for customers, service and personnel, ease in meeting regulatory requirements, government economic development incentives, etc. Define and select the core organizational management team needed to establish a commercial base in Europe and to bring to cash flow breakeven in the most expeditious manner possible but with some consideration for future growth. Co-develop and then meet monthly, annual and long term sales and profitability goals. Co-identify, along with R&D, a list of key influential accounts. Use European contacts as information for identifying and obtaining licensing for key new products. Execute strategy for closing key accounts with initial placement of instrument. Define and implement proof sources from these accounts. Provide consistent, fair, standard performance feedback to staff and ensure that philosophy is followed throughout the organization. Develop a culture within Ventana Europe that rewards and celebrates excellence in customer satisfaction and outstanding performance and yet recognizes the practical necessities of making a profit and providing a good consistent return to the investors. Manage customer support functions to include field technical support, technical consultation center, field service, customer training, order entry and distribution. This includes the responsibility to move the reporting relationship of each of these or even other functions in/out of individual country's responsibility as the Company grows and the "best fit for the customer benefit/organizational economics" dictate otherwise; e.g., centralized order entry for all of Europe through order entry specific for each country. 6 MARKETING RESPONSIBILITIES EXHIBIT I Perform classical market segmentation analysis and develop strategies and tactics for optimum return from each segment, a segment being defined as either a disease state or a geographic area. Determine product value, establish value attributes for customer, and develop pricing accordingly. Develop and continually update account profiles of both current and future customers. Define information to be routinely collected by sales reps. Use profile information for providing target accounts to sales and defining sales programs. Identify key target accounts with logical factual parameters that mesh with segmentation analysis and overall strategies. Target and prioritize key accounts for sales activities. Develop and continually update sales aides and tools as required to achieve penetration and pricing. Develop and execute market growth strategies and tactics, including educational programs for pathologists, support of seminars at national meetings or development of tertiary influences such as oncologists. Develop and train sales people with effective closing tools for each market segment or each decision maker within segments; e.g. financial models, quality story boards, etc. Generate technical papers and proof sources in respected technical and trade journals. Hold focus panels/cultivate key influential leaders to bring customer needs both current and future into the Company. Form a scientific advisory board for Europe. Develop and maintain price lists. Develop, update and manage the distribution of product brochures. Develop and execute advertising strategies that fit into the overall product strategy. Develop, update sales pitch books and train how to use. Define R&D priority input as fits European needs and as based on factual market segment information. 7 EXHIBIT I Develop and update market size, growth information in both dollars, local currency and slide volume by market opportunity, country specific. Develop and update market size and penetration information for all planning processes. Co-devlop sales incentive programs to meet target sales goals. Develop and execute public relations campaigns, ensuring that they fit within the overall segment strategy. Develop and distribute various product and Company information for customers and end user use; e.g. newsletters, etc. Co-develop customer satisfaction indices for sales and support organizations and whole company. Co-develop sales/profitability plans, monthly, annual, long term. Lead role in defining trade show tactics and attend key shows. Analyze competition and provide standard competitive information to sales and R&D; e.g., handling objections, generalized comparisons, technical performance comparisons - internal, external proof source comparisons. 8 SALES RESPONSIBILITIES EXHIBIT I Co-develop and then meet monthly, annual, long term sales and profitability plans. Hire, train, motivate, lead sales team. Co-develop and then meet customer satisfaction indices for sales, customer support, and whole team. Co-develop with marketing key reference accounts for written and verbal proof sources. Develop trade show tactics and attend in both sales and competitive information gathering role. Co-develop and lead sales training programs including key items such as product knowledge, negotiation and clsoing skills, account development strategies, financial skills (both Ventana's and accounts perspective) and administrative skills, e.g. customer profile information, time management, forecasting, etc. Determine optimum expansion plans including determination of which countries merit direct sales force and which countries merit distributor arrangements. Establish and monitor sales performance standards and goals. Provide competitive information back to marketing for action and co-develop competitive tactics. Develop European business unit budgets and meet budgetary expense goals consistent with actual or expected sales performance. Field travel as needed to develop a fundamental understanding of the customers, the selling process and to teach, coach, train and lead the sales force in the process of closing the customers; 70-80% travel would not be unexpected in the earlier stages of market development. Select distributors and negotiate distribution contracts to ensure optimum returns to Ventana and to insure that optimum protection for Company growth is provided in contracts. 9 [ARTICLE] 5 [MULTIPLIER] 1,000 [PERIOD-TYPE] YEAR [FISCAL-YEAR-END] DEC-31-1995 [PERIOD-START] JAN-01-1995 [PERIOD-END] DEC-31-1995 [CASH] 1,103 [SECURITIES] 0 [RECEIVABLES] 1,925 [ALLOWANCES] 0 [INVENTORY] 1,767 [CURRENT-ASSETS] 4,819 [PP&E] 4,198 [DEPRECIATION] 1,940 [TOTAL-ASSETS] 7,378 [CURRENT-LIABILITIES] 2,054 [BONDS] 0 [PREFERRED-MANDATORY] 35,180 [PREFERRED] 0 [COMMON] 244 [OTHER-SE] 0 [TOTAL-LIABILITY-AND-EQUITY] 7,378 [SALES] 10,613 [TOTAL-REVENUES] 10,613 [CGS] 4,282 [TOTAL-COSTS] 4,282 [OTHER-EXPENSES] 3,343 [LOSS-PROVISION] 0 [INTEREST-EXPENSE] 0 [INCOME-PRETAX] (3,269) [INCOME-TAX] 0 [INCOME-CONTINUING] (3,269) [DISCONTINUED] 0 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] (3,269) [EPS-PRIMARY] 0.14 [EPS-DILUTED] 0.14
EX-10.10 15 RESTATED INVESTORS RIGHTS AGREEMENT 2/26/96 1 Exhibit 10.10 EXHIBIT G RESTATED INVESTORS RIGHTS AGREEMENT This Agreement is made as of February 20, 1996 by and between Ventana Medical Systems, Inc., a Delaware corporation (the "Company"), and certain holders of the Company's Preferred Stock and Warrants to purchase Preferred Stock. WHEREAS, the Company intends to enter into a Note and Warrant Purchase Agreement. In connection with this transaction, the Company wishes to restate its prior Restated Investors Rights Agreement dated October 17, 1994, as amended, among the Company and certain holders of the Company's Preferred Stock and Warrants to purchase Preferred Stock (the "Prior Rights Agreement"). NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Registration Rights. 1.1 Certain Definitions. As used in this paragraph 1, the following terms shall have the following respective meanings: "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Act. "Holder" shall mean the original purchaser of the Registrable Securities and any person holding Registrable Securities to whom the rights under this paragraph 1 have been transferred in accordance with paragraph 1.1 hereof. "Initiating Holders" shall mean any Holders of greater than one-quarter (1/4) of the outstanding Registrable Securities. "Registrable Securities" means (i) the Common Stock issuable upon conversion of Series A Preferred Stock issued pursuant to the Series A Preferred Stock Purchase Agreements dated December 31, 1987 and August 16, 1988; (ii) the Common Stock issuable upon conversion of the Series C Preferred Stock issued upon conversion of the Series B Preferred Stock issued pursuant to the Series B Preferred Stock Purchase Agreement dated and June 6, 1989, as amended December 29, 1989; (iii) the Common Stock issuable upon exercise of the Warrant for 45,000 shares of Series C Preferred Stock issued to Lease Management Associates, Inc.; (iv) the Common Stock issuable upon conversion of the Series C Preferred Stock issued pursuant to the Series C Preferred Stock Purchase Agreement dated April 22, 1991 and the Series C Preferred Stock Purchase Agreement dated October 10, 1991, as amended January 13, 1992; (v) the Common Stock issuable upon conversion of the Series D Preferred Stock issuable upon exercise of the Warrants issued to Victoria Bannister and Jack Schuler in connection with loans to the Company made pursuant to a Note Agreement dated April 15, 1992, (vi) the Common Stock issuable upon conversion of the Series D Preferred Stock issuable upon exercise of the Warrants issued to Marquette Venture Partners and MBW Venture Partners pursuant to the Bridge Loan and Warrant Agreement dated August 21, 1992; (vi) the Common Stock issuable upon conversion of the Series D Preferred Stock issued pursuant to the 2 Series D Preferred Stock Purchase Agreement dated September 30, 1992, as amended March 25, 1993, and as further amended April 26, 1993; (vii) the Common Stock issuable upon conversion of the Series D Preferred Stock issued pursuant to the Series D Preferred Stock Purchase Agreement dated October 17, 1994, as amended and the Common Stock issuable upon conversion of the Series D Preferred Stock issuable upon exercise of warrants issued pursuant to such Series D Preferred Stock Purchase Agreement; (viii) the Common Stock issuable upon conversion of the convertible subordinated promissory notes issued pursuant to the Note and Warrant Purchase Agreement of even date herewith, (ix) the Common Stock issuable upon conversion of the Series D Preferred Stock (or other securities) issuable upon exercise of the Series D Preferred Stock Warrants issued pursuant to the Note and Warrant Purchase Agreement; and (x) any Common Stock of the Company issued or issuable in respect of the Series A Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or other securities issued or issuable pursuant to the conversion of the Series A Preferred Stock, Series C Preferred Stock or Series D Preferred Stock upon any stock split, stock dividend, recapitalization, or similar event, or any Common Stock otherwise issued or issuable with respect to the Series A Preferred Stock, the Series C Preferred Stock or Series D Preferred Stock; provided, however, that shares of Common Stock or other securities shall only be treated as Registrable Securities if and so long as they have not been (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) sold or are available for sale in the opinions of counsel to the Company and counsel to the Initiating Holders in a transaction exempt from the registration and prospectus delivery requirements of the Act so that all transfer restrictions and restrictive legends with respect thereto are removed upon the consummation of such sale. The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Act, and the declaration or ordering of the effectiveness of such registration statement. "Registration Expenses" shall mean all expenses, other than Selling Expenses, incurred by the Company in complying with paragraphs 1.2, 1.3 and 1.4 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company) and the reasonable fees and disbursements of one counsel for all Holders. "Purchaser" shall mean a purchaser of Series A Preferred Stock pursuant to the Series A Preferred Stock Purchase Agreements dated December 31, 1987 and August 16, 1988, a purchaser of Series B Preferred Stock pursuant to the Series B Preferred Stock Purchase Agreement dated June 6, 1989 as amended December 29, 1989, a purchaser of Series C Preferred Stock pursuant to the Series C Preferred Stock Purchase Agreement dated April 22, 1991, a purchaser of Series C Preferred Stock pursuant to the Series C Preferred Stock Purchase Agreement dated October 10, 1991, as amended January 13, 1992, a purchaser of Series D Preferred Stock pursuant to the Series D Preferred Stock Purchase Agreement dated September 30, 1992, as amended March 25, 1993, and as further amended April 26, 1993, a purchaser of Series D Preferred Stock pursuant to the Series D -2- 3 Preferred Stock Purchase Agreement dated October 17, 1994 and a Purchaser of Notes and Warrants pursuant to the Note and Warrant Purchase Agreement of even date herewith. "Restricted Securities" shall mean the securities of the Company required to bear a legend in the form set forth in paragraph 4.2 of the Series A Preferred Stock Purchase Agreements dated December 31, 1987 and August 16, 1988, the Series B Preferred Stock Purchase Agreement dated June 6, 1989 as amended December 29, 1989, the Series C Preferred Stock Purchase Agreements dated April 22, 1991 and October 10, 1991, the Series D Preferred Stock Purchase Agreement dated September 30, 1992, as amended March 25, 1993, and as further amended April 26, 1993, the Series D Preferred Stock Purchase Agreement dated October 17, 1994, as amended, and the Note and Warrant Purchase Agreement of even date herewith. "Act" shall mean the Act of 1933, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Selling Expenses" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the securities registered by the Holders and, except for fees and disbursements of counsel included within the definition of Registration Expenses, all reasonable fees and disbursements of counsel for any Holder. 1.2 Requested Registration. (a) Request for Registration. In case the Company shall receive from Initiating Holders a written request that the Company effect any registration, qualification or compliance with respect to shares of Registrable Securities having an expected aggregate offering price of at least $3,000,000, the Company will: (i) promptly give written notice of the proposed registration, qualification or compliance to all other Holders; and (ii) as soon as practicable, use its best efforts to effect such registration, qualification or compliance (including, without limitation, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within 20 days after receipt of such written notice from the Company; Provided, however, that the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this paragraph 1.2: (A) In any particular jurisdiction (other than New York or Illinois) in which the Company would be required to execute a general consent to service of process in effecting such -3- 4 registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Act; (B) Prior to six months after the effective date of the Company's first registered public offering of its stock; (C) During the period starting with the date sixty (60) days prior to the Company's estimated date of filing of, and ending on the date six (6) months immediately following the effective date of, any registration statement pertaining to securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan), provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; (D) After the Company has effected two such registrations pursuant to this paragraph 1.2 (a), which registrations have been declared or ordered effective and in which registrations at least 50% of the securities requested to be registered for the account of the Holders have been sold; (E) If the Company shall furnish to such Holders a certificate signed by the President of the Company stating that in the reasonable good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its stockholders for a registration statement to be filed in the near future, then the Company's obligation to use its best efforts to register, qualify or comply under this paragraph 1.2 shall be deferred for a period not to exceed 120 days from the date of receipt of written request from the Initiating Holders. Subject to the foregoing clauses (A) through (E), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable, after receipt of the request or requests of the Initiating Holders. (b) Underwriting. In the event that a registration pursuant to paragraph 1.2 is for a registered public offering involving an underwriting, the Company shall so advise the Holders as part of the notice given pursuant to paragraph 1.2(a)(i). In such event, the right of any Holder to registration pursuant to paragraph 1.2 shall be conditioned upon such Holder's participation in the underwriting arrangements required by this paragraph 1.2, and the inclusion of such Holder's Registrable Securities in the underwriting to the extent requested shall be limited to the extent provided herein. The Company shall (together with all Holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by a majority in interest of the Initiating Holders, but subject to the Company's reasonable approval. Notwithstanding any other provision of this paragraph 1.2, if the managing underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Company shall so advise all holders of Registrable Securities and the number of shares of Registrable Securities that may be -4- 5 included in the registration and underwriting shall be allocated among all Holders thereof in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders at the time of filing the registration statement. No Registrable Securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest 100 shares. If any Holder of Registrable Securities disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the managing underwriter and the Initiating Holders. The Registrable Securities and/or other securities so withdrawn shall also be withdrawn from registration, and such Registrable Securities shall not be transferred in a public distribution prior to 120 days after the effective date of such registration, or such other shorter period of time as the underwriters may require. 1.3 Company Registration. (a) Notice of Registration. If at any time or from time to time the Company shall determine to register any of its securities, either for its own account or the account of a security holder or holders, other than (i) a registration relating solely to employee benefit plans or (ii) a registration relating solely to a Commission Rule 145 transaction, the Company will: (i) promptly give to each Holder written notice thereof; and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within 20 days after receipt of such written notice from the Company, by any Holder. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to paragraph 1.3(a)(i). In such event the right of any Holder to registration pursuant to paragraph 1.3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company. Notwithstanding any other provision of this paragraph 1.3, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the Registrable Securities or other securities to be included in such registration. The Company shall so advise all Holders and other holders distributing their securities through such underwriting and the number of shares of Registrable Securities and other securities that may be included in the registration and underwriting shall be allocated as follows: (i) first, the securities the Company proposes to sell, (ii) second, the Registrable Securities requested to be included in such registration, pro rata among the Holders on the basis of -5- 6 the number of shares originally proposed to be registered by such Holders and (iii) third, other securities requested to be included in such registration, pro rata among the holders of such securities on the basis of the number of securities originally proposed to be registered by such holders. To facilitate the allocation of shares in accordance with the above provisions, the Company may round the number of shares allocated to any Holder or holder to the nearest 100 shares. If any Holder or holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration, and shall not be transferred in a public distribution prior to 120 days after the effective date of the registration statement relating thereto, or such other shorter period of time as the underwriters may require. (c) Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this paragraph 1.3 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. 1.4 Registration on Form S-3. (a) If any Holder or Holders holding in the aggregate not less than 5% of the then outstanding Registrable Securities request that the Company file a registration statement on Form S-3 (or any successor form to Form S-3) for a public offering of shares of the Registrable Securities the reasonably anticipated aggregate price to the public of which, net of underwriting discounts and commissions, would exceed $1,000,000, and the Company is a registrant entitled to use Form S-3 to register the Registrable Securities for such an offering, the Company shall use its best efforts to cause such Registrable Securities to be registered for the offering on such form and to cause such Registrable Securities to be qualified in such jurisdictions as the Holder or Holders may reasonably request; provided, however, that the Company shall not be required to effect more than one registration pursuant to this paragraph 1.4 in any twelve (12) month period. The substantive provisions of paragraph 1.2(b) shall be applicable to each registration initiated under this paragraph 1.4. (b) Notwithstanding the foregoing, the Company shall not be obligated to take any action pursuant to this paragraph 1.4: (i) in any particular jurisdiction other than New York or Illinois in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Act; (ii) during the period starting with the date sixty (60) days prior to the Company's estimated date of filing of, and ending on the date six (6) months immediately following, the effective date of any registration statement pertaining to securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan), provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; or (iii) if the Company shall furnish to such Holder a certificate signed by the President of the Company stating that in the reasonable good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its stockholders for registration statements to be filed in the near future, then the -6- 7 Company's obligation to use its best efforts to file a registration statement shall be deferred for a period not to exceed 120 days from the receipt of the request to file such registration by such Holder. 1.5 Expenses of Registration. All Registration Expenses incurred in connection with all registrations pursuant to paragraphs 1.2, 1.3 and 1.4 shall be borne by the Company. Unless otherwise stated, all Selling Expenses relating to securities registered on behalf of the Holders and all other Registration Expenses shall be borne by the Holders of such securities pro rata on the basis of the number of shares so registered. 1.6 Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to this paragraph 1, the Company will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense the Company will: (a) Prepare and file with the Commission a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for at least one hundred eighty (180) days or until the distribution described in the Registration Statement has been completed; (b) Furnish to the Holders participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities. 1.7 Indemnification. (a) The Company will indemnify each Holder, each of its officers and directors and partners, and each person controlling such Holder within the meaning of Section 15 of the Act, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Act, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of the Act or any rule or regulation promulgated under the Act applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Holder, each of its officers and directors, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue -7- 8 statement or omission, made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder, controlling person or underwriter and stated to be specifically for use therein. (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Act, and each other such Holder, each of its officers and directors and each person controlling such Holder within the meaning of Section 15 of the Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein. Notwithstanding the foregoing, the liability of each Holder under this subsection (b) shall be limited in an amount equal to the initial public offering price of the shares sold by such Holder, unless such liability arises out of or is based on willful conduct by such Holder. (c) Each party entitled to indemnification under this paragraph 1.7 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this paragraph 1 unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action and provided further, that the Indemnifying Party shall not assume the defense for matters as to which there is a conflict of interest or separate and different defenses. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of 'each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. 1.8 Information by Holder. The Holder or Holders of Registrable Securities included in any registration shall furnish to the Company such information regarding such Holder or Holders, the -8- 9 Registrable Securities held by them and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this paragraph 1. 1.9 Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Act, at all times after the effective date that the Company becomes subject to the reporting requirements of the Act or the Securities Exchange Act of 1934, as amended. (b) Use its best efforts to file with the commission in a timely manner all reports and other documents required of the Company under the Act and the Securities Exchange Act of 1934, as amended (at any time after it has become subject to such reporting requirements); (c) So long as a Purchaser owns any Restricted Securities to furnish to the Purchaser forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Act and the Securities Exchange Act of 1934 (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration. 1.10 Transfer of Registration Rights. The rights to cause the Company to register securities granted under paragraphs 1.2, 1.3 and 1.4 may be assigned to a transferee or assignee in connection with any transfer or assignment of Registrable Securities provided that such assignee or transferee acquires at least 50,000 shares of Registrable Securities. Notwithstanding the foregoing, the rights to cause the Company to register securities may be assigned to any constituent partner of a Purchaser, without compliance with the preceding sentence, provided written notice thereof is promptly given to the Company. 1.11 Standoff Agreement. Each Holder agrees, so long as such Holder holds at least one percent (1%) of the Company's outstanding voting equity securities, in connection with the Company's initial public offering of the Company's securities or any public offering of the Company's securities made hereunder that, upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities (other than those included in the registration) without the prior written consent of the Company or such underwriters, -9- 10 as the case may be, for such period of time (not to exceed one hundred twenty (120) days) from the effective date of such registration as may be requested by the underwriters. 1.12 Amendment and Termination of Registration Rights. With the written consent of the holders of more than 50% of the then outstanding Registrable Securities (including the securities convertible into Registrable Securities), the Company may amend this paragraph 1, or enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder to include such securities as Registrable Securities under this Agreement. This paragraph 1 shall terminate six years following the effective date of the Company's first registered public offering of its stock. The Company shall not enter into any agreement which would conflict with or prohibit the Company from fulfilling its obligations hereunder. 2. Issuance of New Securities: Right of First Refusal. Should the Company propose to sell and issue any New Securities, (as defined below) and should such sale and issuance be approved in the manner required by the Company's Certificate of Incorporation, the Company hereby grants to each Purchaser the right of first refusal to purchase, pro rata, a portion of such New Securities. A Purchaser's pro rata share, for purposes of this right of first refusal, is the ratio of the number of shares of Common Stock held by such Purchaser (including shares of Common Stock issuable upon conversion of Preferred Stock or acquirable upon exercise of warrants held by such Purchaser) to the total number of shares of Common Stock outstanding (including all securities convertible into, exchangeable for or exercisable for Common Stock). This right of first refusal shall be subject to the following provisions: (a) "New Securities" shall mean any capital stock of the Company whether or not now authorized, the rights, options or warrants to purchase capital stock and securities of any type whatsoever that are, or may become, convertible into capital stock; provided that the term "New Securities" does not include (i) securities issuable upon exercise or conversion of currently outstanding securities; (ii) the Preferred Stock or the Common Stock into which such Preferred Stock is convertible; (iii) securities issued pursuant to a public offering pursuant to an effective registration statement under the Act; (iv) securities issued pursuant to the Company's acquisition of another corporation by merger, purchase of substantially all the assets or other reorganization whereby the Company owns not less than fifty-one percent (51%) of the voting power of such corporation or entity; (v) securities issued to employees, consultants, and directors of or scientific advisors to the Company pursuant to any arrangement approved by the board of directors; (vi) securities issued in equipment leasing or equipment financing transactions; and (vii) securities issued in connection with any stock split or stock dividend of the Company. (b) In the event the Company proposes to undertake an issuance of New Securities and after it has received a bona fide offer to purchase such New Securities, it shall give each Purchaser written notice of its intention, describing the type of New Securities, the price and the general terms upon which the Company proposes to issue the same. Each Purchaser shall have twenty (20) days from the date of receipt of any such notice to agree to purchase the Purchaser's pro rata share of such -10- 11 New Securities for the price and upon the general terms specified in the notice by giving written notice to the Company and stating therein the quantity of New, Securities to be purchased. (c) In the event the Purchaser fails to exercise the right of first refusal within said twenty (20) day period, the Company shall have one hundred twenty (120) days thereafter, to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within sixty (60) days from the date of said agreement) to sell the New Securities respecting which the Purchaser's option was not exercised, at the price and upon the terms specified in the Company's notice. In the event the Company has not entered into an agreement to sell the New securities within said 120-day period (or sold and issued New Securities in accordance with the foregoing within sixty (60) days from the date of said agreement), the Company shall not thereafter issue or sell any New Securities, without first offering such securities to the Purchasers in the manner provided above. (d) The right of first refusal granted under this Agreement shall expire upon the first to occur of the following: (i) the closing of a Qualifying Public Offering (as defined in Article 4, Section 4(b) of the Company's Restated Certificate of Incorporation) a public offering pursuant to an effective registration statement under the Act, or (ii) as to any Purchaser if such Purchaser no longer holds 80,000 shares of Preferred Stock (or Common Stock issued upon conversion of such Preferred Stock). 3. Waivers and Amendments to Prior Agreements. 3.1 Waivers. The holders of Preferred Stock hereby waive their rights of first refusal set forth in paragraph 2 of the Prior Rights Agreement with regard to the proposed sale and issuance of the Notes and the Warrants (and the Series D Preferred Stock issuable upon exercise of the Warrants and the Common Stock issuable upon conversion thereof) pursuant to the Note and Warrant Purchase Agreement of even date herewith. This waiver shall be effective upon execution of this Agreement by the Company and the holders of more than 50% of the Preferred Stock. 3.2 Amendments to Prior Agreements. The Prior Rights Agreement is hereby terminated and superseded in its entirety by this Agreement. This amendment to the Prior Rights Agreement shall be effective upon the execution of this Agreement by the Company and the holders of more than 50% of the Preferred Stock. 4. Miscellaneous. 4.1 Waivers and Amendments. With the written consent of the Company and the Holders of more than 50% of the Registrable Securities, the obligations of the Company and the rights of the Holders under this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively and either for a specified period of time or indefinitely), and with the same consent the Company, when authorized by resolution of its Board of Directors, may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement; provided, however, that no such -11- 12 waiver or supplemental agreement shall reduce the aforesaid percentage of Registrable Securities, the Holders of which are required to consent to any waiver or supplemental agreement without the consent of the Holders of all of the Registrable Securities. Neither this Agreement nor any provisions hereof may be changed, waived, discharged or terminated orally, but only by a signed statement in writing. Any amendment, waiver or supplementary agreement effected in accordance with this paragraph shall be binding upon each Holder of any Registrable Securities then outstanding, each future Holder of all such Registrable Securities and the Company. 4.2 Governing Law. This Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. 4.3 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 4.4 Entire Agreement. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof 4.5 Notices. All notices and other communications required or permitted hereunder shall be in writing and may be delivered in person, by telecopy with written confirmation, overnight delivery service or U.S. mail, in which event it may be mailed by first-class, certified or registered, postage prepaid, addressed (a) if to a Holder, at such address as such Holder shall have furnished the Company in writing, or; until any such Holder so furnishes an address to the Company, then to and at the address of the last holder of such securities who has so furnished an address to the Company, or (b) if to the Company, at such address as the Company shall have furnished to the Holders in writing. Each such notice or other communication shall for all purposes this Agreement be treated as effective or having been given when delivered if delivered personally, or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid, or if sent by telecopier with written confirmation, at the earlier of (i) 24 hours after confirmation of transmission by the sending telecopier machine or (ii) delivery of written confirmation. 4.6 Titles and Subtitles. The titles of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 4.7 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 4.8 Nominees. Securities registered in the name of a nominee for a Holder shall, for purposes of this Agreement, be treated as being owned by such Holder. -12- 13 4.9 SBIC Regulatory Matters. (a) SBIC Regulatory Compliance Cooperation. (i) If a Purchaser determines that it has a Regulatory Problem (as defined below), the Company agrees to take all such actions as are reasonably requested by such Purchaser (x) to effectuate and facilitate any transfer by such Purchaser of any Securities (as defined below) of the Company then held by such Purchaser to any Person designated by such Purchaser, (y) to permit such Purchaser (or any Affiliate of such Purchaser) to exchange all or any portion of the voting Securities then held by such Person on a share-for-share basis for shares of a class of nonvoting Securities of the Company, which nonvoting Securities shall be identical in all respect to such voting Securities, except that such new Securities shall be nonvoting and shall be convertible into voting Securities on such terms as are requested by such Purchaser in light of regulatory considerations then prevailing, and (z) to continue and preserve the respective allocation of the voting interests with respect to the Company provided for in the Purchase Agreement and with respect to such Purchaser's ownership of the Company's voting securities. Such actions may include, without limitation, (x) entering into such additional agreements as are reasonably requested by such Purchaser to permit any Person(s) designated by such Purchaser to exercise any voting power which is relinquished by such stockholder upon any exchange of voting Securities for nonvoting Securities of the Company; and (y) entering into such additional agreements, adopting such amendments to the Certificate of Incorporation and bylaws of the Company and taking such additional actions as are reasonably requested by such Purchaser in order to effectuate the intent of the foregoing. (ii) If a Purchaser has the right or opportunity to acquire any of the Company's Securities from the Company, any Purchaser or any other Person (as the result of a preemptive offer, pro rata offer or otherwise), at such Purchaser's request the Company will offer to sell (or if the Company is not the seller, to cooperate with the seller and such stockholder to permit such seller to sell) such non-voting Securities on the same terms as would have existed had such Purchaser acquired the Securities so offered and immediately requested their exchange for non-voting Securities pursuant to paragraph (i) above. (iii) Before the Company redeems, purchases or otherwise acquires, directly or indirectly, or converts or takes any action with respect to the voting rights of, any Securities, the Company shall give written notice of such pending action to each Purchaser. Upon the written request of any Purchaser made within 10 days after its receipt of such notice stating that after giving effect to such action such Purchaser would have a Voting Regulatory Problem, the Company shall defer taking such action for such period (not to extend beyond 45 days after such Purchaser's receipt of the Company's original notice) as such Purchaser requests to permit it and its Affiliates to reduce the quantity of the Company's Securities they own or take other appropriate action in order to avoid the Voting Regulatory Problem. In addition, in the event of any merger, consolidation, recapitalization or other transaction involving the Company pursuant to which any Purchaser would be required to take any voting Securities, or any Securities convertible into or exchangeable or exercisable for, voting Securities, the Company will give the Purchaser at least 30 days notice of the -13- 14 closing of such transaction and will cooperate with the Purchaser in seeking to resolve any Voting Regulatory Problem which such Purchaser may have as a result of such transaction. (iv) In the event that any Subsidiary of the Company ever offers to sell any of its Securities, then the Company will cause such Subsidiary to enter into agreements with each stockholder substantially similar to this Section 4.9. (b) Cooperation of Other Stockholders. Each Purchaser agrees to cooperate with the Company in complying with Section 4.9(a) above, including without limitation, voting to approve amending the Company's Certificate of Incorporation in a manner reasonably requested by the Purchaser requesting such amendment; provided, however, that no Purchaser shall be required to vote in favor of any such amendment to the Company's Certificate of Incorporation which adversely affects such Purchaser. (c) Covenant Not to Amend. The Company and each Purchaser agree not to amend or waive the voting or other provisions of this Agreement or the Company's Certificate of Incorporation if such amendment or waiver would cause any Stockholder to have a Voting Regulatory Problem promptly after it has notice of such amendment or waiver. No provision of this Section 4.9 may be amended without the consent of The CIT Group/Venture Capital, Inc. (d) Certain Definitions. As used in this Section 4.9: "Person" shall be construed broadly and shall include an individual, partnership, corporation, joint venture, association, limited liability company, joint-stock company, trust, unincorporated organization, union, business association, firm, government or agency or political subdivision thereof, or other entity. "Regulatory Problem" means (i) any set of facts or circumstance wherein it has been asserted by any governmental regulatory agency (or a Purchaser believes that there is a substantial risk of such assertion) that such Purchaser is not entitled to hold, or exercise any significant right with respect to, the Securities or (ii) a Voting Regulatory Problem. "Securities" means with respect to any Person, such Person's capital stock or any options, warrants or other securities that are directly or indirectly convertible into, or exercisable or exchangeable for, such Person's capital stock. Whenever a reference herein to Securities is referring to any derivative Securities, the rights of a Purchaser shall apply to such derivative Securities and all underlying Securities directly or indirectly issuable upon conversion, exchange or exercise of such derivative securities. "Voting Regulatory Problem" shall exist when a Person and such Person's Affiliates would own, control or have power over a greater quantity of Securities of any kind issued by the Company or any other Person than are permitted under any requirement of any governmental authority." -14- 15 The foregoing Restated Investors Rights Agreement is hereby executed as of the date first above written. COMPANY: VENTANA MEDICAL SYSTEMS, INC. By: /s/ R. JAMES DANEHY -------------------------- R. James Danehy, President -15- 16 HOLDERS: Number and Name of Holder Series of Shares -------------- ---------------- - ---------------------------- 10,000 Series D Edwin A. Albritton - ---------------------------- 23,256 Series D Jerry D. Armstrong /s/ ALFRED R. BADER - ---------------------------- 107,539 Series D Alfred R. Bader /s/ ISABEL BADER - ---------------------------- 10,000 Series D Isabel Bader DANIEL BADER, MARVIN KLITSNER, 15,000 Series D JERE D. McGAFFEY, WAYNE R. LUEDERS, TRUSTEES OF THE DANIEL BADER 1992 INVESTMENT TRUST DATED 5/20/92 By: /s/ DANIEL BADER --------------------- Title: Trustee --------------------- /s/ VICTORIA BANNISTER - ---------------------------- 300,000 Series C Victoria Bannister 21,715 Series D /s/ REX J. BATES - ---------------------------- 53,770 Series D Rex J. Bates - ---------------------------- 11,628 Series D James D. Bell -16- 17 Number and Series of Shares ---------------- JAMES L. BENNINGTON AND 3,334 Series C JOSEPHINE K. BENNINGTON LIVING TRUST By: ---------------------- Title: ---------------------- - ----------------------------- 7,778 Series C Lawrance A. Brown, Jr. 621 Series D - ----------------------------- 23,256 Series D Ray O. Brownlie - ----------------------------- 44,445 Series C Ian R.N. Bund BUSINESS DEVELOPMENT FINANCE 41,666 Series C CORPORATION By: --------------------- Title: --------------------- - ----------------------------- 23,401 Series A J. Charles Casebeer - ----------------------------- 16,000 Series A Mary Cawley - ----------------------------- 1,000 Series C Mary Cawley, as custodian for Graham Dexter Cawley -17- 18 Number and Series of Shares ---------------- - ----------------------------- 1,000 Series C Mary Cawley, as custodian for Andrew Clinton Cawley - ----------------------------- 14,000 Series D Joseph Charboneau - ----------------------------- 7,693 Series A Ardner R. Cheshire WAYNE L. CLEVENGER PENSION PLAN 1,112 Series C By: ------------------------- Title: ---------------------- - ----------------------------- 20,000 Series D David Collin CORONADO CO-INVESTORS, L.P. 37,778 Series C By: ------------------------- Title: ---------------------- CORONADO VENTURE FUND, L.P. 153,847 Series A 172,668 Series C By: ------------------------- Title: ---------------------- -18- 19 Number and Series of Shares ---------------- CORONADO VENTURE FUND II, L.P. 438,889 Series C 2,325 Series D By: -------------------------- Title: ----------------------- CORONADO VENTURE FUND III, L.P. 279,071 Series D By: -------------------------- Title: ----------------------- - ------------------------------ 46,512 Series D John Curran CURRAN PARTNERS 93,024 Series D By: -------------------------- Title: ----------------------- - ------------------------------ 27,160 Series D Herbert Austin Pope Doree DRC TRUST DATED OCTOBER 19, 1993 24,807 Series A 25,000 Series C By: -------------------------- 6,744 Series D Donald R. Caughey, Trustee -19- 20 Number and Series of Shares ---------------- MYRON EICHEN, JOAN D. EICHEN, 23,770 Series D TRUSTEES OF THE EICHEN FAMILY TRUST UTA 05/26/82 By: ------------------------- Title: ---------------------- SUSAN STEIN ELMENDORF TRUST 89,535 Series D U/W CLARA M. STEIN, FIDUCIARY TRUST By: /s/ REX BATES ------------------------- Title: Trustee ---------------------- - ----------------------------- 4,000 Series A Gist Farr, M.D. THE CHARLOTTE C. FINLEY TRUST DATED 2,500 Series A OCTOBER 14, 1994, CHARLOTTE C. FINLEY, TRUSTEE, FEIN: ###-##-#### By: ------------------------- Title: ---------------------- THE FINLEY FAMILY TRUST DATED OCTOBER 14, 2,500 Series A 1994, SARAH FINLEY, ANN BUTLER, PAUL R. FINLEY AND IAN D. FINLEY, CO-TRUSTEES, FEIN: 86-6234869 By: ------------------------- Title: ---------------------- -20- 21 Number and Series of Shares ---------------- PEOPLES BANK OF BLOOMINGTON, 20,000 Series D STEVEN R. FRANK IRA By: ------------------------------- Title: ---------------------------- /s/ EDWARD M. GILES - ----------------------------------- 49,439 Series D Edward M. Giles IRA Fiduciary Trust - ----------------------------------- 30,386 Series D Shirley R. Greene - ----------------------------------- 7,693 Series A Donald W. and Kathleen Grogan - ----------------------------------- 12,308 Series A Thomas F. Grogan, Jr. LEO S. GUTHMAN TTEE UNDER THE LEO 23,300 Series D GUTHMAN TRUST DTD 07/15/83 By: /s/ LEO S. GUTHMAN ------------------------------- Title: ---------------------------- - ----------------------------------- 2,223 Series C Robert J. Harrington - ----------------------------------- 36,500 Series A Thomas B. Healy, Jr. 20,000 Series C -21- 22 Number and Series of Shares ---------------- /s/ JOHN HOGAN - ------------------------------ 21,496 Series D John Hogan IRA Fiduciary Trust HOKENSTAD & CO. 10,000 Series C By: -------------------------- Title: ----------------------- - ------------------------------ 23,077 Series A W. Ross Humphreys ILLINOIS WESLEYAN UNIVERSITY 236,280 Series D ENDOWMENT By: -------------------------- Title: ----------------------- INTERWEST PARTNERS IV, L.P. 1,003,616 Series D By: Interwest Management Partners, IV L.P., its general partner By: /s/ ALAN W. CRITES ----------------------- Alan W. Crites, General Partner JASTLA & Co. 177,440 Series D By: [SIGNATURE CUT] -------------------------- Title: Controller ----------------------- -22- 23 Number and Series of Shares ---------------- - ----------------------------- 11,628 Series D George F. Kasten, Jr. J.N. KAZAN ASSOCIATES 5,116 Series D By: ------------------------- Title: ---------------------- - ----------------------------- 21,425 Series D Andrew B. Kim IRA LMM PARTNERSHIP #1 29,712 Series C By: ------------------------- Title: ---------------------- - ----------------------------- 153,847 Series A J. David Lowell LEASE MANAGEMENT SERVICES, INC. 24,070 Series C By: ------------------------- Title: ---------------------- -23- 24 Number and Series of Shares ---------------- MARQUETTE VENTURE PARTNERS L.P. 3,333,333 Series C 583,465 Series D By: Marquette Venture Associates L.P., Its General Partner By: Marquette Management Partners L.P., Its General Partner By: ------------------------------ Title: ------------------------------ MARQUETTE VENTURE PARTNERS II, L.P. 1,134,859 series D By: Marquette General II, Its General Partner By: JED, Limited Partnership, or LDR, Limited Partnership, or JP, Limited Partnership, Its Partners By: ------------------------------ Title: ------------------------------ MBW VENTURE PARTNERS L.P. 2,968,978 Series C 474,981 Series D By: /s/ JAMES R. WEERSING ------------------------------ Title: Manager Director ------------------------------ PHILIP E. McCARTHY PENSION PLAN 2,224 Series C By: ------------------------------ Title: ------------------------------ -24- 25 Number and Series of Shares ---------------- /s/ DAVIS U. MERWIN - ---------------------------- 53,770 Series D Davis U. Merwin - ---------------------------- 7,693 Series A Thomas P. Miller 6,000 Series C /s/ PETER MODEL - ---------------------------- 41,256 Series D Peter Model MODEL CHARITABLE LEAD TRUST 111,024 Series D By: /s/ PETER MODEL ------------------- Title: Trustee ------------------- MVP II AFFILIATE FUND, L.P. 32,425 Series D By: Marquette General II, Its General Partner By: JED, Limited Partnership, or LDR, Limited Partnership, or JP, Limited Partnership, Its Partners By: [SIGNATURE CUT] ------------------- Title: General Partner ------------------- - ---------------------------- 2,308 Series A Marijo Nagle - ---------------------------- 2,308 Series A Raymond B. Nagle -25- 26 Number and Series of Shares ---------------- NATIONAL ACADEMY OF PUBLIC 30,000 Series D ADMINISTRATION By: ---------------------- Title: ---------------------- - ------------------------------- 6,000 Series C David Nunnery - ------------------------------- 25,770 Series A John A. O'Malley, Ph.D 18,611 Series C DOROTHY L. O'NEAL REVOCABLE TRUST 25,477 Series A 22,223 Series C By: ---------------------- Title: ---------------------- /s/ RICHARD B. PETERSON - ------------------------------- 49,700 Series D Richard B. Peterson - ------------------------------- 30,386 Series D Frederick W. Rapp - ------------------------------- 30,386 Series D Mardell H. Rapp - ------------------------------- 30,386 Series D Robert M. Reardon - ------------------------------- 6,980 Series D David P. Reddrop -26- 27 Number and Series of Shares ---------------- - ----------------------------- 25,000 Series D Joseph Ricardo /s/ WILLIAM H. SCHIELD, JR. - ----------------------------- 30,000 Series D William H. Schield, Jr. /s/ JACK W. SCHULER - ----------------------------- 222,223 Series C Jack W. Schuler 250,163 Series D - ----------------------------- 84,615 Series A Jan Karel Smeets STATE FARM MUTUAL AUTOMOBILE 222,223 Series C INSURANCE COMPANY 1,860,466 Series D By: /s/ JOHN S. CONKLIN By: [SIGNATURE CUT] -------------------- ------------------ Title: VP-Fixed Income Its: Investment Officer -------------------- ------------------ /s/ REX J. BATES - ----------------------------- 150,305 Series D Sydney Stein, Jr., As Trustee of Self Declaration of Revocable Trust - ----------------------------- 8,333 Series C Doug Sweet - ----------------------------- 2,223 Series C Thomas A. & Rosemary S. Tisch - ----------------------------- 3,623 Series C Thomas A. & Rosemary S. Tisch 506 Series D Trust dated 10/3/80 -27- 28 Number and Series of Shares ---------------- - ------------------------------- 5,555 Series B Raymond R. Tubbs VALLEY PARTNERS 46,154 Series A By: ---------------------- Title: ---------------------- VERTICAL MEDICAL PARTNERS, L.P. 99,622 Series D By: /s/ RICHARD EMMETT ---------------------- Title: General Partner ---------------------- VERTICAL FUND ASSOCIATES, L.P. 99,622 Series D By: /s/ RICHARD EMMETT ---------------------- Title: General Partner ---------------------- VERTICAL PARTNERS, L.P. 233,176 Series D By: /s/ RICHARD EMMETT ---------------------- Title: General Partner ---------------------- -28- 29 Number and Series of Shares ---------------- 4600 INVESTMENT PARTNERSHIP 49,275 Series D By: /s/ EUGENE C. SIT ------------------- Title: Partner ------------------- - ---------------------------- 23,256 Series D James B. Wallace JAMES R. WEERSING AND MARY H. 15,557 Series C WEERSING, TRUSTEES OF THE 1,241 Series D WEERSING FAMILY TRUST U/D/T DATED APRIL 24, 1991 By: ------------------- Title: ------------------- NED M. WEINSHENKER 2,446 Series C MONEY PURCHASE PENSION PLAN By: ------------------- Title: ------------------- - ---------------------------- 1,612 Series C Damion E. Wicker THE WILKERSON FAMILY CHARITABLE 23,256 Series D LEAD TRUST By: ------------------- Title: ------------------- -29- 30 Number and Series of Shares ---------------- - ---------------------------- 30,770 Series A William Kent Wonders /s/ GEORGE F. WOOD - ---------------------------- 23,256 Series D George F. Wood WS INVESTMENT CO. 16,667 Series C By: ------------------- Title: ------------------- - ---------------------------- 23,077 Series A Jessica Youle CIT Group/Venture Capital, Inc. 930,233 Series D By: /s/ BRUCE SCHACKMAN ------------------- Title: Vice President ------------------- -30- EX-10.11 16 SUBLEASE W/ JERRY R. JONES 2/29/96 1 EXHIBIT 10.11 OFFICE BUILDING LEASE 1. PARTIES. This Lease, dated, for reference purposes only, October 26, 1988, is made by and between NORTH TUCSON BUSINESS CENTER, an Arizona partnership, (herein called "Landlord") and JERRY R. JONES & ASSOCIATES, INC., an Arizona corporation, (herein called "Tenant"). 2. PREMISES. Landlord does hereby lease to Tenant and Tenant hereby leases from Landlord that certain office, industrial and service space (herein called "Premises"), known as Building"A", North Tucson Business Center, containing approximately 14,700 square feet of office space and 1,560 square feet of industrial and service space in Building "D", as shown on Exhibit "A", attached hereto and incorporated herein by reference, said Premises being agreed, for the purpose of this Lease to have a total area of approximately 16,260 rentable square feet. Said Lease is subject to the terms, covenants and conditions herein set forth and the Tenant covenants as a material part of the consideration for this Lease to keep and perform each and all of said terms, covenants and conditions by it to be kept and performed and that this Lease is made upon the condition of said performance. 3. PAYMENT BY LANDLORD. The Landlord shall pay as and for partial consideration for the Tenant entering into this Lease Agreement, not more than Twenty Thousand and No/100 Dollars ($20,000), in cash, to reimburse the Tenant for moving expenses incurred, payable immediately upon Landlord's receipt of a written statement(s) of said moving expenses from Tenant. 4. TERM. The term of this Lease shall be for ten (10) years commencing on the first day of February, 1989, and expiring on the 31st day of January, 1999. 5. BASE RENT. During the first two (2) years of the term of this Lease, the Base Rent shall be abated. In the third year, commencing on February 1, 1991, Tenant agrees to pay Landlord, as Base Rent, without prior notice or demand, for the Premises the sum of ten Thousand Eight Hundred Forty ($10,840) per month ($8.00 per square foot) and a like sum on or before the first day of each successive calendar month thereafter up to and including January, 1992. Thereafter, Tenant agrees to pay Landlord as Base Rent, without prior notice or demand, for the Premises, the sum of Eleven Thousand Five Hundred Seventeen Dollars ($11,517) per month ($8.50 per square foot) on or before the first day of February, 1992, and a like sum on or before the first day of each and every successive calendar month thereafter during the term hereof. Rent for any period during the term hereof which is for less than one (1) month shall be a prorated portion of the month installment herein based upon a thirty (30) day month. Said Base Rent shall be paid to Landlord at the Landlord's address or at such other place as Landlord may designate in writing. 6. SECURITY DEPOSIT. Tenant shall deposit with Landlord the sum of Eleven Thousand Five Hundred Seventeen Dollars ($11,517) on or before February 1, 1992. Said sum shall be held by Landlord as security for the faithful performance by Tenant of all the terms, covenants, and conditions 2 of this Lease to be kept and performed by Tenant during the remainder of the term. If Tenant shall fully and faithfully perform every provision of this Lease to be performed by it, the security deposit or any balance thereof shall be returned to Tenant at the expiration of the Lease term. 7. POSSESSION. (a) Landlord shall use its best efforts to deliver possession of the Premises to the ten by February 1, 1989. It is acknowledge by Tenant and Landlord that approximately three (3) months construction time will be required to deliver the Premises and that construction cannot commence until the Landlord and Tenant have approved the plans and specifications to be prepared pursuant to the Construction of Improvement Rider attached to this Lease. Landlord covenants to deliver possession to the Tenant at a time no later than three (3) months from the date of execution by the Landlord of the construction contract to complete the construction pursuant to the plans and specifications approved by Landlord and Tenant. In the event the Landlord fails to deliver possession of the Premises by that time, the Tenant shall have the right, but not the obligation, to terminate this Lease. Rent and other charges shall be abated during the period between the commencement of said term and the time when the Landlord delivers possession. In addition, all annual periods set forth in paragraph 5, above, for the commencement and adjustment of Base Rent, paragraphs 10(a), 10(g)(ii), 10(h), and 14, below, for the obligation of the Landlord in the first year of the lease term shall be extended and shall commence from the date of delivery of possession rather than February 1, 1989. (b) In the event that Landlord shall permit Tenant to occupy the Premises prior to the commencement date of the term, said occupancy shall be subject to all provisions of this Lease. Said early possession shall not advance the termination date hereinabove provided, but shall advance the date to commence payment of Base Rent as set forth in paragraph 5, above. 8. COST OF LIVING INCREASES. The Base Rent shall be increased the second month of the years 1993, 1995, and 1997, in proportion the increase in the United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index for Urban Wage Earners and Clerical Workers (hereinafter the "Index"), which has occurred between the month of February 1992, and the second month of the year in which the rent is to be increased; provided, however, that the maximum increase for each cost of living increase shall not exceed five percent (5%). Landlord shall notify Tenant of each increase by delivering a written statement setting forth the Indices for the appropriate months, the percentage increase between those two Indices, and the new amount of the Base Rent. The Base Rent shall not be reduced from the last previous adjusted Base Rent by reason of any decrease in the Index. Tenant shall pay the new Base Rent from its effective date until the next periodic increase. Landlord's notice may be given after the effective date of the increase since the Index for the appropriate month may be unavailable on the effective date. In such event, Tenant shall pay Landlord the necessary rental adjustment for the months elapsed between the effective date of the increase and Landlord's notice of such increase within ten (10) days after Landlord's notice. If the format or components of the Index are materially changed after the date of lease, Landlord shall substitute an index which is published by the Bureau of Labor Statistics or similar agency and which is most nearly equivalent to the Index in effect on the date of lease. Landlord shall notify Tenant of the substituted index, which shall be used to calculate the increase in the Base Rent unless Tenant objects in writing within fifteen (15) days after receipt of Landlord's notice. If Tenant objects, the -2- 3 substitute Index shall be determined in accordance with the rules and regulations of the American Arbitration Association. The cost of such arbitration shall be borne equally by Landlord and Tenant. 9. TERMINATION; ADVANCE PAYMENTS. Upon the termination of this Lease not resulting from Tenant's default, and after Tenant has vacated the Property in the manner required by this Lease, an equitable adjustment shall be made concerning advance rent, and any other advance payments or charges made by Tenant to or on behalf of Landlord, and Landlord shall refund the unused portion of the security deposit to Tenant. 10. ADDITIONAL CHARGES PAYABLE BY TENANT. (a) Payment of Taxes. Tenant shall pay all Real Property Taxes on the Premises during the Lease term except for the first year of the Lease term when the Landlord shall pay all real property taxes. Subject to paragraph (c) below, such payment shall be made at least ten (10) days prior to the delinquency date of the taxes. Tenant shall promptly furnish Landlord with satisfactory evidence that the Real Property Taxes have been paid. Landlord shall reimburse Tenant for any Real Property Taxes paid by Tenant covering any period of time prior to or after the Lease term. If Tenant fails to pay the Real Property Taxes when due, Landlord may pay the taxes and Tenant shall reimburse Landlord for the amount of such tax payment. (b) Definition of "Real Property Tax." "Real Property Tax" means any fee, license fee, license tax, business license fee, rental, tax, transaction privilege fee, sales tax, levy, charge or assessment upon the Premises or upon the Landlord or the Tenant based upon the amount of rent paid hereunder. "Real Property Tax" does not, however, include Landlord's federal or state income, franchise, inheritance or estate taxes. (c) Joint Assessment. If the Premises is not separately assessed, Tenant's share of the real property tax payable by Tenant under paragraph (a) above shall be 24.16% of the total tax. Said percentage is equal to the percentage of square feet of the total rental area of the buildings (67,240 square feet) which is occupied by the Tenant. Tenant shall pay such share to Landlord within fifteen (15) days after receipt of Landlord's written statement. (d) Personal Property Taxes. Tenant shall pay, before delinquency, all taxes charged against trade fixtures, furnishings, equipment or any other personal property belonging to Tenant. Tenant shall try to have personal property taxed separately from the Premises. (e) Tenant's Right to Contest Taxes. Tenant may attempt to have the assessed valuation of the Premises reduced or may initiate proceedings to contest the real property taxes. If required by law, Landlord shall join in the proceedings brought by Tenant. However, Tenant shall pay all costs of the proceedings, including any costs of fees incurred by Landlord. (f) Utilities. Tenant shall pay, directly to the appropriate supplier before delinquency, the cost of all natural gas, heat, light, power, sewer service, telephone, water, refuse disposal and other utilities and services supplied to the Premises. However, if any services or utilities are jointly metered with other property, Tenant shall pay the percentage of the total bill which is equal to the percentage of total rentable area of the property jointly metered occupied by the Tenant. Tenant shall pay such share to Landlord within fifteen (15) days after receipt of Landlord's written statement calculating the percentage and the amount owed. (g) Insurance Premiums (i) Liability Insurance. During the Lease term, Tenant shall pay for and maintain a policy of comprehensive public liability insurance, insuring Landlord against liability arising out of the ownership, use, occupancy or maintenance of the Premises, except during the first year of the Lease term when the Landlord shall pay all premiums for all insurance. The initial amount of such insurance shall be at least $1,000,000, with a commercially reasonable deductible amount and shall be subject to periodic increase based upon inflation, increased liability awards, recommendation of professional insurance advisers, and other relevant factors. Tenant shall, at Tenant's expense, maintain such other liability insurance as Tenant deems necessary to protect Tenant. (ii) Hazard Insurance. During the Lease term, Tenant shall pay for and maintain policies of insurance, covering loss of or damage to the Premises in the full amount of its replacement value, except during the first year of the Lease term when the Landlord shall pay all premiums for all insurance. Such policy shall provide protection against all perils included within the classification of fire, extended coverage, vandalism and malicious mischief, and any other perils (except flood and earthquake, unless required by any lender holding a security interest in the Premises) which Landlord deems reasonably necessary. (iii) Payment of Premiums; Insurance Policies. Tenant shall pay all premiums for the insurance policies covering the Premises described in section (a) and (b) above, within fifteen (15) days after receipt by Tenant of a copy of the premium statement or other evidence of the amount due. All insurance shall be maintained with companies holding a "General Policyholder's Rating" of B or better, as set forth in the most current issue of "Best's Insurance Guide" Tenant shall designate the Landlord as a party entitled to notice of cancellation of the insurance policies. (h) Multiple Tenant Buildings. Tenant shall pay monthly, in advance, the 24.16% of the common area maintenance and repair costs of the Landlord (determined by standard accounting practices) which percentage is equal to the percentage of square feet of the total rentable area of the building or group of buildings (67,320 square feet) which is occupied by the Tenant. Landlord shall pay all common area charges assessable to Tenant during the first year of this Lease. 11. USE. Tenant shall use the Premises for general office purposes and industrial and service purposes and shall not use or permit the Premises to be used for any other purpose without the prior written consent of Landlord. Tenant shall not do or permit anything to be done in or about the Premises nor bring anything therein which will in any way increase the existing rate of or affect any fire or other insurance upon the Premises or any of its contents, or cause cancellation of any insurance policy covering said Premises or any part thereof or any of its contents. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants or injure or annoy them or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about he Premises. Tenant shall not commit or suffer to be committed any waste in or about the Premises. -3- 4 12. COMPLIANCE WITH THE LAW. Tenant shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. 13. ALTERATIONS AND ADDITIONS. Tenant shall not make or suffer to be made any alterations, additions or improvements to or of the Premises or any part thereof without first obtaining the written consent of the Landlord. Any alterations, additions or improvements to or of said Premises, including but not limited to, wall covering, paneling and built-in cabinet work, but excepting moveable furniture and trade fixtures, shall on the expiration of the term become a part of the realty and belong to the Landlord and shall be surrendered with the Premises. In the event Landlord consents to the making of any alterations, additions or improvements to the Premises by Tenant, the same shall be made by Tenant at Tenant's sole cost and expense. 14. REPAIRS. (a) From the commencement of this Lease during the first year of the Lease term, the Landlord shall be solely responsible for all repairs and maintenance to the Premises (except those caused by the negligent act or omission of the Tenant, its agents, employees and invitees), including but not limited to, the maintenance of the Premises in good sanitary order, condition and repair, the repair and replacement of plumbing, air conditioning, heating and electrical systems and structural portions of the building, including the roofs. After January 31, 1990, the Landlord shall maintain the exterior on the Premises of the common areas in good sanitary order, condition and repair and may charge the expense for the same as a common area maintenance charge, except for any extraordinary maintenance and repairs, the cost of which shall be borne solely by the Landlord. Subject to the provisions of paragraph 28, extending any time limitation placed upon the Landlord for repair, replacement and maintenance, the Landlord shall be liable for the failure to make any repairs or to perform any maintenance in the event such failure shall persist after thirty (30) days after written notice of the need for such repairs or maintenance is given to Landlord and for the failure to immediately repair, restore or replace any property or improvement after forty-eight (48) hours after written notice from the Tenant that the failure or damage of the property or improvement diminishes services to the Tenant by interrupting or causing the interruption of electric, gas, water or other essential services to the Tenant or said damage results in a failure of the Landlord to comply with the applicable building codes affecting health and safety or renders the Premises unfit for its intended uses. (b) By remaining in possession of the Premises on and after February 2, 1990, the beginning of the second year of the Lease term, Tenant shall be deemed to have accepted the Premises as being in good, sanitary order, condition and repair. Tenant shall, at Tenant's sole cost and expense, keep the interior of the Premises and every part thereof in good condition and repair; damage thereto from causes beyond the reasonable control of Tenant and ordinary wear and tear excepted. Tenant shall upon the expiration or sooner termination of this Lease, surrender the Premises to the Landlord in good condition, ordinary wear and tear and damage from causes beyond the reasonable control of Tenant excepted. -4- 5 15. PARKING. Landlord and Tenant acknowledge that the Premises are a part of an industrial complex known as North Tucson Business Center, Phase I. Landlord and Tenant further acknowledge that the complex consist of six (6) buildings totaling sixty-seven thousand three hundred twenty (67,320) square feet. Landlord covenants that there are three hundred and one (301) existing parking stalls shared in common by all tenants. Landlord reserves the right to allocate certain parking to existing tenants provided such allocation does not exceed a percentage of the total parking computed by the ratio of any tenant space to the total space. Landlord shall, upon the request of the Tenant, provide 24.16% of the parking nearest the Tenant's Premises to be allocated to the Tenant for its use, or approximately seventy-two (72) spaces total, including that certain secured parking located in the carport area to the west of Building A. Landlord covenants that no change in the rules and regulations will affect Tenant's percentage of the total spaces allocated and that at no time will the total parking space in the complex known as North Tucson Business Center be less than three hundred one (301) spaces. 16. WAIVER AND RELEASE FOR DAMAGE TO PERSONAL PROPERTY. Tenant waives, releases and discharges Landlord, its agents, employees, and contractors from all claims or demands whatsoever which Tenant may have or acquire arising out of damage to or destruction of the machinery, equipment, furniture, fixtures, personal property, and loss of use thereof occasioned by fire or other casualty and agrees to look to the insurance coverage only in the event of such loss, provided that said damage to or destruction of the machinery, equipment, furniture, fixtures, personal property, and loss of use thereof occasioned by fire or casualty is not caused by or resulting from the negligence of or breach of contract by Landlord, its agents, employees, contractors or licensees. 17. QUIET ENJOYMENT. If Tenant pays the Base Rent and complies with all other terms of this Lease, Tenant may occupy and enjoy the Premises for the full Lease term. 18. LIENS. Tenant shall keep the Premises and the property in which the Premises are situated free from any liens arising out of any work performed, materials furnished or obligations incurred by Tenant. 19. ASSIGNMENT AND SUBLETTING. Tenant shall not assign, transfer, mortgage, pledge, hypothecate or encumber this Lease or any interest therein, and shall not sublet the said Premises or any part thereof, or any right or privilege appurtenant thereto or suffer any other person (the employees, agents, servants and invitees of Tenant excepted) to occupy or use the said Premises, or any portion thereof, without first obtaining the written consent of Landlord, which consent shall not be unreasonably withheld. A consent to one assignment, subletting, occupation or use by any other person shall not be deemed to be a consent to any subsequent assignment, subletting, occupation or use by another person. Any assignment or subletting without Landlord's consent shall be void, and shall, at the option of the Landlord, constitute a default under this Lease. 20. HOLD HARMLESS. Tenant shall indemnify and hold harmless Landlord against and from any and all claims arising from Tenant's use of the Premises for the conduct of its business or from any activity, work, or other thing done, permitted or suffered by the Tenant in or about the building, and shall further indemnify and hold harmless Landlord against and from any and all claims arising -5- 6 from any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of this Lease, or arising from any act or negligence of the Tenant, or any officer, agent, employee, guest, or invitee of Tenant, and from any and all costs, attorneys' fees, expenses and liabilities incurred by reason of any claim, action or proceeding brought thereon. In the event any action or proceeding be brought against Landlord by reason of such claim, Tenant upon notice from Landlord shall defend the same at Tenant's expense. Tenant as a material part of the consideration to Landlord hereby assumes all risk of damage to property or injury to person, in, upon or about the Premises, from any cause other than the negligence of the Landlord, its employees, agents, licensees or contractors. Landlord shall not be liable for loss or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak from any part of the building or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface or from any other place resulting from dampness or any other causes whatsoever, unless caused by or due to the negligence of or breach of contract by Landlord, its agents, contractors, licensees or employees. Tenant shall give prompt notice to Landlord in case of fire or accidents on the Premises in the building or of defects therein or in the fixtures or equipment. Notwithstanding the foregoing, Landlord agrees to indemnify and save Tenant, its employees, agents, contractors, and licensees harmless against and from any and all claims, loss, damage and expense by or on behalf of any person, firm, or corporation, arising from any breach or default on the part of Landlord on the performance of any covenant or agreement on the part of Landlord to be performed, pursuant to the terms of this Lease Agreement, or arising from any act or negligence on the part of Landlord or its agents, contractors, servants, employees or licensees, or arising from any accident, injury or damage to the extent caused directly or indirectly by Landlord, its agents, and employees to any person, firm or corporation occurring during the term of this Lease Agreement, in or about the Premises, other buildings and common areas and from and against all costs, attorneys fees, expenses and liabilities incurred in or about any such claim or action or proceeding brought thereon; and in case any action or proceeding be brought against Tenant or its agents, contractors, servants, employees or licensees, by reason of any such claim, Landlord, upon notice from Tenant covenants to resist or defend such action or proceeding. In addition to the foregoing, Landlord shall be responsible for loss or damage to personal property sustained by Tenant due to the negligent acts or fault of Landlord, its employees, agents, contractors or licensees. 21. SUBROGATION. As long as their respective insurers so permit, Landlord and Tenant hereby mutually waive their respective rights of recovery against each other for any loss insured by fire, extended coverage and other property insurance policies existing for the benefit of the respective parties. Each party shall obtain any special endorsements, if required by their insurer to evidence compliance with the aforementioned waiver. 22. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with the rules and regulations that Landlord shall from time to time promulgate. Landlord reserves the right from time to time to make all reasonable modifications to said rules, which modifications will not adversely affect the Tenant's interest. Landlord covenants to use its best efforts to protect Tenant from violation of any rules and regulations concerning the common area or the Premises, provided, however, that Tenant and Landlord agree that no changes in the rules and regulations will affect the ratio of parking area as the same is set forth in paragraph 15, above, nor will Landlord change the location of any of such parking as it relates to the Premises. Failure of Landlord to comply with this provision may be considered a default pursuant to paragraph 28. 23. ENTRY BY LANDLORD. Landlord reserves and shall at any and all times have the right to enter the Premises upon reasonable notice to Tenant, inspect the same, to submit said Premises to prospective purchasers or tenants, and to alter, improve or repair the Premises and any portion of the Building of which the Premises are a part, that Landlord may deem necessary or desirable. In exercising any right of entry for making repairs or alterations of the Premises, Landlord shall use all reasonable efforts not to interfere with Tenant's business operations of the Premises and to avoid excessive noise in connection with the work performed by it in and around the Premises and to the extent possible perform such work at other than normal business hours. Landlord shall perform any repair, restoration or alteration required of Landlord hereunder with all due diligence. Furthermore, Landlord shall give Tenant reasonable notice prior to its exercise of such right, provided that no such notice shall be required in case of emergency. 24. DAMAGE OR DESTRUCTION. (a) Partial Damage to Premises. Tenant shall notify Landlord in writing immediately upon the occurrence of any damage to the Premises. If the Premises is only partially damaged, that is the Premises is not rendered unfit for Tenant's intended uses, and if the proceeds received by Landlord from the insurance policies described in paragraph 10(g) are sufficient to pay for the necessary repairs, this Lease shall remain in effect and Landlord shall repair the damage as soon as reasonably possible. Landlord may elect to repair any damage to Tenant's fixtures, equipment, or improvements. Tenant shall, if the damage is due to an act or omission of Tenant, pay Landlord the "deductible amount" (if any) under the insurance policies. If the insurance proceeds received by Landlord are not sufficient to pay the entire cost of repair, or if the cause of the damage is not covered by the insurance policies maintained under paragraph 10(g), Landlord may elect either (i) to repair the damage within thirty (30) days of the date the damage occurred, in which case this Lease shall remain in full force and effect, or (ii) terminate this Lease as of the date the damage occurred. Landlord shall notify Tenant within fifteen (15) days after receipt of notice of the occurrence of the damage, whether Landlord elects to repair the damage or terminate the Lease. If Landlord elects to repair the damage, Tenant shall, if the damage was due to an act or omission of Tenant, pay Landlord the "deductible amount (if any) under Landlord's insurance policies, and, the difference between the actual cost of repair and any insurance proceeds received by Landlord. If Landlord elects to terminate this Lease, Tenant may elect to continue this Lease in full force and effect, in which case Tenant shall repair any damage to the Premises and any building in which the Premises is located. Tenant shall pay the cost of such repairs, except that, upon completion of such repairs, Landlord shall deliver to Tenant any insurance proceeds received by Landlord for the damage repaired by Tenant. Tenant shall give Landlord written notice of such election within ten (10) days after receiving Landlord's termination notice. If the damage to the Property occurs during the last six (6) months of the Lease Term, Landlord may elect to terminate this Lease as of the date the damage occurred, regardless of the sufficiency of any insurance proceeds. In such event, Landlord shall not be obligated to repair or restore the Premises and Tenant shall have no right to continue this Lease. Landlord shall notify -6- 7 Tenant of its election within fifteen (15) days after receipt of notice of the occurrence of the damage. Tenant shall, if the damage was due to an act or omission of Tenant, pay Landlord the "deductible amount" (if any) under landlord's insurance policies. (b) Total or Substantial Destruction. If the Premises is totally or substantially destroyed by any cause whatsoever, such that the Premises is rendered unfit for Tenant's intended uses, or if the Premises is in a building which is substantially destroyed (even though the Premises is not totally or substantially destroyed), this Lease shall terminate as of the date the destruction occurred regardless of whether Landlord receives any insurance proceeds. However, if the Premises can be rebuilt within one (1) year after the date of destruction, Landlord may elect to rebuild the Premises at Landlord's own expense, in which case, this Lease may remain in effect. Landlord shall notify Tenant of such election within thirty (30) days after the occurrence of total or substantial destruction and thereafter Tenant has thirty (30) days to notify the Landlord of Tenant's election to continue or terminate the Lease. If Tenant elects to continue the Lease, Landlord shall complete the rebuilding within one (1) year after the date of destruction. If the destruction was caused by an act or omission of Tenant, Tenant shall pay Landlord the difference between the actual cost of rebuilding and any insurance proceeds received from Landlord, in addition to the "deductible amount" (if any). (c) Temporary Reduction of Rent. If the Premises is destroyed or damaged and Landlord or Tenant repairs or restores the Premises pursuant to the provisions of this paragraph 24, any rent or other charges payable by Tenant during the period of such damage, repair and/or restoration shall be reduced according to the degree, if any, to which Tenant's use of the Premises is impaired. However, the reduction shall not exceed the sum of one year's payment of Base Rent, insurance premiums, real property taxes and other charges payable by Tenant. Except for such possible reduction in Base Rent, insurance premiums and real property taxes, Tenant shall not be entitled to any compensation, reduction, or reimbursement from Landlord as a result of any damage, destruction, repair, restoration of or to the Premises unless such damage, destruction, repair or restoration was directly or indirectly caused by the negligence of Landlord, its employees, agents or servants. 25. CONDEMNATION. If all or any portion of the Premises is taken under the power of eminent domain or sold under the threat of that power (all of which are called "Condemnation"), this Lease shall terminate as to the part taken or sold on the date the condemning authority takes title or possession, whichever occurs first. If more than twenty percent (20%) of the floor area of the Premises, is taken, either Landlord or Tenant may terminate this Lease as of the date the condemning authority takes title or possession, by delivering written notice to the other within ten (10) days after receipt of written notice of such taking (or in the absence of such notice, within ten (10 days after the condemning authority takes possession). If neither Landlord nor Tenant terminates this Lease, this Lease shall remain in effect as to the portion of the Premises not taken, except that the Base Rent shall be reduced in proportion to the reduction in the floor area of the Premises. If this Lease is not terminated, Landlord shall repair any damage to the Premises caused by the Condemnation, except that Landlord shall not be obligated to repair any damage for which Tenant has been reimbursed by the condemning authority. If the severance damages received by Landlord are not sufficient to pay -7- 8 for such repair, Landlord shall have the right to either terminate this Lease or make such repair at Landlord's expense. Tenant shall have the right to prove in any condemnation proceedings and/or to receive any separate award which may be made for damages to or condemnation of Tenant's movable trade fixtures and equipment and for moving expenses and for all other damages including loss of leasehold and interest in this Lease Agreement as provided by the applicable statutes and laws of the State of Arizona. 26. DEFAULT OF TENANT. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant. (a) The vacating or abandonment of the Premises by Tenant. (b) The failure of Tenant to make any payment of rent or any other payment required to be made by Tenant hereunder, as and when due, where such failure shall continue for a period of ten (10) days after written notice thereof by Landlord to Tenant. (c) The failure of Tenant to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by the Tenant, other than described in article 26(b) above, where such failure shall continue for a period of thirty (30) days after written notice thereof by Landlord to Tenant; provided, however, that if the nature of Tenant's default is such that more than thirty (30) days are reasonably required for it to cure, then Tenant shall not be deemed to be in default if Tenant commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (d) The making by Tenant of any general assignment or general arrangement for the benefit of creditors; or the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt, or a petition or reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); or the appointment of a trustee or a receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days; or the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged in thirty (30) days. 27. REMEDIES IN DEFAULT. In the event of any such default or breach by Tenant, Landlord may at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of a right or remedy which Landlord may have by reason of such default or breach: (a) Terminate Tenant's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. In such event Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default including but not limited to, the cost of recovering -8- 9 possession of the Premises; expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, any real estate commission actually paid; the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Tenant proves could be reasonably avoided; that portion of the leasing commission paid by Landlord and applicable to the unexpired term of this Lease. Unpaid installments of rent or other sums shall bear interest from the date due at the rate of fifteen percent (15%) per annum. In the event Tenant shall have abandoned the Premises, Landlord shall have the option of (i) taking possession of the Premises and recovering from Tenant the amount specified in this paragraph, or (ii) proceeding under the provisions of the following paragraph 27(b). (b) Maintain Tenant's right to possession, in which case this Lease shall continue in effect whether or not Tenant shall have abandoned the Premises. In such event Landlord shall be entitled to enforce all of Landlord's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decision of the State in which the Premises are located. Notwithstanding any provision contained in this paragraph 27 to the contrary, the Landlord shall have the duty and obligation to mitigate each and every claim for damages as a result of any breach by Tenant of any term or obligation under this Lease including, but not limited to proceeding with due diligence to relet the Premises even if in so doing the Landlord must accept less favorable terms under a lease agreement or a lesser amount of Base Rent, or other charges paid by Tenant and even if in so doing the Landlord relets the Premises to the Tenant, its employees, agents or assigns. Further, Landlord shall at all times act in good faith with respect to all of its dealings and the enforcement of all of its rights pursuant to this Lease Agreement. 28. DEFAULT BY LANDLORD AND REMEDIES. If, during the term of this Lease: (a) Landlord shall default in fulfilling any of the covenants, obligations or agreements of this Lease; (b) Landlord shall fail to make any repairs and do whatever is necessary to put and keep the Premises in fit and habitual condition as required herein; (c) Landlord shall fail to keep all common areas in clean and safe condition; (d) Landlord fails to repair, restore, or replace any property service or improvement within thirty (30) days of written notice of the Tenant or within forty-eight (48) hours of the written notice of the Tenant in the event said damage adversely affects the Tenant's use and occupancy of the Premises as provided in paragraph 14; then the Landlord shall be deemed to be in default hereunder. -9- 10 In the event of Landlord's default hereunder, Tenant may give Landlord notice of such default and, if at the expiration of thirty (30) days after service of such notice (or forty-eight (48) hours of such notice as provided in paragraph 14), the default upon which said notice was based shall continue to exist, or in the event of a default or contingency which cannot with due diligence be cured within a period of thirty (30) days (or forty-eight (48) hours if applicable), if Lessor fails to proceed promptly after the service of said notice and with all due diligence to commence to cure the same and thereafter to prosecute the curing of such default with all due diligence (it being intended that in connection with the default not susceptible of being cured with due diligence within thirty (30) days, the time within which the Landlord is to cure the same shall be extended for such period as may be necessary to complete the same with all due diligence), Tenant, at its option, may terminate this Lease and upon such termination Tenant will quit and surrender the Premises to Landlord but Tenant shall retain any and all rights and remedies provided by this Agreement and at law or equity for damages, costs, expenses and attorneys' fees sustained by Tenant as a result of Landlord's default. In addition to other remedies in this Lease provided, Tenant shall be entitled (i) to cure the default which the Landlord has failed to cure within the applicable time periods, at the Landlord's expense by causing the work to be done by a licensed contractor and after submitting to the Landlord an itemized statement and a waiver of lien, deduct from his rent the actual cost of the work; or (ii) to recover damages for Landlord's default. 29. OFFSET/ESTOPPEL STATEMENT. Tenant shall at any time and from time to time upon not less than ten (10) days prior written notice from Landlord execute, acknowledge and deliver to Landlord a statement in writing, (a) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease as so modified, is in full force and effect), and the date to which the rental and other charges are paid in advance, if any, and (b) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of the Landlord hereunder, or specifying such defaults on the part of the Landlord hereunder, or specifying such defaults if any are claimed. Any such statement may be relied upon by any prospective purchaser or encumbrancer of all or any portion of the real property of which the Premises are a part. In the event Tenant fails to provide said statement within the ten (10) days, Tenant irrevocably constitutes and appoints the Landlord as its special attorney-in-fact to execute and deliver the certificate to any third party. 30. GENERAL PROVISIONS. (a) Waiver. The waiver by Landlord of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition on any subsequent breach of the same or any other term, covenant or condition herein contained. The failure of Tenant to insist in any one or more cases upon the strict performance of any of the covenants of this Lease or to exercise any option herein contained shall not be construed as a waiver or relinquishment for the future of such covenant or option or any other covenant or option. No waiver by the Tenant of any breach or any covenant hereof of which the Tenant has knowledge shall be deemed to be a waiver of any future breach or default. -10- 11 (b) Notices. All notices, elections, demands or other statements this Lease Agreement requires or permits either party to give to the other shall be in writing and shall be personally delivered, or delivered by air courier service, deposited in a regularly maintained receptacle of the United States Mail in a sealed wrapper with first class and certified or registered postage applied, prepaid, return receipt requested, or be transmitted by telegram. Notices are to be addressed to the respective parties as follows: Landlord: North Tucson Business Center 17062-A Murphy Avenue Irvine, California 92714 Tenant: Jerry R. Jones & Associates, Inc. 35 East Toole Avenue Tucson, Arizona 85702 Either party or any other person entitled to notice hereunder may from time to time designate to the others, in writing and give in accordance with this paragraph, a different address for service of notice. If mailed or delivered, all such notices, elections, demands or other writings shall be deemed served upon delivery thereof. If telegramed all such notices, elections, demands or other writings shall be deemed served upon delivery to the addressee as confirmed by the telegraphic agency to the sender. (c) Marginal Heading. The marginal headings and article titles to the articles of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. (d) Time. Time is of the essence of this Lease and each and all of its provisions in which performance is a factor. (e) Successors and Assigns. The covenants and conditions herein contained, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of the parties hereto. (f) Prior Agreements. This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Lease, and no prior agreements or understanding pertaining to any such matters shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. This Lease shall not be effective or binding on any part until fully executed by both parties hereto. (g) Attorneys' Fees. In the event of any action or proceeding brought by either party against the other under this Lease the prevailing party shall be entitled to recover all costs and expenses including the fees of its attorneys in such action or proceeding in such amount as the court may adjudge reasonable as attorneys' fees. -11- 12 (h) Sale of Premises by Landlord. In the event of any sale of the building, Landlord shall be and is hereby entirely freed and relieved of all liability under any and all of its covenants and obligations contained in or derived from this Lease arising out of any act, occurrence or omission occurring after the consummation of such sale; and the purchaser, at such sale or any subsequent sale of the Premises shall be deemed, without any further agreement between the parties or their successors in interest or between the parties and any such purchaser, to have assumed and agreed to carry out any and all of the covenants and obligations of the Landlord under this Lease. (i) Subordination, Attornment. Upon request of the Landlord, Tenant will in writing subordinate its rights hereunder to the lien of any first mortgage, or first deed of trust to any bank, insurance company or other lending institution now or hereafter in force against the land and building of which the Premises are a part, and upon any building hereafter placed upon the land of which the Premises are a part, and to all advances made or hereafter to be made upon the security thereof. In the event any proceedings are brought for foreclosure, or in the event of the exercise of the power of sale under any mortgage or deed of trust made by the Landlord covering the Premises, the Tenant shall attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as the Landlord under this Lease. The provisions of this article to the contrary notwithstanding, and so long as Tenant is not in default hereunder, this Lease shall remain in full force and effect for the full term hereof. (j) Severability. Any provision of this Lease which shall prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other provision hereof and such other provision shall remain in full force and effect. (k) Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. (l) Choice of Law. This Lease shall be governed by the laws of the State in which the Premises are located. (m) Signs. Tenant shall be entitled to place a sign(s) upon the Premises or building with the Landlord's prior written consent, which consent shall not be unreasonably withheld. 31. RIDER. The following Rider is attached to and made a part of this Lease: Construction of Improvements Rider. 32. BROKERS. Tenant warrants that it has had no dealings with any real estate broker or agents in connection with the negotiation of this Lease excepting only ILIFF THORN & COMPANY and it knows of no other real estate broker or agent who is entitled to a commission in connection with this Lease. -12- 13 33. FIRST RIGHT OF REFUSAL. During the term of this Lease, and only in the event that the Landlord has elected to subdivide the property known as North Tucson Business Center, Phase I, such that any part or all of the Premises may be sold separate and apart from the remaining portions of North Tucson Business Center, Phase I, the Tenant shall have a right of first refusal to purchase either or both Building A and Building D of North Tucson Business Center, Phase I. This first right of refusal shall not apply to any offer to purchase or agreement between the Landlord and any third party for the sale, transfer or conveyance of all of the property known as North Tucson Business Center, Phase I. Upon receipt of a written offer from a third party to purchase all or any portion of Building A or/and Building D or the execution of an agreement between the Landlord and any third party for the sale, transfer or conveyance of all or any portion of Building A and/or Building D, then the Landlord shall notify the Tenant in writing, by providing the Tenant with a copy of the offer or agreement and of all other material terms of said sale, conveyance, transfer or disposition. Upon receipt of such notification, the Tenant shall have five (5) working days to notify the Landlord, in writing by posting the same by certified mail to the Landlord, of its desire to purchase the subject property under the same terms and conditions as included in the third party agreement or offer. In the event the Tenant fails to elect to exercise its first right to refusal in the time period specified herein and the Landlord subsequently sells the property to a third party pursuant to the terms of the offer or agreement for transfer, sale, or conveyance of Building A and/or Building D was previously submitted to the Tenant, then upon the closing of that transaction and transfer of title to said property, this first right of refusal shall forever be extinguished and shall no longer bind the Landlord or its successors or assigns. -13- 14 The parties hereto have full authority to and have executed this Lease at the place and on the dates specified immediately adjacent to =their respective signatures. LANDLORD: TENANT: NORTH TUCSON BUSINESS CENTER JERRY R JONES & ASSOCIATES, INC. By /s/ ROBERT D. JONES By /s/ JERRY R. JONES ----------------------------- -------------------------------- Its General Partner Its President ---------------------------- ------------------------------- 15 STATE OF ARIZONA ) ) ss: COUNTY OF PIMA ) The foregoing instrument was acknowledged before me this _____ day of __________, 1988, by ____________________, its ____________________ of NORTH TUCSON BUSINESS CENTER, an Arizona partnership, on behalf of the partnership. __________________________________________ Notary Public My Commission Expires: ________________________ 16 STATE OF ARIZONA ) ) ss: COUNTY OF PIMA ) The foregoing instrument was acknowledged before me this _____ day of __________, 1988, by JERRY R. JONES, President of JERRY R. JONES & ASSOCIATES, INC. an Arizona corporation, on behalf of the corporation. _____________________________________ Notary Public My Commission Expires: ______________________ 17 CONSTRUCTION OF IMPROVEMENTS BY LANDLORD LEASE RIDER This Rider is attached to and made a part of that certain Lease dated October 26, 1988, between NORTH TUCSON BUSINESS CENTER, a Landlord and JERRY R. JONES & ASSOCIATES, INC., as Tenant, covering the Property commonly known as Buildings "A" and "D," North Tucson Business Center, ("the Lease"). The terms used in this Rider shall have the same definitions as set forth in the Lease. The provisions of this Rider shall prevail over any inconsistent or conflicting provisions of the Lease. A. Description of Improvements. Landlord shall, at Landlord's expense, construct certain improvements on or about the Property (the "Work") in accordance with certain plans and specifications attached hereto as Exhibit "1" and incorporated herein by this reference and the Final Plans, as hereinafter defined. B. Preliminary Plans. If the plans and specifications attached hereto are final plans and specifications, such final plans and specifications are hereinafter referred to as the "Final Plans," and the remainder of this paragraph shall be inoperative. If the plans and specifications attached hereto are preliminary plans, Landlord shall prepare final working drawings and outlined specifications for the Work and submit such plans and specifications to Tenant for its approval on or before October 28, 1988. Tenant shall approve or disapprove such drawings and specifications within ten (10) days after receipt from Landlord. Tenant shall have the right to disapprove such drawings and specifications only if they differ from the plans and specifications attached hereto. If Tenant disapproves such drawings and specifications, Landlord and Tenant shall promptly meet in an attempt to resolve any dispute regarding such drawings and specifications. If the parties are unable to agree upon the final working drawings and specifications for the Work on or before November 30, 1988, either Landlord or Tenant may terminate the Lease upon seven (7) days' prior written notice to the other party, in which case neither Landlord nor Tenant shall have further liability to the other; provided, however, that all costs incurred for the preparation of the plans and specifications shall be divided in half, both the Landlord and Tenant to bear the cost of one-half thereof. Final working drawings and specifications prepared in accordance with this paragraph B and approved by Landlord and Tenant are hereinafter referred to as the "Final Plans." C. Completion of the Work. Landlord shall use its best efforts to complete the Work described in the Final Plans prior to the scheduled Commencement Date set forth in Section 3 of the Lease. D. Changes. Landlord's obligation to prepare the Property for Tenant's occupancy is limited to the completion of the Work set forth in the Final Plans. Landlord shall not be required to furnish, construct or install any items not shown thereon. If Tenant requests any change, addition or alternation ("Changes") in such plans and specifications or in the construction of the Work, Landlord shall promptly give Tenant an estimate of the cost of such Changes and the resulting delay in the delivery of the Property to Tenant. Withing ten (10) days after receipt of such estimate, Tenant shall 18 give Landlord written notice whether Tenant elects to proceed with such Changes. If Tenant notifies Landlord in writing that Tenant elects to proceed with such Changes and if Landlord approves such Changes, Landlord shall, at Tenant's expense, promptly make such Changes. If Tenant fails to notify Landlord of its election within the ten (10) day period, Landlord may either (1) make such Changes at Tenant's expense or (2) complete the Work without making such Changes. Any delay caused by Tenant's request for any Changes or from the construction of any Changes shall not, in any event, delay the Commencement Date, which shall occur on the date it would have occurred but for such Changes. The Work shall be property of Landlord and shall remain upon and be surrendered with the Property upon the expiration of the Lease Term. E. Amount for Tenant Improvements. The Landlord shall expend $311,000 for the Work and Changes thereto. In the event the Landlord must expend more than $311,000 for the Work and Changes, then such additional expense shall be payable by the Tenant upon the following terms: (i) The Landlord shall send the Tenant written notice and evidence of the additional expense no later than thirty (30) days after completion of the Work and Changes. Said notice shall include the amount of the monthly payment. (ii) The additional expense shall bear interest from January 1, 1991, at the rate of ten percent (10%) per annum and shall be amortized over a ten (10) year period. (iii) Monthly payments of principal and interest shall be paid each month on the same day Base Rent is payable, beginning with the month in which Base Rent is first payable by Tenant, February, 1991. (iv) At the expiration of the Lease term, January 31, 1999, no further payments shall be due or payable by Tenant. In the event the Landlord expends less than $311,000 for the Work and Changes, then the difference between the actual amount expended and $311,000 shall be a reduction of the rent payable by Tenant, calculated as follows: (i) The Landlord shall send the Tenant written notice of the difference and evidence of the actual expense no later than thirty (30) days after completion of the Work and Changes. Said notice shall include the amount of the monthly payment. (ii) The difference shall bear interest from January 1, 1991, at the rate of ten percent (10%) per annum and shall be amortized over a ten (10) year period. (iii) The amount of principal and interest due monthly to amortize the difference shall be a reduction of the amount of the Base Rent payable by Tenant beginning with the month in which Base Rent is first payable by Tenant, February 1991. -2- 19 (iv) At the expiration of the Lease term, January 31, 1999, no further offset shall be due or allocable to the Tenant. Attach plans and specifications as Exhibit "1." Initials /s/ JRJ /s/ RJ -------------- -3- 20 SUBLEASE This Sublease is made this 29th day of February, 1996, by and between David Evans and Associates, Inc. ("Sublessor"), the successor in interest to Jerry R. Jones & Associates, Inc. (original "Tenant"), and Ventana Medical Systems ("Sublessee"). Sublessor is the Tenant under that certain Lease ("Master Lease") by and between North Tucson Business Center ("Landlord") and Sublessor ("Tenant"), executed on or about October 26, 1988 for the premises described in the Master Lease ("Premises"), a true and correct copy of which is attached hereto as Exhibit A and incorporated herein by this reference. In consideration of the mutual promises contained herein, Sublessor hereby subleases the Premises to Sublessee subject to the terms of the Master Lease, and further subject to the provisions of this Sublease as follows: 1. Sublessee hereby agrees to abide by and observe all the terms, covenants and conditions of the Master Lease. 2. The Premises to be subleased by Sublessee consist of approximately 14,700 rentable square feet of office space in 3845 N. Business Center Drive, plus approximately 1,560 rentable square feet in 3875 N. Business Center Drive, Suite 104. Sublessee agrees to accept the Premises in an "as-is" condition, at no expense to Sublessor. 3. The term of this Sublease shall be for a period commencing upon the vacating of the Premises by Sublessor, estimated to be on or about May 1, 1996, and ending on the expiration of the Master Lease, January 31, 1999. 4. Provided the provisions of the Master Lease do not conflict with the specific provisions of this Sublease, each provision is incorporated into this Sublease as if fully and completely rewritten herein, and Sublessee agrees to be bound to Sublessor by all the terms of the Master Lease and to perform all the obligations and responsibilities that Sublessor, by the Master Lease, assumes towards the Landlord. 5. Sublessee agrees to pay Sublessor monthly rent for the Premises, not including applicable rental tax, as follows: From commencement through January 31, 1997, $11,885.54 per month, plus applicable tax. Commencing February 1, 1997, and ending January 31, 1999, $11,885.54 per month, plus CPI increase (not to exceed 5% per year) and applicable rental tax. 21 In addition, Sublessee shall assume the obligations of Sublessor under the Construction of Improvements by Landlord Lease Rider dated October 26, 1988. Said Lease Rider outlines the payment of $1,776.00 per month, principal and interest, which Sublessee agrees to pay beginning upon commencement of this Sublease and continuing through January 31, 1999. Beginning February 1, 1999, the obligation shall revert to Sublessor, unless otherwise provided for by Sublessor. Sublessee shall pay any Additional Charges Payable by Tenant as provided for in the Master Lease, including but not limited to, real estate taxes, insurance, utilities, repairs, fees for covered parking, and security bills. 6. The following events shall be deemed to be events of default by Sublessee under this Sublease: any events of default by Sublessee listed as events of default by Tenant as set forth in the Master Lease or any default in the provisions of this Sublease. Upon the occurrence of any such events of default, and in addition to any other available remedies provided by law or in equity, Sublessor shall have all remedies granted to Landlord in the Master Lease. Sublessor shall be in default under this Sublease if Sublessor fails to perform any obligations under this Sublease or under the Master Lease and Sublessee shall have all rights and remedies provided by law. 7. Upon execution of this Sublease, Sublessee shall deposit with Sublessor the amount of Eleven Thousand Eight Hundred Eighty-Five and 54/100 Dollars ($11,885.54) as a security deposit to be held by Sublessor pursuant to the provisions of the Master Lease. 8. Time is of the essence of this Sublease and each and all of the terms hereof. 9. Any notice or other communication required or permitted to be given under this Sublease or under the Master Lease shall be in writing and shall be deemed to be delivered on the date it is hand delivered to the party to whom such notice is given, at the address set forth below, or if such notice is mailed, on the date on which it is deposited in the United States Mail, postage prepaid, certified or registered mail, return receipt requested, addressed to the party to whom such notice is directed, at the address set forth below. Sublessor: Mark Hanshaw David Evans and Associates, Inc. 345 E. Toole Avenue Suite 300 Tucson, AZ 85701 Sublessee: Preston Brown Ventana Medical Systems, Inc. 3865 North Business Center Drive Tucson, AZ 85705 -2- 22 10. Sublessee shall have no right to assign or sublet any interest in this Sublease without first obtaining the written consent of the Landlord and Sublessor, which consent may or may not be granted by the Landlord or Sublessor in their sole opinion, judgment or discretion. 11. Sublessor shall have no liability to Sublessee for any wrongful action or default on the part of Landlord pursuant to the terms of the Master Lease and Sublessee hereby agrees to look solely to Landlord in event of any such default, the liability and obligations of Sublessor being solely pursuant to the terms and conditions of this Sublease. 12. In the event one or more of the provisions contained in this Sublease shall for any reason be held invalid, illegal or unenforceable in any respect, such invalidity , illegality or unenforceability shall not affect any other provision hereof and this Sublease shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 13. This Sublease constitutes the sole and only agreement of the parties hereto and supersedes any prior understandings and written or oral agreements between the parties respecting the subject matter of this Sublease. Upon the commencement date of this Sublease, the Sublease Agreement dated March 8, 1994, together with Addendum No. 1 dated June 2, 1995, and Addendum No. 2 dated June 2, 1995, shall be cancelled and of no further force and effect. 14. Hazardous Substances. Sublessee shall be responsible for any damage, contamination, liability, clean up, legal cost, fine, or other result of improper handling, use of, storage by any person, except Sublessor, of any toxic or hazardous materials in the Premises or in transporting such materials by Sublessee, or its employees, agents, or contractors, on the real property of Sublessor. In the event any agency of any governmental jurisdiction orders Sublessee to discontinue the transporting, handling, storage or use of any toxic or hazardous materials in the Premises or on the real property of Sublessor, or orders any clean up work resulting from Sublessee's handling, use, or storage of such materials, Sublessee shall immediately comply with such order. Sublessee shall indemnify and defend Sublessor from any claim of damage or liability by any person or entity arising out of such transportation, handling, use or storage of toxic or hazardous materials by Sublessee or its employees, agents or contractors. 15. Sublessee shall have the right to install telephone and computer cables and terminals provided the installation of these items does not substantially damage the Premises. -3- 23 Executed on the day and year first written above. SUBLESSOR: DAVID EVANS AND ASSOCIATES, INC. BY: /s/ MARK HANSAAN ------------------------ ITS: Associate ----------------------- SUBLESSEE: VENTANA MEDICAL SYSTEMS, INC. BY: /s/ PRESTON BROWN ------------------------ ITS: Manufacturing Partner ----------------------- Consent to this Sublease is hereby given by NTBC Tucson Limited Partnership, Halualoa Arizona, Inc., General Partner, Landlord for the premises described herein under the Lease dated October 26, 1988, between North Tucson Business Center and Jerry R. Jones & Associates, Inc. BY:________________________ ITS:_______________________ DATE:______________________ EX-10.12 17 MASTER LEASE PURCHASE AGREE W/ COPELCO 4/13/94 1 EXHIBIT 10.12 MASTER LEASE PURCHASE AGREEMENT THIS AGREEMENT dated as of April 13, 1994 between Ventana Medical Systems, Inc., a Delaware corporation, with its principal place of business at 3865 North Business Center Drive, Tucson, Arizona 85705 ("Vendor"), and Copelco Leasing Corporation, with its principal place of business at 1700 Suckle Plaza, Pennsauken, New Jersey 08110 ("Copelco"). RECITALS A. Vendor is the manufacturer and marketer of various types of medical equipment. B. Subject to the terms and conditions set forth in this Agreement, Vendor agrees to sell and Copelco agrees to evaluate and, in its sole discretion, purchase from Vendor all of Vendor's right, title and interest in and to certain lease or noncancelable rental agreements (the "Offered Leases") that Vendor has entered into and will in the future enter into with customers of the Vendor ("Lessees") for the lease of certain new equipment (the "Equipment") and the Equipment subject to the Offered Leases under the program described in this Agreement (the "Program"). NOW, THEREFORE intending to be legally bound hereby, and in consideration of the initial covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. OFFERS OF LEASES Vendor hereby grants to Copelco a right of first refusal to acquire the Offered Leases and related Equipment. The form of Offered Lease is attached hereto as Exhibit "1" and made a part hereof. Copelco shall furnish its lease rates to Vendor and shall provide Vendor, with at least thirty (30) days prior written notice of any change in its lease rates. 2. PURCHASE AND SALE OF LEASES (a) Purchase. As to all Offered Leases accepted by Copelco (the "Leases"), upon payment by Copelco to Vendor of the Purchase Price (as defined below), Copelco purchases from Vendor and Vendor sells, assigns and transfers to Copelco all of Vendor's right, title and interest in and to (i) the Leases; (ii) the related Equipment; (iii) all chattel paper (as defined in the Uniform Commercial Code), delivery and acceptance certificates, guaranties, financing statements, recourse agreements, insurance, manufacturer's warranties and other similar documents (collectively, the "Related Documents"); and (iv) the proceeds of the foregoing (all of the foregoing hereinafter referred to, collectively, as the "Assets"). In connection with the sale by Vendor to Copelco of the Assets, the parties agree to execute a Master Assignment and Bill of Sale in the form attached hereto as Exhibit "2" and made a part hereof (the "Master Assignment and Bill of Sale"). 2 (b) Purchase Price. The Purchase Price for each Lease, the related Equipment and the other Assets related thereto shall be agreed upon from time to time by the parties. A price list will be provided by Vendor to Copelco, with updates from time to time. The Purchase Price shall be paid upon Copelco's receipt of the following documents: (i) All original executed counterparts of the Lease (other than any copy retained by the Lessee); (ii) All originals of documents relating to the Lease, such as instruments, guaranties, security agreements, representations and warranties, letters of credit, financing statements, recourse agreements, corporate or partnership resolutions, certificates of title and other documents (collectively, the "Related Documents"); (iii) Uniform Commercial Code ("UCC") financing statements against each Lessee covering any Equipment and naming Lessee as debtor, Vendor as secured party and Copelco as assignee of secured party; (iv) Invoice for the Equipment; (v) Evidence of insurance coverage on the Equipment, in compliance with the terms of the Lease, with Vendor named as loss payee and additional insured; and (vi) Such other documents and instruments as Copelco may reasonably request, duly executed by Vendor, to further implement and effect the purposes of this Agreement. 3. TERM The term of this Agreement shall commence on the date hereof and shall continue until either party shall give the other party sixty (60) days prior written notice. Termination shall not affect the rights and obligations of the parties with respect to any Leases entered into prior to termination and this Agreement shall be deemed to be continuing as to such Leases. 4. VENDOR'S REPRESENTATIONS AND WARRANTIES (a) As to each Lease and the related Equipment and other Assets, Vendor does hereby warrant and represent, upon which representations and warranties Copelco relies, and which representations and warranties shall survive the execution, delivery and performance of this Agreement, as follows: (i) The Lease is in full force and effect and Vendor has not assigned the whole or any part of the rights assigned to Copelco; -2- 3 (ii) The Lease is valid, binding and enforceable in accordance with its terms and represents a non-cancelable obligation of a Lessee having legal capacity to contract and the original of the Lease has been given to Copelco; (iii) The execution of the Lease is in compliance with all applicable laws and regulations affecting the same, and unless otherwise disclosed in writing by Vendor to Copelco, the Lease has not been modified, altered or changed in any manner; (iv) The signatures of the Lessee and of the guarantors, if any, in the Lease and any guarantees, respectively, are genuine in all respects; (v) The Lease, the proceeds thereunder and the Equipment covered by the Lease are owned by Vendor and will at the time of Copelco's purchase of such Assets, be free and clear of all defenses, setoffs, counterclaims, security interests, liens and encumbrances of any kind or nature; (vi) Vendor has filed UCC-1 financing statements in such a manner so as to perfect Vendor's interest in the Equipment ahead of all other creditors of the Lessee; (vii) All the information provided by Vendor to Copelco concerning the Lease, the Equipment and the Lessee is accurate and complete in all respects and the description of the Equipment under the Lease is accurate and complete in all respects, including without limitation the information contained in this Agreement and the Exhibits hereto; unless otherwise explicitly stated in the Lease, the Equipment was new, not obsolete and unused at the commencement of the Lease. Vendor has no knowledge that any item of Equipment has suffered any loss or damage which has not been repaired, (viii) No down payment has been advanced to the Lessee by Vendor; (ix) The Equipment has been delivered to and accepted by the Lessee; (x) There does not exist any dispute or claim with respect to the Equipment, the Lease or Vendor's performance thereunder; (xi) No agreement or instrument has been executed by the Lessee, which would modify or amend the terms and conditions of the Lease or impair Copelco's rights to collect the proceeds of the Lease or impair Copelco's right, title and interest in the Equipment; (xii) All Equipment is to be used by the Lessee solely for business or commercial purposes and not for personal, family or household purposes; (xiii) The Lessee has not defaulted in any payment or performance obligations under the Lease; -3- 4 (xiv) All documents executed by Vendor and/or the Lessee in connection with the leasing of the Equipment to the Lessee have been furnished to Copelco and there are no other agreements or understandings between Vendor and the Lessee, written or oral, with respect to the Equipment or lease thereof, (xv) Vendor is a validly organized and existing corporation and in good standing in its state of incorporation and duly qualified to do business in the state where the Equipment is located if other than its state of incorporation, where such qualification is required; (xvi) Vendor has the power and authority to carry on its business as it is currently conducted, to own, operate and lease its assets and to enter into and perform this Agreement; (xvii) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not (A) constitute a violation of, or default under or conflict with, any term or provision of Vendors Certificate or Articles of Incorporation, or any contract, commitment, indenture, lease or other agreement to which it is a party or by which it is bound; (B) violate any provisions of law, statute, rule or regulation to which it is subject; or (C) violate any judgment, order, writ, injunction or decree of any court applicable to it; and (xviii) No consent, authorization, license, permit, registration or approval of, or exemption or other action by, any governmental or public body, commission or authority is required in connection with the execution, delivery and performance of this Agreement by Vendor. 4A. COPELCO'S COVENANTS Copelco covenants during the term of this Agreement and for a period of one (1) year thereafter, provided that no Vendor event of default has occurred hereunder, as follows: (a) Copelco will not use any information directly furnished to it by Vendor with respect to Vendor's customer base for the purpose of soliciting business with such customers in connection with the leasing of non-vendor equipment; (b) Without Vendor's consent, Copelco will not offer Vendor salespeople or employees incentives to obtain Offered Leases under the leasing program described in this Agreement; and (c) Copelco will work with Vendor's Director of Sales and Lease Administrator on all customer complaints and disputes, as further provided in paragraph 7. 5. INDEMNIFICATION -4- 5 (a) Copelco shall indemnify and hold Vendor harmless from and against any demand, claim, action, cost, loss, liability, damage or expense of any kind, including without limitation reasonable attorney's fees, arising from or in connection with Copelco's breach of any warranty, representation or covenant contained herein. (b) Vendor shall indemnify Copelco from and against any demand, claim, action, cost, loss, liability, damage or expense of any kind, including without limitation reasonable attorney's fees, arising out of or in connection with: (i) Vendor's breach of any representation, warranty, covenant or obligation contained in this Agreement or any of the Leases, (ii) the Equipment, including without limitation, the manufacture, selection, delivery, possession or lease of the Equipment, and (iii) any warranties, expressed or implied, given by the Vendor for the Equipment. (c) Any party claiming a right to indemnification under the provisions of this paragraph shall give prompt written notice to the other party of its claim for indemnification. Each party shall have the right to satisfy any claim for indemnification under this Agreement by setoff or credit against any amounts owed to it by the other party under this Agreement or any amounts owed by it to the other party under this Agreement and to pursue any and all other remedies available to it for any deficiency. Any claim for indemnification shall be paid within thirty (30) days after notice of the claim. Any amounts not paid when due under this paragraph shall bear interest from the date due until the date paid at a rate equal to twelve (12%) percent per annum. 6. REPURCHASE OBLIGATIONS OF VENDOR (a) In the event that (i) any representation or warranty made by Vendor herein or in the Master Assignment and Bill of Sale is false, or (ii) Vendor has breached any covenant or other obligation contained herein, in any Lease or in the Master Assignment and Bill of Sale, or (iii) proceedings under the Federal Bankruptcy Act or other insolvency laws shall be instituted against Vendor, or a trustee or receiver appointed for Vendor of any of its property, or Vendor shall make an assignment for the benefit of creditors or institute proceedings to be adjudicated a bankrupt or insolvent, or Vendor shall wind-up, liquidate or dissolve its business or affairs, an event of default hereunder shall have occurred and Vendor agrees to repurchase from Copelco, within ten (10) days after Copelco's written demand, the Leases affected by such event of default. (b) The repurchase price for each Lease that Vendor is obligated to repurchase under this paragraph 6 (the "Repurchase Price") shall be the aggregate of the following: (i) An amount equal to (x) all rentals and other sums then due and owing but unpaid under such Lease plus (y) the present value of the remaining sums to be paid by Lessee during the remaining term of the Lease and Copelco's booked residual for the Equipment as provided by Copelco to Vendor, discounted at the rate used when the Lease was assigned to Copelco (but only to the extent permitted by law); and -5- 6 (ii) All out-of-pocket expenses incurred by Copelco in connection with the collection or attempted collection of payments due it under such Lease, including but not limited to reasonable attorney's fees and costs. (c) If the Repurchase Price is not paid within thirty (30) days after Copelco's demand, Vendor shall pay interest on the Repurchase Price at the rate of one and a half (1-1/2%) percent per month until paid, but in any event, at an interest rate not in excess of the maximum amount permitted by law. Copelco's delay or failure to exercise any of its rights hereunder shall not be deemed to be a waiver of such rights. Upon Copelco's receipt of the full Repurchase Price, such Lease shall be reassigned by Copelco to Vendor without recourse or warranty of any kind. 7. BILLING AND COLLECTION: ATTORNEY-IN-FACT (a) Copelco shall have the sole right to do all billing and make all collections on all Leases in Vendor's name and to exercise any and all of the Lessor's rights, powers and remedies thereunder. All bills sent by Copelco, in the name of Vendor, shall direct the Lessees to remit all payments to a post office box designated by and under the sole control of Copelco. Copelco shall submit to vendor on a weekly basis, an aging report on all of the leases. In the event that a Lessee becomes more than thirty (30) days delinquent, Copelco shall contact Vendor and Vendor shall have 30 days to cause Lessee to cure the default. At the end of such 30 day period, Vendor shall notify Copelco as to whether it wishes to remarket the Equipment, in which case Vendor shall assume the Lease payments while it is remarketing the Equipment as provided in paragraph 7(d) below, or whether Copelco should pursue collection in its own name. (b) In the event of Vendor's default under this Agreement or the Master Assignment, Copelco may elect in its sole and absolute discretion at any time, upon fifteen (15) days prior written notice to Vendor, to perform the billing and collection in its own name and to so notify all of the Lessees. (c) Vendor hereby irrevocably constitutes and appoints Copelco, its successors and assigns, and any officer or agent thereof with full power of substitution, as Vendor's true and lawful attorney-in-fact, with full irrevocable power and authority in the place and stead of Vendor and in the name of the Vendor or otherwise, to (i) ask, require, demand, receive, compound and give acquittance for any and all monies and claims for money due and to become due under, or arising out of each Lease, to endorse any checks or other instruments or orders in connection therewith, to give all or any of the notices, consents, instructions or other communications reserved to Vendor in the Lease, and to file any claims or take any action or institute any proceedings which Copelco deems necessary or advisable; and (ii) to take any and all appropriate action and execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement. Vendor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest, shall be irrevocable and shall terminate -6- 7 only upon payment in full of the obligations hereunder and the termination or expiration of this Agreement and the Leases. The powers conferred on Copelco hereunder are solely to protect Copelco's interests in any such powers. (d)(i) Vendor hereby agrees that where it has elected to remarket the Equipment under the terms of this paragraph 7, Vendor shall, at its sole expense, repossess the Equipment and refurbish the Equipment to the extent necessary to put the Equipment in good working order and meet manufacturer's specifications, if applicable, and exercise its best efforts to remarket the Equipment in the following manner: (A) Vendor will locate a new lessee, acceptable to Copelco, to assume the balance of rentals then due and to become due under the Lease at the time of default; or (B) Vendor will sell the Equipment for an amount in cash equal to the aggregate of (y) the rental payments then due plus (z) the present value of the rental payments to become due during the term of the Lease and Copelco's anticipated residual recovery from the Equipment, all discounted at the rate of six (6%) percent (collectively, the "Lease Balance"). (ii) If Vendor shall fail to remarket the Equipment in the manner described above within ninety (90) days after Copelco's written request, then Vendor shall become liable under the Lease to make all required payments due under the Lease in the manner described therein, which liability shall continue until the Equipment has been remarketed or until all of the obligations of Lessee have been fulfilled, whichever is earlier. 8. FURTHER ASSURANCES Vendor agrees that at any time and from time to time, upon the written request of Copelco, Vendor will promptly and duly execute and deliver any and all such further instruments and documents as Copelco or any subsequent assignee may reasonably deem desirable in obtaining the full benefits of this Agreement or the Master Assignment and Bill of Sale and of the rights and powers herein granted. 9. ENTIRE AGREEMENT This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Except for any supplemental documents that may be required by Copelco, this Agreement, the Master Assignment and Bill of Sale and all Exhibits hereto, constitutes the entire agreement between the parties with respect to the subject matter hereof and any change or modification hereto must be in writing and signed by the parties. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute a waiver of any other provision hereof (whether or not similar), nor shall any such waiver constitute a continuing waiver unless otherwise expressly provided. -7- 8 10. NOTICE Any notice, demand, request, consent, report, approval or communication required hereunder shall be in writing and sent by registered mail, return receipt requested, or by overnight delivery to the address of the party set forth in this Agreement. Notice shall be deemed given three (3) days after the date mailed if sent by registered mail or when sent, if sent by overnight mail. 11. ASSIGNMENTS Copelco shall have the right to assign or transfer the Leases or grant a security interest in any Equipment or any sums due under the Leases or hereunder and all of its rights under this Agreement to any wholly-owned subsidiary or third party financing sources, provided, however, that Copelco will continue to perform all billing and collecting; in such event, Copelco's assignee, transferee or grantee shall have all the rights, powers, privileges and remedies of Copelco under the Leases and this Agreement and Vendor agrees not to assert any claim or defense arising out of this Agreement or otherwise which it may have against Copelco in connection with the transferred Lease or Equipment. Vendor shall not make any assignment of its obligations hereunder. 12. LAW GOVERNING; WAIVER OF JURY TRIAL This Agreement shall be governed in all respects, whether as to validity, construction, capacity, performance or otherwise, by the laws of the State of New Jersey. TO THE EXTENT PERMITTED BY LAW, THE PARTIES WAIVE TRIAL BY JURY IN ANY ACTION BROUGHT IN CONNECTION WITH THIS AGREEMENT. 13. COUNTERPARTS This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by its duly authorized officers, all as of the day and year first above written. COPELCO LEASING CORPORATION VENTANA MEDICAL SYSTEMS, INC. By: /s/ By: /s/ R. MICHAEL RODGERS -------------------------------- ------------------------- Title: Vice President-General Manager Title: Vice President -------------------------------- ------------------------- -8- 9 EXHIBIT 1 COPELCO'S FORM OF LEASE -9- 10 EXHIBIT 2 MASTER ASSIGNMENT AND BILL OF SALE THIS ASSIGNMENT AND BILL OF SALE is made this 13th day of April 1994, by Ventana Medical Systems, Inc. ("Assignor"). RECITALS WHEREAS, Assignor and Copelco Leasing Corporation ("Copelco") have entered into a Master Lease Purchase Agreement dated April 13, 1994 (the "Agreement"). Capitalized terms used but not defined herein shall have the same meaning as ascribed to them by the Agreement; WHEREAS, Assignor shall from time to time assign and sell certain leases, including any guarantees and other documents in connection with the leases, and sell the equipment related to such leases (each such transaction hereinafter referred to as an "Assigned Lease") to Copelco; and WHEREAS, such assignment and sale of an Assigned Lease and related equipment shall be effected by and shall be in accordance with the terms set forth in this Master Assignment and Bill of Sale, unless modified by a written agreement signed by Assignor and Copelco. NOW, THEREFORE, in consideration of the foregoing premise and of the mutual covenants herein contained, and intending to be legally bound hereby, Assignor and Copelco agree as follows: 1. For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, upon delivery to Copelco of the original counterpart copy of each Assigned Lease, Assignor will and does hereby sell, assign, and transfer and by these presents has sold, assigned and transferred to Copelco each such Assigned Lease, together with all of the Assignor's right, title and interest in and to the equipment described in each such Assigned Lease (the "Equipment") and all sums due and to become due under each such Assigned Lease (including without limitation all sums payable by reason of damage, destruction or loss to the Equipment), all claims for damages arising out of the breach thereof and all rights of Assignor including, without limitation, the right to terminate the Assigned Lease, to perform thereunder and to compel performance of the terms thereof. 2. All of Assignor's right, title and interest assigned hereunder may be reassigned by Copelco and any subsequent assignee. -10- 11 EXHIBIT 2 PAGE 2 3. Assignor does hereby constitute Copelco, its successors and assigns, as Assignor's true and lawful attorney, irrevocably, with full power (in the name of Assignor or otherwise) to ask, require, demand, receive, compound and give acquittance for any and all moneys and claims for money due and to become due under, or arising out of each such Assigned Lease, to endorse any checks or other instruments or orders in connection therewith, to give all or any of the notices, consents, instructions or other communications reserved to Assignor in the Assigned Lease and to file any claims or take any action or institute any proceedings which Copelco or any subsequent assignee deem necessary or advisable in the premises. 4. Assignor agrees that at any time and from time to time, upon the written request of Copelco, Assignor will promptly and duly execute and deliver any and all such further instruments and documents as Copelco may reasonably deem necessary or advisable in obtaining the full benefits of this Assignment and of the rights and powers herein granted. 5. Assignor hereby agrees that it will not, without the prior written consent of Copelco, extend, amend, supplement, modify or terminate any Assigned Lease or agree to, or permit, any modification, waiver or other alteration of the terms thereof. 6. With respect to each Assigned Lease, Assignor hereby represents, warrants and agrees that Assignor has delivered to Copelco all original counterparts of the Assigned Lease other than counterparts in the Lessee's possession. 7. The terms, conditions, representations and warranties of the Agreement are hereby incorporated herein and made a part hereof In the event that any of the terms, conditions, representations and warranties contained in this Assignment shall conflict with the provisions of the Agreement, the provisions of this Assignment shall govern. WHEREFORE, each of the parties hereto has caused this Assignment to be executed by its duly authorized officer, as of the day first above written. COPELCO LEASING CORPORATION VENTANA MEDICAL SYSTEMS, INC. By: /s/ By: /s/ R. MICHAEL RODGERS --------------------------------- -------------------------- Title: Vice President - Gen'l MGR. Title: Vice President ----------------------------- ---------------------- -11- EX-10.13(A) 18 AGREEMENT & PLAN OF REORGANIZATION 1/19/96 1 EXHIBIT 10.13(a) AGREEMENT AND PLAN OF REORGANIZATION BY AND AMONG VENTANA MEDICAL SYSTEMS, INC. VENTANA ACQUISITION CORPORATION AND BIOTEK SOLUTIONS, INC. 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I - THE MERGER...................................................... 3 SECTION 1.1 The Merger........................................ 3 SECTION 1.2 Effective Time.................................... 3 SECTION 1.3 Closing........................................... 3 SECTION 1.4 Articles of Incorporation......................... 4 SECTION 1.5 Bylaws............................................ 4 SECTION 1.6 Directors and Officers............................ 4 SECTION 1.7 Tax Consequences of Merger........................ 4 ARTICLE II - EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS................................ 4 SECTION 2.1 Effect on Sub Capital Stock....................... 4 SECTION 2.2 Effect on BioTek Capital Stock.................... 4 SECTION 2.3 BioTek Options.................................... 5 SECTION 2.4 BioTek Warrants................................... 5 SECTION 2.5 BioTek Investor Notes............................. 5 SECTION 2.6 Payment of Merger Consideration................... 5 SECTION 2.7 Discharge of BioTek Liabilities................... 6 SECTION 2.8 Dissenting Shares................................. 7 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF BIOTEK...................... 7 SECTION 3.1 Organization of BioTek............................ 7 SECTION 3.2 Capital Stock..................................... 8 SECTION 3.3 Subsidiaries...................................... 8 SECTION 3.4 Corporate Authority............................... 8 SECTION 3.5 Consents and Approvals............................ 8 SECTION 3.6 Financial Statements.............................. 9 SECTION 3.7 Operating Rights.................................. 9 SECTION 3.8 Undisclosed Liabilities........................... 10 SECTION 3.9 Absence of Certain Changes or Events.............. 10 SECTION 3.10 Agreements, Contracts and Commitments............. 11 SECTION 3.11 Material Contracts................................ 12 SECTION 3.12 No Violation...................................... 12 SECTION 3.13 Tax Matters....................................... 12 SECTION 3.14 Title to Assets................................... 13 SECTION 3.15 Condition of Personal Property.................... 14 SECTION 3.16 Patents and Intangible Rights..................... 14
i 3 SECTION 3.17 Labor Matters..................................... 14 SECTION 3.18 Employees......................................... 15 SECTION 3.19 Litigation........................................ 15 SECTION 3.20 Transactions with Affiliates...................... 15 SECTION 3.21 Environmental Matters............................. 15 SECTION 3.22 Employee Benefit Plans............................ 15 SECTION 3.23 Insurance......................................... 16 SECTION 3.24 Payments.......................................... 16 SECTION 3.25 Accounts Receivable............................... 16 SECTION 3.26 Inventory......................................... 16 SECTION 3.27 Minute Books...................................... 16 SECTION 3.28 Investment Bankers, Finders or Brokers............ 17 SECTION 3.29 Compliance With Laws.............................. 17 SECTION 3.30 Antitrust......................................... 17 SECTION 3.31 Material Misstatements Or Omissions............... 17 ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF VENTANA AND SUB............................................. 18 SECTION 4.1 Organization of Ventana and Sub................... 18 SECTION 4.2 Corporate Authority............................... 18 SECTION 4.3 No Violation...................................... 18 SECTION 4.4 Investment Bankers, Finders or Brokers............ 18 SECTION 4.5 Capitalization.................................... 18 SECTION 4.6 Financial Statements.............................. 19 SECTION 4.7 Material Misstatements Or Omissions............... 19 ARTICLE V - ADDITIONAL COVENANTS AND AGREEMENTS............................. 20 SECTION 5.1 Conduct of Business by BioTek..................... 20 SECTION 5.2 Access to Information; Confidentiality............ 22 SECTION 5.3 Customer Contact.................................. 22 SECTION 5.4 No Solicitation................................... 22 SECTION 5.5 Shareholder Meeting............................... 23 SECTION 5.6 Consents.......................................... 23 SECTION 5.7 Best Efforts and Further Assurances............... 23 SECTION 5.8 Break-Up Fee; Ventana Initial Payment Option...... 23 SECTION 5.9 Public Announcements.............................. 24 SECTION 5.10 Discharge of Liabilities.......................... 24 SECTION 5.11 Biogenex Patent Litigation........................ 24 SECTION 5.12 Exchange of BioTek Investor Notes................. 24 SECTION 5.13 Other Covenants of BioTek......................... 24 SECTION 5.14 Ventana Board Representation...................... 25
ii 4 ARTICLE VI - CONDITIONS TO THE MERGER..................................................... 25 SECTION 6.1 Conditions to Each Party's Obligation to Effect the Merger...... 25 SECTION 6.2 Conditions to Ventana's and Sub's Obligation to Effect the Merger............................................ 25 SECTION 6.3 Conditions to BioTek's Obligation to Effect the Merger.......... 27 ARTICLE VII - SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS............................................................... 28 SECTION 7.1 Survival........................................................ 28 ARTICLE VIII - TERMINATION................................................................ 28 SECTION 8.1 Termination or Abandonment...................................... 28 SECTION 8.2 Effect of Termination........................................... 28 ARTICLE IX - MISCELLANEOUS................................................................ 29 SECTION 9.1 Notices......................................................... 29 SECTION 9.2 Headings........................................................ 30 SECTION 9.3 Entire Agreement................................................ 30 SECTION 9.4 Waiver.......................................................... 30 SECTION 9.5 Expenses........................................................ 31 SECTION 9.6 Counterparts.................................................... 31 SECTION 9.7 Governing Law................................................... 31 SECTION 9.8 Assignability................................................... 31 SECTION 9.9 No Third Party Beneficiaries.................................... 31
EXHIBITS Exhibit A - Agreement of Merger Exhibit B - Form of Promissory Note Exhibit C - Escrow Agreement Exhibit D - BioTek Disclosure Schedule Exhibit E - Form of Non-Competition Agreement iii 5 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION is made and entered into on January 19, 1996 by and among Ventana Medical Systems, Inc., a Delaware corporation ("Ventana"), Ventana Acquisition Corporation, a California corporation and a wholly-owned subsidiary of Ventana ("Sub"), and BioTek Solutions, Inc., a California corporation ("BioTek"). RECITALS A. Subsequent to the execution and delivery of this Agreement but prior to the Closing hereunder, Sub and BioTek will enter into an Agreement and Plan of Merger in substantially the form attached hereto as Exhibit A (the "Merger Agreement") which provides for the merger of Sub with and into BioTek (the "Merger") pursuant to the California General Corporation Law (the "California Law"). Under the Merger Agreement, the shares of BioTek Common Stock issued and outstanding immediately prior to the Effective Time (as defined below) of the Merger will be converted into the right to receive from Ventana (i) cash (the "Cash Proceeds") in the aggregate amount of $2,500,000 (which amount shall be reduced by the amount of any Initial Payment made in accordance with Section 5.8 hereof) less all liabilities of BioTek as of the Effective Time, whether accrued, absolute, contingent or otherwise (the "BioTek Liabilities"), that have not been paid or discharged in full as of the Effective Time (the BioTek Liabilities as of the date hereof and the Effective Time shall be set forth on a Schedule of Liabilities (the "Schedule of Liabilities") to be delivered upon execution of this Agreement and updated as of the Effective Time, together with the amount of each such liability and the disposition to be made with respect to each such liability), other than up to $12,550,000 in principal amount of Ventana promissory notes (the "Ventana Exchange Notes") to be issued in exchange for $___________ in principal amount (plus accrued interest of $________ at January 15, 1996) of outstanding promissory notes (the "BioTek Investor Notes") as described elsewhere herein, and (ii) promissory notes (the "Note Proceeds") in substantially the form attached hereto as Exhibit B (the "Ventana Payment Notes") in the aggregate principal amount of $2,000,000 (i) less all BioTek Liabilities in excess of $2,500,000 and (ii) plus the amount, if any, by which $12,550,000 exceeds the sum of (x) the amount of Ventana Exchange Notes issued in connection with the Merger plus (y) the principal and accrued interest payable with respect to BioTek Investor Notes that have not been exchanged for Ventana Payment Notes as of the Effective Time. Up to $750,000 of Ventana Payment Notes (the "Escrow Funds") shall be set aside pursuant to the provisions of the indemnity escrow described elsewhere herein. The Cash Proceeds and the Note Proceeds are sometimes referred to herein as the "Total Consideration." Notwithstanding the foregoing, if as of the Effective Time BioTek is able to discharge all of the BioTek Liabilities other than liabilities to DAKO A/S and its affiliates ("DAKO Liabilities") with the Cash Proceeds but is unable to discharge the DAKO Liabilities, Ventana shall have the option, but not the 6 obligation, to complete the Merger for consideration consisting of the Cash Proceeds plus an amount of Ventana Payment Notes equal to $250,000 plus the amount, if any, by which $12,550,000 exceeds the sum of (x) the amount of Ventana Exchange Notes issued in connection with the Merger plus (y) the principal and accrued interest payable with respect to BioTek Investor Notes that have not been exchanged for Ventana Payment Notes as of the Effective Time. Of such Ventana Payment Notes, $250,000 of which shall be placed in escrow pursuant to the provisions of the indemnity escrow described elsewhere herein. If Ventana elects to proceed in such manner, the DAKO Liabilities shall remain with the Surviving Corporation following the Closing and Ventana shall have no obligation to issue Ventana Payment Notes in excess of the amount set forth above and the amount of Note Proceeds shall therefore equal $250,000 plus the amount, if any, by which $12,550,000 exceeds (x) the amount of Ventana Exchange Notes issued in connection with the Merger plus (y) the principal and accrued interest payable with respect to BioTek Investor Notes that have not been exchanged for Ventana Payment Notes as of the Effective Time. Alternatively, in the event that the BioTek Liabilities cannot be discharged for an amount equal to or less than $2,500,000 in Cash Proceeds plus $1,250,000 in Note Proceeds, Ventana shall have the option (i) to complete the transaction in which event $750,000 of Note Proceeds will be placed in escrow pursuant to the indemnity and escrow described herein and the remaining undischarged BioTek Liabilities shall continue as liabilities of the Surviving Corporation or (ii) to terminate this Agreement without any liability of Ventana to BioTek, including, without limitation any liability or obligation to pay the break-up fee described in Section 5.8 hereof. The aggregate Note Proceeds placed in escrow shall be reduced, in addition to any reduction for payment of indemnification obligations arising under the escrow, for any payments made or required to be made by Ventana to holders of shares of BioTek Common Stock that are Dissenting Shares (as defined below). Subject to the indemnity escrow, the Total Consideration shall be allocated to the holders of issued and outstanding BioTek Common Stock pro rata in accordance with the Articles of Incorporation of BioTek (the "BioTek Articles of Incorporation"). B. Simultaneously with the closing of the Merger, the holders of not less than 90% in original principal amount of BioTek Investor Notes shall exchange such BioTek Investor Notes for Ventana Exchange Notes. Each Ventana Exchange Note shall be in the principal amount equal to the sum of (i) the principal amount of the surrendered BioTek Investor Note, (ii) accrued interest on the surrendered BioTek Investor Note from the date of issuance through December 31, 1995 and (iii) accrued interest on the surrendered BioTek Investor Note from January 1, 1996 through the date of Closing. The issued Ventana Exchange Notes shall be in substantially the form attached as Exhibit B hereto. Notwithstanding the foregoing, the aggregate principal amount of Ventana Exchange Notes plus the aggregate principal and accrued interest on BioTek Investor Notes held by noteholders that do not exchange their BioTek Investor Notes for Ventana Exchange Notes shall not in any event exceed $12,550,000. With respect to holders of BioTek Investor Notes that do not exchange such notes for Ventana Exchange Notes, BioTek shall use its best efforts to obtain by the Effective Time (and it shall be a condition to closing of Ventana that such agreements have been obtained) legally binding agreements providing that such non-exchanging noteholders shall (i) have terminated any security interest they may have in any assets of BioTek and (ii) have waived any right they may have to demand payment of such notes at any time prior to December 31, 1996. -2- 7 C. The parties hereto desire to make this Agreement for the purpose of setting forth certain representations, warranties and covenants made by each to the other as an inducement to the execution and delivery of the Merger Agreement and the conditions precedent to the consummation of the Merger. D. The respective Boards of Directors of Ventana, Sub and BioTek have approved this Agreement and the Merger Agreement. NOW, THEREFORE, the parties hereby agree as follows: ARTICLE I THE MERGER SECTION 1.1 The Merger. Subject to the terms and conditions of this Agreement, Sub and BioTek shall execute and file the Merger Agreement with the Secretary of State of the State of California, whereupon Sub shall be merged with and into BioTek as the surviving corporation. BioTek is sometimes referred to herein as the "Surviving Corporation" and BioTek and Sub as the "Constituent Corporations" in the Merger. Upon effectiveness of the Merger, the separate existence of Sub shall cease, and the Surviving Corporation shall possess all the rights, privileges, powers and franchises of a public as well as of a private nature, and be subject to all the restrictions, disabilities and duties of each of the Constituent Corporations; and all and singular rights, privileges, powers and franchises of each of the Constituent Corporations, and all property, real, personal and mixed, and all debts due to either of the Constituent Corporations on whatever account, as well as for stock subscriptions and all other things in action or belonging to each of the Constituent Corporations, shall be vested in the Surviving Corporation, and all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of the Surviving Corporation as they were of the Constituent Corporations, and the title to any real estate vested by deed or otherwise, in either of the Constituent Corporations, shall not revert or be in any way impaired; but all rights of creditors and all liens upon any property of either of the Constituent Corporations shall be preserved unimpaired, and all debts, liabilities and duties of the Constituent Corporations shall thenceforth attach to the Surviving Corporation, and may be enforced against it to the same extent as if said debts and liabilities had been incurred by it. SECTION 1.2 Effective Time. On the first business day on or by which all of the conditions to consummation of the Merger provided in Article VI hereof shall have been satisfied or waived, the parties shall cause the Merger to be consummated by executing and filing the Merger Agreement with the Secretary of State of the State of California. The Merger shall become effective on the date and time when the Merger Agreement is so filed (such time and date are referred to herein as the "Effective Time"). SECTION 1.3 Closing. The closing of the Merger (the "Closing") shall take place at 3:00 p.m., local time, at the offices of Hewitt & McGuire, 19900 MacArthur Blvd., Suite 1050, Irvine, -3- 8 California, on the Effective Time, or at such other time and place (not to exceed two business days following the Effective Time) as Ventana and BioTek shall agree (the "Closing Date"). SECTION 1.4 Articles of Incorporation. At the Effective Time, the Articles of Incorporation of BioTek shall be amended (except Article One, setting forth the name of the corporation) to be identical to the Articles of Incorporation of Sub as in effect immediately prior to the Effective Time. SECTION 1.5 Bylaws. At the Effective Time, the Bylaws of BioTek shall be amended to be identical to the Bylaws of Sub. SECTION 1.6 Directors and Officers. At the Effective Time, the directors of Sub shall be the directors of BioTek until their respective successors are duly elected or appointing and qualified, and the officers of Sub shall be the officers of BioTek until their respective successors are duly elected or appointed and qualified. SECTION 1.7 Tax Consequences of Merger. The Merger will be a taxable transaction for federal and state income tax purposes. ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS SECTION 2.1 Effect on Sub Capital Stock. At the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of the capital stock of any of the parties hereto, each issued and outstanding share of the Common Stock of Sub shall be converted into one (1) share of Common Stock of the Surviving Corporation. Each stock certificate of Sub evidencing ownership of any such shares shall continue to evidence ownership of such shares of capital stock of the Surviving Corporation. SECTION 2.2 Effect on BioTek Capital Stock. At the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of the capital stock of any of the parties hereto, each issued and outstanding share of BioTek Common Stock, other than shares which shall then or thereafter constitute Dissenting Shares as defined in Section 2.7 below, and subject to the escrow and indemnification provisions set forth in the Escrow Agreement (as defined below), shall be retired and converted into the right to receive from Ventana (i) cash equal to the Cash Proceeds divided by the total number of shares of BioTek Common Stock outstanding immediately prior to the Effective Date and (ii) a Ventana Payment Note in the principal amount equal to the Note Proceeds divided by the total number of shares of BioTek Common Stock outstanding immediately prior to the Effective Date. -4- 9 SECTION 2.3 BioTek Options. BioTek shall use its best efforts to cause all outstanding options to purchase shares of BioTek Common Stock to either be exercised (in accordance with the provisions of such options) or terminate effective at the Effective Time, and it shall be a condition to closing of Ventana that all such options shall have either been exercised or terminated as of the Effective Time. SECTION 2.4 BioTek Warrants. BioTek shall use its best efforts to cause all outstanding warrants to acquire shares of BioTek Common Stock to either be exercised (in accordance with the provisions of such warrants) or terminate effective at the Effective Time, and it shall be a condition to closing of Ventana that all such warrants shall have either been exercised or terminated as of the Effective Time. SECTION 2.5 BioTek Investor Notes. At least 90% in original principal amount of outstanding BioTek Investor Notes shall be exchanged by the holders thereof for Ventana Exchange Notes effective at the Effective Time. With respect to holders of BioTek Investor Notes that do not exchange such notes for Ventana Exchange Notes, BioTek shall use its best efforts to obtain by the Effective Time (and its shall be a condition to closing of Ventana that such agreements have been obtained by the Effective Time) legally binding agreements providing that such non-exchanging noteholders shall (i) have terminated any security interest they may have in any assets of BioTek and (ii) have waived any right they may have to demand payment of such notes at any time prior to December 31, 1996. SECTION 2.6 Payment of Merger Consideration. (a) Prior to the Effective Time, Ventana and BioTek shall mutually agree upon and designate a bank or trust company (the "Exchange Agent") to act as (i) agent for the holders of BioTek Common Stock to receive the funds to which holders of BioTek Common Stock shall become entitled pursuant to Section 2.2 hereof, and (ii) escrow agent pursuant to the terms of an escrow agreement in substantially the form attached as Exhibit C hereto (the "Escrow Agreement"). (b) On the Closing Date, Ventana shall (i) deposit the Escrow Funds into an escrow account on behalf of the shareholders of BioTek pursuant to the terms of the Escrow Agreement and (ii) transfer to the Exchange Agent an amount equal to the Total Consideration reduced by (i) the Escrow Funds and (ii) the Cash Proceeds and Note Proceeds being used to discharge BioTek Liabilities in accordance with Section 2.7 for payment to the shareholders of BioTek pursuant to the procedures established by the remainder of this Section 2.6. (c) Promptly following the Closing Date, the Surviving Corporation shall cause to be sent by United States registered mail, return receipt requested, to each person who was, at the Effective Time, a holder of record of BioTek Common Stock entitled to receive a portion of the Total Consideration pursuant to Section 2.2 hereof, a form (mutually agreed to by BioTek and Ventana) of a letter of transmittal and instructions for use in effecting the surrender of the certificates that, at the Effective Time, shall have evidenced any of such shares to be exchanged pursuant to the Merger. Upon -5- 10 such surrender to the Exchange Agent of such certificates, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, and such other documents as may be requested, the Exchange Agent shall promptly cause to be paid to the holder the aggregate per share consideration applicable to such holder. Until so surrendered and exchanged, each such certificate evidencing shares of BioTek Common Stock shall, after the Effective Time, be deemed to evidence only the right to receive the aggregate per share consideration to which such holder is entitled pursuant to Section 2.2. No interest will be paid or will accrue on the amount to be paid upon the surrender of any such certificate. (d) If payment of the aggregate per share consideration in respect of cancelled shares of BioTek Common Stock is to be made to a person other than the person in whose name a surrendered certificate or instrument is registered, it shall be a condition to such delivery or payment that the certificate or instrument so surrendered shall be properly endorsed or shall be otherwise in proper form for transfer and that the person requesting such delivery or payment shall have paid any transfer and other taxes required by reason of such delivery or payment or shall have established to the satisfaction of the Surviving Corporation or the Exchange Agent that such tax either has been paid or is not payable. (e) Each certificate which immediately prior to the Effective Time represented outstanding shares of BioTek Common Stock shall at and after the Effective Time be deemed to represent only the amount of cash and notes from Ventana into which shares represented by such certificates shall have been converted pursuant to Section 2.2 herein. After the Effective Time, there will be no further transfers on the stock transfer books of BioTek of shares of BioTek Common Stock that were outstanding immediately prior to the Effective Time. If a certificate representing such shares is presented for transfer, it will be cancelled and the aggregate per share consideration will be paid in exchange therefor. (f) Notwithstanding the foregoing, none of the Exchange Agent, Ventana or the Surviving Corporation or any party hereto shall be liable to any holders of shares of BioTek Common Stock for any amounts properly paid or delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. SECTION 2.7 Discharge of BioTek Liabilities. At the Closing, BioTek shall deliver the Schedule of Liabilities which shall set forth all of the BioTek Liabilities as of the Effective Time and, noting for each obligee the amount of the liability to such obligee and the manner in which such liability is to be discharged. For BioTek Liabilities to be discharged with Cash Proceeds, the amount of Cash Proceeds necessary to discharge such BioTek Liabilities will be deposited into a separate account against which checks in payment of such BioTek liabilities will be written. For BioTek Liabilities to be discharged with Ventana Payment Notes, Ventana Payment Notes in the appropriate amounts and payable to the appropriate obligees shall be delivered at Closing. For all obligees that will be receiving Ventana Payment Notes or that will be receiving Cash Proceeds of less than the full amount of the obligations owed to them, BioTek shall deliver releases (in form and substance acceptable to BioTek and Ventana) providing for the release of BioTek's obligations upon payment of the appropriate amount set forth on the Schedule of Liabilities. -6- 11 SECTION 2.8 Dissenting Shares. Notwithstanding anything in this Agreement to the contrary, shares of BioTek Common Stock which are dissenting shares within the meaning of Section 1300 of the California Law ("Dissenting Shares") shall not be converted into or represent a right to receive any consideration from Ventana, but the holders thereof shall be entitled only to such rights as are granted by the California Law. Each holder of Dissenting Shares who becomes entitled to payment therefor pursuant to the California Law shall receive payment from the Surviving Corporation in accordance with the California Law; provided, however, that (i) if any such holder of Dissenting Shares shall have failed to establish his entitlement to appraisal rights as provided in the California Law, (ii) if any such holder of Dissenting Shares shall have effectively withdrawn his demand for appraisal thereof or lost his right to appraisal and payment therefor under the California Law or (iii) if neither any holder of Dissenting Shares nor the Surviving Corporation shall have filed a petition demanding a determination of the value of all Dissenting Shares within the time provided in the California Law, such holder or holders (as the case may be) shall forfeit the right to appraisal of such shares of BioTek Common Stock, and such shares of BioTek Common Stock shall thereupon be deemed to have been converted, as of the Effective Time, into the right to receive the consideration specified in Section 2.2 without interest thereon. BioTek shall give Ventana prompt notice of any written demands for appraisal and any other instruments served pursuant to the California Law received by BioTek and the opportunity to direct all negotiations and proceedings with respect to demands for appraisal under the California Law. BioTek shall not, without the written consent of Ventana, voluntarily make any payment with respect to any demands for appraisal or offer to settle or settle any such demands. ARTICLE III REPRESENTATIONS AND WARRANTIES OF BIOTEK BioTek represents and warrants to Ventana and Sub, subject to the exceptions specifically disclosed in writing in the disclosure schedule supplied by BioTek to Ventana (the "BioTek Disclosure Schedule") and dated as the date hereof, as set forth below. SECTION 3.1 Organization of BioTek. BioTek is a corporation duly organized, validly existing and in good standing under the laws of the State of California, has the corporate power and authority to own its properties and assets and to carry on its business as it is now being conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the ownership of its property or the conduct of its business requires such qualification, except for jurisdictions in which such failure to be so qualified or to be in good standing would not, have a Material Adverse Effect upon BioTek. For purposes of this Agreement, the term "Material Adverse Effect" shall mean and refer to any losses, damages, fines, interest, penalties, assessments, charges, claims, costs, expenses, attorneys' fees, settlement amounts, judgments, refunds, and the like which have a material adverse effect on the stock, assets (including tangible and intangible), business, financial condition, prospects, or results of operations of BioTek. The copies of the BioTek Articles of Incorporation and Bylaws which have been delivered to Ventana are complete and correct and in full force and effect on the date hereof. -7- 12 SECTION 3.2 Capital Stock. BioTek has authorized capital stock of 10,000,000 shares of Common Stock, $.01 par value, 9,367,945 of which are outstanding as of the date hereof. All outstanding shares of BioTek Common Stock are duly authorized, validly issued in compliance with federal and state securities laws, fully paid and non-assessable, and are not subject to preemptive rights whether created by statute, the Articles of Incorporation or Bylaws of BioTek, any agreement to which BioTek is a party or by which it is bound or otherwise. Except as set forth in Section 3.2 of the BioTek Disclosure Schedule, there are not outstanding subscriptions, options, warrants, rights or other outstanding shares of capital stock, or outstanding rights of first refusal, preemptive rights or other rights, options, warrants, conversion rights or other agreements, either directly or indirectly for the purchase or acquisition from BioTek of any shares of its capital stock or relating to, affecting, or incident to any shares of BioTek's capital stock. BioTek shall have used its best efforts to cause, as of the Effective Time, the rights affecting the BioTek Common Stock referred to in the foregoing sentence and any right, interest, or privilege of any person arising under the Shareholder Agreements (as hereinafter defined) or in or to any shares of BioTek capital stock to be terminated, null and void, and of no force or effect. For the purpose of this Agreement, the term "Shareholder Agreements" shall mean and refer to: all agreements relating to (i) the voting of shares of BioTek Common Stock, (ii) registration under federal securities laws of BioTek Common Stock, (iii) granting of any option, warrant or similar right to subscribe for or purchase shares of BioTek Common Stock or (iv) other special rights, covenants or agreements among holders of BioTek Common Stock. All information provided by BioTek to Ventana regarding the "accredited investor" (as defined in Rule 501(a) under the Securities Act of 1933) status of its shareholders and noteholders is true and correct and may be relied on by Ventana for purposes of ascertaining compliance with applicable federal and state securities laws. SECTION 3.3 Subsidiaries. BioTek has no subsidiaries or affiliated companies and does not otherwise own or control, directly or indirectly, any equity interest in any corporation, association or business venture. BioTek is not a participant in any joint venture, partnership or similar arrangement. SECTION 3.4 Corporate Authority. BioTek has the corporate power to enter into this Agreement and the Merger Agreement, and, subject to approval of this Agreement and the Merger Agreement by the shareholders of BioTek, to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement and the Merger Agreement and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by the BioTek Board of Directors and, except for the approval of its shareholders, no other corporate proceedings on the part of BioTek are necessary to authorize this Agreement and the Merger Agreement and the transactions contemplated hereby and thereby. This Agreement has been duly and validly executed and delivered by BioTek, and, subject to approval by the shareholders of BioTek, this Agreement constitutes the valid and binding agreement of BioTek, enforceable against BioTek in accordance with its terms. On or prior to the Effective Time, the Merger Agreement will be duly and validly executed and delivered by BioTek and, subject to approval by the shareholders of BioTek, the Merger Agreement will constitute the valid and binding agreement of BioTek, enforceable against BioTek in accordance with its terms. SECTION 3.5 Consents and Approvals. BioTek is not subject to or obligated under any charter, bylaw or contract provision or any license, franchise or Permit, or subject to any order, judgment -8- 13 or decree or any law or regulation applicable to BioTek or its operations, which would be breached or violated, after notice or lapse of time or both, by BioTek's executing or carrying out this Agreement or the Merger Agreement, except for any breaches or violations which individually or in the aggregate would not have a Material Adverse Effect. Other than in connection with or in compliance with the provisions of the California Law, no material notice to, declaration, filing or registration with, or Permit from any governmental or regulatory body or authority or any other Person is necessary for the consummation by BioTek of the transactions contemplated by this Agreement, except for such Permits, the failure of which to obtain or make would not have a Material Adverse Effect. "Permits" shall mean all licenses, permits, orders, consents, approvals, registrations, authorizations, qualifications and filings under all federal, state, local or foreign laws with any governmental or regulatory body or department or agency thereof, individual, partnership, joint venture, corporation, trust, unincorporated organization, government, group or any other entity (each, a "Person"). SECTION 3.6 Financial Statements. BioTek has furnished to Ventana (i) its unaudited balance sheet dated as of November 30, 1995 and the related unaudited statement of operations, shareholder's equity and cash flow for the five month period ended November 30, 1995, (ii) its unaudited balance sheets as of June 30, 1994 and 1995 and the related unaudited statements of operations, shareholder's equity and cash flows for the fiscal years ended June 30, 1994 and 1995, and (iii) its audited balance sheet as of June 30, 1993 and the related audited statement of operations, shareholder's equity and cash flows for the fiscal year ended June 30, 1993 (collectively, the "BioTek Financial Statements"). The BioTek Financial Statements are complete and correct in all material respects and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as may be indicated in the notes thereto). The BioTek Financial Statements are in accordance in all material respects with BioTek's books of account and records and fairly present the liabilities, obligations, financial condition, and results of BioTek's operations as of the dates and for the periods indicated. SECTION 3.7 Operating Rights. BioTek has all operating authority, clearances, approvals, licenses, franchises, permits, certificates, consents, rights and privileges as are necessary or appropriate to the lawful operation of its business as presently conducted, including but not limited to all clearances from the United States Food and Drug Administration ( "FDA") and other governmental bodies (collectively, "Operating Rights"). The BioTek Disclosure Schedule sets forth a true and complete list of all such Operating Rights. There are no violations, revocations or suspensions of such Operating Rights, and, to BioTek's knowledge, there are no pending or threatened proceedings which could result in the termination, revocation, limitation, restriction, or impairment of any of the Operating Rights. For purposes of this Agreement, the phrase "to BioTek's knowledge" or similar language with reference to matters of fact shall mean and refer to the actual knowledge of any member of the board of directors or any officer of BioTek, after reasonable internal discussions and review among those individuals (including consultants) who would reasonably be expected to have such knowledge. Except as disclosed in the BioTek Disclosure Schedule, there is no action or proceeding by the FDA or any other governmental body, including but not limited to, recall procedures, pending or, to the knowledge of BioTek, threatened against BioTek, and no such proceeding was brought at any time in the past, relating to the safety or -9- 14 efficacy of any of its products, and, to the knowledge of BioTek, there is no basis for any such action or proceeding. SECTION 3.8 Undisclosed Liabilities. Except as set forth on the Schedule of Liabilities, BioTek does not have any liabilities, either accrued, absolute, contingent or otherwise, of a nature required to be reflected in a balance sheet or related notes prepared in accordance with generally accepted accounting principles consistently applied which are not reflected or provided for in the BioTek Financial Statements, except those arising after November 30, 1995 which (a) are in the ordinary course of BioTek's business, consistent with past practices, (b) have not had, and will not have, a Material Adverse Effect, and (c) are not attributable to any period prior to November 30, 1995. SECTION 3.9 Absence of Certain Changes or Events. Except as set forth in the BioTek Disclosure Schedule, since November 30, 1995, there has not been any: (a) material adverse change in the business, assets, financial condition or results of operation of BioTek; (b) damage, destruction or loss of any assets of BioTek, whether covered by insurance or not; (c) transaction by BioTek except in the ordinary course; (d) change by BioTek in accounting principles or methods except insofar as may be required by a change in generally accepted accounting principles; (e) revaluation by BioTek of any of its assets, including, without limitation, writing off notes or accounts receivable other than in the ordinary course of business; (f) acquisition, sale or transfer of any material asset of BioTek other than in the ordinary course of business; (g) declaration, setting aside or payment of any dividends or distributions with respect to the shares of capital stock of BioTek, or any direct or indirect redemption, purchase or other acquisition by BioTek of any of its shares of capital stock; (h) increase in indebtedness for borrowed money, or any release or forgiveness of any indebtedness owing to BioTek; (i) granting of a security interest or lien on any material property or assets of BioTek; (j) capital expenditure by BioTek or additions of equipment to existing leases exceeding $10,000 individually or $100,000 in the aggregate; -10- 15 (k) increase in the salary or other compensation payable or to become payable by BioTek to any of its officers, directors, employees or consultants, or the declaration, payment or commitment or any obligation of any kind for the payment by BioTek of a bonus or other additional salary or compensation (including severance payments) to any such person; (l) loan by BioTek to any person or entity, or guarantee by BioTek of any loan other than advances to employees for travel and business expenses in the ordinary course of business and consistent with past practices; or (m) negotiation or agreement by BioTek to do any of the things described in the preceding clauses (a) through (l), other than negotiations with Ventana regarding the transactions contemplated by this Agreement. SECTION 3.10 Agreements, Contracts and Commitments. Except as set forth on the BioTek Disclosure Schedule, BioTek is not a party nor is it bound by any of the following: (a) any contract, agreement, lease, commitment or other obligation which involves an actual or potential commitment in excess of $50,000; (b) any mortgage, indenture, loan or credit agreement, security agreement or other agreement or instrument relating to the borrowing of money or extension of credit; (c) any pension, profit sharing, stock option, employee stock purchase or other plan providing for deferred or other compensation to employees or any other employee benefit plan, including any agreement or plan where any of the benefits of which will be increased, or the vesting of benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement; (d) any contract for the employment of any officer, employee or other person on full- time, part-time or consulting basis; (e) any contract or agreement prohibiting it from freely engaging in any business or competing anywhere in the world; (f) any contract under which BioTek has advanced or loaned any person or entity any amounts, or guaranteed the obligations of any other person; (g) any agreement of indemnification; (h) any joint marketing agreement or product development agreement, or joint venture or partnership agreement or arrangement; -11- 16 (i) any agreement relating to the performance of clinical trials, product evaluations or testing or regulatory compliance by other parties with respect to products of BioTek; or (j) any agreement with or order by any governmental agency or body relating to the testing, manufacture, registration, labeling, marketing or sale of products manufactured, marketed or sold by BioTek. SECTION 3.11 Material Contracts. The BioTek Disclosure Schedule sets forth a list of all material contracts, agreements and instruments to which BioTek is a party or by which its assets are bound (collectively the "Material Contracts"). All such Material Contracts are valid, binding, and in full force and effect in all material respects. Copies of all Material Contracts have been delivered to Ventana, and BioTek has not received notice of any party's intent to cancel, terminate, or not renew any Material Contract. SECTION 3.12 No Violation. BioTek is not in violation of any term of its Articles of Incorporation or Bylaws, or in any material respect of any term or provision of Material Contract, judgment or decree and is not in material violation of any order, statute, law, rule or regulation applicable to BioTek. There is no such violation or default or event which, with the passage of time or giving of notice or both, would constitute a violation or default which would have a Material Adverse Effect. BioTek has not received a notice from a governmental authority requiring BioTek to adjust or change the manner in which BioTek currently operates its business or requiring BioTek to obtain licensure to conduct its operations that BioTek does not currently have. SECTION 3.13 Tax Matters. (a) BioTek has timely filed with the appropriate taxing authorities all returns (including without limitation information returns, statements, declarations, reports and other material information) within the manner prescribed by law in respect of Taxes (as defined below) required to be filed through the date hereof and will timely file within the manner prescribed by law any such returns and other information required to be filed on or prior to the Effective Time. As of the time of filing, all returns for Taxes correctly reflected, and returns not yet filed as of the date hereof will correctly reflect, the information required to be shown thereon in all material respects. All required Tax estimates, deposits, prepayments, and similar reports or payments for current periods have been properly made. (b) All Taxes, in respect of periods beginning before the Effective Time, have been timely paid, or will be timely paid prior to delinquency, or have been accrued or an adequate reserve has been established therefor as set forth in the books and records of BioTek, and BioTek does not have any material liability for Taxes in excess of the amounts so paid, accrued, or reserves so established (other than Taxes not yet due and payable or properly accruable on the books and records of BioTek). BioTek has withheld amounts from employees and others working in its business, as required under applicable laws, and has filed all returns with respect to employee income tax withholding and social security and unemployment Taxes in compliance with the tax withholding provisions of the Code and other applicable laws. -12- 17 (c) To BioTek's knowledge, there are no pending or threatened audits, investigations or claims for or relating to any material additional liability in respect of Taxes not adequately reserved for, and there are no matters under discussion with any governmental authorities with respect to Taxes that in the reasonable judgment of BioTek are likely to result in such additional liability for Taxes. Except as specified in the BioTek Disclosure Schedule, no extension of a statute of limitations relating to Taxes is in effect with respect to BioTek. (d) (i) BioTek has not made any election under Section 341(f) of the Code (or any comparable state income tax provision); (ii) BioTek has not agreed to or is required to make any adjustment pursuant to Section 481(a) of the Code by reason of a change in accounting method initiated by BioTek; (iii) there are no elections in effect made by or with respect to BioTek pursuant to Section 338 or Section 336(e) of the Code or the regulations thereunder; (iv) BioTek has not been a member of any consolidated group for purposes of filing tax returns or paying Taxes; and (v) there are no liens for delinquent Taxes upon the assets of BioTek. (e) The term "Taxes" shall mean all taxes, however denominated, including any interest, penalties or other additions to tax that may become payable in respect thereof, imposed by any federal, territorial, state, local or foreign government or any agency or political subdivision of any such government, which taxes shall include, without limiting the generality of the foregoing, all income or profits taxes (including but not limited to, federal income taxes and state income taxes), payroll and employee withholding taxes, unemployment insurance, social security taxes, sales and use taxes, ad valorem taxes, excise taxes, franchise taxes, gross receipts taxes, business license taxes, occupation taxes, real and personal property taxes, stamp taxes, environmental taxes, transfer taxes, workers' compensation, Pension Benefit Guaranty Corporation premiums and other governmental charges, and other obligations of the same or of a similar nature to any of the foregoing, which are required to be paid, withheld or collected. SECTION 3.14 Title to Assets. (a) The BioTek Disclosure Schedule sets forth a true and complete list of all real property and personal property owned or leased by BioTek, and, in the case of leased real property, the name of the lessor, the date of the lease and each amendment thereto and the aggregate monthly rental or other fee payable under such lease. All such leases are in full force and effect and BioTek has not breached, or received any claim or threat that it has breached, any of the terms or conditions of any such lease. BioTek has been in peaceable possession of the tangible property covered by such leases since the commencement of the term thereof. No amount payable under any such lease is past due. (b) Except as set forth on the BioTek Disclosure Schedule, BioTek has good and valid title to, or in the case of leased properties and assets, valid leasehold interests in, all of its tangible properties and assets, real, personal and mixed, used in its business, free and clear of all security interests, mortgages, encumbrances, liens or charges of any kind or character, other than (i) the lien of current taxes not yet due and payable and other liens arising by operation of law in the ordinary course of business (ii) liens and encumbrances which do not have a Material Adverse Effect. No officer, director, -13- 18 shareholder, employee of, or consultant to BioTek has any interest in any property used in BioTek's business, whether real or personal, tangible or intangible, including copyrights, trademarks, or trade names. SECTION 3.15 Condition of Personal Property. All of BioTek's tangible personal property, equipment and fixtures used in its business are in good, operating condition, reasonable wear and tear excluded, or in reasonably repairable condition, are suitable for the purposes for which they are being used and are valued in accordance with generally accepted accounting principles. SECTION 3.16 Patents and Intangible Rights. (a) BioTek is the sole and exclusive owner of, and possesses all right, title or interest to, or is duly licensed to use, all patents, patent applications, inventions and shop rights; trademarks, service marks, trade names, brand names, corporate names, and any applications to register any of the foregoing; copyrights and copyright registrations, mask works and mask work registrations, and all applications to register any of the foregoing; trade secrets (including secret formulae, customer lists, processes, know-how, computer programs, and routines) and all other proprietary rights necessary or desirable for the operation of its business as now conducted. All of the foregoing are collectively referred to herein as "BioTek Intellectual Property Rights." Set forth on the BioTek Disclosure Schedule is a true and complete list of all patents, patent applications, trademarks, service marks, trademark and service mark applications, trade names, registered copyrights and licenses presently owned by or licensed to BioTek. (b) No claim by any third party contesting the validity, enforceability, use or ownership of the BioTek Intellectual Property Rights has been made, is currently outstanding or, to BioTek's knowledge, is threatened. BioTek has not received any notices of and is not aware of any facts which indicate a likelihood of infringement, misappropriation or conflict with any third party as a result of the passage of time or the continued operation of BioTek's business as now conducted with respect to the BioTek Intellectual Property Rights. BioTek, the foregoing intellectual property and all technology related thereto have not infringed, misappropriated or otherwise come in conflict with any rights of any third parties, and, to BioTek's knowledge, none of the BioTek Intellectual Property Rights are being interfered with, misappropriated, or infringed upon by any Person. (c) The transactions contemplated by this Agreement will not have a Material Adverse Effect on BioTek's right, title and interest in and to any of the BioTek Intellectual Property Rights. SECTION 3.17 Labor Matters. BioTek is not a party to any collective bargaining agreement covering any employee of BioTek. Except as set forth on the BioTek Disclosure Schedule, BioTek is, and has been, in compliance with all federal, state and local or other applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and is not engaged in any unfair labor practice. No arbitration proceeding arising out of or under any collective bargaining or other labor agreement is pending and no claim therefor has been asserted. -14- 19 SECTION 3.18 Employees. Set forth on the BioTek Disclosure Schedule is a list of the names, positions, current salaries or wage rates (including bonuses, commissions, and deferred compensation), vacation, sick leave, and other accrued, but unpaid benefits, and years of service of each employee of BioTek as of November 30, 1995. To BioTek's knowledge, no key employee of BioTek has terminated or given notice of termination of his or her employment with BioTek within the past 90 days of the date hereof. All employees of BioTek listed on the BioTek Disclosure Schedule have executed an Employee Proprietary Information Agreement providing for the protection of BioTek's Intellectual Property Rights. A form of such agreement has been delivered to Ventana. To BioTek's knowledge, no employee of BioTek is subject to any secrecy or non-competition agreement or any agreement or restriction of any kind that would impede in any material way the ability of such employee to carry out fully all activities of such employee in furtherance of the business of BioTek now or upon consummation of the transactions contemplated hereby. SECTION 3.19 Litigation. Except as set forth in Section 3.19 of the BioTek Disclosure Schedule, there are no actions, suits, proceedings or investigations pending against BioTek or its properties before any court or governmental agency, arbitration, or other dispute resolution body (nor, to BioTek's knowledge, is there any threat thereof). BioTek is not a party or subject to the provisions of any order, writ, injunction, judgment, or decree of any court or governmental agency or instrumentality. There is no action, suit, proceeding, or investigation by BioTek currently pending or that BioTek presently intends to initiate. SECTION 3.20 Transactions with Affiliates. Except as set forth on the BioTek Disclosure Schedule, since January 1, 1995, there have been no transactions to which BioTek has been a party in which any director, officer or 5% shareholder of BioTek or a member of his or her immediate family had or will have any direct or indirect interest. SECTION 3.21 Environmental Matters. At all times prior to the date hereof, BioTek has complied with applicable environmental laws, orders regulations, rules and ordinances adopted, imposed or promulgated by any governmental body relating to the properties which have been or currently are owned, leased or used by it, the violation of which would reasonably be expected to have a Material Adverse Effect. Any environmental licenses, permits, consents and authorizations required to be obtained by BioTek in the operation of its business as currently conducted are in full force and effect and are listed on the BioTek Disclosure Schedule. Except as set forth on the BioTek Disclosure Schedule, to the knowledge of BioTek, there is no fact or circumstance which could involve BioTek in any environmental litigation or would impose any material liability on BioTek. SECTION 3.22 Employee Benefit Plans. (a) BioTek has no employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) for the benefit of, or relating to, any current or former employee of BioTek. There are presently no ERISA Affiliates and there have been no ERISA Affiliates in the past. An "ERISA Affiliate" shall mean, at the relevant time, any member of a controlled group of corporations, group of trades or businesses (whether or not incorporated) that are -15- 20 under common control, or an affiliated service group within the meaning of Section 414 of the Code, of which BioTek is or was a member. SECTION 3.23 Insurance. The BioTek Disclosure Schedule contains a complete and accurate list of all policies or binders of fire, liability, title, worker's compensation, product liability and other forms of insurance (showing as to each policy or binder the carrier, policy number, coverage limits, expiration dates, annual premiums and a general description of the type of coverage provided) maintained by BioTek. BioTek is not in default under any of such policies or binders, and BioTek has not failed to give any notice or to present any claim under any such policy or binder in a due and timely fashion. There are no facts upon which an insurer might be justified in reducing coverage or increasing premiums on existing policies or binders. There are no outstanding unpaid claims or denied claims under any such policies or binders. All policies and binders of insurance provide sufficient coverage for the types of risks insured against, are in full force and effect on the date hereof and shall be kept in full force and effect through the Effective Time. SECTION 3.24 Payments. BioTek has not, directly or indirectly, paid or delivered any fee, commission or other sum of money or item of property, however characterized, to any finder, agent, government official or other party, in the United States or any other country, which is in any manner related to the operations of BioTek, which is, or may be with the passage of time or discovery, illegal under any federal, state or local laws of the United States (including without limitation the U.S. Foreign Corrupt Practices' Act) or any other country having jurisdiction; and BioTek has not participated, directly or indirectly, in any boycotts or other similar practices affecting any of its actual or potential customers and has at all times done business in an open and ethical manner. SECTION 3.25 Accounts Receivable. Attached to the BioTek Disclosure Schedule is a true and correct and complete aging of BioTek's accounts receivable as of November 30, 1995. All of such accounts receivable (a) have arisen in the normal course of business, (b) represent bona fide indebtedness incurred by the applicable account debtors in the stated amount, (c) are fully collectible, subject to BioTek's reasonable reserve for bad debt, and, to the knowledge of BioTek, are not subject to any bonafide defenses or setoffs. The reserve for doubtful accounts is adequate and the values at which accounts receivable are carried reflect past practice and are in accordance with generally accepted accounting principles applied on a consistent basis. SECTION 3.26 Inventory. BioTek's inventories of finished goods, work in progress, materials and supplies are in good condition and saleable and are not in excess of its reasonable requirements. All obsolete, damaged, slow-moving or unusable inventory has been reserved against or written off in accordance with generally accepted accounting principles. SECTION 3.27 Minute Books. The copy of the minute book of BioTek made available for review by Ventana includes minutes of all meetings of the Board of Directors and shareholders and all actions by written consent without a meeting by the Board of Directors and the shareholders since the date of incorporation and reflect all actions by the Board of Directors (and any committee of the Board of Directors) and the shareholders with respect to all transactions referred to in such minutes accurately -16- 21 in all material respects. The minute books of BioTek accurately reflect all material corporate actions of BioTek's shareholders, Board of Directors, and Board committees and there have been no material transactions involving the business or organization of BioTek, its assets, or its properties which properly should have been set forth therein and which have not been accurately so set forth. SECTION 3.28 Investment Bankers, Finders or Brokers. Except as set forth in the BioTek Disclosure Schedule, BioTek has not employed or engaged any investment banker, broker, finder or intermediary in connection with the transactions contemplated hereby who might be entitled to any fee or expense in connection with or upon consummation of the Merger. SECTION 3.29 Compliance With Laws. BioTek is in compliance, in all material respects, with all laws applicable to its businesses, contractual commitments, assets, and properties, except for violations, if any, which, in any given instance or in the aggregate, have not had, and will not have, a Material Adverse Effect. SECTION 3.30 Antitrust. Without limiting the generality of Section 3.29 above, BioTek has not engaged in any violations of the antitrust laws by: (a) any price fixing or other arrangements which, directly or indirectly, control prices; (b) marketing or purchasing practices which, directly or indirectly, result in the division of markets, exclusive dealing arrangements, group boycotts, tying arrangements, or illegal rebates or pricing; (c) monopolizing or attempted monopolization practices, including predatory conduct or the improper acquisition or maintenance of market share; (d) arrangements by or among clients, providers, or other suppliers, or contractors concerning prices to be charged, whether maximum or minimum prices, or covenants not to compete, exclusivity covenants or favored nations pricing; or (e) information exchanges by or among clients, providers, or other suppliers or contractors concerning prices or fee schedules. SECTION 3.31 Material Misstatements Or Omissions. No representation or warranty made by BioTek in this Article III or in any other Article or Section of this Agreement, or in any certificate, schedule or other document furnished or required to be furnished by BioTek pursuant hereto, contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact necessary to make the statements or facts contained herein or therein not misleading in light of the circumstances under which they are made. -17- 22 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF VENTANA AND SUB Ventana and Sub hereby represent and warrant to BioTek as follows: SECTION 4.1 Organization of Ventana and Sub. Ventana is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has the corporate power and authority to own its properties and assets and to carry on its business as now conducted, and possesses all licenses, franchises, rights and privileges material to the conduct of its business. Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of California. SECTION 4.2 Corporate Authority. Each of Ventana and Sub has the corporate power to enter into this Agreement and the Merger Agreement, and to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement and the Merger Agreement and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of Ventana and Sub. This Agreement has been duly and validly executed and delivered by Ventana and Sub, and is the valid and binding agreement of Ventana and Sub, enforceable against Ventana and Sub in accordance with its terms. The Ventana Payment Notes and the Ventana Exchange Notes have been duly and validly executed and delivered by Ventana, and are the valid and binding agreements of Ventana, enforceable against Ventana in accordance with their respective terms. On or prior to the Effective Time, the Merger Agreement will be duly and validly executed and delivered by Sub, and will constitute the valid and binding agreement of Sub, enforceable against Sub in accordance with its terms. SECTION 4.3 No Violation. The execution, delivery and performance of this Agreement and the Merger Agreement, and the consummation of the transactions herein or therein contemplated, will not conflict with, or result in a breach of the terms of, or constitute a default under or violation of, any law or regulation of any governmental authority, domestic or foreign, the charter documents or bylaws of Ventana or Sub, or any material agreement or instrument to which either of them is a party or by which either of them is bound or to which they are subject. SECTION 4.4 Investment Bankers, Finders or Brokers. Ventana has not employed or engaged any investment banker, broker, finder or intermediary in connection with the transactions contemplated hereby who might be entitled to any fee or expense in connection with or upon consummation of the Merger, except for any such fees or expenses that will be paid by Ventana (and for which BioTek will have no liability or obligation). No such fees shall be payable by Ventana to any former executive officer of BioTek. SECTION 4.5 Capitalization. The authorized capital stock of Ventana as of the date hereof consists of 30,000,000 shares of Common Stock and 18,450,000 shares of Preferred Stock, -18- 23 750,000 shares of which have been designated Series A Preferred Stock, 8,300,000 shares of which have been designated Series C Preferred Stock and 9,400,000 shares of which have been designated Series D Preferred Stock. As of the date hereof, 2,742,968 shares of Common Stock, 750,000 shares of Series A Preferred Stock, 8,083,039 shares of Series C Preferred Stock and 9,036,410 shares of Series D Preferred Stock are outstanding, and no other shares of capital stock are outstanding. Ventana has outstanding warrants to purchase an aggregate of 228,914 shares of Preferred Stock and has 2,110,789 shares of Common Stock and 70,089 shares of Preferred Stock reserved for issuance (including both shares subject to outstanding options or rights and shares reserved for future grant) under its stock option and stock purchase plans. Shares of Common Stock issuable upon conversion of Ventana Payment Notes will, when issued upon any such conversion, be duly and validly issued, fully paid and nonassessable. Prior to the Closing Date, Ventana expects that its authorized number of shares of Common Stock, Preferred Stock and Series D Preferred Stock will increase due to the proposed issuance of warrants to purchase an aggregate of 1,860,500 shares of Series D Preferred Stock in connection with a proposed financing transaction. Ventana will on the Closing Date deliver an updated capitalization schedule as of such date. SECTION 4.6 Financial Statements. Ventana has furnished to BioTek (i) its unaudited balance sheet dated as of November 30, 1995 and the related unaudited statement of operations, shareholder's equity and cash flow for the eleven month period ended November 30, 1995 and (ii) its audited balance sheets as of December 31, 1993 and 1994 and the related audited statements of operations, shareholder's equity and cash flows for the years ended December 31, 1993 and 1994 (collectively, the "Ventana Financial Statements"). The Ventana Financial Statements are complete and correct in all material respects and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as may be indicated in the notes thereto). The Ventana Financial Statements are in accordance in all material respects with Ventana's books of account and records and fairly present the liabilities, obligations, financial condition, and results of Ventana's operations as of the dates and for the periods indicated. Since November 30, 1995, there has been no material adverse change in the business or financial condition of Ventana. SECTION 4.7 Material Misstatements Or Omissions. No representation or warranty made by Ventana in this Article IV or in any other Article or Section of this Agreement, or in any certificate, schedule or other document furnished or required to be furnished by Ventana pursuant hereto, contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact necessary to make the statements or facts contained herein or therein not misleading in light of the circumstances under which they are made. -19- 24 ARTICLE V ADDITIONAL COVENANTS AND AGREEMENTS The parties hereto further agree as follows: SECTION 5.1 Conduct of Business by BioTek. Prior to the Effective Time, or the date, if any, on which this Agreement is earlier terminated pursuant to Article VIII hereof (the "Termination Date"), and except as may be required or expressly permitted pursuant to this Agreement, or as disclosed in the BioTek Disclosure Schedule or as may be consented to in writing by Ventana, BioTek covenants that it: (a) shall conduct its operations according to its ordinary and usual course of business; (b) shall use its best efforts to preserve intact its business organization and good will and maintain satisfactory relationships with suppliers, distributors, customers, banks and others having business relationships with it; (c) shall not, other than in the ordinary course of business, terminate any supplier, distributor, customer, or other contractor without prior consultation with Ventana, and shall notify Ventana of any notices of termination, cancellation, or nonrenewal of any supplier, distributor, customer or other material contractor of BioTek; (d) shall maintain its assets in customary repair, order and condition (reasonable wear and tear excepted); (e) shall confer on a regular and frequent basis with one or more representatives of Ventana to report on operational matters and the general status of ongoing operations, subject to compliance with applicable law; (f) shall notify Ventana of any emergency or other change in the normal course of its business or in the operation of its properties and of the assertion, commencement or received threat of any claim, litigation, proceeding, investigation or governmental action or audit involving BioTek or its business activities; (g) shall not incur any indebtedness for borrowed money, assume, guarantee, endorse (other than endorsement of accounts receivable for collection) or otherwise become responsible for the obligations of any other Person, or make any loans or advances to any Person; (h) shall not mortgage, pledge or otherwise encumber any of its properties or assets; -20- 25 (i) shall not sell or transfer any of its properties or assets or cancel, release or assign any indebtedness owed to it or any claims held by it, except in the ordinary course of business; (j) shall not issue any additional shares of its capital stock or grant any additional stock options, warrants, or other rights or interests which are convertible into shares of BioTek's capital stock, except in connection with settlement agreements with Steven Toll or Elliott Friedman; (k) shall not declare or pay any dividends on, or make any distribution on or in respect of, its outstanding shares of capital stock; (l) (i) shall not enter into or amend any employment, consultant, severance or similar agreement; (ii) shall not take any action with respect to the grant of any bonus, severance or termination pay (otherwise than pursuant to policies or agreements in effect on the date hereof) or with respect to any increase of benefits payable under its severance or termination pay policies or agreements in effect on the date hereof or increase in any manner the compensation or fringe benefits of any employee or pay any benefit not required by any existing employee benefit plan or policy; (iii) shall not take any action to make any change in its key management structure, including without limitation the hiring of additional officers or key employees or consultants, or the termination of existing officers or key employees; and (iv) shall cooperate with Ventana and use all reasonable efforts to keep available the services of its employees (including all officers and key employees) and notify Ventana promptly in the event that any employee or consultant resigns or otherwise terminates his or her employment or relationship with BioTek, or gives notice thereof or breaches or violates the terms of his employment or consultant agreement; (m) shall not make any individual capital expenditure in excess of $5,000 or aggregate capital expenditures in excess of $20,000; (n) shall not, except as necessary to consummate the transactions contemplated in this Agreement, propose or adopt any amendments to its Articles of Incorporation or Bylaws; (o) shall not allow or permit to be done any act which it knows or has reason to know will result in the suspension, impairment, or cancellation of its insurance policies; (p) shall not enter into, renew, modify or revise any agreement or transaction with any of its affiliates other than (i) in the ordinary course of business or (ii) settlement agreements (on terms disclosed to Ventana prior to execution of definitive agreements) with Steven Toll or Elliott Friedman; (q) shall not make any income tax election or settlement or compromise with tax authorities; (r) shall not purchase or redeem any shares of its capital stock; and -21- 26 (s) shall not agree, in writing or otherwise, to take any of the foregoing actions or any action which would make any representation or warranty in Article III untrue or incorrect. SECTION 5.2 Access to Information; Confidentiality. (a) Between the date hereof and the Effective Time, BioTek shall (i) give Ventana and its authorized representatives reasonable access to all of its books, records, offices and other facilities and properties; (ii) permit Ventana to make such inspections thereof as Ventana may reasonably request; and (iii) cause its officers, employees and consultants to furnish Ventana with such financial and operating data and other information with respect to its business and properties as Ventana may from time to time reasonably request; provided, however, that any such investigation shall be conducted during normal business hours under the general supervision of BioTek's personnel and in such a manner as to maintain the confidentiality of this Agreement and the transactions contemplated hereby and not interfere unreasonably with BioTek's business operations. (b) All information furnished or provided by BioTek to Ventana, or by Ventana to BioTek, or to their respective representatives, whether furnished before or after the date of this Agreement, shall be held subject to the Mutual Nondisclosure Agreement between BioTek and Ventana dated as of January __, 1996 (the "Nondisclosure Agreement"), and shall be promptly returned to the respective party should this Agreement be terminated and abandoned pursuant to Article VIII hereof. SECTION 5.3 Customer Contact. Ventana and BioTek shall develop a mutually acceptable communications plan pursuant to which Ventana may contact existing and potential suppliers, distributors, customers and clinicians of, and all other Persons having a material relationship with, BioTek respecting the transactions contemplated by this Agreement. SECTION 5.4 No Solicitation. Unless and until this Agreement shall have been terminated by either party pursuant to Article VIII, BioTek shall not, nor shall it authorize any officer, director or employee of, or any investment banker, attorney, accountant or other representative retained by it to: (a) directly or indirectly, encourage, solicit or initiate discussions or negotiations with any Person (other than Ventana or an authorized representative of Ventana) concerning any merger, sale of substantial assets, business combination, sale or purchase of shares of capital stock or similar transactions involving BioTek (an "Acquisition Proposal"), whether by providing non-public information or otherwise; or (b) except as required by law, disclose, directly or indirectly, to any Person any information concerning BioTek's business or properties which is not customarily disclosed to the general public, afford to any such Person access to its properties, books or records, or otherwise assist or encourage any such Person in connection with any of the foregoing. In the event BioTek shall receive any proposal, expression of interest or offer relating to an Acquisition Proposal, BioTek shall promptly inform Ventana as to any such proposal, whether or not such proposal was in writing. -22- 27 (c) Notwithstanding the foregoing, nothing in this Section 5.4 shall preclude BioTek's Board of Directors from carrying out its legal and fiduciary duties with respect to considering any unsolicited Acquisition Proposal. SECTION 5.5 Shareholder Meeting. BioTek shall call a meeting of its shareholders to be held as promptly as practicable after the date hereof for the purpose of voting upon this Agreement, the Merger Agreement and related matters. BioTek will, through its Board of Directors, recommend to its shareholders (consistent with fiduciary duties) approval of such matters. SECTION 5.6 Consents. Each of BioTek, Ventana and Sub shall cooperate, and use their respective best efforts, to make all filings and obtain all licenses, Permits, consents, approvals, authorizations, qualifications and orders of all Persons necessary to consummate the Merger. SECTION 5.7 Best Efforts and Further Assurances. Subject to the terms and conditions of this Agreement, each of the parties hereto shall use all reasonable and diligent efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the Merger in accordance with the terms of this Agreement and the Merger Agreement. Each party, at the reasonable request of another party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of the transactions contemplated hereby. In furtherance and not in limitation of the foregoing, both parties agree to use best efforts to cause the closing conditions set forth herein to be satisfied by, and the Merger to be made effective by, February 15, 1996. SECTION 5.8 Break-Up Fee; Ventana Initial Payment Option. (a) If the transactions contemplated hereby are not consummated as a result of any termination of this Agreement by BioTek in accordance with Section 8.1(b)(i) hereof, then Ventana shall pay to BioTek a breakup fee of $500,000 in cash. (b) If the transactions contemplated hereby are not consummated as a result of (i) the acceptance (either prior to, on or after March 15, 1996) by BioTek's Board of Directors of an unsolicited Acquisition Proposal received after the date hereof and on or prior to March 15, 1996 or (ii) termination of this Agreement by Ventana in accordance with Section 8.1(b)(i) hereof, then BioTek shall pay to Ventana a break-up fee of $500,000 in cash (subject to increase as provided in Section 5.8(c)). If BioTek is unable to make such payment in cash in full, then BioTek shall issue to Ventana a promissory note in the principal amount of $500,000. The promissory note shall be payable upon demand, shall bear simple interest at the rate of 7% per annum, shall provide for interest payments to made on a quarterly basis, and shall be senior in rights to all liabilities and obligations of BioTek (other than the BioTek Investor Notes and existing liens set forth in the BioTek Disclosure Schedule). Notwithstanding the foregoing, in the event of termination pursuant to clause 5.8(b)(i), the break-up fee must be paid by BioTek in cash upon such termination. -23- 28 (c) Ventana shall, within five (5) business days of the date of this Agreement, pay BioTek an initial payment (an "Initial Payment") of $500,000. Any such Initial Payment shall be treated as an advance of the Cash Proceeds payable at the Effective Time, and BioTek shall use the proceeds from such Initial Payment to discharge BioTek Liabilities. Effective at such time as Ventana makes the Initial Payment, the break-up fee payable by BioTek in the event of an unsolicited Acquisition Proposal accepted by the Board of Directors of BioTek shall be $5,000,000, and such break-up fee shall (in accordance with the last sentence of Section 5.8(b)) be payable in cash upon acceptance of any such unsolicited Acquisition Proposal by BioTek's Board of Directors. In the event Ventana makes an Initial Payment but does not complete the Merger, the Initial Payment shall be credited against any break-up fee payable by Ventana under Section 5.8(a) or, if no such break-up fee is payable, BioTek may retain the Initial Payment and shall have no obligation to refund the Initial Payment. SECTION 5.9 Public Announcements. Ventana and BioTek shall consult with each other before issuing any press release or otherwise making any public statement with respect to the Merger or this Agreement, and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by law, and in any event in accordance with the terms of the Nondisclosure Agreement. SECTION 5.10 Discharge of Liabilities. BioTek shall use its best efforts to discharge all of its liabilities on or prior to the Closing, other than the BioTek Investor Notes. SECTION 5.11 Biogenex Patent Litigation. BioTek shall use reasonable efforts to settle its patent litigation with Biogenex on terms reasonably acceptable to Ventana on or prior to the Closing, and shall keep Ventana apprised of, and shall consult with Ventana concerning, all settlement negotiations. SECTION 5.12 Exchange of BioTek Investor Notes. BioTek shall use its best efforts to cause the holders of the BioTek Investor Notes to exchange such notes for Ventana Exchange Notes effective as of the Effective Time. SECTION 5.13 Other Covenants of BioTek. BioTek shall use its best efforts to cause, as of or prior to the Effective Time, the following agreements and plans to be terminated by BioTek in their entirety and thereafter to be of no further force or effect: (i) the Shareholder Agreements; (ii) any consulting and employment agreements identified on the BioTek Disclosure Schedule that Ventana requests BioTek to terminate; and (iii) the BioTek Stock Option Plan. In addition, BioTek shall deliver to Ventana its audited financial statements at and for the period ended June 30, 1994 as soon as they are available (either prior to the Effective Time or as soon as practicable thereafter). BioTek shall set forth on the Schedule of Liabilities all obligations of BioTek for legal, accounting, investment banking and other professional services incurred or expected to be incurred in connection with this Agreement and the transactions contemplated hereby, and shall make provisions for the discharge of all such obligations with Cash Proceeds and/or Note Proceeds. -24- 29 SECTION 5.14 Ventana Board Representation. Until such time as the Ventana Payment Notes and the Ventana Exchange Notes have been repaid or converted into Common Stock, Ventana shall nominate two representatives of BioTek (which representatives shall be designated by the Shareholders Representative (as defined in the Escrow Agreement)) for election by the stockholders of Ventana to the board of directors of Ventana at any annual meeting of stockholders of Ventana held during such period. ARTICLE VI CONDITIONS TO THE MERGER SECTION 6.1 Conditions to Each Party's Obligation to Effect the Merger. The obligations of all parties hereto to effect the Merger shall be subject to satisfaction of the following conditions, unless waived in writing by each of the parties hereto: (a) The holders of not less than 90% of the issued and outstanding shares of BioTek Common Stock shall have approved this Agreement, the Merger and the Escrow Agreement in accordance with the California Law and the Articles of Incorporation and Bylaws of BioTek. (b) The Merger Agreement, officers' certificates and tax clearance certificates shall have been filed with the Secretary of State of the State of California. (c) No governmental action or proceeding shall have been commenced or threatened seeking any injunction, restraining or other order which seeks to prohibit, restrain, invalidate or set aside the consummation of the Merger, and no statute, rule, regulation, executive order, decree or injunction shall have been enacted, entered, promulgated or enforced (and not repealed, superseded or otherwise made inapplicable) by any court or governmental authority which prohibits or restricts the consummation of the Merger. SECTION 6.2 Conditions to Ventana's and Sub's Obligation to Effect the Merger. The obligation of Ventana and Sub to consummate the Merger shall be subject to satisfaction of the following conditions, unless waived in writing by Ventana and Sub on or before the Effective Time: (a) The representations and warranties of BioTek set forth in Article III of this Agreement shall be true and correct in all material respects on and as of the date of this Agreement and as of the Effective Time as though made on and as of the Effective Time (except to the extent such representations and warranties speak only as of an earlier date), and the covenants and agreements of BioTek set forth herein shall have been complied with in all material respects, and Ventana shall have received a certificate signed by the Chief Executive Officer of BioTek dated the Effective Time to such effect. -25- 30 (b) All material Permits and waivers from all Persons necessary to permit BioTek to consummate the transactions contemplated hereby shall have been obtained; (c) The Escrow Agreement, in substantially the form of Exhibit C hereto, shall have been executed and delivered by Ventana, Sub, BioTek, the Shareholders' Representative (as defined therein) and the Escrow Agent. (d) The issuance of the Ventana Payment Notes and the Ventana Exchange Notes shall be exempt from all federal securities registration requirements and all state securities registration or qualification requirements. (e) Ventana shall have completed its legal, business, technical and financial due diligence review of BioTek, and the results thereof shall be satisfactory to Ventana. (f) Since the date of this Agreement, there shall not have occurred any material adverse change in the business, assets, results of operations or financial condition of BioTek, except for changes contemplated hereby or disclosed on the BioTek Disclosure Schedule. (g) The holders of 90% in original principal amount of outstanding BioTek Investor Notes shall have agreed to exchange such notes for Ventana Exchange Notes effective at the Effective Time. With respect to holders of BioTek Investor Notes that do not exchange such notes for Ventana Exchange Notes, BioTek shall by the Effective Time have obtained legally binding agreements providing that such non-exchanging noteholders shall (i) have terminated any security interest they may have in any assets of BioTek and (ii) have waived any right they may have to demand payment of such notes at any time prior to December 31, 1996. (h) If requested by Ventana, the officers and directors of BioTek shall have resigned from their respective positions. (i) Each of Michael Danzi, Robert Case and Johnson Lee shall have entered into a Non-Compete Agreement in substantially the form of Exhibit E attached hereto. (j) Ventana shall have received from Hewitt & McGuire, counsel for BioTek, an opinion dated the Effective Time, in form and substance reasonably satisfactory to Ventana and its counsel. (k) BioTek shall have delivered to Ventana the Schedule of Liabilities together with a certificate, signed by the Chief Executive Officer and Chief Financial Officer of BioTek and dated as of the Effective Time, which certifies to Ventana the total amount of all BioTek Liabilities still outstanding as of the Effective Time, and Ventana shall be satisfied as to and shall approve such amount. The Cash Proceeds and $1,250,000 of Note Proceeds shall be sufficient to discharge all BioTek Liabilities as of the Effective Time. The procedures set forth in Section 2.7 for discharge of the BioTek Liabilities shall have been completed. -26- 31 (l) BioTek shall have delivered to Ventana reasonably satisfactory evidence to the effect that rights of first refusal held by DAKO A/S and Curtis-Matheson Scientific with respect to the sale of the stock or assets of BioTek pursuant to this Agreement have been satisfied or waived; (m) All outstanding options, warrants or other similar rights to subscribe for or purchase BioTek capital stock shall have been exercised or terminated or shall have expired by virtue of the Merger; (n) Ventana shall have received from BioTek certified resolutions adopted by the Board of Directors and shareholders of BioTek approving this Agreement, the Merger Agreement and the transactions contemplated hereby and thereby. SECTION 6.3 Conditions to BioTek's Obligation to Effect the Merger. The obligation of BioTek to consummate the Merger shall be subject to satisfaction of the following conditions, unless waived in writing by BioTek on or before the Effective Time: (a) The representations and warranties of Ventana and Sub set forth in Article IV of this Agreement shall be true and correct in all material respects on and as of the date of this Agreement and as of the Effective Time as though made on and as of the Effective Time (except to the extent such representations and warranties speak only as of an earlier date, including, without limitation, Ventana's representations as to outstanding capitalization), and the covenants and agreements of Ventana and Sub set forth herein shall have been complied with in all material respects, and BioTek shall have received a certificate signed by an authorized officer of Ventana and Sub dated the Effective Time to such effect. (b) All material Permits and waivers from all Persons necessary to permit Ventana and Sub to consummate the transactions contemplated hereby shall have been obtained; (c) BioTek shall have received from Wilson, Sonsini, Goodrich & Rosati, counsel for Ventana, an opinion dated the Effective Time in form and substance reasonably satisfactory to BioTek and its counsel; (d) Two nominees of BioTek (which nominees shall be reasonably acceptable to Ventana) shall have been elected to the board of directors of Ventana; (e) BioTek shall have received from Ventana certified resolutions adopted by the Board of Directors of Ventana, and the Board of Directors and Shareholder of Sub, approving this Agreement, the Merger Agreement and the transactions contemplated hereby and thereby. -27- 32 ARTICLE VII SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS SECTION 7.1 Survival. The representations, warranties and covenants of BioTek and Ventana contained in this Agreement or in any certificate or instrument delivered pursuant hereto, shall survive the Merger for a period of twelve (12) months after the Effective Time, regardless of any investigation which may have been or may be made at any time by or on behalf of Ventana or Sub. Any representation, warranty, or covenant which is the subject of a claim or dispute asserted in writing prior to the expiration of said twelve (12) month period shall survive with respect to such claim or dispute until the final resolution thereof. ARTICLE VIII TERMINATION SECTION 8.1 Termination or Abandonment. Notwithstanding anything contained in this Agreement to the contrary, this Agreement may be terminated and abandoned at any time prior to the Effective Time, whether before or after approval of this Agreement by the shareholders of BioTek or Sub, as follows: (a) by mutual agreement of the Boards of Directors of Ventana and BioTek; (b) by the Board of Directors of either Ventana or BioTek if: (i) there has been a material breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of the other party set forth in this Agreement and such breach of a covenant or agreement has not been cured within ten (10) days following receipt of written notice; (ii) the Merger shall not have been consummated on or before March 15, 1996; or (iii) if any court of competent jurisdiction in the United States or other United States governmental body shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the Merger and such order, decree, ruling or other action shall have become final and nonappealable. SECTION 8.2 Effect of Termination. In the event of termination of this Agreement by either BioTek or Ventana as provided above, this Agreement and the Merger Agreement shall terminate, -28- 33 and there shall be no other liability or obligation on the part of BioTek or Ventana or their respective directors, officers, shareholders or affiliates, except as set forth in Sections 5.2(b) and 5.8, and except to the extent that such termination results from the intentional, material breach by a party hereto of any of its representations, warranties, covenants or agreements set forth in this Agreement. ARTICLE IX MISCELLANEOUS SECTION 9.1 Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be delivered in person by commercial courier, by telecopy with written confirmation, overnight delivery service or U.S. mail, in which event it shall be mailed by first-class, certified or registered, postage prepaid, addressed as follows: If to Ventana or Sub: Ventana Medical Systems, Inc. 3865 North Business Center Drive Tucson, AZ 85705 Attention: President Telecopy No.: (520) 887-2555 Copy to: Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304 Attention: Christopher D. Mitchell, Esq./Timothy Stevens, Esq. Telecopy No.: (415) 493-6811 -29- 34 If to BioTek: BioTek Solutions, Inc. 610 Newport Center Drive, Suite 1199 Newport Beach, CA 92660 Attention: Chief Executive Officer Telecopy No.: 714-261-6006 Copy to: Hewitt & McGuire 19900 MacArthur Blvd., Suite 1050 Irvine, CA 92715 Attention: William L. Twomey Telecopy No.: 714-798-0511 Each such notice, report or other communication shall for all purposes under this Agreement be treated as effective or having been given when delivered if delivered personally by commercial courier or, if sent by registered or certified mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid, or, if sent by telecopier with written confirmation, at the earlier of (i) 24 hours after confirmation of transmission by the sending telecopier machine or (ii) delivery of written confirmation. SECTION 9.2 Headings. The headings of the several sections of this Agreement are inserted for convenience of reference only and are not intended to affect the meaning or interpretation of this Agreement. SECTION 9.3 Entire Agreement. This Agreement, together with the Merger Agreement and the other Exhibits and Schedules hereto, the Nondisclosure Agreement and other documents contemplated hereby, constitute the entire agreement of the parties hereto, and supersedes all other prior or contemporaneous agreements and understandings, both written and oral, between the parties, or any of them, with respect to the subject matter hereof and thereof. No addition to or modification of any provision of this Agreement shall be binding upon any party unless made in writing and signed by all parties hereto. SECTION 9.4 Waiver. Either Ventana and Sub or BioTek may, by written notice to the other, (i) waive any of the conditions to its obligations hereunder or extend the time for the performance of any of the obligations or actions of the other; (ii) waive any inaccuracies in the representations of the other contained in this Agreement or in any documents delivered pursuant to this Agreement; (iii) waive compliance with any of the covenants of the other contained in this Agreement; and (iv) waive or modify performance of any of the obligations of the other. Neither consummation of the Merger nor any action taken pursuant to this Agreement, including without limitation any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any -30- 35 representation, warranty, condition or agreement contained herein. Waiver of the breach of any one or more provisions of this Agreement shall not be deemed or construed to be a waiver of other breaches or subsequent breaches of the same provisions. SECTION 9.5 Expenses. Subject to the provisions of Section 5.8 and 5.13 hereof, BioTek and Ventana shall each pay their own costs and expenses (including the fees and expenses of their respective investment bankers, finders, brokers and counsel) incurred in connection with this Agreement, the Merger Agreement and the transactions contemplated hereby and thereby, whether or not the Merger is consummated. SECTION 9.6 Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered the same agreement. SECTION 9.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to the principles of conflicts of laws thereof. SECTION 9.8 Assignability. This Agreement shall not be assignable by operation of law or otherwise; provided however that Ventana or Sub may assign this Agreement or its rights or duties under this Agreement to an affiliate. SECTION 9.9 No Third Party Beneficiaries. This Agreement is not intended to confer upon any Person other than the parties hereto any rights or remedies hereunder. -31- 36 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the date first above written. VENTANA MEDICAL SYSTEMS, INC. By:_________________________________________ Title:______________________________________ VENTANA ACQUISITION CORPORATION By:_________________________________________ Title:______________________________________ BIOTEK SOLUTIONS, INC. By:_________________________________________ Title:______________________________________ -32- EX-10.13(B) 19 AGREEMENT & PLAN OF MERGER 2/26/96 1 EXHIBIT 10.13(b) AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (the "Merger Agreement") is made on February 26, 1996 by and between Ventana Acquisition Corporation, a Delaware corporation ("Sub") and BioTek Solutions, Inc., a California corporation ("BioTek"). BioTek and Sub are hereinafter collectively referred to as the "Constituent Corporations." RECITALS A. Ventana Medical Systems, Inc., a Delaware corporation ("Ventana") directly owns all of the outstanding shares of capital stock of Sub. B. Prior to the execution of this Merger Agreement, the Constituent Corporations and Ventana have entered into an Agreement and Plan of Reorganization (the "Reorganization Agreement") providing for certain representations, warranties and agreements in connection with the transactions contemplated herein and therein. C. The respective Boards of Directors of Ventana and the Constituent Corporations deem it advisable and in the best interests of Ventana and the Constituent Corporations and in the best interests of the shareholders of the Constituent Corporations that BioTek be acquired by Ventana through a merger ("Merger") of Sub with and into BioTek. D. Capitalized terms used herein shall have the meanings designated for them in the Reorganization Agreement, unless the context requires otherwise. NOW THEREFORE, the Constituent Corporations hereby agree as follows: ARTICLE I THE CONSTITUENT CORPORATIONS 1.1 BioTek. BioTek was incorporated under the laws of the State of California on October 26, 1990. BioTek is authorized to issue an aggregate of 10,000,000 shares of Common Stock, $.01 par value per share ("BioTek Common Stock"). On the date hereof, 9,367,945 shares of Common Stock are validly issued and outstanding. 1.2 Sub. Sub was incorporated under the laws of the State of Delaware on February 20, 1996. Sub is authorized to issue an aggregate of 1,000 shares of Common Stock, $.001 par value per share ("Sub Common Stock"). On the date hereof, an aggregate of 1,000 shares of Sub Common Stock are validly issued and outstanding and held by Ventana. 2 ARTICLE II TERMS AND CONDITIONS OF THE MERGER 2.1 Merger of Sub into BioTek. At the Effective Time (as defined below), Sub shall be merged with and into BioTek (the "Merger") and thereafter the separate existence of Sub shall cease. BioTek shall be the surviving corporation in the Merger (hereinafter sometimes referred to as the "Surviving Corporation") and its separate corporate existence, with all its purposes, objects, rights, privileges, powers, and franchises shall continue unaffected and unimpaired by the Merger. The Merger will occur in accordance with the General Corporation Law of the State of California (the "California Law") and the General Corporation Law of the State of Delaware (the "Delaware Law"). 2.2 Effective Time of the Merger. The Merger shall be effective when this Merger Agreement and accompanying certificates shall be filed with the Secretary of State of California and the Secretary of State of Delaware (the "Effective Time"). 2.3 Effect of the Merger. The Surviving Corporation shall succeed to all of the rights, privileges, powers and franchises, of a public as well as of a private nature, of Sub, and all of the debts, chooses in action and other interests due or belonging to Sub, all as more fully set forth in Section 1107 of the California Law and the applicable provisions of the Delaware Law. 2.4 Additional Actions. If, at any time after the Effective Time, the Surviving Corporation shall consider or be advised that any deeds, bills of sale, assignment, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Corporation its right, title or interest in, to or under any of the rights, properties or assets of Sub acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger or to otherwise carry out this Agreement and Plan of Merger, the officers and directors of the Surviving Corporation shall and will be authorized to execute and deliver, in the name of and on behalf of the Constituent Corporations or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of the Surviving Corporation or otherwise carry out this Agreement and Plan of Merger. ARTICLE III ARTICLES OF INCORPORATION AND DIRECTORS OF THE SURVIVING CORPORATION 3.1 Articles of Incorporation. The Articles of Incorporation of the Surviving Corporation shall be as currently in effect. -2- 3 3.2 Directors. The directors of Sub immediately prior to the Effective Time of the Merger shall be the directors of the Surviving Corporation, in each case until their successors shall have been elected and shall qualify or until otherwise provided by law, the Articles of Incorporation of the Surviving Corporation or the Bylaws of the Surviving Corporation. 3.3 Officers. The officers of Sub immediately prior to the Effective Time of the Merger shall be the officers of the Surviving Corporation, in each case until their successors shall have been elected and shall qualify or until otherwise provided by law, the Articles of Incorporation of the Surviving Corporation or the Bylaws of the Surviving Corporation. ARTICLE IV EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS 4.1 Effect on Sub Capital Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of the capital stock of the parties hereto, each issued and outstanding share of Sub Common Stock shall be converted into one (1) share of Common Stock of the Surviving Corporation. Each stock certificate of Sub evidencing ownership of any such shares shall continue to evidence ownership of such shares of capital stock of the Surviving Corporation. 4.2 Effect on BioTek Capital Stock. At the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of the capital stock of any of the parties hereto, each issued and outstanding share of BioTek Common Stock, other than shares which shall then or thereafter constitute Dissenting Shares as defined in Section 4.7 below, and subject to the escrow and indemnification provisions set forth in the Escrow Agreement attached to the Reorganization Agreement as Exhibit C (the "Escrow Agreement"), shall be retired and converted into the right to receive from Ventana from Ventana (i) cash (the "Cash Proceeds") in the aggregate amount of $2,500,000 (which amount shall be reduced by the $500,000 Initial Payment made by Ventana in accordance with Section 5.8 of the Reorganization Agreement) less all liabilities of BioTek as of the Effective Time (other than liabilities of BioTek to DAKO A/S (the "DAKO Liabilities"), whether accrued, absolute, contingent or otherwise (the "BioTek Liabilities"), that have not been paid or discharged in full as of the Effective Time (the BioTek Liabilities as of the Effective Time shall be set forth on a Schedule of Liabilities (the "Schedule of Liabilities") to be delivered upon execution of this Agreement and updated as of the Effective Time, together with the amount of each such liability and the disposition to be made with respect to each such liability); and (ii) promissory notes (the "Note Proceeds") in the aggregate principal amount of $250,000 plus the amount, if any, by which $12,550,000 exceeds the sum of (x) the amount of Ventana Exchange Notes issued in connection with the Merger plus (y) the principal and accrued interest -3- 4 payable with respect to BioTek Investor Notes that have not been exchanged for Ventana Payment Notes as of the Effective Time less (z) any Ventana Exchange Notes that have been used to satisfy other liabilities of BioTek (other than the DAKO Liabilities). $250,000 of such Ventana Payment Notes (the "Escrow Funds") shall be placed in escrow pursuant to the provisions of the indemnity escrow described elsewhere herein. . The liabilities of BioTek to DAKO A/S (the "DAKO Liabilities") shall remain with the Surviving Corporation following the Closing. Ventana shall have no obligation to issue Ventana Payment Notes in excess of the amount set forth above and the amount of Note Proceeds shall therefore equal $250,000 plus the amount, if any, by which $12,550,000 exceeds the sum of (x) the amount of Ventana Exchange Notes issued in connection with the Merger plus (y) the principal and accrued interest payable with respect to BioTek Investor Notes that have not been exchanged for Ventana Payment Notes as of the Effective Time less (z) any Ventana Exchange Notes that have been used to satisfy other liabilities of BioTek (other than the DAKO Liabilities). The Cash Proceeds and the Note Proceeds are sometimes referred to herein as the "Total Consideration." The aggregate Note Proceeds placed in escrow shall be reduced, in addition to any reduction for payment of indemnification obligations arising under the escrow, for any payments made or required to be made by Ventana to holders of shares of BioTek Common Stock that are Dissenting Shares (as defined below). Subject to the indemnity escrow, the Total Consideration shall be allocated to the holders of issued and outstanding BioTek Common Stock pro rata in accordance with the Articles of Incorporation of BioTek (the "BioTek Articles of Incorporation"). 4.3 BioTek Options. BioTek shall use its best efforts to cause all outstanding options to purchase shares of BioTek Common Stock to either be exercised (in accordance with the provisions of such options) or terminate effective at the Effective Time, and it shall be a condition to closing of Ventana that all such options shall have either been exercised or terminated as of the Effective Time. 4.4 BioTek Warrants. BioTek shall use its best efforts to cause all outstanding warrants to acquire shares of BioTek Common Stock to either be exercised (in accordance with the provisions of such warrants) or terminate effective at the Effective Time, and it shall be a condition to closing of Ventana that all such warrants shall have either been exercised or terminated as of the Effective Time. 4.5 BioTek Investor Notes. At least 90% in original principal amount of outstanding BioTek Investor Notes shall be exchanged by the holders thereof for Ventana Exchange Notes effective at the Effective Time. With respect to holders of BioTek Investor Notes that do not exchange such notes for Ventana Exchange Notes, BioTek shall use its best efforts to obtain by the Effective Time (and its shall be a condition to closing of Ventana that such agreements have been obtained by the Effective Time) legally binding agreements providing that such non-exchanging noteholders shall (i) have terminated any -4- 5 security interest they may have in any assets of BioTek and (ii) have waived any right they may have to demand payment of such notes at any time prior to December 31, 1996. 4.6 Payment of Merger Consideration. (a) Prior to the Effective Time, Ventana and BioTek shall mutually agree upon and designate an exchange agent (the "Exchange Agent") to act as (i) agent for the holders of BioTek Common Stock to receive the funds to which holders of BioTek Common Stock shall become entitled pursuant to Section 4.2 hereof, and (ii) escrow agent pursuant to the terms of an escrow agreement in substantially the form attached as Exhibit C to the Reorganization Agreement (the "Escrow Agreement"). (b) On the Closing Date, Ventana shall (i) deposit the Escrow Funds into an escrow account on behalf of the shareholders of BioTek pursuant to the terms of the Escrow Agreement and (ii) transfer to the Exchange Agent for payment to the shareholders of BioTek pursuant to the procedures established by the remainder of this Section 4.6 an amount equal to the Total Consideration reduced by (i) the Escrow Funds and (ii) the Cash Proceeds and Note Proceeds being used to discharge BioTek Liabilities in accordance with Section 4.7 of this Agreement. (c) Promptly following the Closing Date, the Surviving Corporation shall cause to be sent by United States registered mail, return receipt requested, to each person who was, at the Effective Time, a holder of record of BioTek Common Stock entitled to receive a portion of the Total Consideration pursuant to Section 4.2 hereof, a form (mutually agreed to by BioTek and Ventana) of a letter of transmittal and instructions for use in effecting the surrender of the certificates that, at the Effective Time, shall have evidenced any of such shares to be exchanged pursuant to the Merger. Upon such surrender to the Exchange Agent of such certificates, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, and such other documents as may be requested, the Exchange Agent shall promptly cause to be paid to the holder the aggregate per share consideration applicable to such holder. Until so surrendered and exchanged, each such certificate evidencing shares of BioTek Common Stock shall, after the Effective Time, be deemed to evidence only the right to receive the aggregate per share consideration to which such holder is entitled pursuant to Section 4.2. No interest will be paid or will accrue on the amount to be paid upon the surrender of any such certificate. (d) If payment of the aggregate per share consideration in respect of canceled shares of BioTek Common Stock is to be made to a person other than the person in whose name a surrendered certificate or instrument is registered, it shall be a condition to such delivery or payment that the certificate or instrument so surrendered shall be properly endorsed or shall be otherwise in proper form for transfer and that the person requesting such delivery or payment shall have paid any transfer and other taxes required by reason of such delivery or payment or shall have established to the satisfaction of the Surviving Corporation or the Exchange Agent that such tax either has been paid or is not payable. (e) Each certificate which immediately prior to the Effective Time represented outstanding shares of BioTek Common Stock shall at and after the Effective Time be deemed to represent -5- 6 only the amount of cash and notes from Ventana into which shares represented by such certificates shall have been converted pursuant to Section 4.2 herein. After the Effective Time, there will be no further transfers on the stock transfer books of BioTek of shares of BioTek Common Stock that were outstanding immediately prior to the Effective Time. If a certificate representing such shares is presented for transfer, it will be canceled and the aggregate per share consideration will be paid in exchange therefor. (f) Notwithstanding the foregoing, none of the Exchange Agent, Ventana or the Surviving Corporation or any party hereto shall be liable to any holders of shares of BioTek Common Stock for any amounts properly paid or delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. 4.7 Discharge of BioTek Liabilities. At the Closing, BioTek shall deliver the Schedule of Liabilities which shall set forth all of the BioTek Liabilities as of the Effective Time and, noting for each obligee the amount of the liability to such obligee and the manner in which such liability is to be discharged. For BioTek Liabilities to be discharged with Cash Proceeds, the amount of Cash Proceeds necessary to discharge such BioTek Liabilities will be deposited into a separate account against which checks in payment of such BioTek liabilities will be written. For BioTek Liabilities to be discharged with Ventana Payment Notes, Ventana Payment Notes in the appropriate amounts and payable to the appropriate obligees shall be delivered at Closing. For all obligees that will be receiving Ventana Payment Notes or that will be receiving Cash Proceeds of less than the full amount of the obligations owed to them, BioTek shall deliver releases (in form and substance acceptable to BioTek and Ventana) providing for the release of BioTek's obligations upon payment of the appropriate amount set forth on the Schedule of Liabilities. 4.8 Dissenting Shares. Notwithstanding anything in this Agreement to the contrary, shares of BioTek Capital Stock which are dissenting shares within the meaning of Section 1300 of the California Law ("Dissenting Shares") shall not be converted into or represent a right to receive any cash proceeds from Ventana, but the holders thereof shall be entitled only to such rights as are granted by the California Law. Each holder of Dissenting Shares who becomes entitled to payment therefor pursuant to the California Law shall receive payment from the Surviving Corporation in accordance with the California Law; provided, however, that (i) if any such holder of Dissenting Shares shall have failed to establish his entitlement to appraisal rights as provided in the California Law, (ii) if any such holder of Dissenting Shares shall have effectively withdrawn his demand for appraisal thereof or lost his right to appraisal and payment therefor under the California Law or (iii) if neither any holder of Dissenting Shares nor the Surviving Corporation shall have filed a petition demanding a determination of the value of all Dissenting Shares within the time provided in the California Law, such holder or holders (as the case may be) shall forfeit the right to appraisal of such shares of BioTek Capital Stock, and such shares of BioTek Capital Stock shall thereupon be deemed to have been converted, as of the Effective Time, into the right to receive the cash consideration specified in Section 4.2 above without interest thereon. BioTek shall give Ventana (i) prompt notice of any written demands for appraisal and any other instruments served pursuant to the California Law received by BioTek and (ii) the opportunity to direct all negotiations and proceedings with respect to demands for appraisal under the California Law. BioTek shall not, without -6- 7 the written consent of Ventana, voluntarily make any payment with respect to any demands for appraisal or offer to settle or settle any such demands. ARTICLE V AMENDMENT AND TERMINATION 5.1 Termination. Notwithstanding the approval and adoption of this Agreement and Plan of Merger by the shareholders of the Constituent Corporations, this Agreement and Plan of Merger shall terminate forthwith in the event that the Reorganization Agreement shall be terminated as therein provided. In the event of the termination of this Agreement and Plan of Merger as provided above, this Agreement and Plan of Merger shall forthwith become void and there shall be no liability on the part of the parties hereto except as otherwise provided in the Reorganization Agreement. 5.2 Amendment. This Agreement and Plan of Merger shall not be amended except by an instrument in writing signed on behalf of each of the parties hereto pursuant to an amendment to the Reorganization Agreement approved in the manner therein provided. If any such amendment to the Reorganization Agreement is so approved, any amendment to this Agreement and Plan of Merger required by such amendment to the Reorganization Agreement shall be effected by the parties hereto by action taken by their respective Boards of Directors. ARTICLE VI MISCELLANEOUS 6.1 Multiple Counterparts. This Agreement and Plan of Merger may be executed in one or more counterparts, all of which shall be considered one and the same instrument, and shall become effective when one or more counterparts have been signed by each of the parties and delivered to each of the other parties. 6.2 Choice of Law. This Agreement shall be governed by and construed, in accordance with the laws of the State of California without reference to choice of law provisions. -7- 8 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. VENTANA ACQUISITION CORPORATION By: /s/ JAMES DANEHY -------------------------------------- James Danehy, President Attest: /s/ R. MICHAEL RODGERS - ----------------------------- R. Michael Rodgers, Secretary BIOTEK SOLUTIONS, INC. By: /s/ MICHAEL DANZI -------------------------------------- Michael Danzi, President Attest: /s/ JOSEPH RASMUSSEN - ----------------------------- Joseph Rasmussen, Secretary -8- 9 VENTANA ACQUISITION CORPORATION (Disappearing Corporation) OFFICERS' CERTIFICATE James Danehy and R. Michael Rodgers hereby certify that: 1. They are the President and Secretary, respectively, of Ventana Acquisition Corporation, a Delaware corporation (the "Corporation"). 2. The Agreement of Merger to which this Certificate is attached (the "Merger Agreement"), has been duly approved by the Board of Directors of the Corporation. 3. The Corporation has one class of stock outstanding, designated "Common Stock", of which 1,000 shares are outstanding and entitled to vote on the merger. 4. The principal terms of the Merger Agreement in the form attached hereto were approved by the Corporation by a vote of a number of shares which equaled or exceeded the vote required. The vote required was greater than 50% of the outstanding shares of Common Stock. 5. The vote of the shareholders of Ventana Medical Systems, Inc., the parent of the Corporation, was not required by the provisions of the General Corporation Law of Delaware. Each of the undersigned declares under penalty of perjury that the matters set out in the foregoing Certificate are true of his own knowledge. Executed at Palo Alto, California on February 26, 1996. /s/ JAMES DANEHY ------------------------------- James Danehy, President /s/ R. MICHAEL RODGERS ------------------------------- R. Michael Rodgers, Secretary -9- 10 BIOTEK SOLUTIONS, INC. (Surviving Corporation) OFFICERS' CERTIFICATE Michael Danzi and Joseph Rasmussen hereby certify that: 1. They are the President and Secretary, respectively, of BioTek Solutions, Inc., a California corporation (the "Corporation"). 2. The Agreement of Merger to which this Certificate is attached (the "Merger Agreement"), has been duly approved by the Board of Directors of the Corporation. 3. The Corporation has one class of stock outstanding, designated "Common Stock." An aggregate of 9,367,945 shares of Common Stock are outstanding and entitled to vote on the Merger. 4. The principal terms of the Merger Agreement in the form attached hereto were approved by the Corporation by a vote of a number of shares of Common Stock which equaled or exceeded the vote required. The vote required was greater than 50% of the outstanding shares of Common Stock. Each of the undersigned declares under penalty of perjury that the matters set out in the foregoing Certificate are true of his own knowledge. Executed at Palo Alto, California on February 26, 1996. /s/ MICHAEL DANZI ------------------------------- Michael Danzi, President /s/ JOSEPH RASMUSSEN ------------------------------- Joseph Rasmussen, Secretary -10- EX-10.13(C) 20 ESCROW AGREEMENT 2/26/96 1 EXHIBIT 10.13(c) ESCROW AGREEMENT This Escrow Agreement (the "Agreement") is made as of February 26, 1996, by and among Wilson Sonsini Goodrich & Rosati as escrow agent (the "Escrow Agent"), Ventana Medical Systems, Inc., a Delaware corporation ("Ventana"), Ventana Acquisition Corporation, a Delaware corporation ("Sub"), BioTek Solutions, Inc., a California corporation ("BioTek"), and Michael Danzi as representative of the stockholders of BioTek ("Shareholder Representative"). RECITALS A. Ventana, Sub and BioTek are parties to an Agreement and Plan of Reorganization dated January 19, 1996 (the "Reorganization Agreement"), and Sub and BioTek have entered into a related Agreement and Plan of Merger (the "Merger Agreement") pursuant to which the parties thereto have agreed to cause the merger of Sub with and into BioTek (the "Merger"). B. The Reorganization Agreement provides that as a condition to the Merger the parties hereto shall enter into an escrow agreement with respect to a portion of the consideration to be paid by Ventana in connection with the Merger whereby Ventana shall be indemnified in the event of losses arising from breaches of representations in the Reorganization Agreement and for certain other costs and expenses in connection with or arising from the Merger. C. Capitalized terms used herein without definition shall have the meanings designated for them in the Reorganization Agreement unless the context requires otherwise. NOW, THEREFORE, it is hereby mutually agreed by all parties hereto as follows: 1. Acknowledgment of Receipt of Reorganization Agreement. The Escrow Agent hereby acknowledges receipt of a copy of the Reorganization Agreement, but except for reference thereto for definitions of certain words or terms not defined herein, the Escrow Agent is not charged with any duties or responsibilities thereunder. This Escrow Agreement shall become effective at the Effective Time. 2. Escrow Fund. (a) At the Closing of the Merger, Ventana shall withhold an aggregate of $250,000 of the aggregate Note Proceeds (the "Withheld Amount") payable to the holders of BioTek Common Stock (the "Shareholders") in the Merger under the Reorganization Agreement, and shall deposit a Ventana Payment Note registered in the name of the Escrow Agent in such amount (the "Escrow Note") with the Escrow Agent. The principal amount of the Escrow Note shall be adjusted as set forth herein. Payment of interest on the Escrow Note shall be deferred until disbursement of the Escrow Note in accordance with the provisions of this Agreement. The Escrow Agent shall hold 2 the Escrow Note in escrow ("Escrow") until such time as it is required to disburse the Escrow Note as herein provided. 3. BioTek Shareholders; Proportionate Interests. BioTek represents and warrants that attached hereto as Schedule A is a true, accurate and complete list of the holders of BioTek Common Stock entitled to a portion of the proceeds in the Merger and the "proportionate interest" (as defined below) of each of the Shareholders in the Escrow Note. The "proportionate interest" of each Shareholder in the Escrow Note shall represent that Shareholder's proportionate interest in the total proceeds available in the Merger. 4. Indemnity. (a) The Shareholders shall indemnify Ventana and hold it harmless against and in respect of any interest, penalty, fine, loss, cost, settlement payment, expense, claim, liability, judgment or damage (including reasonable legal and expert fees and expenses) ("Liability") incurred by Ventana, any of its shareholders, affiliates or subsidiaries (including BioTek), or any successor of any of them, directly or indirectly (such indemnification to be limited to Escrow Fund) and caused by or resulting from any of the following: (i) any inaccuracy in or breach of any of the representations, warranties or covenant made by BioTek in the Reorganization Agreement; (ii) any failure of the BioTek Liabilities (other than the DAKO Liabilities) (as defined in the Reorganization Agreement) to have been satisfied as of the Effective Time (as defined in the Reorganization Agreement); or (iii) the pending litigation between BioTek and Biogenex, which shall include both costs of litigation, judgments and settlements including license payments. (b) The indemnity provided herein shall cover 100% of any Liability incurred by Ventana, its subsidiaries or its successors and assigns up to a maximum aggregate amount of $250,000 for indemnification under Sections 4(a)(i), (ii) and (iii); provided, however, that no Claims (as defined below) shall be made pursuant to Section 4(a)(i) above unless and until the aggregate amount of such Claims exceeds $50,000 and thereafter only to the extent such Claims are in excess of $50,000. 5. Purchase Price Adjustment. Promptly following the Closing, BioTek shall deliver to Ventana a balance sheet dated as of the Closing Date (the "Closing Date Balance Sheet"). The Closing Date Balance Sheet shall be prepared in accordance with generally accepted accounting principals on a basis consistent with past periods. If the value of the Net Tangible Assets (as defined below) as shown on the adjusted Closing Date Balance Sheet is less than $1,750,000, then the amount of the difference shall be deducted from the principal amount of the Escrow. If the value of the Net Tangible Assets as shown on the Closing Date Balance Sheet is more than $2,250,000, then Ventana shall promptly deliver the difference to the Escrow Agent in cash and the Escrow Agent shall -2- 3 immediately disburse the same to the Shareholders in accordance with their respective proportionate interests. If the value of the Net Tangible Assets as shown on the Closing Date Balance Sheet is more than $1,750,000 but less than $2,250,000, then there shall be no purchase price adjustment. In the event that BioTek and Ventana are unable to agree upon the value of the Net Tangible Assets, Ventana shall cause the Closing Date Balance Sheet to be audited by a "big-six" auditing firm mutually selected by Ventana and the Shareholders Representative and the Closing Date Balance Sheet as audited by such firm shall be final for all purposes under this Agreement. For purposes of this Agreement, "Net Tangible Assets" shall mean cash, net accounts receivable, inventory, prepaid expenses and net fixed assets. 6. Administration of the Escrow. (a) Shareholder Representative. From and after the establishment of the Escrow as provided in Section 2 hereof, the Shareholders shall be represented hereunder by Michael Danzi (the "Shareholder Representative"). The Shareholder Representative has been duly authorized to act on behalf of the Shareholders by the affirmative vote of the holders of a majority of the shares of BioTek Common Stock outstanding immediately prior to the Effective Time, and the Shareholder Representative has the power and authority to bind all of the Shareholders with respect to the Shareholder Representative's performance of this Agreement. In the event that the Shareholder Representative shall die or resign or otherwise terminate its authority hereunder, the Shareholders holding a majority in interest of the proportionate interests shall elect a successor representative to make all decisions with respect to the Escrow Note on behalf of the Shareholders. In such event, the substitute Shareholder Representative shall agree in writing to abide by the terms of this Agreement, and, upon such written agreement, Ventana shall recognize the substitute as the Shareholder Representative hereunder. The Shareholder Representative shall have the following powers and duties: (i) to take such actions and to incur such costs and expenses as the Shareholder Representative in its sole discretion, deems necessary or advisable to safeguard the interests of the Shareholders in the Escrow Note; (ii) to employ accountants, attorneys and such other agents as the Shareholder Representative may deem advisable; and (iii) to take all actions which the Shareholder Representative deems necessary or advisable in order to carry out the foregoing. The Shareholder Representative shall serve without compensation. The Shareholder Representative shall not be liable to any Shareholder by reason of any error of judgment or for any act done or step taken or omitted by Shareholder Representative or for any mistake of fact or law or anything which Shareholder Representative may do or refrain from doing in connection herewith, unless caused by or arising out of her own gross negligence or willful misconduct. The Shareholder Representative shall have full and complete authorization and protection for any action taken or suffered by Shareholder Representative hereunder in good faith and in accordance with the advice of attorneys, accountants, experts and other agents engaged by Shareholder Representative. (b) Indemnification Procedure. If Ventana, any of its parents, affiliates, or subsidiaries (including BioTek), or any successor to or assign of any of them, shall have any claim of indemnification pursuant to Section 4 hereof which the intended indemnitee has paid or properly accrued or which the intended indemnitee reasonably anticipates that it will have to pay or properly accrue (a "Claim"), Ventana shall give written notice to the Shareholder Representative and Escrow -3- 4 Agent (a "Claim Notice"). The Claim Notice shall include a description of the amount of the Claim and a brief description of the facts upon which such Claim is based. If the Shareholder Representative does not object to the claimed indemnification within ten (10) days following receipt of the Claim Notice, then the Escrow Agent shall reduce the principal amount of the Escrow by the amount of the Claim set forth in the Claim Notice. If the Shareholder Representative objects to the claimed indemnification within ten (10) days following receipt of the Claim Notice, then a representative of Ventana and the Shareholder Representative shall meet to discuss the Claim and to attempt in good faith to resolve the dispute. If the representative of Ventana and the Shareholder Representative are unable to resolve the dispute, then they shall mutually select an independent certified public accounting firm (the "Arbitrator") to hear and arbitrate the dispute. The decision of the Arbitrator shall be conclusive and binding upon the parties. The cost of the Arbitrator shall be borne 50% by Ventana and 50% by the Shareholder Representative. If the Arbitrator determines that Ventana is entitled to indemnification, then the Escrow Agent shall reduce the principal amount of the Escrow Note by the amount of the permitted indemnification. 7. Termination of Escrow; Distribution of Escrow Note. (a) The indemnification obligations under Section 4 shall terminate 365 days following the Effective Time (the "Termination Date"), except with respect to any Claims identified by Ventana in a Claim Notice delivered within the 365 day period after the Effective Time with respect to which the indemnification obligations shall remain in effect until such Claims have been resolved as set forth in Section 6(b) above. (b) Immediately following the Termination Date, the Escrow Agent shall notify Ventana and the Shareholder Representative of the adjusted principal amount of the Escrow Note less the amount of any pending Claims that were submitted in a timely manner but have not yet been resolved. Upon receipt of such notice, Ventana shall immediately prepare separate Ventana Payment Notes (the "Settlement Notes") in the principal amounts corresponding to the proportionate interests of the Shareholders and deliver the same to the Escrow Agent. Concurrently with delivery of the Settlement Notes to the Escrow Agent, Ventana will deliver to the Escrow Agent payment of accrued interest on that portion of the Escrow Note that is being converted into Settlement Notes ("Interest Payments"). Upon receipt of the Settlement Notes, the Escrow Agent shall immediately deliver the Escrow Note to Ventana for cancellation and distribute the Settlement Notes and Interest Payments to the Shareholders. Upon final resolution of the remaining Claim(s), a similar procedure shall be followed to provide final distributions to the Shareholders. 8. Exclusive Remedy. Ventana agrees that its exclusive remedy with respect to any breach under the Reorganization Agreement, the Merger Agreement or this Agreement (except for breaches that are the result of willful misconduct or fraudulent acts or omissions) shall be indemnification as set forth herein and only up to the maximum amounts set forth in Section 4(b). 9. Escrow Agent's Protection. In taking any action whatsoever hereunder, the Escrow Agent shall be protected in relying upon any notice, paper or other document reasonably believed by it to be genuine, or upon any evidence reasonably deemed by it to be sufficient. The Escrow Agent -4- 5 shall not be liable to Ventana, Sub or the Shareholders for any act performed or omitted to be performed by it in good faith and shall be liable only in case of its own bad faith or willful misconduct or negligence. In addition, the Escrow Agent may consult with legal counsel of its choosing in connection with its duties hereunder and shall be fully protected in any act taken, suffered or permitted by it in good faith in accordance with the advice of counsel. 10. Indemnification of Escrow Agent. Ventana shall reimburse, indemnify and hold harmless the Escrow Agent, its employees and agents (referred to herein severally and collectively as the "Escrow Agent"), from and against any loss, damage, liability or claim suffered, incurred by, or asserted against the Escrow Agent (including any amounts paid in settlement of any action, suit, proceeding, or claim brought or threatened to be brought and including expenses of legal counsel) arising out of, in connection with or based upon any act or omission by the Escrow Agent relating in any way to this Agreement or its services hereunder, so long as the Escrow Agent has acted in good faith and without negligence, and except with respect to any claims made by the Shareholders or the Shareholder Representative in which event the Shareholders shall reimburse, indemnify and hold harmless the Escrow Agent, its employees and agents as set forth above. Ventana may participate at its own expense in the defense of any claim or action which may be asserted against the Escrow Agent. The right of the Escrow Agent to indemnification hereunder shall survive its resignation or removal as Escrow Agent and shall survive the termination of this Agreement by lapse of time or otherwise. 11. Fees. All fees and costs of the Escrow Agent shall be paid by Ventana when incurred, and shall be deducted from the principal amount of the Escrow Note prior to distribution of the same to the Shareholders. All out-of-pocket costs of the Shareholders' Representative shall also be deducted from the principal amount of the Escrow Note prior to the distribution of the same to the Shareholders, and the portion of the Escrow Note attributable to the Shareholders Representative's costs will be disbursed to the Shareholders Representative. 12. Address for Notices. Any notice or other communication required or permitted to be given to the parties hereunder shall be in writing and shall be deemed to have been given if delivered in person, or two business days after mailing, addressed as follows (or at such other address as the addressed party may have substituted by notice pursuant to this Section): If to Ventana or Sub: Ventana Medical Systems, Inc. 3865 North Business Center Drive Tucson, AZ 85705 Attention: President Copy to: Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road -5- 6 Palo Alto, CA 94304-1050 Attention: Christopher D. Mitchell, Esq./ Timothy Stevens, Esq. If to the Shareholders or Shareholder Representative: Danzi Capital Group 610 Newport Center Drive, Suite 1195 Newport Beach, CA 92660 Attn: Michael R. Danzi Copy to: Hewitt & McGuire 19900 MacArthur Blvd., Suite 1050 Irvine, CA 92715 Attention: William L. Twomey, Esq. If to the Escrow Agent: Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304-1050 Attn: Christopher D. Mitchell, Esq. 13. Successors and Assigns. This Agreement is binding upon and shall inure to the benefit of the respective parties hereto and their respective heirs, executors, administrators, successors and assigns; provided, however, that any heirs, executors, administrators, successors and assigns shall only be liable for any liabilities hereunder to the extent of the value of the property or assets received from their respective predecessor in interest. 14. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without reference to conflicts of laws principles. 15. Amendments. Any provision of this Agreement may be amended only by agreement in writing signed by all of the signatories hereto. 16. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. -6- 7 IN WITNESS WHEREOF, Ventana, Sub, BioTek, the Shareholder Representative and the Escrow Agent have caused this Escrow Agreement to be duly executed on the day and year first above written. VENTANA MEDICAL SYSTEMS, INC. By: /s/ R. JAMES DANEHY ----------------------------------------- Title: Chief Executive Officer -------------------------------------- VENTANA ACQUISITION CORPORATION By: /s/ R. JAMES DANEHY ----------------------------------------- Title: Chief Executive Officer -------------------------------------- BIOTEK SOLUTIONS, INC. By: /s/ MICHAEL DANZI ----------------------------------------- Title: Chief Executive Officer -------------------------------------- /s/ MICHAEL DANZI --------------------------------------------- Michael Danzi, as Shareholders Representative WILSON SONSINI GOODRICH & ROSATI, as Escrow Agent By: /s/ CHRISTOPHER D. MITCHELL ----------------------------------------- Title: Member -------------------------------------- -7- 8 SCHEDULE A BioTek Shareholders Proportionate Interests Shareholder Name and Address Proportionate Interest - --------------------------------------------------- ------------------------- EX-10.14(A) 21 FORM OF STOCK PURCHASE WARRANT SERIES D PREFERRED 1 EXHIBIT 10.14(a) THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION THEREOF. THE SECURITIES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION AND QUALIFICATION WITHOUT, EXCEPT UNDER CERTAIN SPECIFIC LIMITED CIRCUMSTANCES, AN OPINION OF COUNSEL FOR THE HOLDER, CONCURRED IN BY COUNSEL FOR THE COMPANY THAT SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED. STOCK PURCHASE WARRANT TO PURCHASE SHARES OF SERIES D PREFERRED STOCK OF VENTANA MEDICAL SYSTEMS, INC. THIS CERTIFIES that, for value received, _______________ (the "Investor"), is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time on or prior to the close of business on the date five (5) years after the date hereof, but not thereafter, to subscribe for and purchase, from VENTANA MEDICAL SYSTEMS, INC. a Delaware corporation (the "Company"), _______ shares of Series D Preferred Stock. The purchase price of one share of Series D Preferred Stock under this Warrant shall be $2.15 per share. The purchase price and the number of shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. The class and series of shares of capital stock of the Company issuable upon exercise of this Warrant is also subject to adjustment pursuant to Section 9 hereof. 1. Title of Warrant. Prior to the expiration hereof and subject to compliance with applicable laws, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company, referred to in Section 2 hereof, by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. 2. Exercise of Warrant. (a) The purchase rights represented by this Warrant are exercisable by the registered holder hereof, in whole or in part, at any time before the close of business on the date five (5) years after the date hereof, by the surrender of this Warrant and the Subscription Form annexed hereto duly executed at the office of the Company, in Tucson, Arizona (or such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company), and upon payment of the purchase price of the shares thereby purchased (by cash or by check or bank draft payable to the order of the Company or by cancellation of indebtedness of the Company to the holder hereof, if any, at the time of exercise in an amount equal to the purchase price of the shares thereby purchased); whereupon the holder of this Warrant shall be entitled to receive a certificate for the number of shares of Series D Preferred Stock so purchased. The Company agrees that if at the time of the surrender of this Warrant and purchase the holder hereof shall be entitled to exercise this Warrant, the shares so purchased shall be and be deemed to be issued to such holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised as aforesaid. 2 (b) In lieu of the cash payment set forth in paragraph 2(a) above, the Holder shall have the right ("Conversion Right") to convert this Warrant in its entirety (without payment of any kind) into that number of shares of Series D Preferred Stock equal to the quotient obtained by dividing the Net Value (as defined below) of the shares issuable upon exercise of this Warrant by the Fair Market Value (as defined below) of one share of Series D Preferred Stock. As used herein, (A) the Net Value of the Shares means the aggregate Fair Market Value of the shares of Series D Preferred Stock subject to this Warrant minus the aggregate purchase price; and (B) the Fair Market Value of one share of Series D Preferred Stock means: (i) if the exercise is in upon the closing of the Company's initial registered firm commitment underwritten public offering of its equity securities, the Fair Market Value of one share of Series D Preferred Stock means the initial "Price to Public" specified in the final prospectus with respect to the offering multiplied by the number of shares of Common Stock issuable upon conversion of Series D Preferred Stock in connection with such initial public offering; (ii) if the exercise occurs at a time during which the Company's Common Stock is traded on a national securities exchange or on the Nasdaq National Market, the Fair Market Value of one share of Series D Preferred Stock means the average last reported or closing sale price for the Company's Common Stock on such exchange or market for the three trading days ending one business day before the exercise of this Warrant multiplied by the number of shares of Common Stock issued upon conversion of Series D Preferred Stock at the time of the Company's initial public offering; (iii) if the exercise is in connection with a merger, sale of assets or other reorganization transaction as described in Section 9(a) below, the Fair Market Value of one share of Series D Preferred Stock means the value received by the holders of the Company's Series D Preferred Stock pursuant to such Merger Transaction; and (iv) in all other cases, the Fair Market Value of one share of Series D Preferred Stock shall be determined in good faith by the Company's Board of Directors. (c) Certificates for shares purchased hereunder shall be delivered to the holder hereof within a reasonable time after the date on which this Warrant shall have been exercised as aforesaid. The Company covenants that all shares of Series D Preferred Stock which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant, be fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction of a share called for upon the exercise of this Warrant, an amount equal to such fraction multiplied by the then current price at which each share may be purchased hereunder shall be paid in cash to the holder of this Warrant. -2- 3 4. Charges, Taxes and Expenses. Issuance of certificates for shares of Series D Preferred Stock upon the exercise of this Warrant shall be made without charge to the holder hereof for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the holder of this Warrant or in such name or names as may be directed by the holder of this Warrant; provided, however, that in the event certificates for shares of Series D Preferred Stock are to be issued in a name other than the name of the holder of this Warrant, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the holder hereof; and provided further, that upon any transfer involved in the issuance or delivery of any certificates for shares of Series D Preferred Stock, the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. 5. No Rights as Shareholders. This Warrant does not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company prior to the exercise thereof. 6. Exchange and Registry of Warrant. This Warrant is exchangeable, upon the surrender hereof by the registered holder at the above-mentioned office or agency of the Company, for a new Warrant of like tenor and dated as of such exchange. The Company shall maintain at the above-mentioned office or agency a registry showing the name and address of the registered holder of this Warrant. This Warrant may be surrendered for exchange, transfer or exercise, in accordance with its terms, at such office or agency of the Company, and the Company shall be entitled to rely in all respects, prior to written notice to the contrary, upon such registry. 7. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 8. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or a Sunday or shall be a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a legal holiday. 9. Early Termination and Dilution. (a) Merger, Sale of Assets, etc. If at any time the Company proposes to consolidate with, merge with, sell or convey all or substantially all of its assets to any other corpora tion or effect another form of reorganization transaction in which the shareholders of the Company immediately prior to such transaction will, immediately after such transaction own less than 50% of the surviving entity or its parent company, then the Company shall give the holder of this Warrant -3- 4 thirty days notice of the proposed effective date of such transaction and if the Warrant has not been exercised by the effective date of such transaction it shall terminate. (b) Dilutive Financing If at any time prior to the first to occur of (i) the Company's initial firm commitment underwritten public offering of equity securities or (ii) the expiration or termination of this Warrant, the Company effects a sale of securities that would result in an adjustment to the conversion price of the Series D Preferred Stock pursuant to Article FOUR, Section 4(e) of the Company's Restated Certificate of Incorporation (other than an issuance of Excluded Stock (as defined in the Restated Certificate, which issuance would not result in any such adjustment)(a "Dilutive Financing"), then this Warrant shall, immediately and with no further action on the part of the holder hereof, become exercisable for the number and class and series of shares issued in the Dilutive Financing determined by dividing (X) by (Y), where (X) equals the number of shares of Series D Preferred Stock issuable upon exercise of this Warrant multiplied by the exercise price for one share of Series D Preferred Stock pursuant to this Warrant; and (Y) equals the issue price per share of the securities issued in the Dilutive Financing. In such event, the exercise price per share for the securities issued in the Dilutive Financing shall be equal to the issue price per share of the securities issued in the Dilutive Financing. (b) Reclassification, etc. If the Company at any time shall, by subdivision, combination or reclassification of securities or otherwise, change any of the securities to which purchase rights under this Warrant exist into the same or a different number of securities of any class or classes, this Warrant shall thereafter be to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities which were subject to the purchase rights under this Warrant immediately prior to such subdivision, combination, reclas sification or other change. If shares of the Company's Series D Preferred Stock are subdivided or combined into a greater or smaller number of shares of Series D Preferred Stock, the purchase price under this Warrant shall be proportionately reduced in case of subdivision of shares or proportionately increased in the case of combination of shares, in both cases by the ratio which the total number of shares of Series D Preferred Stock to be outstanding immediately after such event bears to the total number of shares of Series D Preferred Stock outstanding immediately prior to such event. (c) Cash Distributions. No adjustment on account of cash dividends or interest on the Company's Series D Preferred Stock or other securities purchasable hereunder will be made to the purchase price under this Warrant. (d) Authorized Shares. The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Series D Preferred Stock a sufficient number of shares to provide for the issuance of Series D Preferred Stock upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this -4- 5 Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of the Company's Series D Preferred Stock upon the exercise of the purchase rights under this Warrant. 10. Miscellaneous. (a) Issue Date. The provisions of this Warrant shall be construed and shall be given effect in all respect as if it had been issued and delivered by the Company on the date hereof. This Warrant shall be binding upon any successors or assigns of the Company. This Warrant shall constitute a contract under the laws of the State of California and for all purposes shall be construed in accordance with and governed by the laws of said state. (b) Restrictions. The holder hereof acknowledges that the Series D Preferred Stock acquired upon the exercise of this Warrant may have restrictions upon its resale imposed by state and federal securities laws. (c) Waivers and Amendments. With the consent of the Holders (as defined below) holding rights to purchase more than fifty percent (50%) of the shares issuable upon exercise of the then outstanding Warrants (as defined below), the obligations of the Company and the right of the Holders may be waived (either generally or in a particular instance, either retroactively or prospectively and either for a specified period of time or indefinitely), and with the same consent the Company may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Warrants; provided, however, that no such waiver or supplemental agreement shall reduce the aforesaid percentage which is required for consent to any waiver or supplemental agreement, without the consent of all of the Holders of the then outstanding Warrants. As used in this paragraph 10(c), (i) the "Warrants" shall be the warrants issued pursuant to the Company's Note and Warrant Purchase Agreement of even date herewith, and (ii) the "Holders" shall be the record holders of the Warrants. -5- 6 IN WITNESS WHEREOF, VENTANA MEDICAL SYSTEMS, INC. has caused this Warrant to be executed by its officers thereunto duly authorized. Dated: February 26, 1996 VENTANA MEDICAL SYSTEMS, INC. By______________________________ Name: R. Michael Rodgers Title: Chief Financial Officer -6- 7 NOTICE OF EXERCISE To: VENTANA MEDICAL SYSTEMS, INC. (1) The undersigned hereby elects to purchase ____________ shares of Series D Preferred Stock of VENTANA MEDICAL SYSTEMS, INC. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate of certificates representing said shares of Series D Preferred Stock in the name of the undersigned or in such other name as is specified below: _______________________________________________ (Name) _______________________________________________ _______________________________________________ (Address) (3) The undersigned represents that the aforesaid shares of Series D Preferred Stock are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. __________________________ _________________________________________ (Date) (Signature) -7- 8 ASSIGNMENT FORM (To assign the foregoing warrant, execute this form and supply required information. Do not use this form to purchase shares.) FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to ______________________________________________________________________________ (Please Print) whose address is _____________________________________________________________ (Please Print) ______________________________________________________________________________ Dated: _____________________, 19____. Holder's Signature: ________________________________ Holder's Address: __________________________________ ____________________________________________________ Signature Guaranteed: _______________________________________________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant. -8- EX-10.14(B) 22 FORM OF PREFERRED STOCK PURCHASE WARRANT 1 EXHIBIT 10.14(b) EXHIBIT F THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OR CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE LAWS, AND NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION OR SUCH TRANSACTION IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND LAWS. PREFERRED STOCK PURCHASE WARRANT VENTANA MEDICAL SYSTEMS, INC. THIS CERTIFIES that, for value received, _____________________________ is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time on or after the date hereof and at or prior to 11:59 p.m., Mountain time, on January ___, 2000 (the "Expiration Time"), but not thereafter, to acquire from Ventana Medical Systems, Inc., a Delaware corporation (the "Company"), in whole or from time to time in part, up to ____________ fully paid and nonassessable shares of Series D Preferred Stock of the Company ("Warrant Stock") at a purchase price per share (the "Exercise Price") of $2.15. Such number of shares, type of security and Exercise Price are subject to adjustment as provided herein, and all references to "Warrant Stock" and "Exercise Price" herein shall be deemed to include any such adjustment. 1. EXERCISE OF WARRANT The purchase rights represented by this Warrant are exercisable by the registered holder hereof, in whole or in part, at any time and from time to time at or prior to the Expiration Time by the surrender of this Warrant and the Notice of Exercise form attached hereto duly executed at the principal executive office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company), and upon payment of the Exercise Price for the shares thereby pur chased (by cash or by check or bank draft payable to the order of the Company or by cancellation of indebtedness of the Company to the holder hereof, if any, at the time of exercise in an amount equal to the purchase price of the shares thereby purchased); whereupon the holder of this Warrant shall be entitled to receive from the Company a stock certificate in proper form representing the number of shares of Warrant Stock so purchased. 2. RIGHT TO CONVERT WARRANT The registered holder hereof shall have the right to convert this Warrant, in whole or in part, at any time and from time to time at or prior to the Expiration Time, by the surrender of this Warrant and the Notice of Conversion form attached hereto duly executed to the office of the Company at the -1- 2 address set forth in Section 1 hereof (or such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company), into shares of Warrant Stock as provided in this Section 2. Upon exercise of this conversion right, the holder hereof shall be entitled to receive that number of shares of Warrant Stock of the Company equal to the quotient obtained by dividing [(A - B)(X)] by (A), where: A = the Fair Market Value (as defined below) of one share of Warrant Stock on the date of conversion of this Warrant. B = the Exercise Price for one share of Warrant Stock under this Warrant. X = the number of shares of Warrant Stock as to which this Warrant is being converted. If the above calculation results in a negative number, then no shares of Warrant Stock shall be issued or issuable upon conversion of this Warrant. "Fair Market Value" of a share of Warrant Stock shall mean: (a) if the conversion right is being exercised in connection with a reorganization transaction specified in clause (i) of Section 10 hereof, the value of the consideration (determined, in the case of noncash consideration, in good faith by the Board of Directors of the Company) to be received pursuant to such transaction by the holder of one share of Warrant Stock; (b) if the conversion right is being exercised in connection with a public offering of common stock of the Company ("Common Stock") in connection with which the Warrant Stock will be converted into Common Stock in accordance with the Company's Restated Certificate of Incorporation (as amended and restated from time to time and including all designations of rights and preferences of preferred stock, the "Certificate"), the price to public of one share of Common Stock in such public offering multiplied by the number of shares of Common Stock issuable upon conversion of one share of Warrant Stock; or (c) in all other cases, the fair value as determined in good faith by the Company's Board of Directors. Upon conversion of this Warrant in accordance with this Section 2, the registered holder hereof shall be entitled to receive a certificate for the number of shares of Warrant Stock determined in accordance with the foregoing. 3. ISSUANCE OF SHARES; NO FRACTIONAL SHARES OR SCRIP -2- 3 Certificates for shares purchased hereunder or issuable upon conversion hereof shall be delivered to the holder hereof within a reasonable time after the date on which this Warrant shall have been exercised or converted in accordance with the terms hereof. The Company hereby represents and warrants that all shares of Warrant Stock which may be issued upon the exercise or conversion of this Warrant will, upon such exercise or conversion, be duly and validly authorized and issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issuance thereof (other than liens or charges created by or imposed upon the holder of the Warrant Stock). The Company agrees that the shares so issued shall be and be deemed to be issued to such holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised or converted in accordance with the terms hereof. No fractional shares or scrip representing fractional shares shall be issued upon the exercise or conversion of this Warrant. With respect to any fraction of a share called for upon the exercise or conversion of this Warrant, an amount equal to such fraction multiplied by the then current price at which each share may be purchased hereunder shall be paid in cash to the holder of this Warrant. 4. CHARGES, TAXES AND EXPENSES Issuance of certificates for shares of Warrant Stock upon the exercise or conversion of this Warrant shall be made without charge to the holder hereof for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the holder of this Warrant or in such name or names as may be directed by the holder of this Warrant; provided, however, that in the event certificates for shares of Warrant Stock are to be issued in a name other than the name of the holder of this Warrant, this Warrant when surrendered for exercise or conversion shall be accompanied by the Assignment Form attached hereto duly executed by the holder hereof. 5. NO RIGHTS AS SHAREHOLDERS This Warrant does not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company prior to the exercise or conversion hereof. 6. REGISTRATION RIGHTS. The Company hereby grants to the holder hereof, with respect to the shares of Common Stock issuable upon conversion of the Warrant Stock issuable upon exercise or conversion of this Warrant, registration rights identical to those set forth in that certain Restated Investor Rights Agreement dated as of October 17, 1994, as amended, among the Company and the parties listed on the signature pages thereto, and the holder hereof and the Company hereby agree to be bound by all the provisions of such Agreement which relate to registration rights, including without limitation the definitions and the registration rights provisions of Section 1 thereof (consisting of subsections 1.1 through 1.12), as if the holder hereof was a "Holder" of "Registrable Securities" as those terms are defined in such Agreement. 7. EXCHANGE AND REGISTRY OF WARRANT -3- 4 This Warrant is exchangeable, upon the surrender hereof by the registered holder at the above-mentioned office or agency of the Company, for a new Warrant of like tenor and dated as of such exchange. The Company shall maintain at the above-mentioned office or agency a registry showing the name and address of the registered holder of this Warrant. This Warrant may be surrendered for exchange, transfer, exercise or conversion, in accordance with its terms, at such office or agency of the Company, and the Company shall be entitled to rely in all respects, prior to written notice to the contrary, upon such registry. 8. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and in case of loss, theft or destruction of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 9. SATURDAYS, SUNDAYS AND HOLIDAYS If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or a Sunday or shall be a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a legal holiday. 10. MERGER, SALE OF ASSETS, PUBLIC OFFERING ETC. If at any time the Company proposes to (i) merge or consolidate with or into any other corporation, effect any reorganization, or sell or convey all or substantially all of its assets to any other entity in a transaction in which the shareholders of the Company immediately before the transaction will own immediately after the transaction less than a majority of the outstanding voting securities of the entity (or its parent) succeeding to the business of the Company or (ii) effect a public offering of its securities pursuant to a registration statement on Form S-1 (or any successor form thereto) filed with and declared effective by the Securities and Exchange Commission and in connection with which the Warrant Stock will be converted into Common Stock pursuant to the Certificate, then the Company shall give the holder of this Warrant forty-five (45) days' prior written notice of the proposed effective date of such transaction, and if this Warrant has not been exercised or converted by or on the effective date of such transaction, it shall terminate. 11. RECLASSIFICATION, CONVERSION, ETC. If the Company at any time shall, by reclassification of securities or otherwise, change the Warrant Stock into the same or a different number of securities of any class or classes, this Warrant shall thereafter entitle the holder to acquire such number and kind of securities as would have been issuable in respect of the Warrant Stock (or other securities which were subject to the purchase rights -4- 5 under this Warrant immediately prior to such subdivision, combination, reclassification or other change) as the result of such change if this Warrant had been exercised in full for cash immediately prior to such change. The Exercise Price hereunder shall be adjusted if and to the extent necessary to reflect such change. If the Warrant Stock or other securities issuable upon exercise or conversion hereof are subdivided or combined into a greater or smaller number of shares of such security, the number of shares issuable hereunder shall be proportionately increased or decreased, as the case may be, and the Exercise Price shall be proportionately reduced or increased, as the case may be, in both cases according to the ratio which the total number of shares of such security to be outstanding immediately after such event bears to the total number of shares of such security outstanding immediately prior to such event. The Company shall give the holder prompt written notice of any change in the type of securities issuable hereunder, any adjustment of the Exercise Price for the securities issuable hereunder, and any increase or decrease in the number of shares issuable hereunder. 12. TRANSFERABILITY Prior to the Expiration Time and subject to compliance with applicable laws, this Warrant and all rights hereunder are transferable by the holder hereof, in whole or in part, at the office or agency of the Company referred to in Section 1 hereof. Any such transfer shall be made in person or by the holder's duly authorized attorney, upon surrender of this Warrant together with the Assignment Form attached hereto properly endorsed. 13. REPRESENTATIONS AND WARRANTIES The Company hereby represents, warrants and covenants to the holder hereof that: (a) During the period this Warrant is outstanding, the Company will reserve from its authorized and unissued Series D Preferred Stock a sufficient number of shares to provide for the issuance of Warrant Stock upon the exercise or conversion of this Warrant; (b) During the period this Warrant or the Warrant Stock issuable hereunder is outstanding, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon conversion of the Warrant Stock issuable upon exercise or conversion of this Warrant; (c) The issuance of this Warrant shall constitute full authority to the Company's officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the shares of Warrant Stock issuable upon exercise or conversion of this Warrant; (d) The Company has all requisite legal and corporate power to execute and deliver this Warrant, to sell and issue the Warrant Stock hereunder, to issue the Common Stock issuable upon conversion of the Warrant Stock and to carry out and perform its obligations under the terms of this Warrant; and -5- 6 (e) All corporate action on the part of the Company, its directors and shareholders necessary for the authorization, execution, delivery and performance of this Warrant by the Company, the authorization, sale, issuance and delivery of the Warrant Stock and the Common Stock issuable upon conversion of the Warrant Stock, the grant of registration rights as provided herein and the performance of the Company's obligations hereunder has been taken; (f) The Warrant Stock and the Common Stock issuable upon conversion of the Warrant Stock, when issued in compliance with the provisions of this Warrant and the Certificate, will be validly issued, fully paid and nonassessable, and free of any liens or encumbrances, and will be issued in compliance with all applicable federal and state securities laws; and (g) The issuance of the Warrant Stock and the Common Stock issuable upon conversion of the Warrant Stock will not be subject to any preemptive rights, rights of first refusal or similar rights. 14. GOVERNING LAW This Warrant shall be governed by and construed in accordance with the laws of the State of Delaware. -6- 7 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its duly authorized officers. Dated: ___________, 1995 VENTANA MEDICAL SYSTEMS, INC. By: ___________________________ Title: ________________________ -7- 8 NOTICE OF EXERCISE To: Ventana Medical Systems, Inc. (1) The undersigned hereby elects to purchase __________ shares of Series D Preferred Stock of Ventana Medical Systems, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Series D Preferred Stock in the name of the undersigned or in such other name as is specified below: ________________________________ (Name) ________________________________ (Address) (3) The undersigned represents that the aforesaid shares of Series D Preferred Stock are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. ____________________________________ ________________________________ (Date) (Signature) 9 NOTICE OF CONVERSION To: Ventana Medical Systems, Inc. (1) The undersigned hereby elects to convert the attached Warrant into such number of shares of Series D Preferred Stock of Ventana Medical Systems, Inc. as is determined pursuant to Section 3 of such Warrant, which conversion shall be effected pursuant to the terms of the attached Warrant. (2) Please issue a certificate or certificates representing said shares of Series D Preferred Stock in the name of the undersigned or in such other name as is specified below: ________________________________ (Name) ________________________________ (Address) (3) The undersigned represents that the aforesaid shares of Series D Preferred Stock are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. ____________________________________ ______________________________ (Date) (Signature) 10 ASSIGNMENT FORM (To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.) FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to _______________________________________________________________________________ (Please Print) whose address is ______________________________________________________________ (Please Print) Dated: ___________________________________________ Holder's Signature: _____________________________ Holder's Address: _______________________________ ___________________________________________ Guaranteed Signature: ________________________________________________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant. EX-10.14(C) 23 MBW & MARQUETTE WARRANTS 8/21/92 1 EXHIBIT 10.14(c) The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or the securities laws of any state and may not be sold, transferred, hypothecated or otherwise assigned except pursuant to a registration statement with respect to such securities which is effective under such act and under any applicable state securities laws unless an exemption from the registration requirements of such act and any applicable state securities laws is available. PREFERRED STOCK PURCHASE WARRANT Date of Issuance: August 21, 1992 Certificate No. 1 For value received, Ventana Medical Systems, Inc., a California corporation (the "Company"), hereby grants to Marquette Venture Partners, L.P., a Delaware limited partnership ("MVP" or the "Holder"), and its assigns, the right to purchase from the Company up to a number of shares of Preferred Stock equal to the quotient derived by dividing (i) $17,500 by (ii) the Exercise Price. This Warrant is one of two warrants (collectively, the "Warrants") issued on August 21, 1992 pursuant to a Bridge Loan and Warrant Agreement among the Company, MVP and MBW Venture Partners, L.P. (the "Bridge Loan Agreement"). Certain capitalized terms used herein are defined in Section 5 hereof. The amount and kind of securities purchasable pursuant to the rights granted hereunder and the purchase price for such securities are subject to adjustment pursuant to the provisions contained in this Warrant. This Warrant is subject to the following provisions: Section 1. Exercise of Warrant. 1A. Exercise Period. The Holder may exercise, in whole or in part, the purchase rights represented by this Warrant at any time and from time to time during the period beginning on August 21, 1992 and ending on (and including) August 21, 1997 (the "Exercise Period"). 1B. Exercise Procedure. (i) This Warrant shall be deemed to have been exercised when the Company has received all of the following items (the "Exercise Time"): (a) a completed Exercise Agreement, as described in paragraph 1C below, executed by the Person exercising all or part of the purchase rights represented by this Warrant (the "Purchaser"); (b) this Warrant; (c) if this Warrant is not registered in the name of the Purchaser, an Assignment or Assignments in the form set forth in Exhibit II hereto evidencing the 2 assignment of this Warrant to the Purchaser, in which case the Holder shall have complied with the. provisions set forth in Section 7 hereof; and (d) either (x) a check payable to the Company in an amount equal to the product of the Exercise Price (as such term is defined in Section 2 hereof) multiplied by the number of shares of Preferred Stock being purchased upon such exercise (the "Aggregate Exercise Price") or (y) the surrender to the Company of securities of the Company having a Market Price equal to the Aggregate Exercise Price of the Preferred Stock being purchased upon such exercise. (ii) Certificates for shares of Preferred Stock purchased upon exercise of this Warrant shall be delivered by the Company to the Purchaser within five business days after the date of the Exercise Time. Unless this Warrant has expired or all of the purchase rights represented hereby have been exercised, the Company shall prepare a new Warrant, substantially identical hereto, representing the rights formerly represented by this Warrant which have not expired or been exercised and shall, within such five-day period, deliver such new Warrant to the Person designated for delivery in the Exercise Agreement. (iii) The Preferred Stock issuable upon the exercise of this Warrant shall be deemed to have been issued to the Purchaser at the Exercise Time, and the Purchaser shall be deemed for all purposes to have become the record holder of such Preferred Stock at the Exercise Time. (iv) The issuance of certificates for shares of Preferred Stock upon exercise of this Warrant shall be made without charge to the Holder or the Purchaser for any issuance tax in respect thereof or other cost incurred by the Company in connection with such exercise and the related issuance of shares of Preferred Stock. Each share of Preferred Stock issuable upon exercise of this Warrant, shall upon payment of the Exercise Price therefor, be fully paid and nonassessable and free from all liens and charges with respect to the issuance thereof. (v) The Company shall not close its books against the transfer of this Warrant or of any share of Preferred Stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant. (vi) Notwithstanding any other provision hereof, if an exercise of any portion of this Warrant is to be made in connection with a public offering or sale of the Company, the exercise of any portion of this Warrant may, at the election of the Holder hereof, be conditioned upon the consummation of the public offering or sale of the Company in which case such exercise shall not be deemed to be effective until the consummation of such transaction. 1C. Exercise Agreement. Upon any exercise of this Warrant, the Exercise Agreement shall be substantially in the form set forth in Exhibit I hereto, except that if the shares of Preferred Stock are not to be issued in the name of the Person in whose name this Warrant is registered, the Exercise Agreement shall also state the name of the Person to whom the certificates for the shares of Preferred Stock are to be issued, and if the number of shares of Preferred Stock to be issued does not include all -2- 3 the shares of Preferred Stock purchasable hereunder, it shall also state the name of the Person to whom a new Warrant for the unexercised portion of the rights hereunder is to be delivered. Such Exercise Agreement shall be dated the actual date of . execution thereof. Section 2. Early Termination and Anti-Dilution. 2A. Merger, Sale of Assets, etc. If at any time the Company proposes to (i) merge with or into any other corporation, effect a reorganization or sell or convey all or substantially all of its assets to any other entity in a transaction in which the shareholders of the Company immediately before the transaction own immediately after the transaction less than a majority of the outstanding voting securities of the surviving entity (or its parent) or (ii) effect a registered public offering of its Common Stock which results in the automatic conversion of the Preferred Stock under the Company's Articles of Incorporation, then the Company shall give the holder of this Warrant thirty (30) days prior written notice of the proposed effective date of such transaction (and the consequences of such transaction under this Section 2A) and if the Warrant has not been exercised by the effective date of such transaction it shall terminate. 2B Reclassification, etc. If the Company at any time shall, by subdivision, combination or reclassification of securities or otherwise, change any of the securities to which. purchase rights under this Warrant exist into the same or a different number of securities of any class or classes, this Warrant shall thereafter be to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities which were subject to the purchase rights under this Warrant immediately prior to such subdivision, combination, reclassification or other change. If shares of the Company's Preferred Stock are subdivided or combined into a greater or smaller number of shares of Preferred Stock, the purchase price under this Warrant shall be proportionately reduced in case of subdivision of shares or proportionately increased in the case of combination of shares, in both cases by the ratio which the total number of shares of Preferred Stock to be outstanding immediately after such event bears to the total number of shares of Preferred Stock outstanding immediately prior to such event. 2C. Certain Events. If any event occurs of the type contemplated by the provisions of this Section 2 but not expressly provided -for by such provisions, then the Company's board of directors shall make an appropriate adjustment in the Exercise Price and the number of shares of Preferred Stock obtainable upon exercise of this Warrant so as to protect the rights of the Holders of the Warrants; provided that no such adjustment shall increase the Exercise Price or decrease the number of shares of Preferred Stock obtainable as otherwise determined pursuant to this Section 2. 2D. Notices. (i) Immediately upon any adjustment of the Exercise Price, the Company shall give written notice thereof to the Holder, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Company shall give written notice to the Holder at least 20 days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or -3- 4 distribution upon the Preferred Stock or Common Stock, (B) with respect to any pro rata subscription offer to holders of Preferred Stock or Common Stock or (C) for determining rights to vote with respect to any organic change, dissolution or liquidation. Section 3. Liquidating Dividends. If the Company declares or pays a dividend upon the Preferred Stock payable otherwise than in cash out of retained earnings or earned surplus (determined in accordance with generally accepted accounting principles, consistently applied) except for a stock dividend payable in shares of Common Stock (a "Liquidating Dividend"), then the Company shall pay to the Holder of this Warrant at the time of payment thereof the Liquidating Dividend which would have been paid to such Holder on the Preferred Stock had this Warrant been fully exercised immediately prior to the date on which a record is taken for such Liquidating Dividend, or, if no record is taken, the date as of which the record holders of Preferred Stock entitled to such dividends are to be determined. Prior to the- exercise of this Warrant, the holder hereof shall have no rights to receive payment in respect of a cash dividend paid from retained earnings or earned surplus. Section 4. Purchase Rights. If at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of Preferred Stock (the "Purchase Rights"), then the Holder of this Warrant shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of Preferred Stock acquirable upon complete exercise of this Warrant immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Preferred Stock are to be determined for the grant, issue or sale of such Purchase Rights. Section 5. Definitions. The following terms have meanings set forth below: "Common Stock" means, the Company's Common Stock, no par value, and any capital stock of any class of the Company hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Company; provided that if there is a change such that the securities issuable upon exercise of the Warrants are issued by an entity other than the Company or there is a change in the class of securities so issuable, then the term "Common Stock" shall mean one share of the security issuable upon exercise of the Warrants if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable in shares. "Common Stock Deemed Outstanding" means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Section 2 hereof. "Equity Financing" means a private placement of equity securities of the Company which raises at least $6.5 million in new equity capital (excluding any investment made by the Lenders pursuant to Section 7 of the Bridge Loan Agreement). -4- 5 "Holder" means MVP and each other person to whom this Warrant is properly assigned. "Initial Exercise Price" means, if this Warrant is exercisable to purchase Series C Preferred, $0.90 per share, and, if this Warrant is exercisable to purchase New Equity Securities, the lowest per share price at which the New Equity Securities are sold by the Company in the Equity Financing. "Market Price" means as to any security the average of the closing prices of such security's sales on all domestic securities exchanges on which such security may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M., New York time, on such day, or, if on any day such security is not quoted in the NASDAQ System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the day as of which "Market Price" is being determined and the 20 consecutive business days prior to such day; provided that if such security is listed on any domestic securities exchange the term "business days" as used in this sentence means business days on which such exchange is open for trading. If at any time such security is not listed on any domestic securities exchange or quoted in the NASDAQ System or the domestic over-the-counter market, the "Market Price" shall be the fair value thereof determined jointly by the Company and the Holders of Warrants representing a majority of the Common Stock purchasable upon exercise of all the Warrants then outstanding; provided that if such parties are unable to reach agreement within a reasonable period of time, such fair value shall be determined by an appraiser jointly selected by the Company and the Holders of Warrants representing a majority of the Common Stock purchasable upon exercise of all the Warrants then outstanding. The determination of such appraiser shall be final and binding on the Company and the Holders of the Warrants, and the fees and expenses of such appraiser shall be paid by the Company. "New Equity Securities" means the class or series of equity securities issued in an Equity Financing. "Person" means an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. "Preferred Stock" means the Company's Series C Preferred Stock or, if the Company consummates an Equity Financing on or prior to September 30, 1992, the New Equity Securities. Section 6. No Voting Rights, Limitations of Liability. This Warrant shall not entitle the Holder hereof to any voting rights or other rights as a stockholder of the Company. No provision hereof, in the absence of affirmative action by the Holder to purchase Common Stock, and no enumeration herein of the rights or privileges of the Holder shall give rise to any liability of such Holder for the Exercise Price of Common Stock acquirable by exercise hereof or as a stockholder of the Company. -5- 6 Section 7. Warrant Transferable. This Warrant and all rights hereunder are transferable, in whole or in part, without charge to the Holder, upon surrender of this Warrant with a properly executed Assignment (in the form of Exhibit II hereto) at the principal office of the Company. Section 8. Warrant Exchangeable for Different Denominations. This Warrant is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company, for new Warrants of like tenor representing in the aggregate the purchase rights hereunder, and each of such new Warrants shall represent such portion of such rights as is designated by the Holder at the time of such surrender. The date the Company initially issues this Warrant shall be deemed to be the "Date of Issuance" hereof regardless of the number of times new certificates representing the unexpired and unexercised rights formerly represented by this Warrant shall be issued. All Warrants representing portions of the rights hereunder are referred to herein as the "Warrants." Section 9. Replacement. Upon receipt of evidence reasonably satisfactory to the Company (an affidavit of the Holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing this Warrant, and in the case of any such loss, theft, destruction, upon receipt of indemnity reasonably satisfactory to the Company (provided that if the Holder is a financial institution or other institutional investor its own agreement shall be satisfactory), or, in the case of any such mutilation upon surrender of such certificate, the Company shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the same rights represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. Section 10. Notices. Except as otherwise expressly provided herein, all notices referred to in this Warrant shall be in writing (including telexed, telecopied or telegraphic communication) and mailed, telexed, telecopied, telegraphed or delivered (i) to the Company, at its principal executive offices and (ii) to the Holder of, this Warrant, at such Holder's address as it appears in the records of the Company (unless otherwise indicated by any such Holder). All such notices and other communications shall, except as otherwise expressly herein provided, be effective upon delivery if delivered by hand; when deposited in the mail, postage prepaid; in the case of a telex or telecopy, when received; or in the case of telegraph,. when delivered to the telegraph company, charges prepaid. Section 11. Amendment and Waiver. Except as otherwise provided herein, the provisions of the Warrants may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the Holders of the Warrants. Section 12. Descriptive Headings; Governing Law. The descriptive headings of the several Sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. The construction, validity and interpretation of this Warrant shall be governed by the internal law, and not the conflicts law, of California. * * * * -6- 7 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and attested by its duly authorized officers under its corporate seal and to be dated the Date of Issuance hereof. VENTANA MEDICAL SYSTEMS, INC. By: /s/ VICTORIA BANNISTER __________________________ Its: President __________________________ Attest: ______________________________ Secretary -7- 8 EXHIBIT I EXERCISE AGREEMENT To: Dated: The undersigned, pursuant to the provisions set forth in the attached Warrant (Certificate No. W-1), hereby agrees to subscribe for the purchase of __________ shares of Common Stock covered by such Warrant and makes payment herewith in full therefor at the price per share provided by such Warrant. Signature________________________________ Address__________________________________ __________________________________ __________________________________ 9 EXHIBIT II ASSIGNMENT FOR VALUE RECEIVED, ______________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (Certificate No. W-1) with respect to the number of shares of Common Stock covered thereby set forth below, unto: NAME OF NO. OF ASSIGNEE ADDRESS SHARES - ------------------------- ------------------------- -------------------------- Dated: Signature__________________________ __________________________ Witness __________________________ 10 The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or the securities laws of any state and may not be sold, transferred, hypothecated or otherwise assigned except pursuant to a registration statement with respect to such securities which is effective under such act and under any applicable state securities laws unless an exemption from the registration requirements of such act and any applicable state securities laws is available. PREFERRED STOCK PURCHASE WARRANT Date of Issuance: August 21, 1992 Certificate No. 2 For value received, Ventana Medical Systems, Inc., a California corporation (the "Company"), hereby grants to MBW Venture Partners, L.P., a Delaware limited partnership ("MBW" or the "Holder"), and its assigns, the right to purchase from the Company up to a number of shares of Preferred Stock equal to the quotient derived by dividing (i) $17,500 by (ii) the Exercise Price. This Warrant is one of two warrants (collectively, the "Warrants") issued on August 21, 1992 pursuant to a Bridge Loan and Warrant Agreement among the Company, MBW and Marquette Venture Partners, L.P. (the "Bridge Loan Agreement"). Certain capitalized terms used herein are defined in Section 5 hereof. The amount and kind of securities purchasable pursuant to the rights granted, hereunder and the purchase price for such securities are subject to adjustment pursuant to the provisions contained in this Warrant. This Warrant is subject to the following provisions: Section 1. Exercise of Warrant. 1A. Exercise Period. The Holder may exercise, in whole or in part, the purchase rights represented by this Warrant at any time and from time to time during the period beginning on August 21, 1992 and ending on (and including) August 21, 1997 (the "Exercise Period"). 1B. Exercise Procedure. (i) This Warrant shall be deemed to have been exercised when the Company has received all of the following items (the "Exercise Time"): (a) a completed Exercise Agreement, as described in paragraph 1C below, executed by the Person exercising all or part of the purchase rights represented by this Warrant (the "Purchaser"); (b) this Warrant; 11 (c) if this Warrant is not registered in the name of the Purchaser, an Assignment or Assignments in the form set forth in Exhibit II hereto evidencing the assignment of this Warrant to the Purchaser, in which case the Holder shall have complied with the provisions set forth in Section 7 hereof; and (d) either (x) a check payable to the Company in an amount equal to the product of the Exercise Price (as such term is defined in Section 2 hereof) multiplied by the number of shares of Preferred Stock being purchased upon such exercise (the "Aggregate Exercise Price") or (y) the surrender to the Company of securities of the Company having a Market Price equal to the Aggregate Exercise Price of the Preferred Stock being purchased upon such exercise. (ii) Certificates for shares of Preferred Stock purchased upon exercise of this Warrant shall be delivered by the Company to the Purchaser within five business days after the date of the Exercise Time. Unless this Warrant has expired or all of the purchase rights represented hereby have been exercised, the Company shall prepare a new Warrant, substantially identical hereto, representing the rights formerly represented by this Warrant which have not expired or been exercised and shall, within such five-day period, deliver such new Warrant to the Person designated for delivery in the Exercise Agreement. (iii) The Preferred Stock issuable upon the exercise of this Warrant shall be deemed to have been issued to the Purchaser at the Exercise Time, and the Purchaser shall be deemed for all purposes to have become the record holder of such Preferred Stock at the Exercise Time. (iv) The issuance of certificates for shares of Preferred Stock upon exercise of this Warrant shall be made without charge to the Holder or the Purchaser for any issuance tax in respect thereof or other cost incurred by the Company in connection with such exercise and the related issuance of shares of Preferred Stock. Each share of Preferred Stock issuable upon exercise of this Warrant shall, upon payment of the Exercise Price therefor, be fully paid and nonassessable and free from all liens and charges with respect to the issuance thereof. (v) The Company shall not close its books against the transfer of this Warrant or of any share of Preferred Stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant. (vi) Notwithstanding any other provision hereof, if an exercise of any portion of this Warrant is to be made in connection with a public offering or sale of the Company, the exercise of any portion of this Warrant may, at the election of the Holder hereof, be conditioned upon the consummation of the public offering or sale of the Company in which case such exercise shall not be deemed to be effective until the consummation of such transaction. -2- 12 1C. Exercise Agreement. Upon any exercise of this Warrant, the Exercise Agreement shall be substantially in the form set forth in Exhibit I hereto, except that if the shares of Preferred Stock are not to be issued in the name of the Person in whose name this Warrant is registered, the Exercise Agreement shall also state the name of the Person to whom the certificates for the shares of Preferred Stock are to be issued, and if the number of shares of Preferred Stock to be issued does not include all the shares of Preferred Stock purchasable hereunder, it shall also state the name of the Person to whom a new Warrant for the unexercised portion of the rights hereunder is to be delivered. Such Exercise Agreement shall be dated the actual date of execution thereof. Section 2. Early Termination and Anti-Dilution. 2A. Merger, Sale of Assets, etc. If at any time the Company proposes to (i) merge with or into any other corporation, effect a reorganization or sell or convey all or substantially all of its assets to any other entity in a transaction in which the shareholders of the Company immediately before the transaction own immediately after the transaction less than a majority of the outstanding voting securities of the surviving entity (or its parent) or (ii) effect a registered public offering of its Common Stock which results in the automatic conversion of the Preferred Stock under the Company's Articles of Incorporation, then the Company shall give the holder of this Warrant thirty (30) days prior written notice of the proposed effective date of such transaction (and the consequences of such transaction under this Section 2A) and if the Warrant has not been exercised by the effective date of such transaction it shall terminate. 2B. Reclassification, etc. If the Company at any time shall, by subdivision, combination or reclassification of securities or otherwise, change any of the securities to which purchase rights under this Warrant exist into the same or a different number of securities of any class or classes, this Warrant shall thereafter be to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities which were subject to the purchase rights under this Warrant immediately prior to such subdivision, combination, reclassification or other change. If shares of the Company's Preferred Stock are subdivided or combined into a greater or smaller number of shares of Preferred Stock, the purchase price under this Warrant shall be proportionately reduced in case of subdivision of shares or proportionately increased in the case of combination of shares, in both cases by the ratio which the total number of shares of Preferred Stock to be outstanding immediately after such event bears to the total number of shares of Preferred Stock outstanding immediately prior to such event. 2C. Certain Events. If any event occurs of the type contemplated by the provisions of this Section 2 but not expressly provided for by such provisions, then the Company's board of directors shall make an appropriate adjustment in the Exercise Price and the number of shares of Preferred Stock obtainable upon exercise of this Warrant so as to protect the rights of the Holders of the Warrants; provided that no such adjustment shall increase the Exercise Price or decrease the number of shares of Preferred Stock obtainable as otherwise determined pursuant to this Section 2. -3- 13 2D. Notices. (i) Immediately upon any adjustment of the Exercise Price, the Company shall give written notice thereof to the Holder, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Company shall give written notice to the Holder at least 20 days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Preferred Stock or Common Stock, (B) with respect to any pro rata subscription offer to holders of Preferred Stock or Common Stock or (C) for determining rights to vote with respect to any organic change, dissolution or liquidation. Section 3. Liquidating Dividends. If the Company declares or pays a dividend upon the Preferred Stock payable otherwise than in cash out of retained earnings or earned surplus (determined in accordance with generally accepted accounting principles, consistently applied) except for a stock dividend payable in shares of Common Stock (a "Liquidating Dividend"), then the Company shall pay to the Holder of this Warrant at the time of payment thereof the Liquidating Dividend which would have been paid to such Holder on the Preferred Stock had this Warrant been fully exercised immediately prior to the date on which a record is taken for such Liquidating Dividend, or, if no record is taken, the date as of which the record holders of Preferred Stock entitled to such dividends are to be determined. Prior to the exercise of this Warrant, the holder hereof shall have no rights to receive payment in respect of a cash dividend paid from retained earnings or earned surplus. Section 4. Purchase Rights. If at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of Preferred Stock (the "Purchase Rights"), then the Holder of this Warrant shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of Preferred Stock acquirable upon complete exercise of this Warrant immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Preferred Stock are to be determined for the grant, issue or sale of such Purchase Rights. Section 5. Definitions. The following terms have meanings set forth below: "Common Stock" means, the Company's Common Stock, no par value, and any capital stock of any class of the Company hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Company; provided that if there is a change such that the securities issuable upon exercise of the Warrants are issued by an entity other than the Company or there is a change in the class of securities so issuable, then the term "Common Stock" shall mean one share of the security issuable upon exercise of the Warrants if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable in shares. -4- 14 "Common Stock Deemed Outstanding" means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Section 2 hereof. "Equity Financing" means a private placement of equity securities of the Company which raises at least $6.5 million in new equity capital (excluding any investment made by the Lenders pursuant to Section 7 of the Bridge Loan Agreement). "Holder" means MVP and each other person to whom this Warrant is properly assigned. "Initial Exercise Price" means, if this Warrant is exercisable to purchase Series C Preferred, $0.90 per share, and, if this Warrant is exercisable to purchase New Equity Securities, the lowest per share price at which the New Equity Securities are sold by the Company in the Equity Financing. "Market Price" means as to any security the average of the closing prices of such security's sales on all domestic securities exchanges on which such security may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M., New York time, on such day, or, if on any day such security is not quoted in the NASDAQ System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the day as of which "Market Price" is being determined and the 20 consecutive business days prior to such day; provided that if such security is listed on any domestic securities exchange the term "business days" as used in this sentence means business days on which such exchange is open for trading. If at any time such security is not listed on any domestic securities exchange or quoted in the NASDAQ System or the domestic over-the-counter market, the "Market Price" shall be the fair value thereof determined jointly by the Company and the Holders of Warrants representing a majority of the Common Stock purchasable upon exercise of all the Warrants then outstanding; provided that if such parties are unable to reach agreement within a reasonable period of time, such fair value shall be determined by an appraiser jointly selected by the Company and the Holders of Warrants representing a majority of the Common Stock purchasable upon exercise of all the Warrants then outstanding. The determination of such appraiser shall be final and binding on the Company and the Holders of the Warrants, and the fees and expenses of such appraiser shall be paid by the Company. "New Equity Securities" means the class or series of equity securities issued in an Equity Financing. "Person" means an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. -5- 15 "Preferred Stock" means the Company's Series C Preferred Stock or, if the Company consummates an Equity Financing on or prior to September 30, 1992, the New Equity Securities. Section 6. No Voting Rights; Limitations of Liability. This Warrant shall not entitle the Holder hereof to any voting rights or other rights as a stockholder of the Company. No provision hereof, in the absence of affirmative action by the Holder to purchase Common Stock, and no enumeration herein of the rights or privileges of the Holder shall give rise to any liability of such Holder for the Exercise Price of Common Stock acquirable by exercise hereof or as a stockholder of the Company. Section 7. Warrant Transferable. This Warrant and all rights hereunder are transferable, in whole or in part, without charge to the Holder, upon surrender of this Warrant with a properly executed Assignment (in the form of Exhibit II hereto) at the principal office of the Company. Section 8. Warrant Exchangeable for Different Denominations. This Warrant is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company, for new Warrants of like tenor representing in the aggregate the purchase rights hereunder, and each of such new Warrants shall represent such portion of such rights as is designated by the Holder at the time of such surrender. The date the Company initially issues this Warrant shall be deemed to be the "Date of Issuance" hereof regardless of the number of times new certificates representing the unexpired and unexercised rights formerly represented by this Warrant shall be issued. All Warrants representing portions of the rights hereunder are referred to herein as the "Warrants." Section 9. Replacement. Upon receipt of evidence reasonably satisfactory to the Company (an affidavit of the Holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing this Warrant, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Company (provided that if the Holder is a financial institution or other institutional investor its own agreement shall be satisfactory), or, in the case of any such mutilation upon surrender of such certificate, the Company shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the same rights represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. Section 10. Notices. Except as otherwise expressly provided herein, all notices referred to in this Warrant shall be in writing (including telexed, telecopied or telegraphic communication) and mailed, telexed, telecopied, telegraphed or delivered (i) to the Company, at its principal executive offices and (ii) to the Holder of this Warrant, at such Holder's address as it appears in the records of the Company (unless otherwise indicated by any such Holder). All such notices and other communications shall, except as otherwise expressly herein provided, be effective upon delivery if delivered by hand; when deposited in the mail, postage prepaid; in the case of a telex or telecopy, when received; or in the case of telegraph, when delivered to the telegraph company, charges prepaid. Section 11. Amendment and Waiver. Except as otherwise provided herein, the provisions of the Warrants may be amended and the Company may take any action herein prohibited, or omit to -6- 16 perform any act herein required to be performed by it, only if the Company has obtained the written consent of the Holders of the Warrants. Section 12. Descriptive Headings; Governing Law. The descriptive headings of the several Sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. The construction, validity and interpretation of this Warrant shall be governed by the internal law, and not the conflicts law, of California. * * * * -7- 17 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and attested by its duly authorized officers under its corporate seal and to be dated the Date of Issuance hereof. VENTANA MEDICAL SYSTEMS, INC. By:_____________________________________ Its:____________________________________ Attest: ____________________________________ Secretary -8- 18 EXHIBIT I EXERCISE AGREEMENT To: Dated: The undersigned, pursuant to the provisions set forth in the attached Warrant (Certificate No. W-1), hereby agrees to subscribe for the purchase of __________ shares of Common Stock covered by such Warrant and makes payment herewith in full therefor at the price per share provided by such Warrant. Signature_______________________________ Address_________________________________ _________________________________ _________________________________ 19 EXHIBIT II ASSIGNMENT FOR VALUE RECEIVED, ______________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (Certificate No. W-1) with respect to the number of shares of Common Stock covered thereby set forth below, unto:
NAME OF NO. OF ASSIGNEE ADDRESS SHARES - --------------------------- ---------------------------------- ----------------
Dated: Signature_______________________________ _______________________________ Witness _______________________________ EX-10.14(D) 24 SCHULER WARRANT 9/30/92 1 EXHIBIT 10.14(d) The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or the securities laws of any state and may not be sold, transferred, hypothecated or otherwise assigned except pursuant to a registration statement with respect to such securities which is effective under such act and under any applicable state securities laws unless an exemption from the registration requirements of such act and any applicable state securities laws is available. PREFERRED STOCK PURCHASE WARRANT Date of Issuance: September 30, 1992 Certificate No. _____ For value received, Ventana Medical Systems, Inc., a California corporation (the "Company"), hereby grants to _________ (the "Holder"), and its assigns, the right to purchase from the Company up to ______ shares of Series D Preferred Stock at $2.15 per share (the "Exercise Price"). Certain capitalized terms used herein are defined in Section 5 hereof. The amount and kind of securities purchasable pursuant to the rights granted hereunder and the purchase price for such securities are subject to adjustment pursuant to the provisions contained in this Warrant. This Warrant is subject to the following provisions: Section 1. Exercise of Warrant. 1.1 Exercise Period. The Holder may exercise, in whole or in part, the purchase rights represented by this Warrant at any time and from time to time during the period beginning on September 30, 1992 and ending on (and including) September 30, 1997 (the "Exercise Period"). 1.2 Exercise Procedure. (i) This Warrant shall be deemed to have been exercised when the Company has received all of the following items (the "Exercise Time"): (a) a completed Exercise Agreement, as described in Section 1.3 below, executed by the Person exercising all or part of the purchase rights represented by this Warrant (the "Purchaser"). (b) this Warrant; (c) if this Warrant is not registered in the name of the Purchaser, an Assignment or Assignments in the form set forth in Exhibit II hereto evidencing the assignment of this Warrant to the Purchaser, in which case the Holder 2 shall have complied with the provisions set forth in Section 7 hereof; and (d) either (x) a check payable to the Company in an amount equal to the product of the Exercise Price multiplied by the number of shares of Preferred Stock being purchased upon such exercise (the "Aggregate Exercise Price") or (y) the surrender to the Company of securities of the Company having a Market Price equal to the Aggregate Exercise Price of the Preferred Stock being purchased upon such exercise. (ii) Certificates for shares of Preferred Stock purchased upon exercise of this Warrant shall be delivered by the Company to the Purchaser within five business days after the date of the Exercise Time. Unless this Warrant has expired or all of the purchase rights represented hereby have been exercised, the Company shall prepare a new Warrant, substantially identical hereto, representing the rights formerly represented by this Warrant which have not expired or been exercised and shall, within such five-day period, deliver such new Warrant to the Person designated for delivery in the Exercise Agreement. (iii) The Preferred Stock issuable upon the exercise of this Warrant shall be deemed to have been issued to the Purchaser at the Exercise Time, and the Purchaser shall be deemed for all purposes to have become the record holder of such Preferred Stock at the Exercise Time. (iv) The issuance of certificates for shares of Preferred Stock upon exercise of this Warrant shall be made without charge to the Holder or the Purchaser for any issuance tax in respect thereof or other cost incurred by the Company in connection with such exercise and the related issuance of shares of Preferred Stock. Each share of Preferred Stock issuable upon exercise of this Warrant shall, upon payment of the Exercise Price therefor, be fully paid and nonassessable and free from all liens and charges with respect to the issuance thereof. (v) The Company shall not close its books against the transfer of this Warrant or of any share of Preferred Stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant. (vi) Notwithstanding any other provision hereof, if an exercise of any portion of this Warrant is to be made in connection with a public offering or sale of the Company, the exercise of any portion of this Warrant may, at the election of the Holder hereof, be conditioned upon the consummation of the public offering or sale of the Company in which case such exercise shall not be deemed to be effective until the consummation of such transaction. -2- 3 1.3 Exercise Agreement. Upon any exercise of this Warrant, the Exercise Agreement shall be substantially in the form set forth in Exhibit I hereto, except that if the shares of Preferred Stock are not to be issued in the name of the Person in whose name this Warrant is registered, the Exercise Agreement shall also state the name of the Person to whom the certificates for the shares of Preferred Stock are to be issued, and if the number of shares of Preferred Stock to be issued does not include all the shares of Preferred Stock purchasable hereunder, it shall also state the name of the Person to whom a new Warrant for the unexercised portion of the rights hereunder is to be delivered. Such Exercise Agreement shall be dated the actual date of execution thereof. Section 2. Early Termination and Anti-Dilution. 2.1 Merger, Sale of Assets, etc. If at any time the Company proposes to (i) merge with or into any other corporation, effect a reorganization or sell or convey all or substantially all of its assets to any other entity in a transaction in which the shareholders of the Company immediately before the transaction own immediately after the transaction less than a majority of the outstanding voting securities of the surviving entity (or its parent) or (ii) effect a registered public offering of its Common Stock which results in the automatic conversion of the Preferred Stock under the Company's Articles of Incorporation, then the Company shall give the holder of this Warrant thirty (30) days prior written notice of the proposed effective date of such transaction (and the consequences of such transaction under this Section 2.1) and if the Warrant has not been exercised by the effective date of such transaction it shall terminate. 2.2 Reclassification, etc. If the Company at any time shall, by subdivision, combination or reclassification of securities or otherwise, change any of the securities to which purchase rights under this Warrant exist into the same or a different number of securities of any class or classes, this Warrant shall thereafter be to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities which were subject to the purchase rights under this Warrant immediately prior to such subdivision, combination, reclassification or other change. If shares of the Company' Preferred Stock are subdivided or combined into a greater or smaller number of shares of Preferred Stock, the purchase price under this Warrant shall be proportionately reduced in case of subdivision of shares or proportionately increased in the case of combination of shares, in both cases by the ratio which the total number of shares of Preferred Stock to be outstanding immediately the total number of shares of Preferred Stock outstanding immediately prior to such event. -3- 4 2.3 Certain Events. If any event occurs of the type contemplated by the provisions of this Section 2 but not expressly provided for by such provisions, then the Company's board of directors shall make an appropriate adjustment in the Exercise Price and the number of shares of Preferred Stock obtainable upon exercise of this Warrant so as to protect the rights of the Holders of the Warrants; provided that no such adjustment shall increase the Exercise Price or decrease the number of shards of Preferred Stock obtainable as otherwise determined pursuant to this Section 2. 2.4 Notices. (i) Immediately upon any adjustment of the Exercise Price, the Company shall give written notice thereof to the Holder, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Company shall give written notice to the Holder at least 20 days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Preferred Stock or Common Stock, (B) with respect to any pro rata subscription offer to holders of Preferred Stock or Common Stock or (C) for determining rights to vote with respect to any organic change, dissolution or liquidation. Section 3. Liquidating Dividends. If the Company declares or pays a dividend upon the Preferred Stock payable otherwise than in cash out of retained earnings or earned surplus (determined in accordance with generally accepted accounting principles, consistently applied) except for a stock dividend payable in shares of Common Stock (a "Liquidating Dividend"), then the Company shall pay to the Holder of this Warrant at the time of payment thereof the Liquidating Dividend which would have been paid to such Holder on the Preferred Stock had this Warrant been fully exercised immediately prior to the date on which a record is taken for such Liquidating Dividend, or, if no record is taken, the date as of which the record holders of Preferred Stock entitled to such dividends are to be determined. Prior to the exercise of this Warrant, the holder hereof shall have no rights to receive payment in respect of a cash dividend paid from retained earnings or earned surplus. Section 4. Purchase Rights. If at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of Preferred Stock (the "Purchase Rights"), then the Holder of this Warrant shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of Preferred Stock acquirable upon complete exercise of this Warrant immediately -4- 5 before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Preferred Stock are to be determined for the grant, issue or sale of such Purchase Rights. Section 5. Definitions. The following terms have meanings set forth below: "Common Stock" means, the Company's Common Stock, no par value, and any capital stock of any class of the Company hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Company; provided that if there is a change such that the securities issuable upon exercise of the Warrants are issued by an entity other than the Company or there is a change in the class of securities so issuable, then the term "Common Stock " shall mean one share of the security issuable upon exercise of the Warrants if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable in shares. "Holder" means Holder and each other person to whom this Warrant is properly assigned. "Market Price" means as to any security the average of the closing prices of such security's sales on all domestic securities exchanges on which such security may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M., New York time, on such day, or, if on any day such security is not quoted in the NASDAQ System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged Price" is being determined and the 20 consecutive business days prior to such day; provided that if such security is listed on any domestic securities exchange the term "business days" as used in this sentence means business days on which such exchange is open for trading. If at any time such security is not listed on any domestic securities exchange or quoted in the NASDAQ System or the domestic over-the-counter market, the "Market Price" shall be the fair value thereof determined jointly by the Company and the Holders of Warrants representing a majority of the Common Stock purchasable upon exercise of all the Warrants then outstanding; provided that if such parties are unable to reach agreement within a reasonable period of time, such fair value shall be determined by an appraiser jointly selected by the Company and the Holders of -5- 6 Warrants representing a majority of the Common Stock purchasable upon exercise of all the Warrants then outstanding. The determination of such appraiser shall be final and binding on the Company and the Holders of the Warrants, and the fees and expenses of such appraiser shall be paid by the Company. "Persons" means an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. "Preferred Stock" means the Company's Series D Preferred Stock. Section 6. No Voting Rights; Limitations of Liability. This Warrant shall not entitle the Holder hereof to any voting rights or other rights as a stockholder of the Company. No provision hereof, in the absence of affirmative action by the Holder to purchase Preferred Stock, and no enumeration herein of the rights or privileges of the Holder shall give rise to any liability of such Holder for the Exercise Price of Preferred Stock acquirable by exercise hereof or as a stockholder of the Company. Section 7. Warrant Transferable. This Warrant and all rights hereunder are transferable, in whole or in part, without charge to the Holder, upon surrender of this Warrant with a properly executed Assignment (in the form of Exhibit II hereto) at the principal office of the Company. Section 8. Warrant Exchangeable for Different Denominations. This Warrant is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company, for new Warrants of like tenor representing in the aggregate the purchase rights hereunder, and each of such new Warrants shall represent such portion of such rights as is designated by the Holder at the time of such surrender. The date the Company initially issues this Warrant shall be deemed to be the "Date of Issuance" hereof regardless of the number of times new certificates representing the unexpired and unexercised rights formerly represented by this Warrant shall be issued. All Warrants representing portions of the rights hereunder are referred to herein as the "Warrants." Section 9. Replacement. Upon receipt of evidence reasonably satisfactory to the Company (an affidavit of the Holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing this Warrant, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Company (provided that if the Holder is a financial institution or other institutional investor its own agreement shall be satisfactory), or, in the case of any such mutilation upon surrender of such certificate, the Company shall (at its expense) execute and deliver in lieu of such -6- 7 certificate a new certificate of like kind representing the same rights represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. Section 10. Notices. Except as otherwise expressly provided herein, all notices referred to in this Warrant shall be in writing (including telexed, telecopied or telegraphic communication) and mailed, telexed, telecopied, telegraphed or delivered (i) to the Company, at its principal executive offices and (ii) to the Holder of this Warrant, at such Holder's address as it appears in the records of the Company (unless otherwise indicated by any such Holder). All such notices and other communications shall, except as otherwise expressly herein provided, be effective upon delivery if delivered by hand; when deposited in the mail, postage prepaid; in the case of a telex or telecopy, when received; or in the case of telegraph, when delivered to the telegraph company, charges prepaid. Section 11. Amendment and Waiver. Except as otherwise provided herein, the provisions of the Warrants may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the Holders of the Warrants. Section 12. Descriptive Headings; Governing Law. The descriptive headings of the several Sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. The construction, validity and interpretation of this Warrant shall be governed by the internal law, and not the conflicts law, of California. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and attested by its duly authorized officers under its corporate seal and to be dated the Date of Issuance hereof. VENTANA MEDICAL SYSTEMS, INC. By: __________________________ Its: __________________________ Attest: _______________________ Secretary -7- 8 EXHIBIT I EXERCISE AGREEMENT To: Dated: The undersigned, pursuant to the provisions set forth in the attached Warrant (Certificate No. _____) hereby agrees to subscribe for the purchase of _________ shares of Preferred Stock covered by such Warrant and makes payment herewith in full thereof or at the price per share provided by such Warrant. Signature ____________________ Address ______________________ ______________________ ______________________ 9 EXHIBIT II ASSIGNMENT FOR VALUE RECEIVED, _________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (Certificate No. ) with respect to the number of shares of Preferred Stock covered thereby set forth below, unto: Names of Assignee Address No. of Shares - ----------------- ------- ------------- Dated: Signature --------------------- --------------------- Witness --------------------- EX-10.15(A) 25 FORM OF CONVERTIBLE UNSECURED PROMISSORY NOTE 1 Exhibit 10.15(a) THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. VENTANA MEDICAL SYSTEMS, INC. CONVERTIBLE UNSECURED PROMISSORY NOTE $_______________ Tucson, Arizona February 26, 1996 FOR VALUE RECEIVED, VENTANA MEDICAL SYSTEMS, INC., a Delaware corporation (the "Company"), hereby absolutely and unconditionally promises to pay to _____________________________ (the "Holder"), or order, the principal amount of __________________, together with simple interest on such principal amount at the rate of 7% per annum. This Note is one of several Notes issued pursuant to Note Exchange Agreements entered into in connection with transactions contemplated by an Agreement and Plan of Reorganization dated January 19, 1996 (the "Reorganization Agreement") by and among the Company, Ventana Acquisition Corporation and BioTek Solutions, Inc. All rights under this Note rank equally with all rights under all other Notes, and no holder of this Note shall have rights senior to the rights of the holders of all or any other Notes. All capitalized terms used herein shall have the meanings designated for them in the Reorganization Agreement, unless the context requires otherwise. 1. Repayments and Prepayments. (a) All principal under this Note shall be due and payable on February 26, 1998. All accrued interest under this Note shall be due and payable on the following dates: (i) February 26, 1997 (the first interest payment is referred to herein as the "First Interest Payment" and the date of payment of the First Interest Payment is referred to herein as the "First Interest Payment Date"); (ii) May 26 1997; (iii) August 26, 1997; (iv) November 26, 1997; and (v) February 26, 1998. Any payment of this Note shall be made only at the same time as the Company pays all other Notes issued pursuant to the Reorganization Agreement, with such payments to be made pro-rata in proportion to the then outstanding principal amounts of such Notes. 2 (b) The Company may prepay this Note at any time, either in whole or in part, without premium or penalty and without the prior consent of the Holder. Any prepayment of this Note shall be made only at the same time as the Company prepays all other Notes issued pursuant to the Reorganization Agreement, with such prepayments to be made pro-rata in proportion to the then outstanding principal amounts of such Notes. (c) The Company shall prepay this Note, and all accrued interest thereon, within thirty (30) days following the closing of an initial public offering of the Company's securities provided the net proceeds from such offering to the Company are in excess of $20 million. (d) Notwithstanding anything to the contrary set forth herein, if the Company prepays this Note in full prior to the First Interest Payment Date, or if this Note is converted into shares of Common Stock by the Holder pursuant to Section 3 below, then no interest shall be due and payable hereunder. (e) Notwithstanding anything to the contrary set forth herein, the Company may elect to pay the First Interest Payment in shares of the Company's Common Stock. If the Company makes such an election, then the issuance price of the shares shall be $5.00 per share (subject to proportionate adjustment in the event of a stock split or combination of Ventana Common Stock). (f) All payments received under this Note shall be applied first to accrued interest on the date of payment and then to the outstanding principal balance of this Note. (g) Should any interest not be paid within 15 days of the due date therefor under this Note, such unpaid interest shall, at the option of the holder of this Note, become a part of the principal hereof and thereafter bear like interest as the principal of this Note. 2. Subordination. (a) "Senior Indebtedness" means the principal of and premium, if any, and interest on indebtedness of the Company for money borrowed from commercial banks, equipment lessors or other financial institutions under a secured or unsecured line of credit, term loan or equipment lease. (b) The Company agrees and the holder of each Note, by acceptance thereof, agrees, expressly for the benefit of the present and future holders of Senior Indebtedness, that, except as otherwise provided herein, upon (i) an event of default under any Senior Indebtedness, or (ii) any dissolution, winding up, or liquidation of the Company, whether or not in bankruptcy, insolvency or receivership proceedings, the Company shall not pay, and the holder of such Note shall not be entitled to receive, any amount in respect of the principal and interest of such Note unless and until the Senior Indebtedness shall have been paid or otherwise discharged. Upon (1) an event of default under any Senior Indebtedness, or (2) any dissolution, winding up or liquidation of the Company, any payment or distribution of assets of the Company, which the Holder would be entitled to receive but for the provisions hereof, shall be paid by the liquidating trustee or agent or other person making such -2- 3 payment or distribution directly to the holders of Senior Indebtedness ratably according to the aggregate amounts remaining unpaid on Senior Indebtedness after giving effect to any concurrent payment or distribution to the holders of Senior Indebtedness. Subject to the payment in full of the Senior Indebtedness and until this Note is paid in full, the Holder shall be subrogated to the rights of the holders of the Senior Indebtedness (to the extent of payments or distributions previously made to the holders of Senior Indebtedness pursuant to this Section 2(b)) to receive payments or distributions of assets of the Company applicable to the Senior Indebtedness. (c) This Section 2 is not intended to impair, as between the Company, its creditors (other than the holders of Senior Indebtedness) and the Holder, the unconditional and absolute obligation of the Company to pay the principal of and interest on the Note or affect the relative rights of the Holder and the other creditors of the Company, other than the holders of Senior Indebtedness. Nothing in this Note shall prevent the holder of this Note from exercising all remedies otherwise permitted by applicable law upon default under the Note, subject to the rights, if any, of the holders of Senior Indebtedness in respect to cash, property or securities of the Company received upon the exercise of any such remedy. 3. Conversion. (a) On or before March 27, 1996 (the "Conversion Date"), the Holder hereof shall complete the conversion election attached hereto as Exhibit A (the "Conversion Election") and shall deliver the same to the Chief Financial Officer of the Company. Pursuant to the Conversion Election, the Holder shall have the right to convert all or any portion of the principal amount of this Note into shares of the Company's Common Stock at a conversion price of $5.00 per share (subject to proportionate adjustment in the event of a stock split or combination of Ventana Common Stock). If the Holder elects to convert all or any portion of the principal amount of this Note, then the Holder shall tender this Note to the Company with the Conversion Election. If the Holder fails to deliver the Conversion Election to the Company on or prior to the Conversion Date, then the Holder shall be deemed to have elected to convert one-half (1/2) of the principal amount of this Note into shares of the Company's Common Stock pursuant hereto. The foregoing provisions shall not apply to any Notes included in the Escrow Fund established pursuant to the Reorganization Agreement. (b) The Company shall not be obligated to issue a certificate evidencing shares of the Company's Common Stock issuable upon conversion of this Note unless this Note is either delivered to the Company, or the Holder notifies the Company that this Note has been lost, stolen or destroyed and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with this Note. The Company shall, as soon as practicable after such delivery, or such agreement and indemnification, issue and deliver at such office to such holder of this Note, a certificate or certificates for the Common Stock to which the holder shall be entitled and a Note in the principal amount equal to the principal amount hereunder that the Holder has not elected to convert into Common Stock. -3- 4 4. Events of Default; Acceleration. The principal amount of this Note is subject to prepayment in whole or in part upon the occurrence and during the continuance of any of the following events (each, an "Event of Default"): (i) failure to pay any amount owing by the Company hereunder when due and payable, (ii) failure of the Company to pay any material amount due under or in respect of any material promissory note, lease or other agreement or instrument relating to any indebtedness owing by the Company beyond any grace period provided therein (for purposes hereof, a material amount shall mean an amount in excess of $250,000) or (iii) the initiation of any bankruptcy, insolvency, moratorium, receivership or reorganization by or against the Company, or a general assignment of assets by the Company for the benefit of creditors. Upon the occurrence of any Event of Default, the entire unpaid principal balance of this Note and all of the unpaid interest accrued thereon shall be immediately due and payable. 5. Notices. (a) All notices, reports and other communications required or permitted hereunder shall be in writing and may be delivered in person, by telecopy with written confirmation, overnight delivery service or U.S. mail, in which event it may be mailed by first-class, certified or registered, postage prepaid, addressed (i) if to the Holder, at such Holder's address set forth on Schedule A to the Escrow Agreement attached as Exhibit C to the Reorganization Agreement (or such other address as the Holder shall have furnished the Company in writing) and (ii) if to the Company, at 3865 North Business Center Drive, Tucson, AZ 85705, Attention: President (or such other address as the Company shall have furnished the Holder in writing). (b) Each such notice, report or other communication shall for all purposes under this Note be treated as effective or having been given when delivered if delivered personally or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid, or, if sent by telecopier with written confirmation, at the earlier of (i) 24 hours after confirmation of transmission by the sending telecopier machine or (ii) delivery of written confirmation. 6. Miscellaneous. (a) With the written consent of the record holders of more than 50% of the principal amount of the Notes then outstanding, the obligations of the Company and the rights of the holders under the Notes may be waived (either generally or in a particular instance, either retroactively or prospectively and either for a specified period of time or indefinitely), and with the same consent the Company, when authorized by resolution of its Board of Directors, may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Note; provided, however, that no such waiver or supplemental agreement shall reduce the above percentage of principal amount, the holders of which are required to consent to any waiver or supplemental agreement, without the consent of the record or beneficial holders of all of the Notes, nor reduce the principal amount of a holder's Note or the interest rate payable on a holder's Note or increase the obligations of any holder of a Note without -4- 5 such holder's written consent. Upon the effectuation of each such waiver, consent, agreement, amendment or modification the Company shall promptly give written notice thereof to the record holders of the Notes who have not previously consented thereto in writing. Neither this Note nor any provisions hereof may be changed, waived, discharged or terminated orally, but only by a signed statement in writing. (b) No failure or delay by the Holder to exercise any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other right, power or privilege. The provisions of this Note are severable and if any one provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, such invalidity or unenforceability shall affect only such provision in such jurisdiction. This Note expresses the entire understanding of the parties with respect to the transactions contemplated hereby. The Company and every endorser and guarantor of this Note regardless of the time, order or place of signing hereby waives presentment, demand, protest and notice of every kind, and assents to any extension or postponement of the time for payment or any other indulgence, to any substitution, exchange or release of collateral, and to the addition or release of any other party or person primarily or secondarily liable. (c) This Note shall for all purposes be governed by, and construed in accordance with the laws of the State of Delaware (without reference to conflict of laws). (d) This Note shall be binding upon the Company's successors and assigns, and shall inure to the benefit of the Holder's successors and assigns. IN WITNESS WHEREOF, the Company has caused this Note to be executed by its duly authorized officer to take effect as of the date first hereinabove written. VENTANA MEDICAL SYSTEMS, INC. __________________________________ R. Michael Rodgers, Vice President -5- 6 EXHIBIT A CONVERSION ELECTION To: VENTANA MEDICAL SYSTEMS, INC. (1) The undersigned (a) ____hereby elects to purchase ____________ shares of Common Stock at a purchase price of $5.00 per share upon conversion of that certain Convertible Unsecured Promissory Note (the "Note") issued to the undersigned by Ventana. (b) ____hereby elects not to convert any portion of the Note into Ventana Common Stock and elects to retain the entire Note in its current form. (2) In the event that the election in paragraph 1(a) has been made, please issue a certificate of certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: __________________________ (Name) __________________________ __________________________ (Address) (3) To the extent that the undersigned has elected to convert some (but less than all) of the principal amount of the Note, please issue to the undersigned a replacement Note representing the unconverted principal amount of the original Note. (4) In the event that the election in paragraph 1(a) has been made, the undersigned represents that the aforesaid shares of Common Stock are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. __________________________ __________________________ (Date) (Signature) -6- EX-10.15(B) 26 FORM OF CONVERTIBLE UNSECURED PROMISSORY NOTE 1 Exhibit 10.15(b) THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. VENTANA MEDICAL SYSTEMS, INC. CONVERTIBLE UNSECURED PROMISSORY NOTE $_____________________ Tucson, Arizona February 26, 1996 FOR VALUE RECEIVED, VENTANA MEDICAL SYSTEMS, INC., a Delaware corporation (the "Company"), hereby absolutely and unconditionally promises to pay to _________________________________________ (the "Holder"), or order, the principal amount of $____________________, together with simple interest on such principal amount at the rate of 7% per annum. This Note is one of several Notes (individually a "Note" and collectively the "Notes") issued pursuant to a Note and Warrant Purchase Agreement (the "Purchase Agreement") of even date herewith among the Company and certain investors . All rights under this Note rank equally with all rights under all other Notes as well as, and no holder of this Note shall have rights senior to the rights of the holders of all or any other Notes. In addition, all rights under the Notes shall rank equally with all rights under all notes (the "Exchange Notes") issued to former noteholders of BioTek Solutions, Inc. in a note exchange being effected in connection with the acquisition of BioTek by the Company pursuant to a merger (the "Merger") of BioTek with and into a wholly-owned subsidiary of the Company. All capitalized terms used herein shall have the meanings designated for them in the Purchase Agreement, unless the context requires otherwise. 1. Repayments and Prepayments. (a) All principal under this Note shall be due and payable on February 26, 1998. All accrued interest under this Note shall be due and payable on the following dates: (i) February 26, 1997 (the first interest payment is referred to herein as the "First Interest Payment" and the date of payment of the First Interest Payment is referred to herein as the "First Interest Payment Date"); (ii) May 26, 1997; (iii) August 26, 1997; (iv) November 26, 1997; and (v) February 26, 1998. Any payment of this Note shall be made only at the same time as the Company pays all other Notes issued pursuant to the Reorganization Agreement, with such payments to be made pro-rata in proportion to the then outstanding principal amounts of such Notes. 2 (b) The Company may prepay this Note at any time, either in whole or in part, without premium or penalty and without the prior consent of the Holder. Any prepayment of this Note shall be made only at the same time as the Company prepays all other Notes issued pursuant to the Purchase Agreement, with such prepayments to be made pro-rata in proportion to the then outstanding principal amounts of such Notes. (c) The Company shall prepay this Note, and all accrued interest thereon, within thirty (30) days following the closing of an initial public offering of the Company's securities provided the net proceeds from such offering to the Company are in excess of $20 million. (d) Notwithstanding anything to the contrary set forth herein, if the Company prepays this Note in full prior to the First Interest Payment Date, or if this Note is converted into shares of Common Stock by the Holder pursuant to Section 3 below, then no interest shall be due and payable hereunder. (e) Notwithstanding anything to the contrary set forth herein, the Company may elect to pay the First Interest Payment in shares of the Company's Common Stock. If the Company makes such an election, then the issuance price of the shares shall be $5.00 per share (subject to proportionate adjustment in the event of a stock split or combination of Ventana Common Stock). (f) All payments received under this Note shall be applied first to accrued interest on the date of payment and then to the outstanding principal balance of this Note. (g) Should any interest not be paid within 15 days of the due date therefor under this Note, such unpaid interest shall, at the option of the holder of this Note, become a part of the principal hereof and thereafter bear like interest as the principal of this Note. 2. Subordination. (a) "Senior Indebtedness" means the principal of and premium, if any, and interest on indebtedness of the Company for money borrowed from commercial banks, equipment lessors or other financial institutions under a secured or unsecured line of credit, term loan or equipment lease. (b) The Company agrees and the holder of each Note, by acceptance thereof, agrees, expressly for the benefit of the present and future holders of Senior Indebtedness, that, except as otherwise provided herein, upon (i) an event of default under any Senior Indebtedness, or (ii) any dissolution, winding up, or liquidation of the Company, whether or not in bankruptcy, insolvency or receivership proceedings, the Company shall not pay, and the holder of such Note shall not be entitled to receive, any amount in respect of the principal and interest of such Note unless and until the Senior Indebtedness shall have been paid or otherwise discharged. Upon (1) an event of default under any Senior Indebtedness, or (2) any dissolution, winding up or liquidation of the Company, any payment or distribution of assets of the Company, which the Holder would be entitled to receive but for the provisions hereof, shall be paid by the liquidating trustee or agent or other person making such payment or distribution directly to the holders of Senior Indebtedness ratably according to the -2- 3 aggregate amounts remaining unpaid on Senior Indebtedness after giving effect to any concurrent payment or distribution to the holders of Senior Indebtedness. Subject to the payment in full of the Senior Indebtedness and until this Note is paid in full, the Holder shall be subrogated to the rights of the holders of the Senior Indebtedness (to the extent of payments or distributions previously made to the holders of Senior Indebtedness pursuant to this Section 2(b)) to receive payments or distributions of assets of the Company applicable to the Senior Indebtedness. (c) This Section 2 is not intended to impair, as between the Company, its creditors (other than the holders of Senior Indebtedness) and the Holder, the unconditional and absolute obligation of the Company to pay the principal of and interest on the Note or affect the relative rights of the Holder and the other creditors of the Company, other than the holders of Senior Indebtedness. Nothing in this Note shall prevent the holder of this Note from exercising all remedies otherwise permitted by applicable law upon default under the Note, subject to the rights, if any, of the holders of Senior Indebtedness in respect to cash, property or securities of the Company received upon the exercise of any such remedy. 3. Conversion. (a) On or before March 27, 1996 (30 days following the Closing Date) (the "Conversion Date"), the Holder hereof may complete the conversion election attached hereto as Exhibit A (the "Conversion Election") and may deliver the same to the Chief Financial Officer of the Company. Pursuant to the Conversion Election, the Holder shall have the right to convert all or any portion of the principal amount of this Note into shares of the Company's Common Stock at a conversion price of $5.00 per share (subject to proportionate adjustment in the event of a stock split or combination of Ventana Common Stock). If the Holder elects to convert all or any portion of the principal amount of this Note, then the Holder shall tender this Note to the Company with the Conversion Election. If the Holder fails to deliver the Conversion Election to the Company on or prior to the Conversion Date, then no conversion of any of the principal of this note will be made. (b) The Company shall not be obligated to issue a certificate evidencing shares of the Company's Common Stock issuable upon conversion of this Note unless this Note is either delivered to the Company, or the Holder notifies the Company that this Note has been lost, stolen or destroyed and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with this Note. The Company shall, as soon as practicable after such delivery, or such agreement and indemnification, issue and deliver at such office to such holder of this Note, a certificate or certificates for the Common Stock to which the holder shall be entitled and a Note in the principal amount equal to the principal amount hereunder that the Holder has not elected to convert into Common Stock. 4. Events of Default; Acceleration. The principal amount of this Note is subject to prepayment in whole or in part upon the occurrence and during the continuance of any of the following events (each, an "Event of Default"): (i) failure to pay any amount owing by the Company hereunder when due and payable, (ii) failure of the Company to pay any material amount due under or in respect of any material promissory note, lease or other agreement or instrument relating to any -3- 4 indebtedness owing by the Company beyond any grace period provided therein (for purposes hereof, a material amount shall mean an amount in excess of $250,000) or (iii) the initiation of any bankruptcy, insolvency, moratorium, receivership or reorganization by or against the Company, or a general assignment of assets by the Company for the benefit of creditors. Upon the occurrence of any Event of Default, the entire unpaid principal balance of this Note and all of the unpaid interest accrued thereon shall be immediately due and payable. 5. Notices. (a) All notices, reports and other communications required or permitted hereunder shall be in writing and may be delivered in person, by telecopy with written confirmation, overnight delivery service or U.S. mail, in which event it may be mailed by first-class, certified or registered, postage prepaid, addressed (i) if to the Holder, at such Holder's address set forth on Exhibit A to the Purchase Agreement (or such other address as the Holder shall have furnished the Company in writing) and (ii) if to the Company, at 3865 North Business Center Drive, Tucson, AZ 85705, Attention: President (or such other address as the Company shall have furnished the Holder in writing). (b) Each such notice, report or other communication shall for all purposes under this Note be treated as effective or having been given when delivered if delivered personally or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid, or, if sent by telecopier with written confirmation, at the earlier of (i) 24 hours after confirmation of transmission by the sending telecopier machine or (ii) delivery of written confirmation. 6. Miscellaneous. (a) With the written consent of the record holders of more than 50% of the principal amount of the Notes then outstanding, the obligations of the Company and the rights of the holders under the Notes may be waived (either generally or in a particular instance, either retroactively or prospectively and either for a specified period of time or indefinitely), and with the same consent the Company, when authorized by resolution of its Board of Directors, may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Note; provided, however, that no such waiver or supplemental agreement shall reduce the above percentage of principal amount, the holders of which are required to consent to any waiver or supplemental agreement, without the consent of the record or beneficial holders of all of the Notes, nor reduce the principal amount of a holder's Note or the interest rate payable on a holder's Note or increase the obligations of any holder of a Note without such holder's written consent. Upon the effectuation of each such waiver, consent, agreement, amendment or modification the Company shall promptly give written notice thereof to the record holders of the Notes who have not previously consented thereto in writing. Neither this Note nor any -4- 5 provisions hereof may be changed, waived, discharged or terminated orally, but only by a signed statement in writing. (b) No failure or delay by the Holder to exercise any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other right, power or privilege. The provisions of this Note are severable and if any one provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, such invalidity or unenforceability shall affect only such provision in such jurisdiction. This Note expresses the entire understanding of the parties with respect to the transactions contemplated hereby. The Company and every endorser and guarantor of this Note regardless of the time, order or place of signing hereby waives presentment, demand, protest and notice of every kind, and assents to any extension or postponement of the time for payment or any other indulgence, to any substitution, exchange or release of collateral, and to the addition or release of any other party or person primarily or secondarily liable. (c) This Note shall for all purposes be governed by, and construed in accordance with the laws of the State of Delaware (without reference to conflict of laws). (d) This Note shall be binding upon the Company's successors and assigns, and shall inure to the benefit of the Holder's successors and assigns. IN WITNESS WHEREOF, the Company has caused this Note to be executed by its duly authorized officer to take effect as of the date first hereinabove written. VENTANA MEDICAL SYSTEMS, INC. By:__________________________ Title:_______________________ -5- 6 NOTICE OF CONVERSION To: VENTANA MEDICAL SYSTEMS, INC. (1) The undersigned (a) ____ hereby elects to purchase ____________ shares of Common Stock at a purchase price of $5.00 per share upon conversion of that certain Convertible Subordinated Promissory Note (the "Note") issued to the undersigned by Ventana. (b) ____ hereby elects not to convert any portion of the Note into Ventana Common Stock and elects to retain the entire Note in its current form. (2) In the event that the election in paragraph 1(a) has been made, please issue a certificate of certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: _________________________ (Name) _________________________ _________________________ (Address) (3) To the extent that the undersigned has not elected to convert some (but less than all) of the principal amount of the Note, please issue to the undersigned a replacement Note representing the unconverted principal amount of the original Note. (4) In the event that the election in paragraph 1(a) has been made, the undersigned represents that the aforesaid shares of Common Stock are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. __________________________ _________________________________ (Date) (Signature) -6- EX-11.1 27 STATEMENT RE COMPUTARION OF PER SHARE EARNINGS 1 Exhibit 11.1 VENTANA MEDICAL SYSTEMS, INC. NET LOSS PER COMMON SHARE
Three Months Ended Year Ended December 31 March 31 ---------------------------------------------------------------------------------- 1993 1994 1995 1995 1996 ---------------------------------------------------------------------------------- (Unaudited) Historical - ---------- Net loss (4,979,000) (5,370,000) (3,269,000) (834,000) (7,269,000) Less accretion of preferred stock redemption requirement (1,796,000) (1,983,000) (2,436,000) (579,000) (605,000) ---------------------------------------------------------------------------------- Net loss applicable to common stock (6,775,000) (7,353,000) (5,705,000) (1,413,000) (7,874,000) ================================================================================== Weighted average common shares outstanding 857,191 917,179 957,280 903,013 1,119,455 Stock options and restricted stock issued within one year of initial filing (May 24, 1996) 769,303 769,303 769,303 769,303 769,303 Weighted average common shares and common share equivalents ---------------------------------------------------------------------------------- outstanding during the period 1,626,494 1,686,482 1,726,583 1,672,316 1,888,758 ================================================================================== Net loss per share $(4.17) $(4.36) $(3.30) $(0.84) $(4.17) ================================================================================== Three Months Ended Year Ended December 31 March 31 ---------------------------------------------------------------------------------- 1993 1994 1995 1995 1996 ---------------------------------------------------------------------------------- (Unaudited) Pro Forma - --------- Net loss (4,979,000) (5,370,000) (3,269,000) (834,000) (7,269,000) ================================================================================== Weighted average common shares outstanding 857,191 917,179 957,280 903,013 1,119,455 Assumed conversion of Series A, C, and D preferred shares 5,435,782 5,773,943 6,579,489 6,499,219 6,648,291 Assumed exercise of Series D warrants 0 22,829 48,221 48,221 48,221 Stock options and restricted stock issued within one year of initial filing (May 24, 1996) 769,303 769,303 769,303 769,303 769,303 ---------------------------------------------------------------------------------- Weighted average common shares and common share equivalents outstanding during the period 7,062,276 7,483,254 8,354,293 8,219,756 8,585,270 ================================================================================== Net loss per share $(0.71) $(0.72) $(0.39) $(0.10) $(0.85) ==================================================================================
EX-21.1 28 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21.1 Subsidiaries of Ventana Medical Systems, Inc. Ventana Medical Systems, S.A. Ventana Medical Systems, GmbH BioTek Solutions, Inc. EX-27.1 29 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS YEAR MAR-31-1995 DEC-31-1995 JAN-01-1996 JAN-01-1995 MAR-31-1996 DEC-31-1995 3,436 1,103 0 0 2,834 1,925 0 0 2,472 1,767 4,893 4,819 5,201 4,198 2,278 1,940 19,752 7,378 8,142 2,054 0 0 36,135 35,180 0 0 3,337 244 0 0 19,752 7,378 4,146 10,613 4,146 10,613 1,435 4,282 1,435 4,282 2,892 9,674 0 0 0 0 (12,264) (3,269) 0 0 (12,264) (3,269) 0 0 0 0 0 0 (12,269) (3,269) (0.53) (0.14) (0.53) (0.14)
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